As the luxury sector copes with single-digit growth, executives look back with fondness to the booming nineties —and ponder whether they will ever return.
This story first appeared in the November 25, 2002 issue of WWD. Subscribe Today.
The Nineties. They were the go-go decade of double-digit sales and earnings, a time when fashion companies had to hire extra security to cope with the shopping mobs, and when some luxury groups were so eager for acquisitions they ignored price tags and played dirty tricks on competitors. To some, it appeared the growth would last forever.
As late as September 2000, and in the face of analysts’ warnings about a slowdown in the luxury sector, Bernard Arnault, chairman of LVMH Moët Hennessy Louis Vuitton, was buzzing about the future. “The outlook is very favorable,” he told analysts during a meeting to announce the company’s double-digit first-half earnings. “The luxury market is usually driven by economic expansion, and no one sees why there should be a strong reversal in the coming years.”
Oops. One year later, the luxury goods market was in tatters from the dot-com bust, the slowing economy and the aftershocks of 9/11, and Arnault and other luxury goods executives were singing a different tune, scrambling to cope with the new realities. Today, with the prospect of a war in Iraq, tourism far from its pre-September 11 levels and a bear market, industry observers are uncertain about when — and if — luxury’s wonder years will ever return.
Most industry executives remain, not surprisingly, bullish. Many are already thinking in the long term — and trying to draw on experiences from the past in order to read the future. “Consider the pessimism during the Asian crisis back in 1997-1998 and how fast and strongly the industry picked up in 1999-2000,” said Gucci Group chief executive Domenico De Sole. “It’s difficult to predict the precise timing, but there’s no doubt in my mind that we’ll see another phase of strong growth to follow this moment of weak consumer spending. You just need to look at the increase of wealth around the world, and the growing number of people who appreciate and can afford good quality products.”
If there’s anyone in the luxury business who can foresee a trend — for good or bad — it’s De Sole. In the fall of 1997, he was the first fashion executive to sound the alarm when the crisis in Asia was just beginning.
Another long-term thinker is Gianluca Brozzetti, chief executive of the London-based A&G Group, which owns the Asprey and Garrard brands. He’s been in the luxury business since 1986 — working for Gucci, Bulgari and LVMH — so he’s seen his share of luxury cycles.
“I’ve been through the fall of the Berlin Wall, the Gulf War and the Asian crisis, and what I can say is that the luxury market evolves with the economic trends of the world. In the long run, it is a growing market — even if sales at some of the big players are flat or in the single digits,” Brozzetti said. “The world as a whole is becoming richer, and once people have their house, their car and food on the table, they turn to fashion-oriented, branded products.”
Like others, Brozzetti was reluctant to put a time frame on the recovery. “If you look at the past, it’s been two to three years before the market begins to emerge from its lowest point. There will be an upturn, but no one can say whether we’ll see what we saw in the Nineties for another 10, 20 or 50 years.”
Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London, said he believes luxury companies, in part, have dug their own graves. “We will not be seeing the sort of Nineties-era growth for a long time because the luxury business model has changed. Keep in mind that a lot of these companies went from being manufacturing or wholesaling companies to being retailers, too. Their growth figures were inflated by that transition. So while we may see a pickup in sales at the consumer level, there won’t be such a dramatic change in the sales growth of the companies,” he said.
“We definitely think the 1999-2000 period was a one-off boom for the luxury sector,” said Claire Kent, a managing director and luxury goods analyst at Morgan Stanley. “Going forward, we expect luxury companies to be in a low-growth environment, with sales growth in low– to mid–single digits. We think the strategies most of the quoted luxury companies are following are reasonable, but we doubt they’ll be able to make the same kind of investments in flagships in the future that they made in the past. For those companies with brands which are reaching maturity, developing a second brand should be a priority.”
In the Nineties, luxury’s changing business model coupled with a booming economy and consumer optimism made for a potent growth hormone. “It was quite a moment, one of those times when all of the stars in the sky were aligned perfectly,” said Rose Marie Bravo, chief executive of Burberry. “But things don’t return to what they were. Instead, they evolve — and the consumer evolves. I’m a believer in the democratization of luxury, and I think there are different and new consumers out there.”
Executives are continually trawling the world for new markets, and the biggest potential one out there is China. Bravo, who just returned from a trip to Asia, said she was struck by the consumers on the Mainland. “They’re acquisitive and they aspire to certain brands and status. I’m intrigued by what’s going on there, and also by the fact that people from mainland China are going on buying trips to Hong Kong.”
Robert Bensoussan, chairman and chief executive of Equinox and ceo of Jimmy Choo Ltd., said he, too, is struck by China’s buying potential. “This is a very aspirational place,” said Bensoussan in a telephone interview from Shanghai. “Right now, I’m sitting in a restaurant called The Face, which is serving fusion food and is so cosmopolitan, it could be anywhere in the world.”
Bensoussan said, however, that China needs time to mature. “In 10 years’ time, it’s going to take over Japan in terms of luxury consumption.” He also said luxury brands should not pin their fate on the ups and downs of certain geographic regions. “Brands are still brands no matter what the economic climate, and if they’re not selling in one place, there’s no reason why they cannot sell in another. Just look at the tobacco business.”
Dossin said luxury goods executives shouldn’t hold their breath waiting for China. “Yes, it’s potentially a huge market, and companies such as LVMH have gone in there very aggressively with stores and advertising. But it will take more than one economic cycle for it to rise up, and I can tell you it will not replace Japan at the top of the next economic cycle.” Asked exactly when that next cycle will be, Dossin was prudent. “It’s difficult to put a date in there,” he said.
But Andrew Gowen, luxury analyst at Lehman Bros., pointed out that everything is cyclical and said his bank remains bullish on the luxury sector. “Everything will come around again. It will probably take a decade. It may take two years, and it may take 100 years. No one knows.”
But, he added that all is not doom and gloom in the luxury goods industry. “The genuine luxury brands have shown low–single digit growth over the past year — and under awful conditions. The top lines for these companies are still in the hands of the gods, but the bottom lines are better than people think. We’re not seeing 20 percent declines like in the airline industry.”