While the term “luxury” can be hard to define, it’s not hard to spot luxury goods. Rolex watches, Louis Vuitton handbags, Chanel sunglasses, and Tiffany & Co jewellery are some examples you’re most likely familiar with. These types of products are known for their quality, durability, heritage, and rarity – and they’re coveted by affluent consumers the world over, despite their high price tags.
As for why luxury goods are so popular and seen as desirable by society, it all comes down to the exclusivity factor. Luxury brands do not seek to serve the masses. Instead, they want their products to be expensive and scarce. Ultimately, it’s this scarcity that makes these goods so appealing to consumers. For many people, luxury goods are status symbols. If a product is exclusive, it makes a statement about the owner.
Looking at the luxury goods market from an investment angle, there appears to be a compelling opportunity here. Thanks to the power of their brands, many luxury goods companies are generating sizeable profits today. Meanwhile, the market for luxury products is projected to grow substantially over the next decade as the world’s middle class expands, and technology makes it easier for brands to connect with their customers. To help investors capitalise on the growth story, eToro has created a LuxuryBrands Smart Portfolio. The aim of this portfolio is simple — to provide investors with diversified exposure to the best luxury brand stocks in the world.
Why luxury goods stocks can be good long-term investments
From a long-term investment point of view, there are many things to like about luxury goods companies.
For starters, many have incredibly powerful brands. Take LVMH, for example, which is the largest luxury brands company in the world. Its brands include Louis Vuitton, Moët & Chandon, Tag Heuer, Givenchy, Christian Dior, and Tiffany & Co — all of which are very well known worldwide. A strong brand is a competitive advantage, as it creates customer loyalty. Consumers are willing to go the extra mile to get hold of a brand name they love.
A dominant brand also means pricing power. Unlike companies that sell necessities, luxury goods companies can raise their prices because they are confident that their deep-pocketed customers will be happy to pay up. Rolex, for instance, increased prices on many of its stainless steel watches by 10% or more in early 2022. This kind of pricing power can potentially guard against inflation, which is currently negatively affecting other areas of the retail industry.
On top of this, powerful brands tend to lead to above-average operating margins and returns on capital. British fashion powerhouse Burberry is a good example here. Between 2017 and 2021, it had an average operating margin of 15.0% and an average return on capital of 19.5%. By contrast, the average operating margin and return on capital across the UK’s FTSE 100 Index over this period was 14% and 14.4% respectively.
Finally, companies that sell luxury goods also tend to be quite resilient. This is illustrated by the fact that in 2020, around half of the top 100 luxury goods companies globally remained profitable. Of course, demand for luxury products can decline when economic conditions deteriorate. However, compared to other areas of the retail industry, sales tend to hold up pretty well. One reason for this is that affluent individuals typically aren’t affected as much by economic downturns.
As a result of their competitive advantages, high levels of profitability, and resilience, luxury goods stocks have generated strong returns for investors in the past. Just look at the performance of the S&P Global Luxury Index. For the 10 years leading up to March 31, 2022, it delivered a total return of 12.2% per year1, comfortably outperforming the MSCI World Index, which returned 10.9% per year2. Many of the best luxury stocks delivered even higher returns. LVMH, for example, delivered a share price return of around 17.3% per year over that period3.
Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
A market with significant growth potential
Looking ahead, there are a number of structural growth drivers that could power luxury goods stocks higher.
One such driver is the growth of the world’s middle class. Historically, middle class consumers have shown a high propensity for “conspicuous consumption” — the purchase of goods and services for the specific purpose of showing off one’s wealth. With the global middle class projected to reach 5.5 billion people by 2030, up from around 3.75 billion people in 2021, the luxury goods customer base is likely to expand significantly. A lot of the growth is likely to come from Asia, where more than one billion people are set to join the middle class by 2030.
The “Great Wealth Transfer” could be another key driver of the market going forward. Younger consumers are crucial to the luxury goods industry because they tend to spend more on luxury products than previous generations. Social media plays a role here. With around $30 trillion in wealth set to be passed down between generations in the coming decades, it could have a huge impact on the luxury brands market. According to Bain and Company, millennials will represent 40% of the global personal luxury goods market by 2025.
Technology will be a game-changer for luxury goods
Of course, the growth of e-commerce could also play a major role in the expansion of the luxury brands market over the next decade.
Before the coronavirus pandemic, many luxury brand companies were reluctant to sell their goods online due to fears that selling over the Internet could harm their brands. However, when luxury boutiques across the world were forced to close during COVID-19, these companies had to adapt. As a result, the share of purchases made online for luxury goods shot up, reaching 23% of total sales in 2020 versus 12% in 2019.
Looking ahead, we can expect e-commerce to continue driving growth, as many luxury brands are now really embracing this form of retail. Hugo Boss, for example, is currently targeting online sales of €400 million this year, up from €221 million in 2020. New technologies such as augmented reality (AR), which can help companies create “virtual dressing rooms,” and instant payments, which can lead to more streamlined transactions, should help boost growth here.
E-commerce isn’t the only area of technology that could have a big impact on the growth of luxury brands in the years ahead though. The metaverse also looks set to play a major role. Already, we’ve seen a number of luxury brands embrace the metaverse, including Louis Vuitton, which launched a mobile game embedded with 30 non-fungible tokens (NFTs), Dolce & Gabbana, which sold an NFT collection, and Balenciaga, which featured in Roblox.
Analysts at Morgan Stanley believe that by 2030, the interconnected digital worlds of the metaverse and NFTs will account for around 10% of the luxury goods market, delivering €50 billion in revenues, and lifting profits by around 25%. “As more aspects of people’s lives move to the internet, demand for digital fashion and luxury goods is set to increase dramatically in the coming years,” they wrote in a recent research report. Ultimately, the metaverse should help luxury brands access a whole new group of consumers in the years ahead.
The easy way to invest in luxury brands
With the global luxury goods market forecast to be worth around $355.5 billion by 2027, up from $310 billion in 2021, luxury brands companies look set to enjoy strong tailwinds in the years ahead.
Those interested in gaining portfolio exposure may want to check out eToro’s new LuxuryBrands Smart Portfolio. Designed to provide diversified exposure to this exciting industry, this Smart Portfolio gives investors access to some of the world’s most powerful luxury brand companies including the likes of LVMH, Hermes, Gucci owner Kering, and Cartier owner Richemont.
Sources:
- https://www.spglobal.com/spdji/en/indices/equity/sp-global-luxury-index/#overview
- https://www.msci.com/documents/10199/149ed7bc-316e-4b4c-8ea4-43fcb5bd6523
- https://finance.yahoo.com/quote/MC.PA/history/
Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.