The People Want Champagne and Watches

Luxury goods purveyors such as LVMH are offsetting slowing sales in the U.S. with healthy profits from emerging markets like Russia and China

Louis Vuitton bags are displayed for purchase at the MOCA Los Angeles media preview of "(C) Murakami" at The Geffen Contemporary at MOCA on October 26, 2007 in Los Angeles, California. Noel Vasquez/Getty Images

by Jennifer Fishbein

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When Bernard Arnault, chief executive of the largest luxury goods group in the world, Paris-based LVMH Moët Hennessy Louis Vuitton (LVMH.PA), took the podium Feb. 6 on ritzy Avenue Montaigne to report on the company's performance over the past year, the downturn plaguing many of his competitors did not feature on his agenda. Sure, a recession might be taking place in the U.S., and some luxury shoppers are feeling the pinch (BusinessWeek.com, 1/11/08). But that didn't stop LVMH from posting profits of $2.96 billion in 2007, up 8%, on sales of $24.1 billion, also up 8%.

Among LVMH's successful brands, according to the company's financial statement, were Moët & Chandon champagne, which recorded "spectacular growth" in Russia, Central Europe, China, and India; Louis Vuitton, which experienced "exceptional vitality" in China and South Korea; and Tag Heuer watches, which will expand in India and the Middle East this year. Designer labels Marc Jacobs and Donna Karan fared very well in the U.S., the latter thanks to its "cult fashion" status there, LVMH said.

Global Growth Outside U.S.

What gives? For starters, LVMH and fellow French luxury behemoth PPR (PRTP.PA), owner of Gucci Group and Yves Saint Laurent, are less concentrated in the U.S. and more tapped into high-growth markets like Russia and China than companies such as Tiffany & Co. (TIF) and Coach (COH). PPR has already announced a 16% rise in annual sales, helped by an 8.4% gain at Gucci, in advance of its earnings report scheduled for Feb. 27.

In contrast, New York-based Tiffany reduced its yearend profit outlook last month after sales at U.S. stores open at least a year fell 2% in the two months leading up to New Year's. Coach, the largest U.S. vendor of luxury leather items, saw sales at full-price stores in the U.S. fall 2% in the quarter ended Dec. 29, 2007—the first decline since the 2001 holiday season—while its factory outlet sales rose 18%. LVMH did report that the weak U.S. dollar, as well as the languid Japanese yen, caused the percentage of its total revenues booked in those currencies to drop 2% each from 2006, to 30% and 11%, respectively.

Still, Arnault has said he expects global spending on luxury goods to double in the next five years, to nearly $440 billion, while PPR Chief Executive François-Henri Pinault said last month that he expects the global market for luxury goods to grow 7% this year. If big spenders in the U.S. and, perhaps to a lesser extent, Western Europe are cutting back, where will such growth occur? According to a Feb. 1 report from bank HSBC (HBC), sales in Eastern Europe, the Middle East, and Asia (excluding Japan), which already account for 30% of global luxury sales, will increase by 20% in 2008, adding 6% to sector revenues.

Luxury Purveyors Head East

"The bright spot in the growth of sales of luxury goods is China," says Matt Marsden, a Hong-Kong based analyst with HSBC. "The Chinese aspirational angle, 'You are what you buy,' is here to stay." For the past couple of years, companies like LVMH and Richemont (RIFZ.F), owner of Cartier and Van Cleef & Arpels, have seen sales growth of 40% to 70% in Greater China, despite taxes that often double the prices of luxury items, Marsden says. Though only the top 2% of the Chinese population consumes high-end goods, the next 20 years will see the arrival of 150 million more urban, middle-class Chinese ready and willing to spend, he says.

The findings have propelled a wave of expansion eastward. Tiffany has announced plans for 20 new stores in Europe and Asia. Coach aims to enter the Russian market and open 15 stores in Moscow and St. Petersburg within five years. It's also set to open 30 more shops in Greater China, for a total of 80, in anticipation of China's becoming the company's third-largest market after the U.S. and Japan. Cartier, too, plans to open as many as 10 shops in China this year, bringing its count there to 24, while Burberry (BRBY.L) recently opened one store in Hong Kong and two in Russia.

Even so, no global company is immune to a U.S. recession. Though Arnault insists the current situation "is not an economic cataclysm," a further slowdown could affect even the biggest luxury players. The ones who fare best may be those who heed Arnault's warning that a third of all luxury goods will go to China, Russia, and India in the next 10 years—and focus expansion on the burgeoning eastern frontier.

Click here for a slide show of top luxury brands and their global strategies.

Fishbein is a reporter in BusinessWeek's Paris bureau .