fDi: Demand for Luxury Goods Returns

Premium fashion brands have weathered the recession better than expected, with Asian consumers fuelling sales and sending many luxury goods companies’ pre-tax profits back into the black. By Ginanne Brownell

Usually it is the A-list stars that are the focus of paparazzi snappers; at the Burberry catwalk show in London in March, Kate Hudson was certainly looking glam in her sparkly emerald outfit, Claire Danes wowed crowds with her awe-inspiring spiky heels, while Twilight star Kristen Stewart and Mary-Kate Olsen also attracted much attention. But instead of these Hollywood darlings being asked to preen in front of the cameras, all lenses were pointed in the direction of a petite 61-year-old with a severe haircut and a fabulous coat with a fur collar. For in the world of fashion it is American Vogue editor Anna Wintour who reigns supreme and it was no small feat that Burberry’s creative director Christopher Bailey persuaded the fashion doyenne to fly in from New York to attend his autumn/winter catwalk show.

Wintour’s whirlwind visit was also a nod to show how far the brand has bounced back; the famous Burberry plaid had been hijacked for several years by British chavs, who wore knocked-off scarves and hats, causing traditional lovers of Burberry to question the beige, black and red plaid that had for generations signified luxury.

Burberry must be doing something right these days; not only was Wintour front and centre at the London show, but its sales have gone up over the past year. In the full year ending in March, the group made a pre-tax profit of £166m, up from a £16m loss the year before, on revenues that rose 7% to £1.3bn, and its mini-collection April Showers was rushed into stores in the spring as demand for Burberry fashion exceeded expectations. According to the Financial Times, the company has said it will double capital expenditure in the next year to fund expansion in Asia. “Burberry had a great year in challenging markets,” Stacey Cartwright, Burberry’s chief financial officer, told the FT. “For 2010-11, we intend to reassert the growth agenda by nearly doubling our capital expenditure, accelerating investment in all areas of the business, while being mindful as ever of changing economic conditions.”

But it is not just Burberry that seems to have weathered the financial crisis better than expected; several other luxury brands have also been reporting stronger-than-anticipated profits over the past year, including LVMH Group, which reported sales up 33% in the first three months of 2010. Gucci Group, meanwhile, with holdings that include Alexander McQueen, Balenciaga and Yves St Laurent, experienced growth during the last three months of 2009 after a 4% fall in like-for-like sales to €3.4bn.

That’s all good news for luxury brands, many of which took huge hits during the recession; according to consultancy group Bain & Co, in 2009 luxury sales fell by 8% with most luxury goods companies reporting profit losses. According to the Financial Times, in 2009 LVMH saw its net profit fall by 13% to €1.8bn while Bulgari made a net loss of €47m. Bain & Co is forecasting a 4% increase in sales of luxury goods this year, with its Luxury Goods Worldwide Market Study stating that the first quarter of 2010 showed strong results for companies such as LVMH, Dior Couture and Tiffany, while luxury retail stores have shown impressive like-for-like growth from 15% to 20%.

Bain & Co also found that the recovery was likely to spread across almost all geographies and categories, with China seeing a 15% increase, Asia Pacific seeing 10% and the Americas increasing sales by 3%. Japan is expected to be the only area where there will be a loss in sales, predicted at -3%. However one expert, who heads a global luxury company but wishes to remain anonymous, cautions that it is bullish to say the luxury market is booming. “The end of 2008 and into early 2009 was very depressed and business fell off a cliff, so what we have shown from December 2009 is a function of comparatives,” the expert told fDi Magazine.

One region that continued to remain bullish despite the recession was the Asian market, with China, Hong Kong and Korea all doing remarkably swift business. Companies such as Gucci Group, Burberry, LVMH and Hermes have continued to grow their markets in the region, especially in mainland China. Louis Vuitton has just opened stores in Mongolia and Beirut, while Dior, Christian Louboutin and Versace have been expanding their operations in China at a fast and furious pace. Hermes is also getting in on the action, launching a new label called Shang Xia for the Chinese market, which will focus on ready-to-wear and decorative arts inspired by Chinese traditional craftsmanship.

Bain & Co is predicting that Asia has become the key market in the global luxury trade and that Chinese consumers are driving the global market growth. “China kept growing in 2009, so those who could leverage China were able to partially counterbalance the decline in Europe through [Chinese] sales,” Claudia D’Arpizio, a Milan-based partner in Bain & Co, tells fDi Magazine. “Brands that entered China 15 or 20 years ago or brands like LVMH or Gucci which have invested a lot in China over the last few years [had] a strong buffer of growth.” Since 2004 Gucci Group has launched 26 stores in China and now the company is directing 60% of its investment into Asia. “We have more selling square footage in mainland China built in five years than we built up in 30 years in Japan,” Gucci Group CEO Robert Polet told the Financial Times in March. “This strategy has proved to be correct and will remain like this.”

Another strategy taken on board by luxury brands is to become more innovative in how these businesses market themselves. “In the last few years, those companies that have looked outside the box have been the ones which have succeeded, either because they are bringing out new products or going into new markets,” Kien Tan, a London-based consumer expert with PriceWaterhouseCoopers tells fDi Magazine. “The unthinkable will become more commonplace [and] brands that can be more innovative and take risks may see the benefits from that.”

For example, had the pop-up retail trend happened pre-recession, it would have been something luxury brands would not have tapped into so quickly because it’s seen as underground, experimental and has an unproven track record for sales and marketing. Now, however, luxury brands such as Prada, Hermes and Jimmy Choo have been quick to get on the pop-up retail bandwagon and have helped drive customer traffic, especially by customers who would not normally feel comfortable going into a traditional luxury retail space. According to D’Arpizio, there has also been more brand feedback from stores and a more regional approach to operations by some of the more successful luxury brands. “Feedback mechanisms from different markets helped to counteract the crisis,” she tells fDi Magazine. “In 2008, some brands were already planning product development and merchandising to [counteract the recession] and although no-one could imagine the consequences, those that were more flexible and more forward-thinking forecast [the ramifications] better.”