Gucci, Louis Vuitton thrive despite inflation pressure
August 6, 2022
The rich are more protected from inflation, which means they continue to buy luxury items.
Luxury companies like LVMH, Kering, Ferrari and Hermès are reaping the benefits.
Still, some worry that the Ukraine war, China shutdowns or the recession could affect their bottom line.
As inflation continues to put pressure on consumers at all income levels, wealthy people don’t feel the same pressure, which means the brands they buy from don’t feel it either.
The world’s two largest luxury conglomerates, Kering and LVMH Moët Hennessy Louis Vuitton, reported strong earnings last week, with both companies seeing revenue increases of more than 20% in the first half of the year compared to 2021. They are not the only companies in the luxury sector are doing well right now: it seems that everyone from high-end carmakers to sought-after handbag designers are experiencing strong demand.
This means that the world’s wealthiest consumers haven’t cut back on their spending, even as many Americans opt for cheaper options at McDonald’s or worry about how they’ll pay their bills. Now, with inflation rising to new highs, the big winners are the companies that make products for the ultra-rich.
‘Healthy and high demand’ for cars, clothes and champagne
At LVMH, the French megacorporation run by the world’s third-richest person, Bernard Arnault, luxuries big and small have been flying off the shelves.
Sales of champagne and cognac, in particular, saw “exceptional momentum” in the first half of 2022; fragrances and skincare grew rapidly, and high-end fashion continues to do well. Revenue from LVMH’s fashion and leather goods category rose 24% during that period, with brands including Louis Vuitton, Christian Dior, Fendi and Celine achieving “new profitability records” in the first half of the year, the company said. .
Haute couture houses owned by Kering, including Gucci, Yves Saint Laurent and Bottega Veneta, also saw significant growth in the first half of the year, the company said in its recent earnings report, although the luxury conglomerate has raised prices. twice this year. . Hermès, which makes leather goods such as the coveted Birkin bag, reported a strong performance in the second quarter, with sales up double digits in June. And at Italian fashion house Prada, semi-annual revenue was up 22% year over year.
Wealthy consumers are clamoring for more than fashion: Italian sports car maker Ferrari posted record orders in the second quarter, and Mercedes-Benz said it is seeing “healthy and high demand” for its high-end vehicles.
These gains are in line with recent projections from consultancy Bain, which estimates that luxury goods sales will rise by at least 5% in 2022, with buyers, mostly in the US and Europe, shelling out at least $305,000. million euros, or roughly $312 billion, this year alone.
Claudia D’Arpizio, a partner at Bain, told Reuters in a recent interview that, despite inflation, “consumption doesn’t seem to be affected so far.”
It’s a stark contrast to businesses that cater to other types of consumers.
McDonald’s said during its second-quarter investor call that customers are reducing their orders in the face of inflation. “We’re seeing customers, particularly low-income customers, switch to value offerings and fewer combo meals,” Chief Financial Officer Kevin Ozan said.
At Walmart, customers have changed their spending habits in the face of rising food and gas prices, cutting back on clothes, for example, and switching to cheaper private label brands. And many other companies, from Bath & Body Works to Chipotle, are bracing for slower sales, particularly to low-income consumers, in the coming months.
The recession could be a “self-fulfilling prophecy”
Still, there are signs that even the luxury sector could start to feel some pain from the ongoing war in Ukraine, COVID lockdowns and economic uncertainty.
Kering CFO Jean-Marc Duplaix said the company is in a “wait-and-see mood” about the economy because of the war in Ukraine, which is driving up costs.
Kering and other luxury goods companies are also dealing with ongoing lockdowns in China. Chinese consumers dominate the global luxury market and the closures have shuttered many high-end stores and reduced the number of Chinese tourists shopping abroad.
Kering said that 30% of its stores in China closed in April and May. LVMH Chief Financial Officer Jean Jacques Guiony said sales in China fell by “double digits” in the most recent quarter. However, both companies said they were optimistic business in the region would pick up.
Kering and LVMH have also expressed cautious optimism that European and American tourists will continue to spend on luxury goods.
Guiony said LVMH does not have a “particularly gloomy and pessimistic” outlook on the US economy, but does have a plan in the event of a deeper economic downturn.
“My fear is that all this talk about the recession and falling demand is going to become a self-fulfilling prophecy,” he said.