Will the extraordinary boom in luxury goods ever end?

Sharon Wong had decided she had earned a little indulgence as she browsed at Louis Vuitton in La Samaritaine department store, one of Paris’s marquee luxury shopping destinations.

“It’s expensive, but I’ve been thinking about it for a few months,” the thirtysomething marketing manager from London said as she examined models of the Petit Sac Plat, a small rectangular bag which costs about €1,500. “I save a bit, I think about them as investments. The top names will always have value, especially the styles with history.”

Around the corner, a clutch of suited Italians and a German family milled in the lobby of the five-star Cheval Blanc hotel, where rooms start at about €2,200 a night and staff said occupancy was running at 70 per cent and above.

The hotel, La Samaritaine and Louis Vuitton have one thing in common: they are all part of LVMH. The family-controlled luxury conglomerate was built into a powerhouse by Bernard Arnault through serial acquisitions since the 1990s, giving his family a fortune that is now worth about $212bn.

The company became the first in Europe to cross the $500bn market valuation threshold this week, and the only one to be ranked among the top 10 biggest global companies.

The ascent of LVMH, which this year allowed Arnault to overtake the likes of Tesla’s Elon Musk and Amazon’s Jeff Bezos as the world’s wealthiest person, is a testament to the startling rise and resilience of the luxury sector in the past decade, driven by a large and still expanding US market and voracious appetite from China’s fast-growing upper middle class.

Financial crises, a pandemic, geopolitical ructions, spiralling inflation and a squeeze on the cost of living have done little to dent the rise of the luxury sector, which encompasses both personal goods and experiences — including travel and hospitality.

After contracting sharply as the world locked down in early 2020, the sector rapidly rebounded to €1.15tn in 2021 as bored shoppers flush with savings and government checks indulged themselves. It then defied expectations again by growing a further 19 to 21 per cent in 2022, according to estimates from consultancy Bain.

LVMH leads the way, and is lapping the competition. The group’s shares have gone from trading at €81 at the start of 2010 to over €900 this week. Asked at an April shareholder meeting whether he would consider splitting shares to make owning the company more accessible, Arnault vetoed the idea. “I’m going to disappoint you, but desirability is proportional to value,” he said. “LVMH shares are also a luxury product.”

But with fears of a global recession lingering, can the sector’s growth continue undaunted? It all hangs on the US and China, the twin growth engines of luxury and its biggest consumer markets.

Most luxury companies took a hit to their business in China at the end of last year due to the last gasp of Covid-19 restrictions. But first-quarter sales figures from LVMH and Hermès, the second-biggest luxury group by market value, indicate that recovery in China from the lingering effects of strict zero-Covid policies is already under way, and is expected to accelerate in the second half of the year as travel picks up.

“Chinese consumers used to represent around a third of luxury revenues,” says Caroline Reyl, head of premium brands at Pictet Asset Management, and a shareholder in luxury groups including LVMH, Richemont, Hermès and Moncler. “This went down to about 20 per cent during Covid. There is no reason why it’s not going back to one-third.”

Analysts are more cautious about the slowing pace of growth in the US. Morgan Stanley expects luxury spending to fall by low single digits both there and in Europe during 2023.

After years of extraordinary growth, analysts and investors believe that some moderation is only to be expected. “Will luxury continue to grow mid-to-high teens forever? No, that’s not the logic,” says Erwan Rambourg, global head of consumer and retail research at HSBC. “You will see some moderation at some stage.”

But even that moderation is likely to be modest; he expects the industry to grow in the mid-teens this year and 10 per cent in 2024. That’s partly due to its global appeal; Morgan Stanley predicts spending in the Middle East to rise 15 per cent in 2023, while South Korea and Japan register single-digit growth.

“The luxury sector is one of the few that is truly global, the successful brands are successful everywhere,” says Roberto Costa, head of global luxury banking at Citi. “Companies like Prada: [consumers] know it in the US, in China, in Argentina. So if there is a lack of demand in one place, there will be demand elsewhere.”

