NEW YORK — Where’s the growth?

In the $75 billion luxury goods sector, it’s all but done a disappearing act: Sales gains are expected to retreat even further this year to low-single-digit turf, and next year should be equally tough. The sector isn’t expected to re-accelerate to robust advances before 2004.

That’s when revenue is seen returning to annual growth rates averaging around 8 percent, resulting in profits that rise 15 percent annually, on average. While projecting prospects for luxury goods this year as moderate to slim, nearly a dozen of the sector’s observers contacted by WWD are nonetheless bullish longer term. In 2004, they expect the aspirational customer — who, they say, has abandoned the market for the time being — to begin spending in earnest again for top-end goods.

For now, that customer — who has an annual household income north of $100,000 but less than $1 million and drove much of the sector’s growth during the late Nineties — has traded down, having lost her appetite for the raft of rising and reinvigorated status labels, like Vuitton, Prada and Gucci. The dampening dynamics include the slumping U.S. economy and post-9/11 effect, which are raising concerns about job security and sparking a rebellion against conspicuous consumption; the strong U.S. dollar, which has discouraged tourism here, and the weakening Japanese economy, which is depressing travel by the world’s largest population of luxury goods buyers. Those buyers make approximately two-thirds of their luxury goods purchases, or about $23 billion worth, when touring.

At the same time, high-net-worth individuals, or those with annual household income of at least $1 million, are curtailing luxury goods purchases because of sharp declines in their investment portfolios and, especially in Europe, because a good deal of their assets are tied up in illiquid real estate.

“This is a time when the luxury labels have to be careful about not depreciating the value of the brands they have, say, by staging price promotions,” cautioned Carl Steidtmann, chief economist at Deloitte Research. “It would come back to haunt them as the economy and the aspirational customer come back. They will come back.”

Boding well long-term, noted Anne Catherine Galetic, analyst on Salomon Smith Barney’s London-based luxury goods team, is the favorable outlook for the wealth held by high-net-worth individuals: It’s estimated to grow at a compounded annual rate of 12 percent for the period beginning 1999 through 2004, down just 3 percentage points from the 15 percent pace at which their holdings rose from 1999-2002. That would put $44.9 trillion in the hands of the high-net-worth niche in 2004, up from $25.5 trillion in 1999, Salomon Smith Barney projected.

Luxury tycoons themselves accounted for 21, or 4 percent, of 497 billionaires in 2001, cited in Forbes’ annual issue highlighting the world’s wealthiest people, published this month. While Americans account for nearly half the world’s billionaires, they represent only 19 percent, or four, of the 21 luxury players. Two-thirds of that group are located in Europe, with seven of them in Italy, six in France and one in Germany. The wealth held by the luxe crowd also fared better than that of the broader group of billionaires: 29 percent, or six of them, saw their net worth increase last year, versus 23 percent, or 114 individuals, overall.

Nonetheless, because high-net-worth individuals are buying fewer luxury items and the aspirational, or affluent, customers are trading down, most status labels can look forward to only paltry gains for the foreseeable future.

“The luxury goods industry was growing at about 8 percent annually between 1998 and 2000, and 6 percent over the past 10 years, but in 2001, it slowed down to the low single digits — and we expect it to stay in the low-single-digit range this year,” forecast Dana Telsey, a senior managing director and luxury goods analyst at Bear Stearns, reflecting the prevailing view.

“We’ve seen massive cuts in spending for luxury goods by aspirational customers,” offered a luxury goods analyst at Goldman Sachs’ London office, who asked not to be identified. “The outlook for the business is pretty dismal this year. Brands such as Gucci, LVMH and Tiffany are not predicting a first-half rebound, which means the half will be terrible, as luxury companies are coming up against strong [prior-year] comparisons.”

Indeed, Tiffany on Feb. 28 reported its comps for the fourth quarter dipped 3 percent below prior-year levels in the U.S., and LVMH said Friday its net income for 2001 plunged 98.6 percent to $8.7 million (see related story, page 2).

