The Danger of Europe’s Dependence on Luxury Sales
In recent years, the global boom in luxury sales has led to a significant increase in European markets. While this success story of increased revenue is good news for the region, to what extent has Europe become too dependent on an industry that many consider a symbol of decadence? This article discusses Europe’s growing dependence on luxury sales and how this may be detrimental to the region’s overall economic growth and stability.
Comparing Europe and the US
The article compares Europe’s industry concentration with that of the US’s, where 10 of the biggest tech companies accounted for 65% of stock market returns over the past 12 months. However, in Europe, 10 of the biggest luxury stocks accounted for around 30% of returns, which is unmatched since records began. The luxury industry has grown dramatically within Europe and experienced its best year during the pandemic, with record stimulus adding trillions of new wealth, much of it in the hands of the very rich, who have spent a good deal of it on high-end goods.
Europe will be the first to feel the risk
Europe has finally been able to make hefty sums from an industry it has ruled for centuries, but this could pose significant risks to the region in the long run. Building a knowledge economy on 17th-century craftsmanship is arguably a step backward at a time when Western capitalism faces weak productivity growth, growing wealth inequality, and the conundrum of how to compete and coexist with China. Additionally, Europe’s luxury sector has become more dependent than ever on Chinese consumers, who now account for around a third of its sales.
Power is concentrated at the top
Parallel to the technology industry in the US, power is concentrated at the top in Europe’s luxury industry. The roots of French rule lie in a luxury ecosystem that dates back to the court of Louis XIV and a culture of corporate raiding that began with Bernard Arnault. Rivals followed suit, and the global luxury industry relies increasingly on goods that are still made by small Italian firms but sold by large French conglomerates. Major European brands account for a third of global sales, and the top four luxury companies in Europe, by market capitalization, are all French, namely LVMH, L’Oréal, Hermès, and Christian Dior (owned by LVMH).
Luxury prices continue to increase
Luxury companies serve an increasingly price-insensitive clientele, and the price of a Chanel bag has doubled over the past five years to $10,000, far outpacing the rise in general consumer price inflation seen during that time. One reason for such high profits is pricing power, which has led to higher margins. For instance, Hermès now has margins of over 40%, up from 25% in 2010 and even higher than those of Microsoft, the most profitable of the big tech companies.
Summary
The luxury industry has taken off in Europe over the past decade and experienced its best year during the pandemic, leading two-thirds of global luxury sales revenue to flow to Europe. However, this success story comes with significant risks, especially given Europe’s growing dependence on an industry many consider a symbol of decadence. Luxury sales are concentrated at the top, and power is concentrated in the hands of a few large conglomerates, which poses a significant risk to the region’s overall economic growth and stability. Additionally, the high prices of luxury goods have led to increasing pricing power, which further exacerbates the concentration of wealth in the hands of a few.
Additional Piece: Is the Luxury Industry Sustainable in the Long Run?
Although Europe’s luxury industry has experienced tremendous growth over the past decade, it is important to consider whether this growth is sustainable in the long run. Luxury sales are heavily concentrated, and the industry relies on goods made by small Italian firms but sold by large French conglomerates. Additionally, rising prices have led to a pricing power that is increasingly reliant on an increasingly price-insensitive clientele. However, there are several reasons to question the long-term sustainability of Europe’s luxury industry.
Firstly, the industry’s growth has been heavily reliant on the growth of the very rich, who have spent a significant amount of money on high-end goods. The pandemic has shown that luxury sales are incredibly vulnerable to economic shocks, and it is vital to consider whether the industry’s growth is at risk in the face of economic uncertainty.
Secondly, the industry is heavily dependent on consumers from China, and this dependence is only growing. With the increasingly fraught political climate between China and the West, there is a significant risk that this dependence could lead to vulnerabilities in the luxury market, especially given recent evidence of Chinese consumers boycotting or reducing their spending on luxury goods produced in Europe.
Finally, the industry’s reliance on small Italian firms creates its own set of risks. These firms often employ skilled craftspeople who produce goods using traditional techniques. However, as the luxury industry has grown, companies have looked to cut costs by outsourcing production to countries with lower labor costs. This trend could jeopardize the industry’s reliance on traditional techniques and put smaller firms at risk, even if the larger conglomerates are still able to thrive.
