Luxury Outlook 2008 | How much padding does that luxury cushion have?


LONDON, United Kingdom - Conventional wisdom is that the luxury sector is cushioned from the ups and downs of the overall economy because its customers are amongst the “happy few” who aren’t affected by such trivial matters as making mortgage payments and paying off credit card bills in the midst of a darkening macro-economic environment. But exactly how much padding does that luxury cushion have?

According to Luca Solca of BernsteinResearch, not a lot.

Bernstein_exhibit_2 In his report “PPR: Worsening Macroeconomic Outlook points to slower Luxury Market Growth in 2008,” published today, Solca asserts that there is a strong correlation  between the general economy and the luxury sector (R-squared = 66%).

Therefore, any problems in the general economy are certain to spill over into the luxury sector, especially for companies who have tapped into the aspirational luxury market like Coach and Gucci.

The report expands on the latest estimates for GDP growth which suggest the outlook for the world economy is looking decidedly downbeat, except for one bright spot in China where the economy is expected to continue to barrel along at 10.7% growth in 2008 and 9.8% growth in 2009. However, in Japan (1.3%), North America (1.9%), and the European Union (2.1%), the story for 2008 is a lot bleaker, with small upticks expected for all three of these geographies in 2009.

The most surprising part of the report was anecdotal evidence which suggests that the US luxury market may be resurging, while continental European markets like Italy take the brunt of the downturn:

“F/W pre-collection order books have been filling up above budget expectations in the Far East, Eastern Europe and the Middle East. Continental Europe seems slower, while – surprisingly – European fashion and luxury market players are finding a resurgent market in the USA, possibly supported by increased tourist inflows. Consistently, retail sales over Christmas in both apparel and accessories have been most difficult for companies focused on continental Europe. The Italian fashion and luxury market seems to be developing below the European average”

Exhibit courtesy of Luca Solca and Sanford Bernstein.

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  1. Fascinating. It would be interesting to know more about how they measured the value of the “luxury market” or how this is typically done. Great post!

  2. Defining the boundaries of the luxury market is no easy task. Does perfume count? What about diffusion lines. Do luxury yachts fit into this category, is that a different matter altogether. Truth is, the definition of the luxury market varies from analyst to analyst. In this case, Luca Solca has focused on PPR brands such as Gucci, YSL, Bottega Veneta, YSL Beaute in its definition of the luxury portion of PPRs portfolio. This would indicate that he would use a similar set of characteristics to define the global luxury market, i.e. to include luxury brands and all of their extensions into fragrance, lower priced lines, etc.

  3. Fall 2008 fashion shows had hemlines dropping and somber colours which are typically associated with recessionary times. And the article in Sunday NY Times “It’s Not So Easy Being Less Rich”, indicates that the wealthy are already cutting back on their lavish lifestyles.