Although observers anticipate the sector’s rebound in two years, just a few were willing to take a stab at identifying the labels best positioned to leverage luxury’s longer-term promise. There can be surprises — even in luxury’s realm of languorous change.

“Sometimes, a strong brand is better, regardless of whether it’s classic or aspirational,” the Goldman Sachs analyst pointed out. “Prada and Gucci — aspirational brands — are doing better than such brands as Bulgari, Hermes, the higher-end, more classic brands, which were more resilient during the Asian financial crisis. We’ve found those brands harder hit this time.”

Nonetheless, John Wakely, a managing director at Lehman Bros. who leads the bank’s London-based luxury goods group, said, “Since 9/11, we’ve stuck our neck out and been particularly keen on LVMH. Its share price is now more than double its September lows [roughly $56 versus $26]. We’ve been very bullish on LVMH because it’s one of the best luxury brands — between the very high-priced, like Hermes or Bulgari, and the more aspirational brands, like Gucci and Prada. It also produces some, but not all, of its goods alone.

“We also believe [LVMH chairman] Mr. [Bernard] Arnault is realizing better what a luxury good is — it’s not art,” Wakely added, in a swipe at LVMH’s recent decision to sell some of its stake in the Phillips auction business, in which it took a stake just last year. “Perhaps in the second half, the luxury sector can benefit from pent-up demand,” said Bear Stearns’ Telsey. “They will have weak comparisons versus the post-9/11 period. The U.S. is starting to stabilize. Europe is a little softer. The slump is catching up with them now.”

One surprise delivered recently by the luxury industry, said observers, is its continuing strength in Japan’s domestic market, despite the continued horrible economic news from that country (see related story, page 5). That makes Japan among the few markets where aspirational customers have helped maintain some growth in the segment. This affluent customer is typically in her 20s or 30s, works in an office, lives with her parents, and thus has enough discretionary income to burn $1,000 on a Prada handbag, for one thing.

Of course, when the Japanese begin traveling again in numbers, luxury stands to get a much bigger boost, since the country’s consumers account for about 46 percent of the segment’s volume globally, or about $35 billion in goods bought, according to Goldman Sachs research.

Also holding some promise, said analysts, are prospects for retail expansion in midsized cities, where affluent customers are eager to buy the top-end brands, but are unable to find a location where they’re sold. While luxe labels, by definition, avoid distributing their brands too widely so as not to destroy their cachet, analysts claimed there’s still plenty of room for growth without giving up the status franchise. “The midsized city stores tend to be more profitable than the big flagships, due to spiraling real estate costs in places like New York,” stated Galetic. By the time a flagship breaks even, typically five years, she noted, it’s time to pour profits into a renovation. “If a company has a flagship in Paris or on the Riviera, they should be looking at places like Bordeaux, Lyon — cities with, maybe, one million inhabitants, but where store costs are without comparison to the bigger cities,” Galetic advised.

Potentially lucrative, as well, is the broader Asian market, which observers described as relatively untapped by luxury firms. However, Dana E. Cohen, analyst at Bank of America Securities, warned the terrain could be a little rocky near-term because of the affect the depressed Japanese economy will have on other Asian countries.

In years ahead, observers agreed, consumers’ longing for luxury goods will hinge largely on psychological underpinnings. “The essence of luxury goods is to differentiate sharply,” pointed out Deloitte’s Steidtmann. “This runs counter to the feeling for the common good that has arisen since 9/11. It will take time to know whether the consumer psychology regarding luxury goods will be affected.”

Cohen, for one, is starting to see signs of renewal in the sector. “In a weird way, I think ‘Sex and the City’ defined conspicuous [fashion] consumption in the late Nineties,” she reasoned. “If Sarah Jessica Parker wore Manolo Blahnik shoes, they sold out. Post 9/11, for a short period of time, people felt they didn’t need luxury goods.

“To some extent, people have gotten over that feeling,” Cohen added, “but they haven’t yet resumed spending like before.”

load comments
blog comments powered by Disqus