Bain Luxury Goods Spring update (II) : structural changes in the luxury market

structural changes

Yesterday I wrote about Bain’s analysis of prospects for global luxury goods sales in 2013.  Today, I’m going to take a look at what the consulting company perceives as possible structural changes in the worldwide luxury goods market.

There are two big ones:

Asian tourists remaining closer to home

Japan:  Twenty years + of economic stagnation had finally begun to take a toll on the seemingly insatiable Japanese demand for European luxury goods a few years ago.  Recent sharp devaluation of the yen has depressed this appetite further.  Skeptics (like me) of the ultimate success of Abenomics must believe that this is a permanent change.  Given that, pre-devaluation, the price of luxury goods in Japan has typically been much higher than elsewhere, the negative effect of lower Japanese spending on the profits of luxury goods manufacturers will probably be disproportionately high.

China:  Weakness of the renminbi vs. the euro is a mild negative.  More important, Bain points out that Chinese luxury buyers are beginning to turn away from Europe toward Macau, Hong Kong and Australia as vacation destinations.  On the surface, it shouldn’t make much  difference whether Chinese customers on holiday buy in France or Cotai.  However, the change in vacation travel venue may give a significant opportunity for budding Pacific-based luxury brands to take business away from European rivals.  I think this is already happening.

the Baby Boom passing the baton

Bain characterizes the luxury goods preferences of different age groups as follows:

Baby Boomers (55+)  want:

–a bricks and mortar store

–a one-to-one interaction with a salesperson who represents the brand ans who also knows them well

–high-priced scarce or one-of-a-kind items that they think confer status on them individually as people of unusual taste and means

–a formal buying ritual.

In contrast, Generation Y (20-35) and Generation Z (0-20)–i.e., the children of Baby Boomers–want:

–instant availability 24/7, whether through physical stores or online makes no difference

–to be defined by brand values, but to be able to influence those brand values as well

–unique or novel items, which are not necessarily the most expensive, but which are personalized and which identify them as members of a certain group

–to be entertained.

In a nutshell, this is the difference between buying statement jewelry in a private room and buying a handbag in an online flash sale.  The branding, selling and infrastructure skills differ greatly from the first transaction to the second.

This difference in outlook is increasingly important, because the Baby Boom is retiring and its children are emerging as a new generation of luxury buyers.  One might even argue–with how much validity I’m not sure–that the sudden drying up of demand for traditional high-end European luxury goods in Japan is mostly a function of an aging population and a shrinking workforce.  If so, we may begin to see the same phenomenon in Continental Europe before this decade is out.  Again if so, luxury goods companies that don’t refocus themselves to cater to the preferences of a younger generation of consumers will find themselves struggling to retain relevance.

Bain Luxury Goods Worldwide Study: Spring 2013 update

Consulting firm Bain issued the latest in its series of important studies on the global luxury goods industry last month.  Thanks to Bain, I’ve just received a press copy of the study itself.

I’m going to write about it in two posts.  Today I’ll cover Bain’s view of industry prospects for 2013.  Tomorrow, I’ll write about longer-term structural changes underway for luxury goods.

2012 results

(It’s important to note that the study, conducted by well-known Bain analyst Claudia D’Arpizio, is done in cooperation with the Italian luxury goods trade association, Altagamma.  This means the sales figures are presented in €.  Also, the concept of luxury goods used has a strong traditional European emphasis.)

in € terms

In € terms 2012 was an above-trend sales year, one very close to being on par with 2011.  In both period luxury goods revenues grew by just over 10%, in an industry whose long-term growth rate is closer to +5%-6%.

in constant currency

In constant currency terms, however, 2011 was a +13% year (meaning strength in the € understated how strong the worldwide luxury good business was).  In contrast, 2012 was a +5% year in constant currency (meaning half the revenue rise came from € weakness).

the holiday season

Four factors characterized the key yearend holiday sales season in 2012:

–weaker than expected traffic in the US and Europe

–purchases tended to be for the buyer’s own use, rather than as gifts for others

–online sales, especially mobile, were very strong

–online sales were increasingly driven by special offers and by discounted shipping

2013 prospects…

1Q13 appears to have been a low point.  Sales were up a mere 3% year-on-year in constant currency.  € strength cut that in half in current currency terms.

Bain forecasts a 4%-5% full-year rise in €-denominated sales.

…by region

Japan:  Sharp devaluation of the ¥ has had a strong negative effect on Japanese luxury goods consumption–driven by the resulting loss in wealth and purchasing power of Japanese citizens.

Bain expects luxury purchases by Japanese abroad–notably Hawaii and the EU–to be down by 40% yoy as foreign travel declines and because $- or €-denominated goods have become less affordable.

