2024-07-22 08:03:15
Luxury always sells, they say. But in reality, the market is divided into two parts. This is what distinguishes brands like Louis Vuitton and Hermès from Burberry or Gucci.
If you’re wondering how the luxury market is doing, you only have to look around in Zurich, Hamburg or Frankfurt. There are regular queues in front of Louis Vuitton’s flagship store on Frankfurt’s Goethestrasse. Very long queues. Salvatore Ferragamo has a two-story store directly opposite. But it’s often empty.
When looking at these two neighbours, it becomes obvious that the luxury market is a two-class society: iconic and ultra-luxurious brands are in demand worldwide, while others are suffering from declining sales.
Take Burberry, for example: The luxury group with the check design issued a profit warning in recent days. In the last quarter, sales fell by around a fifth: If things continue like this, the annual forecast will not be met. Shareholders will lose their dividend.
Burberry has been undergoing restructuring since long before the coronavirus pandemic. The company has been trying to reposition itself for years. Business with China in particular is causing problems: the ongoing real estate crisis and weak economic development are causing many customers to be more frugal. Within a year, the share price collapsed by two thirds. Now Burberry wants to focus on what has proven itself: trench coats and scarves. It will be interesting to see what happens.
Antje Erhard has been working as a journalist and TV presenter for around 20 years. Her career took her from the news agency dpa-AFX to ZDF, among others. She currently works for the ARD finance department in Frankfurt and reports daily on what is happening in the world of the stock market and business.
Only real luxury defies the pandemic
Luxury brands were the winners of the Corona pandemic: Sales, profits and prices rose by 2022. Price increases of 25 percent were possible for many brands. Not only because of increased production costs, but because of high demand. And this shows that these price increases were very easy to implement for ultra-luxury brands. Their target group – around 30 percent of all buyers of luxury goods – went along with it. At the same time, they are winning younger people as customers. And new markets like India are on the rise. Exclusivity is prevailing here.
Some companies and products have been established for decades. There are waiting times of several years for design classics such as the Birkin Bag by Hermès. They are more expensive on the second-hand market than in the shop because demand is so high. At Louis Vuitton, monogram bags are very popular. Exclusive bags, some watches in small editions, rare cars are classics – and valuable investments.
The situation is different for brands below the ultra-luxury range: these include Burberry, Salvatore Ferragamo and Gucci as part of the Kering Group. When the economy weakens, this target group reacts more sensitively and buys less. This quickly becomes noticeable: this customer group makes up a good two-thirds of the luxury segment.
Restructuring a brand in such a phase of economic weakness is difficult. If a campaign flops and a collection doesn’t appeal to customers, things quickly go downhill. The Kering subsidiary Gucci felt these difficulties by 2022 at the latest – especially in China. Here, too, sales collapsed. At Balenciaga, which also belongs to Kering, a failed advertising campaign scared away some of its customers. The problem can also be seen in the share price: In the summer of 2021, Kering shares were worth just under 700 euros. Today, they are worth less than half that.
Ferragamo had a similar experience. Sales fell by almost eight percent and profits fell by 60 percent in 2023. With less demand, costs, including those for marketing, were higher. Although sales increased on the European market, the share price fell significantly – 40 percent in one year alone.
Luxury brands traditionally have high fixed costs. Their flagship stores are in the best inner-city locations – Ferragamo just opened a new store in Berlin – and the rent is high. Advertising costs a lot, as do creative teams and store employees. So-called personal shopping, where employees personally look after customers, is costly, but it is part of the luxury that includes not only the product but also the environment.
In return, many customers accept queues like at Louis Vuitton. The brand for the famous monogram-design bags is one of 75 owned by the LVMH group. It is the largest luxury goods manufacturer in the world by sales. The company owns watches by TAG Heuer, fashion by Christian Dior and leather goods by Louis Vuitton and Céline. Business has been booming year after year.