Future Returns: Investing in the Global Luxury Industry

The global luxury industry has had a good run over much of the past decade and signs are pointing to continued strength despite a difficult stretch during the pandemic.

S&P’s Global Luxury Index has beaten the MSCI All Country World Index over the past five years by about 4.3%. It’s been a hotbed for M&A activity, including LVMH’s recent US$15.8 billion acquisition of Tiffany & Co. The sector has proven popular with investors from individuals through to private equity—a pre-pandemic Deloitte survey found 70% of respondents, most of whom were small-medium private equity funds were considering investing in a fashion and luxury asset.

Jessica Gerberi says structural growth themes in the industry have turned luxury stocks from a cyclical to secular growth opportunity.

Gerberi, a senior research analyst with Calamos Investments in Naperville, Ill., was positive on the industry before the pandemic, partly based on the resilience of luxury goods companies, some a century or two old. “Their resilience was just tested in such an unprecedented way with Covid, and Covid’s really been an accelerant for positive change in this industry,” she says.

Bain & Co. finds despite a contraction in the overall global luxury industry due to the pandemic, global online luxury sales grew almost 50%, to about US$59 billion, in 2020, compared to about US$39.7 the prior year. This sales channel is forecast to grow further, from an estimated 23% last year to more than 30% by 2025. Gerberi says the industry may not see a full recovery until 2022 or 2023, but the speedy adaptation to selling online undertaken by many companies offers a compelling reason to consider investing in luxury stocks.

“The strong getting stronger will likely continue to be a theme in this industry,” she says.

Besides the anticipated post-pandemic rebound, growth in emerging markets offers another compelling reason for the sector’s strength. One estimate anticipates the global middle class ballooning to 5.3 billion people by 2030, bringing about 2 billion up the economic ladder. This group is expected to splurge on luxury items, and the industry will reap the reward, particularly in China.

Due to these developments, Gerberi says in a post-Covid, normalized environment there could even be some upside to the industry’s approximate 5% annual growth rate. She shared three tips with Penta on how to invest in the global luxury industry.

Understand Different Exposures

Not all luxury stocks are equally exposed to different elements. For instance, some companies focus on a single brand while others have what Gerberi calls “natural diversification,” meaning multiple brands or that they operate in multiple categories.

“Some of these big luxury conglomerates have built their businesses upon M&A and acquiring new brands, which I think speaks to their ability to balance growing the equity and managing the heritage of their legacy brands,” she says. “But [they are] also keeping on top of current trends and being willing to take a risk on a brand that might not be fully in their wheelhouse.”

She mentions Moncler’s US$1.4 billion acquisition of Stone Island, which brought the down jacket maker together with a streetwear brand. Gerberi says these moves allow companies to tap into certain trends or companies growing at a faster rate than the overall luxury industry.

Geographical exposure comes into play as well. Much of the industry is listed in Europe rather than the U.S., for instance. And though the customer base is often considered from North American or European vantage points, luxury companies serve a diverse, global base of consumers beyond those regions. This means they’re impacted by much broader, global trends.

Embracing Digital Evolution

“Covid really accelerated the digital strategies that companies in the industry are pursuing,” Gerberi says. “And of course they came into the pandemic in varying degrees of development.” This follows other accelerations in online retail, which observers say advanced e-commerce sales and technology by several years during the pandemic.

This evolution is about more than simply having a robust e-commerce site, offering products for sale via third party or increasing the depth and breadth originally offered online. Gerberi says luxury brands have created new digital avenues to engage with their customers and build customer relationships including special sales events, setting up virtual showrooms—even biometric scanning to offer virtual beauty trials.

Investors should watch how companies have embraced this shift, as not all companies have seized the chance to innovate their digital platforms and complement their in-person shopping experiences. “That gap between the haves and have nots has widened,” Gerberi says.

China’s Growing Consumption

The growth of emerging market middle classes is a promising tailwind for luxury goods, Gerberi says. “But in the near term it likely wouldn’t be anywhere as meaningful as the continued growth of the Chinese consumer in this industry.”

In 2019, the Chinese consumer accounted for 35% of global luxury sales. That figure is estimated to rise to 50% by 2025. This may pose attractive investment opportunities in brands with less-established presences in China, offering room to expand their customer base there. Though China-based luxury brands are emerging, globally-recognised brands are expected to be the main driver of this consumption.

Gerberi expects “a good pipeline for luxury consumption” to continue, as China’s Gen Z population ages and gains more disposable income.

Factors like relatively quick economic bounce back from Covid, unemployment returning to pre-Covid levels, and a continued strong appetite for luxury goods bode well for continued sales growth. “All of those things continue to bode well for the outlook for the Chinese consumer with regards to luxury,” she says.

Trying to buy just the right souvenir on a trip is a risky business. You can wind up with a lifetime treasure—or an albatross you feel stuck with forever.

Consider the giant painting of a chicken flying out of Cuba that has been hanging over our couch in Palos Verdes, Calif., for the past 15 years. Buying it cheaply seemed to make sense when we were in Havana, since my husband’s family had fled the country after the revolution.

