the study

Bain and Company published its 11th annual study of the global luxury goods industry in Milan last month.  The study is authored, as usual, by Claudia D’Arpizio, the head of Bain’s luxury goods practice.  It’s developed in cooperation with Altagamma, the Italian luxury goods trade association.  (Thanks to Bain for giving me access to the study, a summary of which can be found on the Bain website.)

three posts

I’m going to write about this year’s study in three posts.

Today I’ll cover Bain’s assessment of the personal luxury goods industry’s prospects for the upcoming holiday season and for full-year 2012, as well as what’s likely to be in store for 2013 and beyond.

Tomorrow I’ll write about the longer-term trends developing in the luxury goods market.

On Wednesday, I’ll add Bain’s view of the geographical structure of the luxury goods market, in addition to–something new this year–the consultant’s sense of where the €212 billion in annual sales of luxury goods stands in the context of the overall €750 billion “market of markets” of all worldwide luxury expenditure.

€ vs. constant currency

The Bain study is framed in euros.  This makes sense, since a majority of the important luxury brands are European and the largest single bloc of affluent customers still remains the EU.  Also, historically the € has been relatively stable.  However, the currency has been uncharacteristically volatile over the past several years, as the Great Recession has brought long-simmering economic, political and demographic issues in the EU to a head.

From an equity investment point of view, it’s no bad thing in an area under economic strain to hold stock in companies with strong global brand names and lots of overseas sales.  So luxury goods firms will find support from local investors.

We’re not all €-based buyers, however.   Also, almost 2/3 of luxury goods sales, and the lion’s share of the growth, lie outside the EU.  For both these reasons, it’s important to separate underlying expansion in demand from fluctuations in currency.

2012

the recent past

The personal luxury goods market hit what was then an all-time peak of €170 billion in 2007.  The market fell by 10% over the following two years to €153 billion in 2009, before rebounding to hit new highs of €173 billion (+13%) in 2010 and €192 billion (+11%) in 2011.

Bain predicts another new record of €212 billion in personal luxury goods sales (+10%) for 2012.

2012 to date

The first two quarters of 2012 are already in the books, showing +14% growth.

Although publicly traded companies have by and large not yet reported 3Q12 earnings (many have fiscal periods ending in October), monthly sales announcements, industry data and anecdotal evidence give us a good sense of how the quarter will play out.  Year on year deceleration is the operative word.  Bain has pencilled in a 7% yoy revenue advance.

two forecasts for the holidays

For the upcoming holiday season, Bain has two forecasts.  Its base case is that 4Q12 will show the same yoy gain as 3Q12, up 7%.  It’s optimistic case is that the holidays will show the same yoy growth they did in 2011, +12%-+13%.  (For what it’s worth–personally, I’m not familiar enough with Ms. Arpizio’s work to have an opinion–both Bain’s base case for 4Q11 (+8%) and is optimistic case (+10%) were conservative.)

Bain continues to project annual +4% to +6% growth in personal luxury goods growth in constant currency over the next several years.  This will be driven by Asian consumers, tourism, deeper penetration of emerging markets and of second-tier cities in developed markets, and rapidly expanding online and outlet channels.  I think this figure may prove to be too low.

Accessories–leather goods and shoes–will likely be the best categories.

weaker than it looks in 2012

2010 industry growth of +13% breaks out into +8% in constant currency and +5% from € weakness

2011 growth of +11% breaks out into +13% in constant currency and -2% from € strength

2012 growth of 10% breaks out into +5% in constant currency and +5% from € weakness.

The Bain study, then, is projecting a continuation of the current environment of slower growth through 2015.

my take

There’s an increasingly large separation between the nationality of the buyers of luxury goods and the places where the purchasing takes place (more about this tomorrow).  If we look at the economies where the large groups of buyers reside,

–China (25% of the market) is, I think, at a cyclical low point from which growth will accelerate next year.  Luxury purchases should be a high-beta function of this rebound.  +20% in 2013?

–Europe (24%) is a continuing mess, from which I’m expecting no better than flat

–the US (20%) is an enigma.  Layoffs of high paid bankers will continue to dampen growth in luxury goods purchases.  But the current slowdown in luxury goods sales is more widespread.  Who knows why?  My guess is that this isn’t the affluent anticipating higher personal income taxes.  Rather it’s the worry, symbolized by the “fiscal cliff,” that gridlock in Washington will undermine economic growth.  Legislators on both sides of the aisle appear refreshingly open to compromise in their post-election statements.  The administration doesn’t sound so willing.  Negotiating stance?…tin ear?  We’ll know more in the coming few weeks.

If I’m correct about Chinese growth in 2013, that country alone will provide Bain’s 5% constant currency growth.  The big imponderable for me is how much the US will add to that number.

At this point, therefore, to me the safest bet–maybe the only safe one–seems to be on accessories sold to Chinese luxury consumers.