PARIS — The luxury sector may have to wait until at least 2004 for a recovery — and it won’t be helped by the fact that the Japanese market, long a bonanza for European and American brands, is contracting and maturing.

Those are the key messages in two reports released Thursday by investment firms Morgan Stanley and Merrill Lynch, respectively.

Morgan Stanley analyst Claire Kent actually upgraded her view on the luxury sector — to "in line" with the general market from "cautious" — but with plenty of caveats.

"We do not see a return to the kind of environment luxury companies enjoyed in the mid-to-late Nineties," she wrote. Due to lower levels of wealth creation and depressed tourism, she forecasts mid-single-digit sales growth.

What’s more, Kent argued that the direct-control orientation of many luxury groups — which led them to buy production and expand store networks — makes them ill-suited to thrive in a low-growth environment. Store closings and brand disposals are likely to accelerate, she wrote.

As reported, LVMH Moët Hennessy Louis Vuitton already has begun this process, selling its small cosmetics brands Urban Decay and Hard Candy as well as its stake in Michael Kors.

"Luxury companies need to refocus their strategies on their core brands and become leaner again," Kent concluded.

By category, she said jewelry and home items offer the greatest upside potential, whereas watches, leather goods and ready-to-wear are likely to grow by no more than single digits. The watch sector, one of the weakest links in luxury last year, is unlikely to improve, partly because of the high ticket price and the dependency on male consumers, she noted.

Meanwhile, in their report, Merrill Lynch luxury analyst Antoine Colonna and his team burst the bubble that Japan’s appetite for luxury is insatiable. Even though Japanese consumers account for more than a third of total luxury sales, and more than a third of the population owns a Louis Vuitton product, "since 1996, the Japanese market for apparel and accessories has lost approximately a third of its value," Colonna wrote. "In 2002, we estimate that the luxury market contracted by 3 percent. In 2003, we expect the market to be flat."Colonna said the good performance of a handful of major brands owned by listed companies creates a skewed perception of Japan as a "safe haven."

In reality, a sluggish economy and aging population are changing consumption patterns and polarizing spending at the high and low ends. What’s more, consumers are gravitating to "star" brands — which include Louis Vuitton, Burberry, Hermès, Chanel, Rolex and Cartier — whereas "wannabe" or weaker brands are becoming marginalized.

Charting average sales growth in Japan for a host of brands from 1997 to 2002, the Merrill Lynch report pegs Valentino, Tommy Hilfiger, Vivienne Westwood and Krizia as "mature," while Tiffany, Escada and Anna Sui are considered to be "under pressure." In general, Colonna notes that "fashion players" like Gucci and Prada have been penalized more by the economic environment than more timeless brands like Hermès or Chanel.

Colonna also predicted a return to the wholesale channel, as some brands struggle to make big-box formats profitable, and he stressed that Japan remains a vital bellwether for the sector.

"The most successful brands in Japan are also more likely to perform well on a global basis," he wrote. "We stress, however, that even these brands should experience more difficulties than in the past to generate additional growth."

For the sector as a whole, Merrill Lynch maintains a neutral stance, but cautious in the near term, forecasting a recovery in consumer confidence once the growing conflict with Iraq is settled and possibly as early as the first half of this year.

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