Our Lust for Gucci Loafers Can't Last Forever

(Bloomberg Opinion) -- The bling bubble shows no sign of bursting. That’s the message from the latest report on the luxury industry from Bain & Company and Altagamma, the Italian luxury association.

In line with recent financial results from mega-brands such as Gucci and Louis Vuitton, growth in the first quarter has been surprisingly opulent. Sales across the personal luxury market excluding currency movements rose by 6-7 percent in the first three months of 2018, according to the report’s authors. That falls to 1 percent when currency movements are included, given the strength of the euro.

The upward trajectory will probably continue this year, with Bain forecasting that full-year sales will rise by 6-8 percent in 2018, excluding foreign exchange effects.

Much of this is being led by Chinese consumers, with the mainland market there expected to increase by 20-22 percent. Demand from shoppers in the U.S. and Europe has returned too.

Given the boom, it’s small wonder that many luxury companies’ valuations have been driven close to highs. That means the risk is firmly on the downside.

As I've argued before, some of the excessive Chinese demand may just be a catchup from 2016, when consumers steered clear of high-priced goods thanks to slower economic growth, an anti-extravagance campaign and unfavorable currency swings. The sharp recovery could start to wane as the year progresses.

What's more, luxury does well when stock markets are roaring ahead and consumers feel happy and wealthy. There was a broader market correction earlier this year, and any more tremors would unnerve top-end shoppers.

Bain says the current growth phase hasn't come easy. It's no longer a case of just opening lots of shops in China. In a more mature market, winners must have the products that wealthy shoppers want. Embracing the latest trends is crucial here.

Companies also need strong online operations  to keep upmarket customers happy, as well as building relationships with younger clients through social media, Bain adds. This might explain why the boom hasn't benefited all luxury groups equally. The big conglomerates such as Kering SA and LVMH Moet Hennessy Louis Vuitton SE are racing ahead, but some single-name houses like Burberry Plc, Tod's SpA and Salvatore Ferragamo SpA are lagging.

Working hard for growth should mean luxury companies are better equipped to defend their positions in tougher climates. But with corporate valuations as highly priced as this season's Balenciaga chunky sneakers and Gucci’s logo-adorned handbags, they won't completely escape the fallout when an inevitable slowdown arrives.

©2018 Bloomberg L.P.

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