Join the Global Boom in Luxury Goods
04/01/2013 7:00 am EST
Luxury goods may be too expensive for some, but buying shares in their makers may prove a smart investment, writes Gillian Duncan for The National.
Not everyone can afford a Louis Vuitton handbag or Gucci shoes, but many could profit from the success of the world's luxury goods companies.
All it takes is a smart investment or two in a type of company operating in the luxury sector, some of which are listed, highly lucrative, and expected to flourish even further. Analysts value the global luxury goods market at about $300 billion and growing, driven mainly by big spenders in emerging economies.
"Overall retail growth in 2012 was stronger than in 2011, with luxury goods sales exceeding $302 billion worldwide" said Fflur Roberts, the head of luxury goods for Euromonitor International. "This represents a year-on-year real value gain of over 4% on 2011."
Euromonitor expects the sector to grow by the same percentage again this year.
Pictet, a Swiss private bank, launched a premium brands fund in 2005, which has so far invested in 38 companies in the industry. "The idea of creating a luxury fund, or more generally a premium brands fund, was to have basically a fund investing in companies generating high revenue growth, which is definitely the case of the luxury sector," said Caroline Reyl, the fund manager at Pictet Premium Brands.
"If you look over a long period of time, the luxury sector definitely generates superior growth versus broad consumer goods."
They are also profitable, with higher than average margins than other companies operating in consumer sectors. And many of the companies plough much of the cash they generate back into their businesses, said Reyl.
Companies in Pictet's fund range from large multinational conglomerates to small Italian firms. Its biggest holding is Swatch Group (Switzerland: UHR), which owns brands including its namesake and Breguet, and is up 21% year to date.
Other strong performers include PPR (Euronext Paris: PP), a French group that owns Gucci, Bottega Veneta, and Yves Saint Laurent and is up 27% year to date, and Salvatore Ferragamo (Italy: SFER), up 28%.
"For some companies, it has been an incredibly strong part of the year, and I think the reason behind this strong performance is that I think investors realize that the growth in earnings this year again is going to be quite good," said Reyl.
Preliminary data for this year so far suggests that demand for luxury products will be strong, resulting in more earnings growth. But brands that serve ultra-high-net-worth individuals are particularly worth a look, she suggests.
"These brands are interesting because usually they sell relatively small volumes, but at very high prices, and given that the amount of high net worth individuals continues to increase globally, we think that those small companies addressing this particular consumer type can do extremely well," she said.
Brunello Cucinelli (Italy: BC), a cashmere company that sells sweaters costing upwards of $2,500, ticks all the boxes. Its shares are up 31% year to date.
"It is one of those small brands that addresses a very exclusive part of the consumer," Reyl said. "We think that particular segment will continue to grow for years to come, because by definition they have very small volumes and a small number of stores, so they have a lot of room to continue and grow going forward."
"What we found very interesting already back in 2005 was the exposure of this luxury sector to emerging markets and emerging-market consumers, which are incredibly small as an amount of the consumers for the luxury sector, but growing incredibly rapidly," said Reyl.
According to Euromonitor, the top five markets in terms of absolute growth over the next five years will be the United States, China, India, Russia, and France, a mixture of established and emerging economies. But the fastest growth will be in emerging economies, with India, China, Malaysia, Indonesia, and Turkey making up the top five markets.
"Prada is a brand which has had tremendous success in Asia—in particular amongst Chinese consumers—and the momentum of that brand is absolutely amazing. It is one that we definitely believe in," said Reyl.