Luxury Companies Face the 'R' Word

Posted by: Carol Matlack on October 28, 2008

Has the luxury growth machine finally hit an obstacle it can’t roll over? Since 1995, global sales of luxury goods have soared from $95 billion to an estimated $219 billion. The post-Sept. 11 downturn and the strong euro slowed things down a bit – but not too much, as the industry kept growing robustly in new markets such as China, India, and Russia.

Now, though, economies just about everywhere are in crisis. The result? The industry “will likely enter a recession in 2009,” according to consulting group Bain & Company, which on Oct. 28 released its annual study of the luxury-goods market worldwide. The study predicts that sales will grow only 3% this year, down from 6.5% last year and 9% in 2006, and then will decline as much as 7% next year.

The pain won’t be spread evenly, though. More moderately-priced brands such as Coach and Ralph Lauren have already seen sales flatten out as middle-class customers curb their spending, the Bain study says. A little further up the scale, “aspirational” brands such as Louis Vuitton and Gucci are still growing, though more slowly. But those at the top of the price heap, such as Hermès and Chanel, are barely feeling the pinch at all, with sales estimated to grow 8% this year.

Investors have seen this coming. Shares in the global No. 1 luxury group, Paris-based LVMH Moët Hennessy Louis Vuitton, are down 50% in the past year, while its crosstown rival PPR Group, owner of Gucci Group, has seen its stock plunge by more than two-thirds during the same period (PPR was harder hit because it also owns mass-market retail groups that have suffered in the downturn). Coach and Ralph Lauren shares have lost about half their value in the past month alone. Contrast that with Hermès, whose Paris-listed shares are about where they were a year ago. (Chanel is privately-held.)

At least, the luxury purveyors can take solace in Bain & Company’s prediction that the recession won’t last long. The study forecasts “a surge in spending by high net-worth individuals on luxury goods over the next five years, ranging between +20% and +35% in emerging markets including Brazil, Russia, China, and India.” That, along with “increasing personal wealth in all markets, growth expectations in global BDP and increasing tourist flows, fuel optimism by the authors of the study for the long-term outlook of the luxury goods market,” Bain says.