Hello and welcome you are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast
visit on finance.org. In March this year, Fortune magazine announced that Elon Musk was no longer the world's richest person after being overtaken by Bernard Arnaud, the founder of luxury goods conglomerate LVMHA. Sign of how big the market for luxury goods had become, Elon has since retaken his position at the top of the list, but is just barely ahead. LVMH is a family controlled
luxury goods conglomerate. Built through acquisition since the 1990s, it was the first European company to cross the half a trillion dollar market valuation threshold and is the only European company to be ranked among the top ten biggest global companies. The personal luxury goods market has seen amazing growth over the last 25 years.
Financial crises, A pandemic, geopolitical problems, inflation and a squeeze on the cost of living have done absolutely nothing to slow the rise of the luxury sector. It posted a record year in 2022 where sales of personal luxury goods hit $385 billion, only outdone within the luxury segment by high end cars. The luxury goods market has grown in terms of categories too. In recent years, luxury was once made-up of things like clothing,
jewelry, wines and cars. But in recent decades there's been huge demand for high end kitchenware, limited edition trainers, and things like makeup and candles. The definition of luxury goods is of course somewhat vague, but it usually describes objects that not only have a very high price, but that promise quality, craftsmanship and an air of
exclusivity. Luxury goods shouldn't be something everyone has, but more and more people of different ages and income brackets are getting caught up in the world of high end goods, driving the industry to an incredible boom. After a contraction as the world locked down in early 2020, the luxury goods sector took off in a big way in 2021 as shoppers, flush with savings, government checks, investment and crypto gains, indulge themselves buying cars, jewelry, clothing,
watches, handbags and more. I remember being quite surprised when stores reopened a few years ago, seeing the long lines of people waiting to be served outside luxury goods stores. The stores seemed almost overwhelmed by the level of business. The luxury sector's momentum kept going into the first quarter of 2023, achieving 9 to 11% growth over the prior year, according to Bain and Company. But there have been some recent signs of weakness.
Prices for luxury Swiss watches on the secondary market, as tracked by the Bloomberg Subdial Watch Index, are near the lowest level seen in almost two years. Prices of luxury watches peaked in February 2022 following an unprecedented surge in demand during the pandemic. Switzerland's Richmond, owner of Cartier and Van Cleef and Arpels fell more than 10% on Monday this week after reporting slightly lower than expected
first quarter sales. Greismont's overall sales grew 19% at constant exchange rates, just below analyst expectations. But sales in the Americas, driven mostly by US customers, the luxury sector's biggest market by sales, turned negative compared with the same period last year. Status symbol SUV's like the AM GG63 were trading at $100,000 premiums over sticker price in late 2021.
Today, higher interest rates, higher fuel prices, and tighter economic conditions overall mean that the high end SUV premium has mostly disappeared. So is the luxury goods bubble bursting or will the boom in high end goods keep on going? Now, you might think that the growth of the luxury goods market is simply due to growing inequality.
It seems obvious that these goods are made for wealthy consumers, and if the rich are getting richer, they should have more money to spend on high ticket items. It might surprise you that a significant portion of the growth in the luxury goods sector comes from middle and low
income shoppers. Americans with a household income of less than $50,000 make up about 27% of regular luxury good consumers, according to global data, which is almost as big a group as shoppers in the bracket up from them with incomes of up to $150,000 a year. While Americans of all income groups were buying more luxury apparel during the pandemic, purchases by individuals making $40,000 a year or less rose the most.
They were 365% higher at the end of 2021 than they were in January 2020, before lockdown began. In the United States, the luxury goods business has been booming not only because there have been more people buying luxury goods
in recent years. But also because the average price of luxury items has risen fast too, having spiked 25% since 2019, according to the ecommerce analytics company Data Weave, Luxury accessories on the online retailer Farfetch rose by almost 39% between February 2020 and May 2021. The luxury goods economy has changed in other ways over the
last decade, too. And the explosion of online luxury resale platforms means that there's now an active secondary market in luxury goods, which were historically bought by people who had no intention of ever selling them. When people could see discontinued luxury items, sometimes rising in price, they began to think of their spending as investment rather than as consumption.
