10th annual Bain Luxury Goods Worldwide Market Study, October 2011 (I)

the study

Bain released its tenth annual Luxury Goods Worldwide Study on October 17th.  It’s based on data from 230+ luxury goods companies, compiled by Bain in cooperation with Altagamma, the Italian luxury goods trade association.  The analysis is directed by Claudia D’Arpizio, the well-known consultant who heads Bain’s fashion and luxury goods practice. (Thanks to Bain & Company for giving me a copy of the study.  You can find a summary on the Bain website.)

the results

I’m going to write about the Bain study in two posts.  Today’s will cover prospects for the full year, and for the holiday selling season, in 2011.  Tomorrow’s will deal with secular trends in the luxury goods industry.

another year of exceptional growth

Despite a litany of macroeconomic woes–the nuclear disaster in Japan, Libya, Greece, slowdown in emerging markets, political craziness in the US and EU–Bain is predicting that luxury goods sales in 2011 will reach €191 billion this year.  That’s up 10% from the all-time high of €173 billion posted in 2010.

Bain is projecting 6%-7% annual sales growth for the luxury goods market from 2012-2014.  I take these figures as general indicators rather than point estimates.  I think the ideas they are intended to communicate are that growth in this industry will continue to be healthy but that the torrid pace of the past two years is likely to slow somewhat.

the most important forces

Three factors are key to this assessment:

–affluent clients in the developed world continue to spend heavily on luxury goods.  This phenomenon is more than a bounce back to pre-financial crisis levels.  It’s a genuine upsurge in demand, despite a slowdown in overall GDP expansion in these markets.

–Chinese customers continue their buying binge, both at home and as tourists abroad.

–the negative effects in Japan of the earthquake/tsunamis have been milder than expected.  In fact, luxury goods’ consumption may be rising again after several years of decline.

the holiday season

Bain thinks the holiday selling season will be a good one.  Its base assumption is that sales will be up 7% vs. 2010.  However, it figures the chances of the season being considerably better than that, at +10%, are twice as high as that sales will be disappointing.  The more positive outcome would bring full-year sales to an 11% gain.

currency effects

Bain keeps score in euros.  This only makes some sense since it’s in partnership with an Italian trade association for this study and because many luxury goods companies are based in either France or Germany.  But political/economic instability in the EU has caused its currency to fluctuate more than usual in the past couple of years–which affects the results of the Bain study.

Constant currency numbers, which give a better idea of underlying unit volume growth worldwide.  They present an even rosier picture of the luxury goods industry today.  The 2010 results of up 13% break out into 8% constant exchange rate growth + a 5% boost from a weak euro.  Bain projects that this year’s underlying growth will be 13%, with a strong euro lowering the figures by 6%.  In other words, global demand for luxury goods is currently accelerating, not decelerating, as the euro-denominated results suggest.


Chinese customers now make up over 20% of global luxury goods sales.  Bain estimates that business in Greater China (the mainland + Hong Kong, Taiwan and Macau) will hit €23.5 billion in 2011, a year on year gain of 29%.  In addition, Chinese tourists will likely buy another €12-15 billion worth of luxury goods on trips abroad.  While the impact of Chinese tourists is noticeable in Hawaii and New York, in cities like Milan and Paris they are probably the main factor driving growth in sales.

Note:  In addition to the fact that travelers like to buy souvenirs, luxury goods prices are generally higher in China than everywhere else except possibly Japan.  You’re also much more confident the items you buy outside China aren’t counterfeit.  And there are outlet stores, as well.   On anti-terrorist grounds, both the US and the UK have made it very difficult for Chinese to get travel visas, a fact that merchants and hoteliers there complain about bitterly.  One result of this policy is to funnel Chinese tourists into continental Europe.


For many years, Japan has been nirvana for luxury goods companies.  Japanese have been persistent buyers of luxury goods, whether the general economy has been good or bad.  Domestic prices are very high.  And the market there is very deep.  It comprises perhaps the top half of the population, as opposed to the top quarter in the US or EU.

In 2007, the music–and Japanese luxury goods sales growth–finally stopped.  No one quite knows why.

