Over the past 30 years, the luxury industry has experienced organic growth of 6-8%, but this pace is unlikely to continue. In a recent report, Bernstein analysts attempt to answer a frequently asked question: “Is the current luxury goods market cyclical or structural?”
The team led by Luca Solca, a specialist in the sector, begins with some observations from the past two years. Western demand has normalized following the post-Covid-19 surge in spending. Inflation and the excesses of the post-pandemic boom (exorbitant prices for luxury goods, despite the same level of creativity) have reached the Western middle class, which has suffered the most over the two-year period. Furthermore, the post-Covid “growth relay” in China never materialized, as the Chinese had to digest the collapse of the real estate market, which forced them to cut back and save.
The end result is the volatile market we’ve seen over the past two years, driven by a rising high-end segment (still in full post-COVID-19 “you only live once” mode, further spurred by record-high financial markets) and a shrinking middle-class consumer base worldwide. Hence the focus on value for money, the strong growth of jewelry (considered more affordable than stocks), an unprecedented amount of down-trading, and the unstoppable success of high-end niche brands.
Bernstein experts are confident about some aspects: “At some point, the Chinese will overcome the sadness associated with the fact that real estate values are not as high as they hoped: it’s already happened in other markets. It takes time, but it’s not the end of the world.” Furthermore, “luxury goods companies are correcting the excesses of the post-COVID-19 boom, adjusting pricing structures, and stimulating innovation. Just think of the unprecedented shift in creative direction in recent months.”
The open question, they believe, is whether we will return to a market driven by both a growing high-end consumer segment and a significant influx of new middle-class consumers—thanks to emerging markets and China, particularly over the past 25 years—or whether wealth and income inequality will continue to grow, impacting the middle class.
“In parallel,” the analysts add, “the rise of deglobalization, ‘impoverish thy neighbor’ international trade policies, and nationalist sentiment raise new questions. At the very least, this creates more challenging conditions for ambitious global brands to continue growing, and even more so, to embody positive values for global audiences around the world. It’s becoming increasingly complex to keep everyone under one roof and hold them to the same ideals.”
The West has certainly had a problem with the bottom of its social pyramid for several decades. Furthermore, the wealthy alone, despite generating a large share of revenue—with the top 2% accounting for a third of global luxury sales—would not be enough to sustain the industry as it is today: “Megabrands must be commercially successful on both sides of the market. Even more so, they must appeal to both sides if they want to remain socially and culturally relevant. If they focused solely on the ultra-rich, they risk becoming the new superyacht brands. Who knows their names? To whom are they relevant? To a tiny fraction of society.”
Currently, as experts note, Western consumer demand appears to be back on track (with the recovery from the post-Covid-19 boom largely over), and the return of Chinese consumer confidence—yet to be confirmed, beyond the initial signs this summer—could lead to a growth trajectory for the luxury market more or less similar to that before the pandemic: “The purchasing power of Chinese consumers, who are regaining confidence, should not be underestimated, given the enormous amount of savings accumulated in recent years.”
History also demonstrates that the aspiration to stand out and achieve personal fulfillment, including through the possession of beautiful things, is a fundamental human need: “To think that humanity can cease to desire beautiful things is like assuming it will stop eating, drinking, or sleeping. Possible for a while. Unlikely, if not impossible, in the long run.”
When it comes to valuing luxury companies, Bernstein recommends evaluating the sector by taking into account certain criteria, and Richemont meets many of them. “A key criterion for measuring a brand’s ability to hold everyone under its spell,” they point out, “is its ‘depth
Louis Vuitton Shanghai
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