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Asia: Setting A New Tone In The Luxury Retail Industry
Perspective | 04 November 2011
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By: Louis Kent Lee
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By: Jade Lee
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Define luxury goods in your own capacity and you’ll find your mind wandering off to a particular magazine you saw or some huge tabloid with a model carrying an exquisite and superiorly priced bag, or item that the media has successfully moulded us to. It is also not surprising that many will think along the lines of famous brands such as Louis Vuitton, Chanel, Hermes, Tag Hueur or Salvatore Ferragamo. What is it that drives people to actually purchase a 5000 dollars bag or watch? And who exactly are the big spenders in such difficult times?


Luxury retailers expand their presence in Asia

Firstly let’s start off with one of the heavy drive behind the spending on heavy price tags. The experts have a term for this. It’s called “conspicuous consumption”. Conspicuous consumption basically means spending on goods and services acquired mainly for the purpose of displaying income or wealth. It is also a form of social status display. And based on cultural aspects, this applies ever more so to the people in Asia.

It is not unfamiliar to hear that Asia is going to be the next big force that drives economic spending worldwide. With the potential of further growth and more spending from the rising middle class, millionaires and billionaires in this region, it is not unnatural for them to want to own items, to display their status.

Amidst the tougher global issues surrounding worldwide markets right now, luxury retailers have reported strong earnings on the back of increased demand in emerging economies like China, Vietnam and Indonesia.

Mergers and Acquisitions (M&A) from French luxury giant Louis Vuitton Moet Hennessy (LVMH) has been fierce as it went round the world in search of strategic M&A opportunities. Among its latest offer, Heng Long International, one of the five big alligator leather manufacturing suppliers was offered $0.60 a share, where LVMH acquired 74% of its shares.

Other deals which LVMH have completed, which gave it significant stake, or making it a majority include names like Bulgari, UK-based Nude Skincare, Charles & Keith, Ole Hendrickson, SMCP, Geneva-based Swiss company La Fabrique du Temps and India’s Genesis Colors.

It is opined that the series of acquisitions could very well be a sign that a positive outlook still remains for the luxury retailers albeit the sloppy market conditions. This is especially so when a significant portion of the total estimated consumption, is fuelled by the rising dragon, China.


Feel good factor fuels demand for luxury goods

The Power Of China’s Spending
Besides being the biggest buyer of US’ debts, China is also one of the biggest spenders driving up the demand bell curve in the luxury retail industry. In fact, the Chinese makes up approximately one third of the emerging market luxury spending as wealth in the rising dragon continues to grow.

According to Capgemini’s World Health Report, millionaires and billionaires from China have been growing and is closing in on those in the US, Japan and Germany. Demographics, too, play an important part in the spending force as well. Nathalie Longuet, senior vice-president of Geneva-based private bank Lombard Odier Darier Hentsch & Cie said that the percentage of China’s population under 45 years of age is 73%, compared with 30% in the US and just 19% in Japan.

“As the Chinese grows richer, and have more expendable income, the feel good factor kicks into play,” said Longuet.

The feel good factor was in reference to the tendency for self-indulgence and the display of social status and wealth, as part of Chinese tradition.

Over the next 10 years, Longuet believes that demand from Chinese consumers could grow at a rate of 15% to 20%, contributing 40% to the luxury-market growth during the period.

Why Luxury Stocks Shine?
Given that the luxury retail market is opined to have a positive outlook on the back of strong demand from China and the other emerging markets in Asia, the idea of owning a small part of the companies behind them may not be a bad idea after all.

Some of the key points that continue to draw investors into this sector are the high entry barriers, strong pricing power and superior profitability and free cash-flow generation this industry inherently has. However, given the uncertain global economy, one may argue that luxury goods market is a high-beta one with high tendency to face the risk of declining.

That said, Longuet noted that this could be an interesting entry point for investors who may want to invest in luxury stocks, taking examples of LVMH and Cie Financiere Richemont SA. Interestingly, Longuet also added that December or January could be the best times to buy luxury shares.

While luxury firms can be highly profitable, we are of the view that a successful brand management is indeed essential as the winners take it all. In the local scene, OSIM International, FJ Benjamin and The Hour Glass are such companies to watch. Meanwhile, strong financials and broadly diversified footprints across regions and sectors also further strengthen our confidence in these stocks.

In short, the luxury goods market seems to be booming one going forward. Be mindful that the best luxury brands may not offer discounts – but their stocks, favourably, often do.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

F J Benjamin Hldgs  0.031 -- --   
Business: Co engages in the brand building and management, and development of retail and distribution networks for international luxury and lifestyle brands.

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