For 2011, however, despite a 12% year on year drop in luxury goods purchasing during 1Q due to the earthquake/tsunamis, Bain is projecting a small (+2%) year on year gain for Japan.  The consulting company thinks results will come in at €18.5 billion, meaning Japan retains its place as the second-largest luxury good market in the world.

world rankings

The top five luxury goods markets in the world at year-end 2010 are:

US        €48.1 billion         28% of the world market  (NY at €15 billion represents 9% of the world)

Japan     €18.1 billion     10.6%

Italy       €17.5 billion     10.2%

France     €13.3 billion     7.8%  (Paris = €8.5 billion    5%)

China     €9.6 billion     5.6%

Strong growth propelled China up from 7th a year earlier, displacing the UK and Germany in the rankings.

That’s it for today.  Market trends tomorrow.

bottom-up investing in a world turning top-down

the old days


I started looking seriously at non-North American stock markets in 1984, after six years researching a number of sectors in the US market.  At that time, UK and continental European investors used almost exclusively a top-down style.  That is, they used macroeconomic analysis to select the countries they were interested in.  They then either bought banks, on the idea that the loan portfolios mirrored the economic structure of the countries; or they ventured into other sectors based on their economists’ view on what would be the areas of greatest economic strength.

…vs. the US

This process stood in stark contrast to what American investors did–which was to select individual stocks, mostly based on firm-specific factors, but with a little industry or sector guesswork also thrown in.  In fact, Peter Lynch of Fidelity Magellan, the most successful investor of that generation, wrote in his first book that he really didn’t pay much attention to macroeconomics.  He just picked good companies.

continental Europe?

When I began to manage a global portfolio at a small firm in 1986, I was faced with the problem of continental Europe.  I had limited resources.  There were lots of countries, all with different customs, different politics and different attitudes toward investing.  But together they only made up 10% or so of my benchmark index.   I’d spend all my time looking at just them if I adopted the European approach.  So I decided to do what Americans do, just pick stocks, on a pan-European basis and hope I didn’t get hurt too badly.

Ten years of European integration–and stellar portfolio performance along the way–later, my “accidental” approach had become the new norm.  It has stayed that way since.

…or so I thought.

macro-driven analysis

I’ve been surprised over the past couple of weeks to be seeing reports that harken back to an earlier day when analysts drew conclusions about individual stocks from general economic analysis, and nothing much else.

Two stick out.

1.  According to press reports, Goldman cut its price target on TIF a few days ago by 13%, from $77 to $67.  2013 eps were clipped by 4%, from $4.60 to $4.40.  Why?  Slowdown in the overall US economy.  That’s it.  Macroeconomic weakness will translate into lower jewelry purchases.

We’ll get some new evidence when TIF reports a little later this morning.   But judging from last night’s results from more down-market jewelry company SIG (which you’d expect to be hurt more severely than TIF if consumers were pulling in their horns),  however, there’s no sign of slowdown yet.  SIG said same store sales in the US were up 12% year on year in each month of the July quarter, and up 12% as well for the first three weeks of August.

I’m not saying GS is particularly insightful about TIF, nor that what I’ve read (I haven’t seen the actual report) is internally consistent.  What strikes me is the methodology–that there’s no apparent attempt to find a metric more subtle than that GDP growth is slowing.

2.  Deutsche Bank recently declared that the growth days for the casino gambling market in Macau are over.  Why?  Imports of German luxury cars into China, which had been growing at close to a 50% annual clip in the first half of 2011, slowed to +22% in July.  Deutsche believes this means wealthy Chinese citizens are seeing their income squeezed by global slowdown and are cutting back on spending (again, I haven’t seen the actual report, but it has been widely covered by the Asian press).

But July was a blowout month for the Macau gaming market.

According to Deutsche, that doesn’t matter.  We’re already seeing now is a reduction in high-roller participation in the market, but it’s being disguised for now by a boost in visits by less affluent Chinese gamblers.  By yearend, Deutsche thinks the Macau market will only be growing by 20%.  Growth of a mere 10% is possible for next year.  Evidence for any of this??

That’s an awful lot of inference from a one-month dropoff in sales of imported automobiles.   Who knows?  …maybe this year’s models are ugly.  …or customers have run out of garage space and will pick up the spending pace when their new garage additions are finished.

This report really struck a nerve in Hong Kong, however.  The entire gambling sector fell, with some stocks off as much as 10%.  It hasn’t recovered to date.

premises and conclusions

It’s always possible that your conclusions end up being correct even though your reasons are crazy–or non-existent. I happen to think that both reports will end up being too negative.  But that’s not my point.

