Living the Lux Life – Entering a New Dawn
While luxury may be more resilient than other consumer categories, growth is being intensely scrutinized. Entering an uncertain macro period could likely mean a potential near-term risk to consumer habits and spending. Therefore, we believe companies that have a diverse portfolio, strong brand equity, and a higher exposure to soft luxury, as it is typically more defensive in a downturn vs. hard luxury, will be better positioned in the near term.
Beyond the near-term cyclical considerations, we have undertaken an extensive analysis of the structural case for the sector.
For soft luxury, historically, the sector has delivered 7% pa growth, and the segment's long-term drivers-including increasing demand and consumption from China, rising global wealth, and international tourism- may still be intact. In terms of brands, ongoing polarisation between the "winners" and "losers" continues. The most desirable continue to get stronger, enjoying the highest pricing power.
For hard luxury, rising wealth and demand from younger consumers should support overall demand, although we argue that hard luxury is increasingly discretionary (and therefore more exposed to cyclicality). Rising penetration of branded jewellery vs. unbranded could be a structural tailwind for growth in that category. But for watches, there are reasons to be more cautious – the market is highly competitive with a long tail of not-so-highly differentiated Swiss-made watches. We see an ongoing threat to all but the very highest end of the watch segment from smartwatches.
Our base case is that 2023 sees a 2009-style downturn in luxury goods consumption, with a recovery in 2023 akin to 2010. The shape and impact of this likely recession might differ, but we seek to analyse where there might be risk to earnings and where the market is comfortably pricing in a significant slow-down in growth.