However, not all luxury brands are created equal. While the top end of the sector — which is led by the brands Louis Vuitton, Dior, Kering-owned Gucci and the independent houses Chanel and Hermès — are expected to keep barrelling ahead globally, weaker and more mid-market brands exposed to the broader middle class such as Coach and Ralph Lauren are starting to feel some pressure.

“It’s not about regions, but the strength of brands and companies,” says Enrico Massaro, head of consumer and retail Emea at Barclays investment bank. “Growth is disproportionately allocated to strong brands, there’s been polarisation for some time and that will continue.”

Selling desire

At about €1,500 each, the Petit Sac Plat bags are considered part of Louis Vuitton’s affordable offering, designed to appeal to aspirational buyers such as Sharon Wong.

And it is consumers like her, not the ultra wealthy, who have spurred the industry’s growth and turned Louis Vuitton into the world’s first luxury brand with €20bn in annual revenues.

“We don’t sell [most Louis Vuitton] products to rich people, it is to people who have money and want to indulge themselves,” says Jean-Jacques Guiony, chief financial officer at LVMH. “The advantage is this cohort is much, much bigger than the super wealthy. We think the upper middle classes will continue to prosper, and we will tailor products and marketing to them.”

Definitions of middle class vary, but its growth has been most pronounced in China. Conservative estimates put the middle class demographic at about 350mn people — or 25 per cent of the population, more than the entire population of the US — in 2018, up from about 1 per cent of the population at the turn of the millennium.

The wealthy, while much smaller in number, have also grown substantially and developed a taste for luxury goods, allowing brands including Chanel, Dior and Hermès — whose signature bags sell for upward of €20,000 and can usually only be purchased after time on a lengthy wait list — to grow by leaps and bounds.

“We couldn’t have believed 10 or 20 years ago these brands would be able to grow [so much] given their exclusive character . . . but we are in a growing market,” Guiony says.

That appetite appears to be revving back into gear as China’s zero-Covid restrictions have lifted in the key growth market for the sector. On Xiaohongshu, a Chinese social app, thousands of users published blog posts complaining about handbag shortages and long lines at Chanel stores in cities across China, Hong Kong and Macau.

Those complaints did little to deter Mingyou, a 33-year-old tech worker who lives in the southern city of Shenzhen and asked to be identified by a nickname. At the end of March, she says, she tried to get her hands on a coveted Chanel bag only to find it had sold out.

“Then I turned to Hermès. But I missed my favourite Hermès bag just because I arrived at the store 15 minutes later than another customer,” she says. In the end she settled for a watch strap and a tie from the storied Parisian house, for a total bill of Rmb6,100.

To cultivate this kind of desire, the luxury industry puts limits on the availability of certain products. But to capture as much of the market as possible, the top brands have also increased their offering of “accessible” items costing up to around €3,000, while simultaneously raising prices on their top shelf offerings to foster a sense of exclusivity. Barclays estimates that LVMH raised its prices overall by about 8 per cent last year, but the degree differs between products and brands.

Bottega Veneta, owned by Kering, increased prices on its cassette bags by 12 per cent to about €2,000 between October and January, according to HSBC, while Chanel faced pushback from customers after raising the price tag on some of its bags by as much as 74 per cent since 2019 — a stance the company has defended, saying that costs of materials and ensuring manufacturing quality have increased.

“The luxury industry, especially in its core categories of accessories and leather goods, is working on an ‘elevation’ strategy through price increases,” says Joëlle de Montgolfier, executive vice-president for retail and luxury at Bain. Last year, 70 per cent of sales growth in leather products was explained by price increases “with only a small percentage explained by volume”.

Testament to Arnault’s theory, those increases have not lessened desire. “So far in the sector there is not a lot of elasticity of demand,” says Costa at Citi. “The ceiling [on price] is: as long as there is quality and experience, people are open to it.”

