For and Against: Consumption Slowdown, Luxury Goods


Sophie Doran | November 03, 2011

Luxury Society investigates the idea that increasing economic instability could lead to a slowdown of luxury goods consumption in 2012

The famed Galeries Lafayette department store in Paris

A myriad of global economic issues are forcing luxury executives to address the possibility of a global recession and consequential slowdown in the consumption of luxury goods. Concerns over economic growth in China, high unemployment rates in the United States, mounting European debt, share market volatility and the questionable Euro are just some of the factors contributing to a state of economic malaise.

Bloomberg suggested that the mid-September luxury stock slump, was reactionary to the news that the International Monetary Fund cut its forecast for full-year global economic growth, as the U.S. Federal Reserve warned of “significant” downside risks to the world’s largest economy. Until mid-September, luxury stocks had survived the stock market sell-off relatively unscathed. Since Sept. 21, Burberry has lost 21 per cent, Richemont 13 per cent, PPR 15 per cent and LVMH 12 per cent (Reuters).

The Argument For

A host of luxury brand executives have recently spoken out about their concern over worsening economic conditions. Speaking with Reuters during Paris Fashion Week, Lanvin CEO, Thierry Andretta, remained confident that the brand would enjoy double-digit growth for 2011. But added, "I am very preoccupied by the world macroeconomic situation”.

Echoing such sentiments, Roberto Cavalli CEO, Gianluca Brozzetti, feels that: “To say it won’t have an effect is madness. The debt crisis will definitely have an impact on consumption, financially speaking, a contingency will be put aside. Psychologically, it will lead people to be cautious.”

Over at Paris department store Printemps, fashion buyer, Tancrede de Lalun, noted a slight downward trend since the beginning of September from French buyers, while tourist sales remained strong. Mr Lalun commented that “There is a general sense of worry in department stores but there is no panic.” But went on to reveal that he “put himself in a position to cancel orders from certain brands if need be..”

“ Financially speaking, a contingency will be put aside. Psychologically, it will lead people to be cautious. ”

Burberry chief financial officer, Stacey Cartwright, has admitted the mega-brand has drawn up contingency plans, designed to cushion against any sales slump that a possible global recession could bring about. After delivering a buoyant first-half trading update, Ms. Cartwright stressed that such a move was nothing more than “contingency planning” and that she saw “absolutely no signs of any slowdown”.

Yet she went on to reveal that Burberry had modelled “significant sales reductions” into its fast-growing Chinese business, which accounts for 10 per cent of the group’s sales, “to see what we would get”. Following fears of a consumer slump in emerging markets such as Asia, which accounts for roughly one-third of Burberry’s revenue and roughly half of PPR brands Gucci and Bottega Veneta.

Altagamma’s Growth Forecast for Luxury Goods by Region

Bain & Co and Altagamma have echoed similar sentiments, in recently released research. Global sales of luxury goods are expected to finish 2011 on a high, but the outlook for next year has been clouded by political and economic uncertainty. Bain & Co declined to provide an outlook for 2012, instead reiterating its forecast of average annual growth of 6 per cent to 7 per cent from 2011 to 2014.

Altagamma’s Forecast on the Worldwide Luxury Industry for 2012, proposed that all markets will grow steadily in 2012. But when compared to Forecasts for 2011, updated by Altagamma in May this year, performance expectations are less optimistic than in previous years – quite literally, showing signs of a slowdown.

Reuters revealed that brokers such as Cheuvreux and UBS are now forecasting growth in the luxury industry will slow to 8-9 percent in 2012 from 15 percent this year, although Goldman Sachs analysts recently stuck with a 15 percent top-line forecast for 2012.

“ When affluents feel threatened, they hold tight till things feel better. I believe we are headed back into this recessionary mind-set ”

Growth forecasts aside, during times of economic uncertainty there is always the threat of a ‘mental recession.’ Pam Danziger, president of Unity Marketing, put it best in conversation with Luxury Daily. “When affluents feel threatened, they can easily hunker down, shop their closet, not the store, and just hold tight till things feel better. I believe we are headed back into this same recessionary mind-set among luxury consumers.”

Ms. Danziger also revealed that Unity Marketing’s Luxury Consumption Index (LCI) took the sharpest downturn in the third quarter of 2011 that has been seen since the lead-up to the recession in 2008. “That does not mean there will not be opportunity for some brands and some companies, but it is better to see this economic glass half empty and plan for that, rather than see it half full,” Ms Danziger remarked.

