The global pandemic does not appear to have diminished global consumers’ appetite for luxury goods. For example, the Swiss firm Richemont, best known for its Cartier brand, experienced surprisingly strong sales from its jewelry division during the fourth quarter of 2020.1 LVMH, the French multinational whose luxury brands run the gamut from Louis Vuitton handbags to Christian Dior perfume, reported sales growth of 18% year-over-year gain in the same period.2 Other companies have followed suit.
These numbers surprised many Wall Street analysts, given the challenges consumer brands faced in 2020: stores closed during lockdowns and travel came to a halt, grounding Chinese tourists who had grown to be a major consumer base for high-end boutiques in Paris, London, New York, and Hong Kong3 before the pandemic.
Despite these difficulties, however, the global luxury market seems poised to continue on its pre-COVID-19 trajectory. From 1996 to 2019, luxury consumption grew at a compound annual growth rate (“CAGR”) of 5.9% as luxury brands grew to create a $300-billion global market. Since the end of the Global Financial Crisis, luxury consumption grew at a faster pace than U.S. personal consumption expenditures.4 Deutsche Bank, a global investment bank, predicts that luxury company sales will make up majority of lost ground in 2021, expecting sales to rebound by 18% in 20215 after falling an estimated 23% in 2020.6
Luxury sales proved to be adaptable during the pandemic. When COVID-19 hit, consumers migrated online to buy luxury brands, as they did with most purchases. As a result, contribution of e-commerce to global e-commerce sales nearly doubled to 23% in 2020, up from 12% in 2019.7 The pandemic has highlighted the brand loyalty of luxury consumers, who may have more resilient spending patterns than consumers of mass-market products. 8
Chinese consumers driving growth
Chinese consumers are a source of long-term optimism for luxury brands. China, with a growing base of middle-class and affluent households, already accounts for much of the global luxury market today and continues to grow in importance every year.
For example, in the 1950s, 90% of the global middle-class lived in Europe and North America;9 today, more than 20% of the global middle-class lives in China. Chinese middle-class expenditure totaled $7.3 trillion in 2020, dwarfing the $4.7 trillion spent by U.S. consumers.
In a 2017 report, McKinsey projected 28% growth in aggregate luxury spending from 2018 to 2025.10 The firm predicted Chinese consumption would grow by 60% over that period, accounting for 65% of total industry growth in the analysis period.
For investors, a portfolio focused on luxury brands can enable them to participate in China’s exceptional growth without taking on risks associated with investing in Chinese stocks.
“Luxury” is expanding beyond traditional luxury segments
Today, the luxury market is no longer limited to Ferrari sportscars, Breguet watches, and Hermès handbags. In recent years, most consumer segments have experienced “premiumization” in one way or another: from beer, to outerwear, to workout gear and training equipment, consumers increasingly prefer quality over quantity.
Premiumization has brought waves of new luxury consumers to all corners of the broader consumer sector. Canada Goose, maker of luxury winter coats and gear; Lululemon, maker of up-market “athleisure” apparel; and Peloton, maker of high-end exercise equipment are only several examples of these trends.
Moreover, work-from-home friendly luxury exercise equipment makers such as Peloton and luxury e-commerce companies like Farfetch and Zalando were direct beneficiaries of the pandemic and highlight the diversity of today’s global “luxury” ecosystem.
Incumbent luxury brands benefit from high barriers to entry
Established luxury brands like Gucci, Hermes, and Louis Vuitton have developed sizable competitive moats in recent decades. These incumbent firms have entrenched themselves as industry bellwethers and are rarely challenged by new industry entrants. Instead, large incumbents, who have the largest marketing and M&A budgets, tend to only expand and “buy vs. build” mentality prevails in the global luxury market.
As such, the global luxury industry has seen a flurry of multi-billion-dollar M&A deals in recent years: for example, Michael Kors purchased Versace, LVMH bought the hotel and leisure company Belmond, Richemont acquired the Italian online fashion retailer YOOX Net-a-Porter, and lens and eyeglass company Essilor merged with premium eyewear brand Luxottica. As recently as January 2021, LVMH closed a $16 billion acquisition of luxury jewelry maker Tiffany.
M&A activity creates benefits for companies on both sides of the transaction, as well as for their investors. The acquirer can emerge as a more dominant and more profitable entity, while takeovers can boost realized investment returns in the smaller target companies.
Assessing potential risks
Luxury brands were not immune to market volatility in 2020. Some analysts question whether high growth rates in luxury expenditure will be sustainable in a post-pandemic world. There are also concerns about valuations of luxury goods companies, as luxury valuations may now rival those of large cap U.S. stocks. 11
Indeed, luxury sales received a boost from online shopping, one of the few activities that consumers could safely engage in during lockdown. It remains to be seen whether consumers will maintain the same level of interest in luxury brands when they can travel and dine-in at restaurants again.
An easy way to access this opportunity
The Emles Luxury Goods ETF (LUXE) is the only ETF to provide investors with access to the growth of the global luxury goods market. It was designed and is overseen by a manager with a history of developing innovative strategies that enable investors to pursue unique opportunities.
The fund is broadly diversified across the global luxury ecosystem, offering exposure to manufacturers of luxury accessories, alcoholic beverages, apparel, athleisure, beauty, home goods, jewelry, vehicles, and other products. In combination with other funds focused on retail brands, LUXE can provide investors with diversification across the consumer sector.
There is no guarantee that consumer spending will grow, particularly in times of financial stress. For important information about the fund, including holdings, please click here.