Bain estimates that an estimated 10% increase in domestic luxury goods purchases will offset some of the shortfall.  But the overall effect will be about a 20% yoy contraction in luxury goods consumption by Japanese this year, a figure more or less in line with the fall in the Japanese currency.

In  Bain’s view, continuing ¥ weakness will limit the luxury goods industry in Japan to +4%-6% growth in € terms in 2013.


Chinese spending on luxury goods grew by 20% in constant currency last year, and by 30% the year before.  Bain is forecasting a relatively modest increase of +7% for 2013, however.

The main reason is change in policy by the newly installed central government.  The new leadership in Beijing is discouraging conspicuous consumption by the ultra-wealthy, particularly those with family connections to high-level present or former Party officials (although Macau gambling doesn’t appear to be suffering).  Perhaps more important, the administration has launched an anti-corruption campaign aimed at the widespread soliciting of “gifts” by officials from those seeking, say, business or construction permits.  Some estimates I’ve heard are that such gifting has made up as much as 25% of the sales of certain luxury brands.  Bain only mentions that sales of watches have been especially hurt.

No mention of a shift away from European to domestic Chinese luxury brands, but I think this is also part of the story.


Although it seems to me that Europe has passed its cyclical low point, and will gradually improve through 2013, the region will scarcely grow at all this year.  As a result of continuing economic weakness, aspirational buyers of luxury goods continue to trade down.  Japanese tourism has slowed dramatically.  And Chinese visitors are purchasing less on their European trips, as renminbi weakness makes €-denominated goods look more expensive.

Bain pegs European luxury goods sales in 2013 at 0%-2% growth.


Bain has little to say–good or bad–about US luxury goods buying.  It has penciled in growth of +5%-7% for this year.

the world

Asia ex China’s the best, at +7%-9% growth.  China’s a close second.  Europe’s the worst.  Overall, Bain thinks worldwide luxury goods sales will advance by +4%-5% in 2013.

More tomorrow.

shifting Federal Reserve priorities

long-term unemployed

For some time the Fed has made it clear that its number one priority has been the economic well-being of the millions of workers laid off during the Great Recession who have yet to find work again.  The Fed’s worry is that the longer this group stays unemployed the greater the chances it will morph into a permanent underclass of the type Europe has long had.

Recently, the Fed has been increasingly vocal about the fact that monetary policy can do little for these incipient lost economic souls.  Their rescue is really a job for fiscal policy that promotes job creation–say, reform of the tax code or infrastructure spending–sound advice that is falling on deaf Congressional and White House ears.

shifting gears

The Fed’s priorities appear to be changing, however.  It’s primary focus is shifting to preparing financial markets for a long journey away from today’s emergency-low interest rates to more normal (that is, higher) ones.  The agency is doing this in its usual indirect way.  It has been so long since investors have had to contemplate a higher cost of money, however, that many may not understand the ritual dance that is now beginning.

Fed signals

So far, the signaling has included:

–remarks by outgoing Fed Chairman, Ben Bernanke,

–discussion by other ranking Fed officials,

–mention in Fed meeting notes,

–hints dropped to favored reporters and columnists.  Their identities as conduits for Fed information are well-known to Fed watchers, who immediately understand the true source of the reporters’ statements.

its purpose

The idea is to get the markets to start to move by themselves in the direction the Fed wants.  That way Fed interest rate hikes seem to be only validating positions the markets are already taking, something the Fed prefers.

Two factors make this process more daunting than usual:

–bond investors have been conditioned for over three decades to think that interest rates only go down,

–in the Fed’s view, overnight money has to rise by more that 400 basis points to get back to “normal,” a huge move that will likely take place over several years.

The real trick will be to prevent bond market from rushing ahead and making the entire move in one leap once investors figure out what’s going on.  It seems to me that this is the purpose of the apparent Fed “confusion.”  It’s deliberate–and it’s intention is to get the interest rate train rolling without gathering too much of a head of steam.

the 21st century stock market cycle

Last Friday, I started to write about the stock market cycle, prompted by a phone call from my younger son.  This is the second installment.

the old model

In a closed economy, unaffected by imports and exports and untroubled by external shocks, the cyclical rhythms of GDP growth–and therefore of the stock market–are controlled by the government.  In the US this has meant, theoretically at least, applying stimulus when GDP begins to falter and taking it away when the economy begins to expand at an unsustainably high rate.  The peak-to-peak or trough-to trough cycle that this action produces has averaged about four years during the post-WW II period–broken out into 2 1/2 years of up and 1 1/2 years of down.