The new group of buyers were buying watches and handbags and even trainers to store them rather than to wear and use them. You have to wonder how collectible these items will actually be in the future when there are so many of them being maintained in perfect condition rather than being used and worn out over time. The assumption is that the items that are most fashionable today will still be in fashion in the future when the investors decide
to sell. The luxury economy of today has become part of youth Internet culture too, where people are trying to figure out new trends through online research. They then buy the goods online and sell old pieces online too. Luxury goods have become a sort of a language through which people communicate taste and connoisseurship on digital platforms, and brands are well aware of this. Their marketing is very focused on social media and Internet
culture. A friend of mine who used to sell luxury watches tells me that Instagramers were a big part of the customer base. They had to have whatever the hottest new product was in order to stay relevant online. The average age of luxury consumers has been falling too. According to a 2022 report from The Real Real, an online and brick and mortar consignment marketplace for used luxury goods, millennials buy and sell more goods on their platform than any other generational cohort.
And together with Gen. Z, they make up 41% of the luxury goods sites, more than 28 million members, according to Bain and Company Research. Members of Gen. ZA cohort between the ages of 11 and 26 are making their first luxury purchases at around the age of 15, which is younger than millennials did. And the same research projects that millennials and younger generations will make up 80% of
luxury spending by 20-30. This might seem to make little sense to older generations, given the countless reports of young people's finances lagging behind those of prior generations at the same age point. But a report from Morgan Stanley argues that this group has more disposable income at a young age because they're living with their parents longer due to high rental prices. If the money doesn't go on rent, it goes on something else.
This age group are also comparing themselves to much wealthier people than their parents generation would have in the past, as platforms like Instagram and YouTube. Give them a look into the lives of wealthy celebrities, or even people who pretend to be wealthy. Online influencers are often given expensive items for free
or are paid to promote them. If you've been feeling an unexplainable urge to buy 110 year old camera, it's probably because you've been watching my videos too often on top of all of this. The availability of Buy now, Pay Later platforms makes it easier for young people to finance an expensive purchase, which would have been impossible for prior
generations. Buying a home might feel too out of reach to even dream of, but buying a watch or a handbag in installments that's sure to go up in value and will impress all of your followers on Instagram is much more doable. As counterintuitive as it may seem that people without significant wealth would borrow to spend on luxury goods, a 2016 paper from the Federal Reserve Bank of Philadelphia found that higher income inequality heightens awareness and anxiety
about social class. And this class anxiety fuels consumption to make things worse for those who spend to impress. As luxury goods have become more widely owned, the wealth signal that they send has become increasingly diluted. People destroy their finances to buy goods, hoping to impress people, and no one really notices.
The term Veblen goods is used by economists to describe goods whose demand increases as their prices rise, resulting in an upward sloping demand curve instead of the more typical downward sloping demand curve. The idea was first explained by Thorsten Veblen in 1899 in his book The Theory of the Leisure Class. He put forth that certain expensive goods aren't purchased in spite of their high price,
but because of their high price. Veblen introduced the idea of conspicuous consumption, or that people specifically buy goods as data symbols. To cultivate this desire, the luxury industry limits the availability of certain products, but they want to capture as much of the market as possible. So increase their offering of accessible items while pushing up the prices of their top shelf offerings to instill a sense of exclusivity. This can be a difficult balancing act, and it sometimes
goes wrong. In the early 2000s, Burberry sold too many affordable items in the UK and this, combined with widely available counterfeit goods, meant that the brand became associated with Chav culture and became viewed as bad taste. After a change of CEO in 2006, they managed to turn the brand around again. Chanel recently faced pushback from customers.