In my experience, good analysts visit stores, interview/survey customers, talk with suppliers and with competitors to build a bottom-up model of a company or an industry.  They have detailed factual knowledge of a set of companies that they then integrate into an industry view.  Then maybe they knock on the door of their firm’s economist to give empirical feedback about the house macroeconomic view.

In these cases, the flow seems to have been reversed.  An economist who deals at the highest level of abstraction seems to be dictating what analysts are “supposed” to be seeing.  There’s a risk that the house macroeconomic view acts as a set of blinders that certainly make the analyst’s job easier, but makes the results less valuable at the same time.  I hope this isn’t the start of a trend.

We’ll know more about TIF later on today.  And Macau gambling numbers for August will be out in a week or so.



LVMH’s acquisition of Bulgari

The LVMH bid

About a week ago, LVMH announced a successful bid for control of the publicly traded Italian jewelry manufacturer and retailer, Bulgari.  Bulgari’s offerings, many of which reflect the founding family’s Greek heritage, mostly range in price from $2,000-$10,000.

The terms:

LVMH will issue shares of its stock in exchange for the 51% of Bulgari controlled by the Bulgari family.  It is offering €12.25 in cash for the 49% held by third parties.

what’s in this for Bulgari?

1.  A significant part of Bulgari’s business is high-end watches, the most extremely cyclical category in the fine jewelry business.  Watch sales are especially difficult to monitor, since wholesalers play such a large role in their distribution.  As a result, economic downturns have tended to be white-knuckle events for the company–and its stock.  Being part of a larger, more stable conglomerate will mean less wear and tear on management’s stomach linings.

2.  The Bulgari family gets two seats on the LVMH board, so it retains a management presence in luxury goods.

3.  Younger-generation family members who don’t want to be involved in the business and would rather have their inheritance right now and in cash will be able to sell without endangering the Bulgari family’s control position.

4.  Francesco Trapani, a Bulgari nephew and the current Bulgari CEO, will become head of the LVMH watches and jewelry business, an organization twice the size of Bulgari.

…and for LVMH?

1.  The larger fine jewelry business means LVMH will be in a stronger competitive position versus other luxury goods conglomerates like Richemont.

2.  The willingness of an entrepreneurial luxury goods family like Bulgari to join the LVMH fold contrasts sharply with the frosty reception of the Hermès management when it learned LVMH had acquired a large ownership position.  The Bulgaris, fellow entrepreneurs, may be able to smooth ruffled feathers in a way that Bernard Arnault has been unable to.

3.  The Bulgaris will likely also be instrumental in convincing other European luxury goods families to follow their lead.

What’s next?

Wall Street rumors have TIF (I own it) as the next target of LVMH and Mr. Trapani.

I don’t agree.  The main attraction of TIF would be the fit between its business and Bulgari’s.  TIF is a dominant factor in “statement” jewelry costing $25,000-$50,000 or more.  The company is unique in its ability to–at the same time–be a leader in the market for jewelry and other gifts that retail for $500 and below, without diluting its brand image (i.e., alienating the very big spenders).   I don’t know why, but TIF has never been very good in the middle; Bulgari would fill the doughnut hole in Tiffany’s offerings.  That’s the positive side.

On the other hand,  Europeans don’t regard TIF as a legitimate luxury brand.  That’s partly because it’s an American company, partly because of its lower-end business.

What is Mr. Arnault’s game plan?  I think it’s to collect up as many small, inefficiently run European family luxury goods businesses as he can over the next few years.  He’ll doubtless be able to use the brand names he acquirers more effectively than their current owners.  And he’ll enjoy manufacturing, distribution and marketing synergies.

His main selling points will be two:  the positive experience of the Bulgari family, and the ego appeal of joining a very exclusive club.  Were he do anything so déclassé as acquiring an American “quasi-luxury” company like TIF, a lot of the positive effect of the Bulgari merger on potential European luxury acquisition candidates would be lost.  Yes, TIF is doing a land office business in Europe currently.  But that’s because the affluent there are trading down.

TIF may eventually be on the Arnault to-do list, but I think he’s gunning for smaller, local game first.


Global luxury goods market: the ninth annual Bain study, October 2010

Note:  You can also get my analysis of the 10th Bain Luxury Goods Worldwide Market Study from October 2011.

I’m going to write about this topic in two posts.  Today’s will cover the present structure of the luxury goods market and the effect of the Great Recession on it.  Tomorrow’s will look at growth prospects for the industry, changes occurring to its structure and investment conclusions.

