GENEVA, Switzerland — In a luxury industry founded on heritage, timelessness and inherent product value, "new" can be a dangerous word. But it’s not too harsh to describe the fundamental shift that is occurring in today’s luxury goods market.
Millennials have new values but similar human desires to both flock and differentiate themselves as they assert their identities. Digital is providing new means to fulfil these desires, allowing for the creation of countless communities all around the world, each with their own idiosyncratic interests, signs and codes. This new luxury aesthetic is obvious, maximalist, irreverent.
The risk for luxury incumbents is that heritage becomes a synonym of old. This threatens to change the competitive dynamics of the industry, as barriers to entry protecting established brands weaken and doors open to new entrants marketing new icons. Just look at the rise of luxury streetwear: countless new brands have come to the party.
The emergence of new brands is hardly earth-shattering news on its own. But the New Luxury world is also one of extreme polarisation between brands that “get it” and those that don’t, and increased trivialisation risk as adoption follows herd behaviour and concentrates on a narrow set of blockbuster products. It also brings new volatility as short-term brand loyalty rises at the expense of long-term brand staying power.
In this new world, luxury brands face a twofold problem: the poor man's problem: how to move from uncool to cool; and the rich man’s problem: staying cool, once you have become cool.
Sneakers are quintessentially streetwear; brogues, suits and ties are not.
So how is this playing out in practice?
Formal dressing is taking the hardest beating. We see companies like Salvatore Ferragamo, with its core equity in formal footwear, under most pressure, alongside, for example, Burberry, Hugo Boss and Brioni: sneakers are quintessentially streetwear; brogues, suits and ties are not.
Leather goods are not immune — not even Hermès. Leather goods are the Trojan horse for today’s new streetwear aesthetics to reach older, more conventional consumers. Mega-brands like Gucci and Louis Vuitton are playing a key role in making the streetwear aesthetic mainstream. Mega-brands still work, but the trigger for consumer adoption is not just mere scale and a dominant market position but the ability to convey the new zeitgeist.
For those of us who observe the luxury industry from a financial perspective, the big question is whether the rise of New Luxury implies lower valuations. Most investors today value luxury goods stocks on the back of organic growth and match organic growth to price earnings ratios. However, this assumes organic growth can be reasonably sustained over time and that dominant brands will always be there and always be relevant. But that argument seems to be losing its strength. Luxury is looking more and more like fashion and fashion brands typically suffer from boom and bust cycles, not a great recipe for long-term investors and means short-term investors must have a sharp eye for spotting the next trend before it happens.
Which brings us back to fundamentals: companies with higher barriers to entry and lower brand trivialisation risk should trade at a premium, because they should be more valuable to long-term investors. The market seems to be working this way.