Recession Who? Inflation Numbers Matched Only by Revenue Increases of Luxury Brands
It’s no secret that the US economy is not doing well right now. Between Jan. and July of 2022, the price of eggs has risen by over 50%, the price of bread by over 10% and the price of butter by almost 25%. There is no doubt that this level of inflation is hitting the average consumer very hard. So it might come as a surprise that LVMH, the world’s largest luxury holding company, which owns brands such as Louis Vuitton, Dior, Fendi and Celine, reported a 28% increase in revenue and a 23% increase in net income in its 2022 half-year financial statements over the first half 2021. LVMH’s primary competitor, Kering, which owns Gucci, Yves Saint Laurent and Bottega Veneta, also reported massive gains. Kering’s revenue and net income for the first half of 2022 were 23% greater and 34% greater, respectively, than the first half of 2021.
Technically, we are not yet in a recession. In the US, a recession must be declared by the National Bureau of Economic Research, and they have so far refrained from doing so. However, we are definitely seeing a lot of common signs. US GDP has fallen for two consecutive quarters, often considered a sign of recession, the major stock indexes are down and inflation is close to 10%. Bringing this all into account it is safe to say that even if we’re not technically in a recession, we should definitely be seeing recessionary spending patterns. So why are luxury brands doing so well?
It has long been seen that the luxury segment does not quite behave the way one would expect it to during a recession. Most people assume that when the economy takes a nosedive, luxury goods will be the first to feel it, as consumers shy away from making large purchases to try to save money or purchase less ostentatious products to avoid appearing tasteless. While the average consumer might shy away from expensive purchases during a recession, the luxury industry does not service the average consumer. According to Milton Pedraza, the CEO of Luxury Institute, which does marketing research and business management, the luxury industry owes 70% of its sales to the wealthiest 20% of its customers. This means the majority of luxury goods are sold to people who are least likely to be hit hard by inflation. Bear in mind that this is not the wealthiest 20% of all consumers but the wealthiest 20% of consumers who are already in the market for luxury goods. The assumption that consumers are more likely to purchase more subtle and understated products, has also been shown to be false. After the 2008 recession the Journal of Consumer Psychology published a paper showing that when comparing the pre-recession designs of Louis Vuitton and Gucci to their counterparts during the recession, the products actually got more obviously branded and ostentatious. Not only that, but the study also showed that their products got more expensive during the 2008 recession, which is something that most companies try to avoid when the average consumer is trying to save money.
The trend of luxury goods doing well is seen not just with clothes and leather goods but also with other products. Diageo, which owns several alcoholic beverage companies, including Don Julio and Casamigos, reported that its luxury beverages portfolio grew 31% for the year ending in June 22, a very impressive amount given that their overall growth across all segments was just 14%.
How has this trend shown in the American retail scene? In the upscale retail market, Nordstrom reported an increase in revenue of 11% for the quarter that ended July 2022 over the quarter that ended July 2021. Walmart, on the other hand, reported an increase in revenue of 8% for the quarter that ended July 2022 over the quarter that ended July 2021 and Target reported an increase in revenue of just 3% for the quarter that ended in July 2022 over the quarter ended July 2021. Budget-friendly retailer Dollar General reported an increase in revenue of around 9% for the quarter ending July 2022 over the quarter ending July 2021. It is notable that of these four companies the ones that performed the best are the most budget-friendly, where people shop to save money, and the most expensive, where people who don’t have to worry about saving money shop.
We saw that both LVMH and Kering had incredible growth, but how has that growth been reflected in their stock? That might be a bit of a surprise as well. LVMH’s stock is down 24% since the beginning of the year (as of the beginning of September 2022) and Kering’s stock is down around 30% from the beginning of the year (as of the beginning of September 2022). Target, which reported very disappointing growth, is down just 29%, from the beginning of the year (as of the beginning of September 2022), a decrease greater than LVMH but less than Kering. Walmart however is down just 7% from the beginning of the year (as of the beginning of September 2022). This is a very interesting phenomenon to note: despite stellar growth, luxury brands have not performed particularly well in the stock market. This was not just in LVMH and Kering; Hermes, Prada, Burberry, Tapestry (which owns Coach, Kate Spade and Stuart Weitzman) and Capri (which owns Versace, Jimmy Choo and Michael Kors) all have lower stock prices now than at the beginning of the year. This is despite the fact that all these companies have reported an increase in revenue. Nordstrom stock also fell, down 26% from the beginning of the year (as of the beginning of September 2022). In fact, out of all the companies mentioned in this article, the only one to have gained in stock price since the beginning of the year is Dollar General, with a modest gain of around 3% (as of the beginning of September 2022).
While it might be that luxury brands are generally shielded from inflation from a revenue perspective, this does not seem to translate into an increase in stock price. On a practical note, this means that they might not be the hedge against inflation one would expect from companies whose revenues grow at aggressive rates despite the economy crashing down around them.
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Photo Caption: Luxury storefront
Photo Credit: Pixabay