Luxury goods market: full of Eastern promise
By
Euan Stuart Dec 12, 2005
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When it comes to luxury goods, think East. The UK high street may be turning sour and US consumers may have to tighten their belts, but what does that matter to the new generation of Chinese millionaires? Or the Japanese and Russian markets, for that matter?
People say that only 2% of the population of China can afford luxury goods, says Jonathan Watts in The Guardian. But that’s 30 million people, the equivalent of half of the entire population of the UK, and it means that China is set to account for 20% of the the world luxury goods market by 2009, or so say analysts at Merrill Lynch. This is, no doubt, why Cartier was the first luxury brand to open up shop in the People’s Republic in 1990 and has opened seven new outlets in the last six months. China’s population is young and has a spending mentality that is fast replacing the ‘pre-1978 generation’s’ desire to save. And they have all been denied access to the world’s luxury market for decades; now their shopping appetite is huge. Chinese tourism is growing rapidly – it has already overtaken Russia in terms of numbers, and Chinese tourists abroad will be two and a half times the number of Japanese ones by 2008. And when they travel, Chinese consumers gain exposure to luxury brands and then want to buy them – whether at home or abroad. It’s the concept of luxury that matters This is also true for Russian consumers, who are now so rich that a boutique in Moscow has opened that will only sell items worth over £1m. Russia’s luxury goods market will expand at an annual rate of about 20% in the years ahead, according to the head of JamilCo, a distributor of European brands, says the St. Petersburg Times. “Russian money is new money,” says Elena Ragozhina, the editor of a UK-based, Russian-language magazine called New Style (aka Ladies’ Info) to Fiona Harkin in the FT. They want to spend their money on big names and labels. “It’s a status symbol,” says Ragozhina. “They say who I am.”
On top of the good news from China and Russia, the long-awaited Japanese uptick is yet another boom for luxury goods makers. The country that revelled in the 1980s love of all things labelled is back in the market for branded goods. Now that corporate Japan is recovering and house prices have turned upwards, Japanese consumers look ready to hit the shops properly for the first time in 14 years. All this growth has been good news for companies such as Tiffany’s, which just announced “exceptionally strong growth” in the last quarter, and for L’Oréal, the French cosmetics group, which now aims to ensure that “every woman in China will own a L’Oréal lipstick” to offset the impact of stagnant growth in Western Europe, says Liz Chong in The Times.
The only fly in the ointment is America. The US consumer has been remarkably resilient for years, but confidence is faltering, in part thanks to Hurricane Katrina. At the lower end, consumers are being hit hard by high petrol prices, for example (energy makes up about 20% of their disposable income). Still, the luxury goods companies in the US aren’t much interested in the poor, and the rich are only getting richer, so falling overall consumer spending there might not turn out to be a problem. And even if it does, the sector has an Eastern protective cushion.
The two best stocks in the sector
Luxury goods companies tend to trade at expensive levels – to match their goods. Here at MoneyWeek we’re not too keen on buying shares at these valuations, but thanks to the China story, many analysts think the sector could still do well. Merrill Lynch favours the luxury goods sector because it believes that most companies can beat earnings expectations for the year. Should you feel that the story is too good to miss out on, here are some of the companies currently being recommended.
Richemont and LVMH are Merrill Lynch’s top picks. Richemont has a “compelling valuation, strong consensus upgrade potential and positive news flow near term”, says Merrill Lynch. Its price target of CHF55 would put it on a p/e of 21.6x for the next 12 months and mean the share price going up by nearly 12%.
LVMH is currently on a below-average p/e, but at 22.4x it’s hardly cheap. However, in terms of revenue, it wants to double in size over the next five years – and “profit-wise it will probably do better than that”, says Sven Lorenz, editor of Profit Hunter Files. He agrees that the sector is “generally rather expensive in terms of p/e”, but believes that LVMH is the one player that has growth prospects and earnings under control.
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