Not over the past two decades, though.

the world has changed

After almost a half-century of globalization–of governments forging ever stronger economic links with one another–the rest of the world is much more important than previously to almost any nation’s domestic stock market.

In the case of the US, the available data suggest that only about half of the profits of S&P companies now come from the domestic economy.  The rest derive in roughly equal amounts from Europe and from the Pacific + other emerging areas.

Surprisingly, this increased economic openness hasn’t been an important disrupter of the US stock market cycle so far.  The culprit has been government policy instead.

policy mistakes in the US

In hindsight, Alan Greenspan made a series of monetary blunders in the 1990s and early 2000s that extended economic cycles but created in both cases stock market/economic bubbles that ultimately collapsed of their own weight.  The damage these collapsing bubbles created was severe.

1997-1999:  the internet bubble

In 1997, a banking crisis in heavily indebted Thailand began to spread to other smaller Asian economies.  Mr. Greenspan chose to open the domestic money taps to offset possible negative economic effects on the US, at a time when domestic considerations alone would have had him either neutral or tightening.  Two years later, he expanded the money supply further.  He feared the possible economic disaster that might occur if all the world’s electronic devices stopped working on January 1, 2000–as prophets of doom like Ed Yardeni were predicting (horse-drawn plows were in short supply, for example, as survivalists planned for a post-Y2K apocalypse).

These actions, however, also allowed the Internet Bubble to form.  That was a heady concoction of hype and fraud concocted by investment banks and the loony predictions of internet “analysts” like Henry Blodget (subsequently barred from the securities business) and Mary Meeker. The bubble collapsed when earnings reports showed the so-called TMT business had begun to contract in early 2000, not expand.

2003-2007:  the housing bubble

This was a much more devastating episode and a much more complex one.

–The Fed supplied the easy money.

–Mr. Greenspan failed to supervise the mortgage industry the way he was supposed to.  “Liars loans” proliferated.

–Congress, which had barred commercial banks from the securities business for their role in causing the Great Depression, let them back into the fray during the late Clinton years–just in time to work their “magic” again.

–Bank and securities regulators failed to stop the spread of complex, badly understood–but nonetheless toxic–derivative securities spawned by commercial and investment banks.

The resulting house of cards began to implode as large numbers of borrowers were unable to make their mortgage payments.

flying by the seat of our pants

That’s where we are now, I think.

The old four-year economic cycle idea hasn’t worked recently.  I don’t see much to generalize from in the two most recent cycles that would provide a framework to replace it. Both downturns were caused by systematic shocks.  But both emanated from the US.  Both had excessively easy money policy at their root.  The Great Recession added in regulatory and Congressional incompetence.

The only practical tool I can see is the general principle that government policy is accommodative while the greater worry is economic weakness.  It turns contractionary (and upward stock market movement ends) when the greater fear is inflation.

Despite my periodic worries about the apparently high current level of the S&P, I think we’re still in accommodative mode, not contractionary.

One other comment:  given that interest rates are zero and that Washington is dysfunctional, the US is especially vulnerable at present to external shocks–though I see none on the horizon and have no strong ideas of when/where one might arise.

current Intel (INTC) strength

I haven’t had the time over the weekend to give the topic of the 21st century stock market cycle will look like the time and attention it deserves–tomorrow, I hope.  Fathers Day with my family and the wedding of the daughter of close friends have shattered my good intentions.  A brief note about INTC instead.


INTC has been a pretty terrible stock in the two years or so I’ve owned it.  Yes, it has gone up.  But so has the market–and the latter by a much larger amount.

INTC made an immense leap from just above $19 a share in August 2011 to briefly stick its head above $28 in April 2012.  But then it gave just about all the advance back as it became clear that no major manufacturer of mobile devices was going to take the chance last year of putting INTC microprocessors in its devices.  INTC chips were still too big and too power-hungry, despite the enormous amounts of money the company had spent–and continues to spend–on R&D and new production facilities.

differences today

A year later, the story is basically the same, waiting for success in the mobile arena, with four differences:

–the market appears to be rotating away from high-dividend defensive issues toward the tech sector,

–INTC’s newest chips are smaller, much more powerful, generate less heat and use less battery than last year’s

–PC makers appear to be making a competitive response to the appeal of tablets (cheap + instant-on) by lowering prices and coming out with tablet-like devices that have significantly more power, and

–INTC has its first “real” customer for a tablet chip–Samsung.

It isn’t all clear sailing yet for INTC.  Some holders, fearing a repeat of the price action of 2012, will be tempted to declare victory and sell.  So far, they’re in the minority.  As for me, I’m content for now to wait and watch.