After raising the prices on some of its handbags by more than 70% since 2019, they defended this price hike by saying that the cost of materials had gone up. Louis Vuitton can't make the same argument as their bags are mostly made of plastic, but I'm told that it's the highest quality artisanal French
plastic. According to Bain and Company, 70% of sales growth in luxury leather goods last year was explained by price increases, with only a small percentage being explained by increased sales volume. Bernard Arnos growing wealth has attracted criticism in France as
evidence of growing inequality. But he argues back that luxury goods companies are key to both the French economy and the European economy, as these companies are big employers, big taxpayers, big exporters and drivers of economic growth in the region. People have said that it's a disgrace for France that all of these big luxury groups produce useless things, so we should get rid of them, Arno said. But how many people do we employ in France? Luxury employees, a million people.
He went on to claim we paid the most taxes of any company in France. LVMH announced their earnings next week and it will be interesting to see how things are going. On their last earnings call, they reported a 17% jump in sales thanks to a rebound in China following the end of lockdowns. The Chinese economy now appears to be stalling with the dollar value of China's exports having fallen by more than 12% in June and property sales are down 27% compared with a year earlier.
US revenue for LVMH grew at 8% in the first quarter, but the CFO said that most of that was down to a brisk business at it's less exclusive Sephora beauty chain. For the rest, the business is slowing down a bit, he said, citing softer demand for jewelry, fashion, leather goods where sales to US shoppers both at home and abroad were
flattish. We have to wonder if what's happening in the auto industry tells us anything about the luxury goods industry, where dealers are struggling to sell luxury used cars priced at over $40,000. While bread and butter cars under $25,000 are seeing plenty of demand, credit card data from Barclays and Bank of America show that Americans dialed back spending in June as fewer people
splashed out on high end goods. Younger shoppers who drew on savings during lockdowns are now under more pressure from rising prices than older generations with higher incomes, according to Citibank. Millions of Americans face ahead of at least $500 a month to their household budgets from the restart of federal student loan payments in September, according to a new study by TransUnion. This resumption of loan payments will hit the young consumers who have been key to the growth of
the luxury goods sector in recent years, Swatch Group, which owns a number of the biggest luxury watch brands, including Omega and Brigade. Reported good earnings recently, but said that growth was strongest in the lowest price segment of watches and jewelry. Demand for the company's popular Moon Swatch, priced at around $260, has accelerated, according
to the company. We've seen luxury watch prices on the second hand market falling and watches that were impossible to buy new a year ago are now starting to become available. The Rolex craze isn't going down. It's still very hard to get a Rolex, but people that have been on the list for a year, two years, three years, they're getting the call. Yeah, you know, but. But that being said, can you walk in and get a dessert? Can get a hard to get one?
Probably not. There are lots of reasons for why watch prices are falling faster than luxury spending in general. It's partially the slowdown in China, where a lot of people sold their watches in the last year or two to fund spending during the lockdown period. It's also the crypto sell off. Coin Bros are no longer buying iced out watches and high spec Corollas. There's also some price distortion in the market coming from Rolex's December launch of an official resale channel.
Rolex watches make up 42% of the global luxury used watch sales market by value, and Rolex official certification is worth a 39% premium according to watch charts. As the CFO of LVMH said on the earnings call in April, maybe interest rate rises are taking their toll on spending. So are luxury goods a good investment? Should you buy designer goods and hope that they'll appreciate
as part of your retirement plan? Well, based on the returns calculated by Knight Frank over the last 10 years, the only luxury investment that has outperformed the S&P 500 has been rare whiskey bottles. The rest of all underperformed, and that's before taking into account storage costs, insurance costs, transaction costs, and so on. The last decade has also been a very good period for collectibles, with interest rates near 0 for most of the
time. In 2018, Dimson, Marsh and Staunton of the London Business School constructed a time series of 118 years of investment performance of wine stamps, violins, art. Collectible books, jewelry, and classic cars and compared them to the returns of global equities over that period. Classic cars were the best performing collectible asset, followed by jewelry, books, fine art, violin, stamps, and then fine wine. But all of these assets underperformed the stock market
over the 118 year time frame. When you take transaction costs and storage costs into account, the returns of most of these assets were entirely wiped out. So it might only make sense to buy these items if you enjoy owning and using them, but not as an investment. Thanks for tuning into today's podcast. If you enjoyed it, send a link to a friend as that would really help the podcast to grow. Have a great day and talk to you next week.
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