A new type of luxury is taking a share of money from wealthy consumers

Luxury goods seemed immune to the economic woes, but their luster may be fading. During the pandemic, the luxury market prospered because the wealthy—unfettered by price gouging— Birkin bag And expensive watches. However, signs now point to a slowdown Boom The luxury of the “Roaring 20’s”.

in ChinaFor example, the sales boom that started in 2023 did not last long. The country’s slow economic recovery and global uncertainty have contributed to a decline in luxury spending. According to Claudia D’ArpizioNo Bain & CoSubject matter experts, despite initial resistance, luxury markets face challenges due to geopolitical changes and low consumer confidence.

The turmoil has affected large companies such as LVMH, the latter group Dio and Louis Vuitton. Its revenue growth slowed in the third quarter from a year earlier, setting a pattern echoed by rivals. carryingthe owner of GucciAnd Burberry.

Richemont’s half-year sales, though up 6%, fell short of expectations and prices for Rolex and Patek Philippe have suffered in the secondary market.

While some outliers, viz HermesIgnoring the recession with strong sales in the third quarter, the luxury sector generally navigated the uncertainty.

However, niche segments such as luxury cruises are thriving with 116% year-on-year growth in constant currency.

The complexity of the current luxury market landscape leads us to question the right path amid conflicting reports on earnings and spending relaxation. What is really happening in the world of opulence?

The pandemic marked the height of luxury: savings piled up thanks to stimulus checks and furlough schemes, which boosted buyers’ purchasing power, but left them with fewer avenues for treatment amid travel bans and lockdowns. . Many people then turned to luxury goods and bought more champagne and designer handbags than ever before.

“There was a huge amount of savings or purchasing power that was released by people staying at home, especially white-collar workers,” he said. JAVIER GONZALEZ LASTRAPortfolio managers focus on luxury ETFs topic.

The magnitude of the luxury category’s growth during the pandemic is reflected in the data here Deloitteshows that the top 100 luxury companies will be bigger and more profitable than ever in fiscal 2022.

But then, as interest rates and inflation rose, Lastra says consumers began to tighten their belts and be more careful about where they spent their money.

The monstrous cost of the era A nationwide epidemic It did wonders for luxury companies’ profit margins, but it was never intended to be the new normal. In any case, it was an anomaly, and the moderation in growth we see today reflects a gradual readjustment. COVID-19.

“Fundamentally, it’s not sustainable, and it shouldn’t be,” according to Flavio CeredaAn investment manager at an asset management firm GAM, based in Zurich, in reference to the high growth rate seen in the luxury segment. “I think what you see this year is a slowdown, a process towards normalization. It looks worse than it is because it comes from a very high level.”

Luxury company executives have also pointed out that the apparent slowdown is nothing more than a throwback to how things used to be, rather than an outright disaster for luxury goods as a whole. Richemont president Johan Rupert noted in last month’s half-year results that there had been a “broad normalization of market growth expectations across the sector”.

Data also supports this: Across all luxury categories worldwide, it is estimated that luxury industry consumption will be around 1.5 trillion euros ($1.62 trillion) in 2023, according to the sector report. Long live luxury No Bain & Co. November.

The figure is roughly 70% above 2019 levels in constant currency terms, according to the retail data company, despite an estimated 29% industry-wide price increase for the period to boost production costs. edited.

The performance of different luxury brands also depends on the type of customers they target, he said. Natalia LachmonovaChief Economist of MasterCard for Europe.

Entry-level “aspirational” consumers may be more affected than the wealthy by macroeconomic factors and the effects on their portfolios.

“It’s important to consider that luxury consumers fall on a spectrum that ranges from the affluent upper middle class to billionaires. The former have become more price-sensitive: investment bank bonuses have declined, technology sector jobs have been lost, the cryptocurrency bubble has burst. is, and many wealthy professionals have increasingly had to prioritize investing. Paying higher interest on their mortgages instead of vacations or expensive bags,” Lachmaneva said in an email. luck.

The reduction in spending in some luxury segments reflects the preferences of buyers in the current economic environment and their appetite for discretionary goods.

But, according to Lastra, ETFs topicConsumers are emerging on a different kind of luxury than in recent years.

“What we’ve seen in terms of the recession is mainly due to the fact that people are now spending on other things,” Lastra said. “So, it’s a question of portfolio distribution, rather than job losses or interest rate pressures, that have an impact.”

In particular, spending is directed toward luxury experiences, according to Bain & Co. D’ArpizioA co-author of a November report on the luxury market noted that the rebound in COVID-19 And the resurgence of travel has inspired more people to devote themselves Practical luxury During 2023, a trend that is expected to continue next year.

“What we see in 2023 is a rebalancing of consumer appetite for experiences and experience-based goods, with an unprecedented urgency for social life and travel across geographies,” said D’Arpizio. “Spending on experiences is rebounding to an all-time high, with consumers once again approaching luxury beyond products,” he added.

This could mean growth in categories such as travel, hospitality and cruises as the flow of tourists increases. As a result of the increase in tourism, the purchase of luxury goods may also benefit, although the stratospheric degree is lower, he predicts. Bain & Co.

Some of these trends are beginning to be reflected in company profits: the largest European hotel group, Accor, doubled its annual profit target this year as demand picked up. British group Rocco Fort HotelsWith establishments across Europe, it has also seen an increase in revenue.

“The value of experiences has doubled since 2010,” he says. D’Arpizio. “This ‘new normal’ means that luxury markets are blurring their boundaries and that brands have an opportunity to expand their reach beyond their roots.”

With signs pointing in different directions, it is clear that the next year for luxury will mark a makeover starting in 2023.

HSBC A late November note warned that since luxury is linked to consumer confidence, tourism and equity markets, what happens to it could have far-reaching implications.

The bank predicts a more modest pace of growth, saying, “Nothing to be ashamed of, but a slow pace hardly bodes well for stocks in the sector.”

With economies of major regions like United States, Europe and China Still finding its footing, 2024 could remain “challenging” for luxury, he wrote. Deutsche Bank last week.

But on the bright side, the luxury industry is more resilient than other consumer sectors of the economy.

“One of the reasons we want to invest in this sector is the rise of the upper middle class around the world and that’s a fantastic tailwind for all these (luxury) companies,” Lastra said.

(C) 2023, Fortune