Gucci and Louis Vuitton thrive despite inflation pressure
- The wealthy are better protected against inflation, which means they continue to buy luxury goods.
- Luxury companies like LVMH, Kering, Ferrari and Hermès are reaping the benefits.
- Still, some worry that war in Ukraine, lockdowns in China or recession could hurt their bottom line.
As inflation continues to squeeze consumers in all income brackets, the wealthy aren’t feeling the same pinch, which means neither are the brands they buy.
The world’s two largest luxury conglomerates, Kering and LVMH Moët Hennessy Louis Vuitton, reported strong earnings last week as both companies saw revenue increases of more than 20% in the first half compared to 2021. These aren’t the only companies in the luxury sector doing well right now: it seems everyone from high-end automakers to designers of coveted handbags are seeing strong demand.
That means the world’s wealthiest consumers haven’t slowed down on spending, even as many Americans opt for cheaper options at McDonald’s or insist on how they’ll pay their bills. Today, with inflation reaching new heights, the big winners are the companies that make products for the ultra-rich.
“Healthy and high demand” for cars, clothes and champagne
At LVMH – the French mega-corporation run by the world’s third-richest person, Bernard Arnault – luxury goods big and small have flown off the shelves.
Sales of champagne and cognac, in particular, experienced “exceptional momentum” in the first half of 2022; fragrances and skincare have grown rapidly, and high-end fashion continues to do well. LVMH’s fashion and leather goods category revenue rose 24% during the period, with brands including Louis Vuitton, Christian Dior, Fendi and Celine reaching “new profitability records” in the first half, the company said.
Fashion houses owned by Kering – including Gucci, Yves Saint Laurent and Bottega Veneta – all saw significant growth in the first half as well, the company said in its recent earnings report, although the luxury conglomerate increased its award twice this year. . Hermès, which makes leather goods like the coveted Birkin bag, had a strong performance in the second quarter, with sales jumping double digits in June. And at Italian fashion house Prada, half-year sales jumped 22% year-on-year.
Affluent consumers are clamoring for more than fashion: Italian sports car maker Ferrari saw record orders in the second quarter, and Mercedes-Benz said it was seeing “healthy and high demand” for its high-end vehicles .
These revenues are in line with recent projections by consultancy Bain, which estimates that sales of luxury goods will increase by at least 5% in 2022, with buyers – mainly in the United States and Europe – shelling out at least 305 billion dollars. euros, or around 312 billion dollars, this year alone.
Claudia D’Arpizio, a partner at Bain, told Reuters in a recent interview that, despite inflation, “consumption doesn’t seem to be affected so far.”
This is a stark contrast to businesses that serve other types of consumers.
McDonald’s said on its second-quarter investor call that customers were cutting back on orders in the face of inflation. “We’re seeing customers, especially low-income customers, opting for value offerings and fewer combo meals,” said CFO Kevin Ozan.
At Walmart, customers have changed their spending habits in the face of rising food and gas prices, such as reducing purchases of clothing and switching to less expensive private labels. And many other companies, from Bath & Body Works to Chipotle, are bracing for slower sales, especially to lower-income consumers, in the months ahead.
Recession could be a ‘self-fulfilling prophecy’
Still, there are signs that even the luxury sector may be starting to feel some pain due to the ongoing war in Ukraine, COVID lockdowns and economic uncertainty.
Kering chief financial officer Jean-Marc Duplaix said the company was “in a wait-and-see mood” on the economy due to the war in Ukraine, which is driving up costs.
Kering and other luxury goods companies are also grappling with ongoing lockdowns in China. Chinese consumers dominate the global luxury market, and the closures have shuttered many high-end stores and reduced the number of Chinese tourists shopping overseas.
Kering said 30% of its stores in China were closed in April and May. LVMH chief financial officer Jean Jacques Guiony said sales in China fell “by double digits” in the last quarter. But both companies said they were optimistic about the resumption of activities in the region.
Kering and LVMH also expressed cautious optimism that European and American tourists will continue to spend on luxury goods.
Guiony said LVMH doesn’t have a “particularly bleak and pessimistic” outlook on the U.S. economy, but it does have a plan in place in the event of a deeper economic downturn.
“My fear is that all this commentary about recession and falling demand will become a self-fulfilling prophecy,” he said.