Market Pulse | Growth, But Perhaps Not As It Used To Be

Savigny Luxury Index October 2012 | Source: Savigny Partners

LONDON, United Kingdom — The Savigny Luxury Index (SLI) gained 4.2 percent in October, outperforming the MSCI World Index (MSCI) by more than 6 percentage points.  Much anticipated results announcements confirmed that the sector still has strong fundamentals but that the three-year boom is coming to its close.

Big news

  • Newsflow pointed to a slowdown in growth for the sector, rather than the meltdown anticipated by the Burberry profit warning in September.  LVMH posted its lowest quarterly organic sales growth since 2009, causing a widespread sell-off and prompting the group to issue a statement reassuring investors that demand remained robust for its core Louis Vuitton brand.  Whilst PPR posted stronger third quarter results and confirmed its outlook for 2012, cracks were beginning to show in the performance of its flagship Gucci brand.  Burberry adopted a more reassuring tone in its second quarter results, announcing that sales have steadied since September.
  • Swiss watch exports fell by 8.6 percent in September, with sales to China falling off a cliff (down 27.5 percent), feeling head-on the impact of the Chinese government’s crackdown on corruption.  This was the first fall recorded by the sector in the last two and half years.
  • Coach and Luxottica bucked the trend, both posting better than expected sales growth in the last quarter.  Coach in particular benefitted from strong sales in China where it is currently under-represented.
  • Strategic vertical integration deals continue to be a key driver of M&A activity.  LVMH acquired bespoke shoemaker Anthony Delos and his team for Berluti, Chanel acquired cashmere manufacturer Barrie Knitwear and Richemont acquired watch component maker Varin Varinor.  Separately the Guerrand-Hermès family acquired a 45 percent stake in jewellery and medals maker Arthus-Bertrand.  Private equity players have also been active in the sector with PAI Partners buying eyewear producer Marcolin and Advent International launching a bid for German perfume retailer Douglas Holding.

Going up

  • Burberry confirmed its full year profit outlook and reassured investors that demand has slowed not as result of the diminishing appeal of its brand but due to broad economic factors.  Its share price increased by 16 percent.
  • PPR’s performance was rewarded by the market (up nearly 14 percent) which perceived it to have done better than its peers in a difficult trading environment.  Its smaller brands also recorded very strong growth.

Going down

  • Mulberry fell by more than 11 percent over the month after it warned that its full year profit will come below expectations, driven by a rationalisation of its wholesale network and softer demand in Asia.

What to watch

  • Political fallout from the leadership change has shone the spotlight on patterns of luxury consumption in China.  Gift giving will undoubtedly continue as a time-honoured tradition, but its conspicuous abuse by government and state-owned companies officials will likely not.  The consumer is also maturing as evidenced by the strong performance of niche brands in the market.  These developments will surely not bring an end to the era of dominance by mega brands in China, as millions and millions will be joining in the luxury frenzy for years to come yet.  However this new degree of sophistication will help usher in some smaller brands who so far have been left at the door.
Pierre Mallevays is a contributing editor at The Business of Fashion and founder and managing partner of Savigny Partners, a corporate advisory firm focusing on the retail and luxury goods industry.