Storm clouds

The outlook for luxury is not entirely pristine blue skies. After several years of record profits supported by price rises, some costs are starting to creep back up and are expected to dampen margin growth in the coming year.

For example, Hermès gave its workers raises of about 7 per cent last year to keep salaries competitive amid inflation and to reward them for a bumper year of profits.

That might contribute to “slight margin pressure this year”, says Thomas Chauvet at Citi. “Though who would have thought at the beginning of Covid that margins would go up rather than down?”

There are also signs that momentum in luxury’s largest market, the US, is beginning to slow. At Kering, whose sales were weaker across the board than LVMH or Hermès, US sales fell in the first few months of 2023.

The pace of sales growth at LVMH also flattened out in the first few months of the year while still growing at 8 per cent. “By region, the US, as expected, was the slowest growing despite being more resilient than we thought,” Rambourg at HSBC notes.

That pullback is more pronounced among what Ralph Lauren’s chief executive, Patrice Louvet, calls its “value-oriented customers”, who tend to shop in the brand’s off-price outlets. Like other accessible luxury brands with a US focus such as Coach, the pace of growth slowed in the first quarter at the purveyor of luxe Americana.

“We’ve seen that group more pressured,” he tells the Financial Times. “That consumer is feeling the effects of inflation, and is being more discerning.”

That means eschewing more frivolous purchases, he says, for “core” items such as sweaters, cotton and linen Oxford shirts, and sport coats. “People still need to buy clothes.”

At Arnault’s LVMH, however, the party seems far from over.

In the past two weeks, Louis Vuitton launched glossy new campaigns featuring the actor and singer Zendaya and football star Lionel Messi. American rapper Jay-Z gave a concert at the Fondation Louis Vuitton, a museum in Paris founded and supported by Arnault, attended by the LVMH chief executive, Rihanna and Beyoncé.

Rihanna then stopped by the Paris headquarters to discuss her LVMH-owned cult beauty brand, Fenty, while Louis Vuitton will fly the fashion world to Seoul this week for a pre-fall women’s runway show orchestrated by the director of the hit dystopian show Squid Game.

Arnault himself will not attend, however; he will be in New York for the reopening of Tiffany’s 10-storey flagship. LVMH bought the famous jeweller in 2021 for $15.8 billion, in its largest ever acquisition.

The company does not disclose figures but has claimed the renovation involved “the biggest investment in the history of luxury”, according to a person close to the company — beating the remodelling of Dior’s flagship on Avenue Montaigne in Paris, which reopened in 2022 and includes a museum, two restaurants and a private apartment to host VIP shoppers.

The displays of opulence has not gone unnoticed in France, however, where Arnault has long been criticised as an avatar of inequality. During months of demonstrations over President Emmanuel Macron’s plan to raise the retirement age, some protesters called for higher taxes on Arnault and the country’s billionaire class.

But luxury companies argue they are key to the French economy as big employers, taxpayers and drivers of growth. Roughly a third of the rally on the CAC40 exchange since the start of the fourth quarter last year stems from burgeoning investor interest in Hermès, Kering, LVMH and beauty group L’Oréal.

“People have said that it is a disgrace for France, that all these big luxury groups produce useless things so we should get rid of them,” Arnault said. “But how many people do we employ in France? Luxury employs a million people.” He went on to claim: “We pay the most taxes of any company in France.”

For as long as there exists a growing global demographic whose affluence is insulated from the volatility of the wider economy, companies like LVMH who have mastered the art of tapping it will benefit.

At this juncture the only thing that could cloud the outlook in 2023 is “a big external event that comes to ruin the party”, says Caroline Reyl, head of premium brands at Pictet Asset Management, who expects growth to normalise in 2024 and 2025 to “high single digits”. 

“In difficult times, the luxury consumer doesn’t trade down,” she adds. “They just buy fewer products.”

Data visualisation by Chris Campbell