Affluent splash out on pricey Birkin bags but clouds loom
With prices set to rise further, analysts are asking how long the boom can last before even the wealthy decide they must tighten their belts.
Brushing off higher prices, affluent spenders are continuing to splash out on luxuries including US$10,000 handbags, high-end perfumes and premium drinks, trading updates from Birkin bag maker Hermes, Gucci-owner Kering, cosmetics giant L'Oreal and spirits company Pernod Ricard showed on Thursday (Oct 20).
Yet with prices set to rise further, analysts are asking how long the boom can last before even the wealthy decide they must tighten their belts. Hermes and Pernod Ricard both said they would continue to raise prices due to higher costs, after beating expectations in the July-September quarter. Business was boosted by Americans returning to Europe and Asia and taking advantage of the strong dollar.
Mainland China also saw a strong rebound for Hermes and Pernod after COVID-19 restrictions were lifted, although some curbs have since been reimposed.
Disruptions in the key Chinese market by COVID lockdowns weighed more heavily on business for Kering and L'Oreal, with sales at Kering's star brand Gucci in particular declining in the quarter.
Analysts were looking closely for signs that the post-pandemic spending boom could ease after months of robust appetite from shoppers drawing on pandemic savings to treat themselves to designer labels and champagne.
Top executives largely brushed those concerns aside.
"It's an industry that has experience of situations of uncertainty, but we have a lot of ammunition ... no matter what factors might weigh in the near- and medium-term, perspectives in the long-term remain solid," said Kering finance chief Jean-Marc Duplaix.
Duplaix said that while business with high US spenders was strong, some cheaper products liked by so-called "aspirational" consumers were doing less well.
Some analysts expect the industry's sales growth to begin to slow in the fourth quarter or starting next year, with the strongest labels likely to grab market share as consumers flock to best-known names.
Flavio Cereda, an analyst at Jefferies, predicted stronger labels like Chanel, Hermes, Louis Vuitton and Dior, as well as some smaller brands like Moncler, will accelerate market share gains in the final part of the year.
"All told, this higher end of the market is far more attractive than other consumer discretionary companies in the current climate," said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, referring in particular to Hermes.
"Higher net worth consumers are far less likely to be impacted by difficult economic conditions."
Jefferies forecasts 13 per cent sales growth for the industry this year and 7 per cent next year.
Pernod Ricard, which raised prices by around 7 per cent globally over the quarter, said it was confident sales growth would continue through its 2023 fiscal year, as consumers trade up to its premium spirits. Hermes, which has waiting lists for its prized US$10,000-plus handbags, plans to raise prices sharply next year, by 5 per cent to 10 per cent, following in the footsteps of rival luxury giants which increased prices throughout the pandemic.
Both Hermes and Kering flagged that suppliers were under pressure from soaring inflation, including raw materials and energy costs.
Companies catering to less affluent consumers have so far also been able to pass on price increases, trading updates from the world's two biggest consumer firms, Nestle and Procter & Gamble showed this week. Shoppers continued to pay more for goods like Nescafe coffee and Gillette razors despite surging inflation.