Overall, while Europe’s luxury sales have provided a significant boost to the region’s economy, there are several reasons to question whether this growth is sustainable in the long run. The industry’s heavy concentration, dependence on wealthier consumers and Chinese buyers, and reliance on small Italian firms raise red flags about the sector’s ability to thrive in the face of economic and global uncertainty.
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The writer is president of Rockefeller International
European markets have received a major boost from the global boom in luxury sales, which is unequivocally good news for the region. However, this success story also raises a troubling question: Has Europe become too dependent on an industry that many consider a symbol of decadence?
Contrast Europe with the US, where over the past 12 months, 10 of the biggest tech companies accounted for 65% of stock market returns, which is in itself an alarming sign of industry concentration. Similar signs of concentration are even more worrying in Europe. There, 10 of the biggest luxury stocks, from LVMH to Ferrari, accounted for around 30% of returns, a share unmatched since records began.
Long a source of pride in Europe, the luxury industry has taken off over the past decade and experienced its best years during the pandemic. The record stimulus has added trillions of new wealth, much of it in the hands of the very rich, who have spent a good deal of it on high-end goods.
As a result, Europe is finally making hefty sums from an industry it has ruled for centuries. Two-thirds of global luxury sales revenue flows to Europe, and now the continent has stock market winners to prove.
Europe’s list of top 10 companies by market capitalization, historically dominated by banks, utilities and industrial conglomerates, now includes four luxury names, up from zero in the early 2010s. luxury are even more profitable than US big tech, with earnings accounting for nearly 25% of revenue.
This could be a step forward for the luxury industry, but not so much for Europe. Building a knowledge economy on 17th-century craftsmanship is arguably a step backwards at a time when Western capitalism faces weak productivity growth, growing wealth inequality, and the conundrum of how to compete and coexist with the China.
While it’s not clear how much smartphones boost productivity growth, it’s safe to say that French perfumes and Italian handbags contribute even less. While tech moguls are the subject of controversy in the United States, luxury moguls are the subject of street protests in France. And as the West debates whether to “mock” its relationship with China, Europe’s luxury sector is more dependent than ever on Chinese consumers, who now account for around a third of its sales.
As US technology has grown over the past decade, so has European luxury. Since 2010, the Big 10 tech companies have nearly quadrupled their share of the US stock market to nearly 25%. Over the same period, the top 10 luxury stocks have nearly tripled their share of European markets to almost 15%, with most of that gain coming in the past year.
In luxury as in technology, power is concentrated at the top. Major European brands now account for a third of global sales, compared to a quarter in 2010. The top four luxury companies in Europe, by market capitalization, are all French: LVMH, L’Oréal, Hermès and Christian Dior (owned of LVMH).
The roots of French rule lie in a luxury ecosystem that dates back to the court of Louis XIV and a culture of corporate raiding that began with Bernard Arnault. After acquiring control of LVMH in 1989, he set out to build the first house of luxury brands through serial acquisitions. Rivals followed suit. The global luxury industry relies increasingly on goods that are still made by small Italian firms but sold by large French conglomerates. Gucci, Bulgari, Fendi: they are all Italian brands now under French ownership.
While US tech companies overshadow all rivals, the same can be said of French luxury. Among the first luxury companies, the French have an annual turnover three times higher than the Swiss one, more than four times the American and Chinese ones and 12 times the Italian one.
In April, LVMH became the first European company to cross the half trillion dollar mark. Hermès now has margins of over 40%, up from 25% in 2010 and even higher than those of Microsoft, the most profitable of the big tech companies.
One reason for such high profits is pricing power. Luxury companies serve an increasingly price-insensitive clientele. The price of a Chanel bag has doubled over the past five years to $10,000, far outpacing the rise in general consumer price inflation seen during that time.
So Europe has finally found a winner, but with an asterisk. Capitalism gains more from competition than from concentration. And given the choice between concentration in high-tech or high-luxury, the answer would be clear. There is something a little old-fashioned, if not downright decadent, about the luxury-driven European model.
https://www.ft.com/content/7342ff23-eec8-4a87-818b-fec4fb35cbc3
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