The luxury sector can perhaps stand as one of the winners of the post-pandemic era in the markets with the greatest accessibility and democratization in the industry. Brands like Hermès or LVMH are already taking off and it seems that the trend may continue forward. Exclusivity reaches more hands. And many of the usual claimants now also have more capital. The wheel keeps turning.
During the global pandemic, consumer spending on travel, dining and social activities has fallen more sharply than ever before. At the same time, governments around the world have stepped in to provide financial aid to struggling individuals and businesses on an unprecedented scale.
As a result, personal disposable income has risen in many developed economies, led by the United States. In the first quarter, disposable personal income in the country increased by 62%. Hence the more important question is how exactly consumers are going to spend this additional income.
China is one of the clear references and marked the way for the confinement. His example showed that consumers are willing to spend some of their surplus money on luxury items.
“For example, when Hermès reopened its Guangzhou store in China in April last year, after months of closure, first-day sales reached a record $2.7 million,” says Frank Beaudry, an equity analyst. from Capital Group.
In April this year, Hermès has achieved growth above the industry, with organic revenue up 33% compared to the first quarter of 2019. Using 2019 is a more consistent comparison, as figures for First quarter 2020 sales were negatively affected by the pandemic.
The quality of growth was particularly attractive, as all business lines returned to strong growth and regional growth was also strong. Sales were very strong in Asia and the United States, but declined in Europe.
"However, this occurred in a period when around a quarter of the stores were closed and there were no tourists from key countries such as China," adds the Capital Group expert.
Meanwhile, LVMH posted record sales in the first quarter of 2021, revenue grew 8%. Sales of its largest and most profitable business unit, fashion and leather goods, increased 37% compared to the first quarter of 2019.
“This shows that the business has not lost a year of growth, but has delivered the equivalent of two strong years in a row amidst very difficult conditions. However, growth in its selective retail business, which includes Sephora and DFS, has slowed by 30%, impacted by international travel restrictions,” says Beaudry.
This is a trend supported by US entities such as JPMorgan: "The luxury sector with companies such as LVMH or Hermès can continue to push up their cash flow and, even more so, considering that the central banks are not yet going to stop with the injection of liquidity into the system”, predicts the Wall Street firm.
According to economist Darrell Spence, “it still looks like the combination of stimulus and the falling savings rate could give retail sales quite a boost in 2021.” As the sector adapts to new ways of doing business, our analysts note that much of the demand has been delayed or displaced to other parts of the world.
For example, in China, consumers who once shopped in Paris or Milan now go to the high-end shopping districts of Beijing or Shanghai. Conversely, due to travel restrictions, luxury brand operators have to rely heavily on local customers for their European stores. "Travel restrictions made the growth of online shopping in the luxury sector important, and brands were forced to focus on their digital presence," he elaborates.
Brand value as the key to a successful future
One of the characteristics underlying strong sales of luxury products is brand power, which can be understood as the willingness of consumers to pay a price much higher than production costs for branded products over decades. Management teams that maintain brand equity and are able to convert it into pricing power - which manifests itself in higher margins and sales growth - are often the ones to achieve long-term success.
Long-term success often means growing, but not simply by opening more stores. Geographic expansion may be relatively easy, but it increases penetration without necessarily increasing desirability, which hurts pricing power. Companies that follow this path often delay the moment of truth and dilute their brand. Taking a more disciplined approach to store expansion can help brands increase appeal and pricing power.
Although 2020 has been a difficult year, it has not been a lost year for building brands and attracting customers who are bored with social distancing, eager to spend again and who have not lost much of their purchasing power. Demand for luxury goods remains resilient. A study by Bain & Company indicates that although the global market for personal luxury goods fell 23% in 2020, its recovery is expected to accelerate in the next three years.
“These globally recognized brands operate across distinct regions and are positioned to potentially benefit from changes in global trade patterns, particularly those we are starting to see as economies open up after coronavirus-induced lockdowns. coronavirus”, concludes Beaudry.