But the flying chicken just didn’t seem as, well, poignant by the time we returned home and hung the 4-by-7-foot painting. No guest has ever said a word about it. “I can’t help you with the chicken,” an art dealer told me long ago when I asked for help in selling it.

So, how do you find the right souvenir? Or is there even any such thing?

An everyday reminder

For many people, the answer to the second question is an unqualified “No,” and they have stopped trying. “Souvenirs never look as enticing or beautiful as they did at the time of purchase once you get them home,” warns Patricia Schultz, the author of “1,000 Places to See Before You Die.”

After collecting rugs on her trips, then Christmas ornaments, before running out of room at home for both, Schultz says, “I have gone cold turkey. I collect memories.”

But for others, surrendering just won’t do. “It’s intrinsic when people travel that they wind up bringing a keepsake of the journey,” says Rolf Potts, the author of “Souvenir,” a book that traces the history of travel souvenirs back to the earliest recorded journeys.

“It can be a way to show off,” he says. “Much like the envy-inducing travel posts on Instagram.” But for many people, he says, “It’s proof you were there, not only to show other people but also for yourself.”

For those who lean in this direction, there are ways to help avoid regrets. Tara Button , founder of the Buy Me Once website, and the author of “A Life Less Throwaway: The Lost Art of Buying for Life,” suggests focusing on practical items that fit your lifestyle and double as mementos.

As an example, she once bought a “very affordable” baby blanket made from alpaca fiber on a trip to Peru and now uses it every day. The blanket not only reminds her of “the time pre-children when I was traveling,” she says. “It goes over my 2-year-old son every night. It’s always soft and always gorgeous.”

She has a friend who collects one cup from each destination. “Those are perfect memory keepers,” she says. “A small item that is used every day.”

Finding the right scale

One obstacle to finding the right souvenir is that it can be hard to think practically when you are swept up in the excitement of a new culture. Consider the Burmese puppet, 15 inches tall, that has spent about two decades in the closet of Liz Einbinder , head of public relations for Backroads, an adventure-tour company.

“We saw a lot of puppets everywhere and just got caught up in all of the Burmese art and culture,” she says. Now she wonders, “Why did I bring this back? It sits in the back of my closet and I can’t seem to get rid of it. It creeps me out when I see it.”

When that buying urge sweeps over you, Button and other travel experts suggest pausing to consider your lifestyle, taste, needs, and the scale of your home—you’re going back to the reality of your everyday life, after all.

But that doesn’t necessarily mean being entirely practical. Einbinder collects miniatures, mostly miniature houses, from every country, and has more than a hundred. Most are in storage, but she keeps a little London bus and a little Egyptian pyramid on her desk. For her, souvenirs aren’t just about memories, they’re also about the hunt. “It gives me something to search for” on each trip, she says. “That’s half the fun.”

Ignore the hard sell

Another way travelers often go wrong is by giving in to pressure, or at least persistence, from salespeople.

When Kimba Hills, an interior designer, went to Morocco, she hired a guide who took her to a rug store in Fez, where the dealers delivered a whirlwind sales pitch while serving tea. She wound up buying a $4,000 flat-weave Turkish rug, measuring about 13 feet by 9 feet.

“No one in my group could believe I got seduced,” she says.

When the rug finally arrived at her home in Santa Monica, “It smelled like cow dung,” she says. Washing the rug was going to change the color.

When she called the dealer in Fez and demanded her money back, he refused, offering to send her a different rug instead. “We got into a yelling match,” says Hills. “All my skills went out the window.”

Looking back, she says, “You are in a buying mode because you are there and feel like you should buy something.” On a recent trip to Mexico, she bought nothing, explaining, “I’m wiser.”

Sometimes, magic

Spontaneity can cut both ways. There’s the chicken painting. But waiting for inspiration to strike, rather than planning to go home with a souvenir, can still help.

Henry Zankov, a sweater designer, says that when he travels, he explores his destinations with the idea that he won’t buy anything unless he comes across something he loves. He still buys plenty, but says “I don’t have regrets.” At his home in Brooklyn, he has ceramics, vases and glassware from shops he found randomly in Spain, Greece, and Italy. “I buy what I have to have,” he says.

There are times he doesn’t find anything. “So I just give up,” he says. “It’s OK.”

Some souvenirs do become the treasure of a lifetime.

Annie Lucas , the co-owner of MIR, which offers tours to less-traveled destinations, became captivated by a mirror on a trip to Morocco. It was made with hand-pounded silver and pieces of camel bones.

She went back to the store three or four times, debating the cost and whether she would regret it once she got home. It was heavy and measured 24 inches by 40 inches.

“That was 15 years ago, and I still treasure it,” she says. “If I had to get out of my house and had only five minutes to pack, I would grab that off the wall.”

Future Returns: Investing in the Global Luxury Industry

Why putting your money in luxury makes sense.

It’s easy to buy clunkers when you’re caught up in the moment. But regrettable purchases aren’t inevitable.

An everyday reminder

Finding the right scale

Ignore the hard sell

Sometimes, magic