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Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about the luxury goods market with Louis Meagher, equity fund manager, global consumer sector, with Setanta Asset Management. We talked about the major players, opportunities for investors, and we started by asking about the size and recent direction of the luxury goods market.

Louis Meagher (LM): In terms of the industry size, the luxury goods market generates annual revenues of just over 360 billion euros. Per capita consumption, it’s hard to get exact numbers for that, but just on rough calculations, you’re looking at around $45 [or] $50 per capita consumption per annum on luxury goods. Now that obviously varies tremendously by country. So, in China, it’s less than $100. In America, it’s close to $300. In South Korea, it’s close to $400. In terms of end markets, Americans currently account for around 29% of spend; Chinese, 22%; and Europeans, 21%. Pre-Covid, Chinese consumers accounted for around a third of the luxury goods consumption. But consumer confidence is at record lows. We don’t know when China is going to recover, but we think there is further growth opportunity there.

Recent market performance

LM: The luxury goods industry is currently going through a downturn. Investors are trying to understand, is this downturn just cyclical, or is there a secular element to it? Stock prices have been hit. So LVMH, their stock price is down around 43% from its highs in 2023. If you look at Kering, which owns the Gucci brand, that stock is down 69% from its highs. And then Hermès, which is the highest-quality luxury name out there, their stock is down 25%. What’s key is that these are discretionary items, and demand is tied to economic growth, wealth creation and incomes. And economic growth has slowed, so consumers are more cautious, and they’re reining in their spending. But on top of this, the industry grew well above trend following the Covid pandemic. So in many ways, a pullback was overdue. There’s also been a shift in consumer spending away from goods towards travel and experiences. And another concern out there is that the luxury goods players, many of them, have raised prices too far. And that has resulted in demand destruction. Similar concerns were raised during the ’08-’09 slowdown. And the industry bounced back. So our sense is that we’ve been here before, we’ve seen this before. There’s really two types of consumers for luxury goods. You have the aspirational consumer, and then you have the wealthy consumer. When we look at the results for the different luxury goods companies out there, it seems like the aspirational consumer is the one that is getting hit at the moment, and they’re cutting back.

New players

LM: The industry has been dominated by European players. But in the recent past, we have seen the emergence of Chinese players in the space. The most prominent is a company called Laopu Gold, a jewelry brand that was only founded in 2009. And its key selling point is that it draws on Chinese cultural heritage in its products. That company has been growing very strongly. So, sales have more than doubled in each of the past two years, and they’re now over a billion dollars. So the risk is that companies like these could take share of wallet away from the European luxury brands. In 2024, Chinese consumers traveled en masse to Japan to buy luxury goods, to take advantage of the weak yen. That kind of gives me a certain level of confidence that they still aspire to own Western luxury brands when they can afford them.

What he looks for

LM: We would look for companies with a sustainable competitive advantage that will enable them to grow faster than the industry, sustain high margins and generate strong cash flow. And in this industry, the luxury industry, a competitive advantage can come from scale, leadership or intangibles — so, the brand equity when managed with a long-term perspective. And a feature of the luxury goods industry is that many companies are family controlled. And so they manage the business for the next generation. They make decisions that benefit the company over the long term, rather than focusing on just short-term profit maximization. These businesses have also become more professionalized over time. They’ve become more vertically integrated, which enables them greater control over their quality and their image. And through M&A, they’ve become less vulnerable than stand-alone single-branded companies. And also as part of larger holding companies, they’ve also benefited from economies of scale.

Opportunities for investors

LM: We think the luxury goods market is still attractive from an investor’s point of view. The cyclicality of the industry and the tendency of markets to overreact can create investment opportunities. Today valuations have come back, and they’re beginning to look more attractive. So they’re currently trading at roughly in line with their 10-year averages. And in terms of the biggest challenges and opportunities, they really relate to Chinese demand for Western luxury products. The industry can still grow without China, but probably needs China to recover, to return to historical growth rates.

And finally, what’s the bottom line on the luxury goods market?

LM: Wanting to have beautiful products, whether for your own enjoyment or to show to the world that you can afford them, is just part of human nature. There’ll always be demand for luxury products to celebrate birthdays, anniversaries and other occasions. And therefore, when you can find investment opportunities, they can turn out to be great long-term investments.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Louis Meagher of Setanta Asset Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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