A Murky Outlook for Luxury Goods
Essay title: A Murky Outlook for Luxury Goods
Sales of luxury goods appear to be snapping back after an awful final quarter of 2001, but analysts and consultants who follow the sector warn that several factors cloud the outlook for growth in the coming months and years.
Short-term worries include the recession in Japan and the coincident devaluation of the yen. Further out, concerns exist about the effectiveness of various distribution channels and the risk of brand saturation in the marketplace.
The recession last year was difficult for many industries, yet sellers of luxury goods held up fairly well ЎX until September. The terrorism attacks and the immediate and severe depression of tourism and air travel proved to be one crisis too many.
“The luxury goods sector tends to be quite recession proof because people who buy them have secure jobs or are wealthy anyway,” Bryan Roberts, a senior retail analyst at the research firm Mintel International Group Ltd., explained. “But Sept. 11 had a massive impact on a number of big global brands. They are very reliant on tourism for their sales, at retail outlets in airports and at larger tourist destinations. A number of businesses were severely hit, with sales down one-fourth to one-third in the fourth quarter.”
The drop in sales was so extreme that the three largest global providers of branded goods ЎX LVMH Moet Hennessy Louis Vuitton SA, Richemont SA and Gucci Group ЎX have either reported or are forecast to report substantial declines in profits for the financial year that includes the fourth quarter.
LVMH, the French company that is the industry leader by far, barely broke even last year, the company announced in early March, although most of the decline was the result of one-time writeoffs. Still, operating profit fell 20 percent. Richemont, a Swiss maker of jewelry, watches and apparel, reported a 58 percent fall in profits last year. Analysts at Merrill Lynch & Co. expect a 22 percent decline at Gucci Group.
The news is not so grim at smaller makers of branded items. Luxottica SpA, an Italian eyeware company, and Ralph Lauren Inc., a U.S. apparel maker, reported profit growth for 2001 of 24 percent and 13 percent, respectively.
Merrill Lynchs analysts expect Tods Group, Hugo Boss AG and Hermes SA to show earnings growth for last year, with declines likely at Bulgari SpA and Tiffany & Co. They expect this year to be much better, with all of those companies showing sales increases and all, except Gucci, recording higher profits as well, especially in the second half.
“Earnings for the sector will be skewed toward the second half of the year, and we are convinced that our estimates for most of the sector will be revised upward throughout the year,” the analysts said in a research report.
Roberts, at Mintel, is also hopeful. “By the middle of 2002, the numbers will normalize,” he said. “People tend to underestimate how resilient consumers are. There seems to be no end to the pickup in appetite for these products. A number of retailers are reporting that although sales at tourist stores and airports are down substantially, sales in Japan and other markets are up substantially.” Sales to Japanese are vital to sellers of branded goods, accounting for 40 percent of the global market, with half of those sales in Japan and the rest to Japanese travelers. The forecast of improvement in the industry could be undone if Japan remains mired in recession. Economic weakness depresses disposable income.
Another key issue is how luxury goods are sold. The big idea for the last 10 years has been directly owned stores. These have been seen ЎX rightly, by most accounts ЎX as a way to control brand image and distribution and to maintain a high profile with shoppers.
People who follow the industry are coming to think that the idea is becoming too big, however. Companies run the risk of brand dilution with too many directly owned stores.
The stores are also very expensive to operate because they must be sited in high-rent districts ЎX Rodeo Drive, Fifth Avenue, Bond Street, Avenue Montaigne. High fixed costs mean that when times get hard, directly owned stores can induce a big hit to profits.
“If a luxury goods brand has a strategy of opening in a prime location, the costs are very significant,” Roberts said. “Its hard to