The Argument Against

On the other side of the coin, 2011 has been a phenomenal year for brands and groups, in terms of sales and performance. Global luxury goods sales have continued 2010’s double-digit growth trajectory and will see an increase of 10 percent, to €191 billion in 2011, according to Bain & Co’s 10th Luxury Goods Worldwide Market Study.

Speaking at the time of launch, lead author of the study, Claudia D’Arpizio, suggested: “Despite the headwinds of global events and economic uncertainty, luxury is experiencing a sort of ‘anti-crisis. We expect to see the sector continue to outperform other categories, if brands stay as nimble as they have been in their approach to recovery.”

Just last week, LVMH recorded revenue of €16.3 billion during the first nine months of 2011, an increase of 15 percent over the same period in 2010. At the opening of Louis Vuitton’s Marina Bay Sands Maison in Singapore, Yves Carcelle told Bloomberg that even in periods of crisis, people want to treat themselves. “We don’t see any signs of slowing down whether it’s in Europe or in America. The world of luxury doesn’t obey the same rule,” remarked Mr Carcelle.

“ We don’t see any signs of slowing down whether it’s in Europe or in America. The world of luxury doesn’t obey the same rule ”

PPR’s Luxury Division reported revenue of €3.519 billion during the first nine months of 2011, an increase of 23.7 percent over the same period in 2010. Revealing these results to the press, finance director, Jean-Francois Palus, made the comment that “The international financial situation has not had any impact on our business.”

Burberry reported half-year total revenue of £830 million (approximately €966 million), up 30 percent underlying. Whilst the brand may have developed a contingency plan, in the event another global recession materialises, it has also actioned several strategic changes since 2008, designed to better protect margins and profitability that could be led by a potential decrease in sales.

“This time around, half of our sales are replenishment styles which don’t need to be marked down, compared to nearer 20 per cent three years ago,” Ms. Cartwright told the Financial Times. The introduction of SAP stock management software gives greater visibility on sales trends, allowing the company to react more quickly to any slowdown. “If things are selling well in one region, but not in another, we can move inventory around, and we could also take corrective action on the next season we’re designing,” she said.

“ The top end of the luxury consumer is not affected as much by the recession as one may think ”

Bain & Co also noted a shift from licensing and franchise models to brands wanting to directly control their retail networks – something Burberry spent £70 million on in 2011, buying back control of its business in China and acquiring 50 stores in 30 cities from its franchisee. The study shows that luxury distribution has undergone a significant shift, with 14 percent growth for direct-owned stores, more than 50 percent higher than the growth rate of wholesale and department stores.

Finally, there are the consumers. Bain & Co’s research highlights a consumer whose return to luxury spending is not simply a rebound, but instead a sustained renewal of spending on apparel, accessories, leather goods, shoes, jewelry, watches, perfume and cosmetics.

Milton Pedraza, CEO of The Luxury Institute, suggests that how a particular company operating within the luxury industry fairs during an economic downturn, is dependent on the segmentation of their consumers and product mix. He agrees that in the toughest of times, the wealthiest consumer segment are often in a position to sustain spending, but that they will direct that spending very carefully towards those brands that represent the ultimate in their category.

“ When there are macroeconomic worries, it always impacts our markets. The fact that we do not see it today does not mean that we will not see it tomorrow ”

The Future

Speaking in Paris before the brand’s SS12 presentation, Hermès CEO Patrick Thomas remained concerned, despite luxury’s recent successes. “When there are macroeconomic worries, it always impacts our markets. The fact that we do not see it today does not mean that we will not see it tomorrow.” Yet as the discussion frequently concludes, no-one can be certain what will happen until the economy and consumers have spoken.

On one hand, decreased consumer confidence and disposable income seem a likely bedfellow to reduced luxury goods consumption. On the other hand, those truly affluent – those thought to be driving the purchases of real luxury goods – are consistently argued to be ‘above the law’ when it comes to economic hardship and expected to continue spending regardless of the economy.

As the age old saying goes, and in the case of Burberry, brands should prepare for the worst and hope for the best.

We invite all Luxury Society members to contribute their thoughts and continue the debate below

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