Independent Online

Saturday, August 20, 2022

Like us on FacebookFollow us on TwitterView weather by locationView market indicators

Luxury sector undaunted by Covid-19 pandemic and soaring inflation

An employee prepares for customers at the Cartier concession, a unit of Richemont, at the Watches of Switzerland Group flagship retail store on Regent Street in London, UK. The chairman of Swiss watch empire Richemont poured cold water on the luxury industry’s hopes of a quick rebound from the coronavirus, warning of “grave economic consequences” that could last three years. Photo: Simon Dawson/Bloomberg

An employee prepares for customers at the Cartier concession, a unit of Richemont, at the Watches of Switzerland Group flagship retail store on Regent Street in London, UK. The chairman of Swiss watch empire Richemont poured cold water on the luxury industry’s hopes of a quick rebound from the coronavirus, warning of “grave economic consequences” that could last three years. Photo: Simon Dawson/Bloomberg

Published Feb 20, 2022

Share

THE pandemic and soaring inflation have done nothing to take the shine off luxury brands – from Louis Vuitton to Gucci and Cartier –as the sector hiked prices to notch-up stellar profits.

The world economy has begun to recover from the pandemic last year but the rebound has been accompanied by rising inflation, with prices for raw materials and energy soaring.

Story continues below Advertisement

But the makers of luxury goods can respond by hiking their prices, and actually look more desirable to their customers.

“Our advantage over many other companies and groups is a certain price flexibility, ie we have the means to react to inflation,” LVMH chief executive Bernard Arnault told reporters.

UBS analysts estimate that top brands such as Louis Vuitton, which is owned by industry leader LVMH, have raised their prices two-and-a-half times higher than the inflation rate over the past 20 years.

Indeed, “pricing power remains one of the key characteristics of the luxury goods industry,” UBS analysts wrote in a research note.

LVMH bagged a record €64 billion (R1 trillion) in sales and €12bn in net profit last year, both exceeding pre-pandemic levels.

The French company also owns a broad range of spirits, perfume, jewellery, and cosmetics products.

Story continues below Advertisement

Less susceptible’ to rising costs

Kering – which owns Gucci and Yves Saint Laurent – also beat its pre-Covid levels to book a net profit of €3.2bn on sales of €17.6bn, the group reported on Thursday.

Kering chief executive Francois-Henri Pinault acknowledged that “for every new season, we create a new collection, and we review all the price matrices”.

Story continues below Advertisement

Hermes chalked up profits of €2.4bn on sales of €9bn.

Hermes chief Axel Dumas said that his brand, which is enjoying “very strong demand”, raises its prices once a year.

“All of our products have the same margins. We don’t play with our prices. They’re linked to manufacturing costs and not to desirability.”

Story continues below Advertisement

He argued that the craftsmanship that goes into making Hermes bags means that they are “perhaps less susceptible to rising energy and raw materials prices than others”.

Swiss group Richemont, which owns Cartier and runs its business year from April to March, said it booked sales of €5.6bn in the third quarter alone, an increase of 38 percent over the corresponding period of 2019.

There are limits’

“In certain cases demand exceeds supply and that means consumers will both trade up and likely accept paying higher prices, which again will cushion the margin,” said analysts at HSBC.

Rolex, for example, had largely refrained from increasing prices during the past two years.

But at the start of 2022, it raised prices by more than 3.0 percent on average “and for some models they soared as high as 12 percent”.

Chanel “has also been in the news for its aggressive price hikes of iconic bags during the pandemic, and more so recently,” the analysts said.

“While not every luxury brand can pull off this double-edged sword, we believe Chanel’s pricing actions have probably created a good space for the likes of Louis Vuitton, Hermes and Gucci to raise their price points further.”

Back in November, consultancy firm Bain & Company forecast that the luxury goods sector would grow by 6 percent to 8 percent annually, and expand to €360bn to €380bn by 2025.

Nevertheless, Flornoy fund manager Arnaud Cadart cautioned that raising prices too sharply could hurt sales.

“There are limits,” he said. “A €1 000 bag that costs €1 200 the next day… That can slow down demand,” Cadart said.

AFP

Related Topics:

Covid-19pandemic

Share