The industry data come from the 9th annual Bain and Company Luxury Goods Worldwide Market Study, directed by the partner who heads Bain’s fashion and luxury practice, Claudia D’Arpizio.  The results were presented at the Fondazione Altagamma conference in Milan earlier this month (thanks to Bain for sending me a copy of the presentation). You can find a summary on the Bain website.

structure of the market


The global luxury market peaked in 2007 at a sales value of €170 billion ($238 billion) in 2007.  Revenues fell during the recession (an unusual occurrence) by about 8%.  Bain predicts that the industry will bounce back to around the former peak this year and exceed it by a few percentage points in 2011.


Bain counts 232 brands in the luxury goods market.  The top 6% of the brands average €1.8 billion ($2.5 billion) each in sales and together control 10% of the market.  The bottom 38% average €300 million each and control only 15% of the market.  It seems to me this segment, which has suffered more than bigger brands from the recession, is ripe for consolidation.


In 2008, 78% of the industry’s sales were made through third parties, notably department stores.  The remaining 22% went through company-owned stores.  Bain thinks that this year 27% of sales will flow through the direct channel, with indirect shrinking to 73%.  The percentage of direct sales will likely continue to increase, for two reasons:  luxury brands continue to open new stores, and company-owned stores tend to exhibit much stronger sales growth than luxury counters in department stores do.

Outlet stores make up about 5% of sales.  On-line comprises somewhat over 2% of the industry.


Sales of luxury goods take place approximately as follows:

Europe     37%

Americas     30%

Asia Pacific (ex Japan)     17%

Japan     11%

Rest of the world     5%

One caveat about location:  Purchases by foreign tourists is a significant factor in this industry.  This is partly because of fluctuation in exchange rates and differences in import and other taxes.  But it is also partly the result of manufacturers’ decisions to price the same item as much as 40% higher in Japan and China as in Europe.

The top cities for luxury goods in the world?  They rank as follows:

New York City     €9 billion ($12.6 billion) in 2009

Paris     €6.0 billion ($8.4 billion)

London     €4.5 billion ($6.3 billion)

Bain estimates that Hong Kong will account for €4.4 billion ($6.2 billion) in sales for 2010, possibly edging it ahead of London in the rankings.  Actually, given that nearby Macau will likely chip in €700 million ($980 million) in sales of luxury goods this year, the two SARs together doubtless already surpass London and likely move ahead of Paris as well within the next year.

Greater China (that is, the mainland plus Taiwan, Hong Kong and Macau) will generate  €17.5 billion ($24.5 billion) in luxury goods sales in 2010 according to Bain, making it larger than any single country market, save the US.


Currently, 62% of purchases are for women, 38% for men.  The numbers are influenced by two factors:  there is a long-term trend of increasing sales to men, counteracted by the much higher cyclicality of the watches and formal wear that men typically buy.

product categories

Apparel     27%

Accessories     24%

Perfume and cosmetics     24%

Hard luxury (jewelry and watches)     19%

Art de la table     4%

luxury in the Great Recession

Bain says the downturn just ended marks the first ever decline in luxury goods sales.

The industry’s customers can be divided into the truly wealthy, for whom luxury goods are everyday items, and a much larger group of what the industry calls “aspirational” buyers, for whom the products also act as badges of wealth, taste and status.  As one might expect, the second group of buyers is much more cyclical than the first.

In addition, in any downturn the indirect distribution channel cuts its new orders back to below the (reduced) level of sales as it tries to shrink its inventories.  This adds to the sales decline for manufacturers.

As one would expect, hard luxury was especially hard hit.  This is due, mostly because of the high price points in this segment, but also to the less-affluent and mostly male composition of the buyers.

Why is gender an issue?  Men’s items tend to be higher-priced and to be purchased less frequently.  As a result, it’s easier to postpone their purchase.  Also, it appears (to me, anyway) that women tend to control the purse strings in most households around the world.  They tend to continue to allocate funds for their own purchases, although they may move down market or buy less frequently, but to zero out their husbands’ allocations.

Surprisingly, and contrary to the Wall Street cliché, cosmetics suffered in this downturn as well. In fact, Bain calls them the “first thing to cut!”  In particular, sales of anti-aging products fell for the first time, as customers turned to non-luxury offerings.

The turn came in the December quarter of 2009, when year on year sales stopped declining.

That’s it for today.  Tomorrow:  the recovery in 2010, growth prospects and investment implications.