Luxury looks less vulnerable to inflation, but isn’t immune: analysis

Bloomberg
Bloomberg

Summary

  • While the luxury sector looks less exposed to inflationary pressures than mass-market retailers, this isn’t the case for all players

Luxury-goods companies will report third-quarter results over the coming month, kicking off with French giant LVMH next week. But while the luxury sector looks less exposed to inflationary pressures than mass-market retailers, this isn’t the case for all players.

For example, luxury-sector brands that are more exposed to the mass market are feeling the pressure, according to Luca Solca at Bernstein. “Higher energy and food prices are squeezing the discretionary spending capacity at the lower end of the social pyramid," he said.

Franco-Italian eyewear maker EssilorLuxottica, which sells sunglasses under luxury brands including Chanel, Prada and Versace but also mass-market products, is more exposed to a squeeze on wallets, he noted.

Brands popular among more aspirational customers--rather than the very rich--are similarly more vulnerable, Solca said, citing British fashion firm Burberry as an example.

Meanwhile, other analysts raise the prospect of a wider downturn in luxury spending. September U.S. credit-card data from Citi show a sequential deceleration in transaction-value growth that might raise concerns of belt-tightening among the more affluent, analysts at the bank warn in a note. That means customers may still buy luxury goods but opt for less pricy items, with consequences for brands’ revenue and margins. Younger consumers in particular--a major driver for postpandemic luxury sales so far--look less immune to a worsening economic environment, Citi says.

Such fears may prove exaggerated, however. High-end consumers may well take inflation in their stride, as they have done with other potential demand headwinds, from the Russia-Ukraine conflict to a declining stock market, Bernstein’s Solca said. “Pent-up demand [is] trumping any bad news we have seen so far this year," he added.

Nevertheless, even if demand holds up well, luxury players may be wary of raising prices in order to combat the pressure of inflation in costs for materials, transportation and labor. Prices have been raised materially over the last two to three years, Solca says, but as postpandemic demand normalizes, such measures look less likely.

Luxury brands’ profitability looks protected, however, against the kind of pressure that has squeezed margins in the wider consumer sector, thanks to the potential for efficiency savings, and by favorable currency effects for eurozone-based companies, he says. If they do increase prices, they are likely to do so in the form of a rebalancing to address the price gap between Europe and other markets, notably Asia, analysts at UBS wrote in a note this week. Such a measure would offer a boon to revenue growth, but only for the stronger brands, they said.

Indeed, as is often the case in the luxury-goods sector, the better-performing players look more protected in general. “Consumers would typically cut their shopping list, and not reduce spend proportionally across brands," making brand desirability a key factor, Solca said. “The weaker the brand momentum, the worse," he added.

This story has been published from a wire agency feed without modifications to the text

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