Interesting analysis - very well written as usual.
I have a few questions:
1. We have just emerged from a period of extraordinarily low rates which resulted in people buying beyond their means on credit. Debt levels in most countries are at unprecedented levels and now rates are normalizing, people are struggling to finance that debt. The next few years will be about reducing debt rather than taking on more. That will consume disposable income. At the same time we have experienced a cost of living squeeze for a host of reasons. How do you think this will impact the luxury end of the market?
2. Companies such as Hermes are obsessively focused on quality. There will never be compromise. It was the way Balenciaga once was when Cristobel was still alive. He was so obsessed with maintaining quality that was unachievable for most, that he decided to wind down his business shortly before his death rather than cashing in on the brand (very noble). However, Kering acquired the name after his death and are producing mass produced low quality merchandize to which they apply the Balenciaga brand (it actually makes me mad and Cristobel must be turning in his grave). But this is the modus operandi of Kering - it isn't about quality, its about maximizing profit at any cost. Is that likely to devalue their brands over time?
I have an opinion piece that delves deeper into these questions which is due to be published at the end of this month or beginning of next. I'll be sure to share it with you. However, before then, I would welcome your views on the points above.
1. Indeed, the luxury spending outlook faces structural, not cyclical, headwinds.
China's problems run deeper than temporary consumption patterns - we're seeing a fundamental shift where domestic brands capture increasing wallet share. I do think China will come out as a "winner" and be able to spend more, but domestic brands might be the ones to capitalise.
The US situation looks particularly concerning. After a decade of artificially suppressed interest rates, we're witnessing the inevitable hangover. Just looking at the US treasuries situation tells you everything you need to know about where US is heading.
Europe might provide some stability, but it lacks both the volume and growth potential to offset Asia-Pacific weakness. Remember that luxury's golden decade wasn't built on European spenders - it was fueled by new Asian middle-class consumers making their first luxury purchases.
2. You've identified the central paradox in luxury. Hermès commands 50x earnings not because their scarves are objectively "better" than competitors' but because they've maintained the perception of uncompromising quality and exclusivity. The actual product attributes matter less than their signalling value.
If forced to allocate capital today, LVMH offers superior risk-adjusted potential at a similar multiple to Kering (around 20x earnings versus Kering's 18x). Their diversified portfolio provides better insulation against fashion volatility, while their selective distribution strategy better protects brand equity.
My stance remains bearish on luxury overall. There are zero catalysts for near-term optimism. That said, those brands are timeless, those companies will survive.
Interesting analysis - very well written as usual.
I have a few questions:
1. We have just emerged from a period of extraordinarily low rates which resulted in people buying beyond their means on credit. Debt levels in most countries are at unprecedented levels and now rates are normalizing, people are struggling to finance that debt. The next few years will be about reducing debt rather than taking on more. That will consume disposable income. At the same time we have experienced a cost of living squeeze for a host of reasons. How do you think this will impact the luxury end of the market?
2. Companies such as Hermes are obsessively focused on quality. There will never be compromise. It was the way Balenciaga once was when Cristobel was still alive. He was so obsessed with maintaining quality that was unachievable for most, that he decided to wind down his business shortly before his death rather than cashing in on the brand (very noble). However, Kering acquired the name after his death and are producing mass produced low quality merchandize to which they apply the Balenciaga brand (it actually makes me mad and Cristobel must be turning in his grave). But this is the modus operandi of Kering - it isn't about quality, its about maximizing profit at any cost. Is that likely to devalue their brands over time?
I have an opinion piece that delves deeper into these questions which is due to be published at the end of this month or beginning of next. I'll be sure to share it with you. However, before then, I would welcome your views on the points above.
Thank you once again for your thoughtful comment.
1. Indeed, the luxury spending outlook faces structural, not cyclical, headwinds.
China's problems run deeper than temporary consumption patterns - we're seeing a fundamental shift where domestic brands capture increasing wallet share. I do think China will come out as a "winner" and be able to spend more, but domestic brands might be the ones to capitalise.
The US situation looks particularly concerning. After a decade of artificially suppressed interest rates, we're witnessing the inevitable hangover. Just looking at the US treasuries situation tells you everything you need to know about where US is heading.
Europe might provide some stability, but it lacks both the volume and growth potential to offset Asia-Pacific weakness. Remember that luxury's golden decade wasn't built on European spenders - it was fueled by new Asian middle-class consumers making their first luxury purchases.
2. You've identified the central paradox in luxury. Hermès commands 50x earnings not because their scarves are objectively "better" than competitors' but because they've maintained the perception of uncompromising quality and exclusivity. The actual product attributes matter less than their signalling value.
If forced to allocate capital today, LVMH offers superior risk-adjusted potential at a similar multiple to Kering (around 20x earnings versus Kering's 18x). Their diversified portfolio provides better insulation against fashion volatility, while their selective distribution strategy better protects brand equity.
My stance remains bearish on luxury overall. There are zero catalysts for near-term optimism. That said, those brands are timeless, those companies will survive.