“Look at me – I’m a thieving enemy of the people”

By MoneyWeek editor-in-chief Merryn Somerset Webb Aug 24, 2012

Merryn Somerset-Webb

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If you lived in Italy today would you buy a new super yacht? I suspect you would not. Why? Because the taxman might see it and if he did he might pop round to ask exactly how you paid for it.

And given the size of the black economy in Italy, that might be a question you didn’t want to answer.

But it might not be just yachts you are shying away from splashing out on. And your reluctance to spend may have nothing to do with being Italian or owning Italian assets.

Across the globe there are signs that high-end buyers of luxury goods are closing their wallets. Tax is one reason. Another is that ostentatious wealth is no longer admired or accepted in the way that it was. And that’s bad news for luxury goods shares.

The Italian government takes no prisoners

If you are in any doubt about the scale of the super yacht exodus have a quick look at this report on empty marinas across Italy.

Meanwhile who’d want a new Ferrari after last year’s campaign against tax evaders – which involved tax inspectors raiding the owners of luxury cars in smart ski resorts and visiting Ferrari-owner events to check the tax returns of every single driver?

And who’d want a luxury car at all given that not only will the taxman be checking your old tax returns if he sees you in a Lamborghini, he’ll also be asking for more: new taxes mean that, owners of the €316,000 Lamborghini Aventador now pay about €8,400 a year in tax.

The answer it seems is no one: according to the blogging hedge fund manager at www.macro-man.blogspot.com the “persecution of Ferrari owners” has become so severe that they are selling them in their thousands. You can now pick one up for the “price of a new VW Polo”.

This is nasty news for Ferrari and its competitors. Not only are sales being hit by general austerity and shocking enforcement of the law, but global second hand prices are likely to be hit by the new exodus of cars from Italy (note that the number of high performance second hand cars exported from Italy tripled to 13,633 in the first five months of 2012 on numbers from auto industry group Unrae).

This is going to be “a vicious value collapse” says Macro Man.

This isn’t just an Italian theme

But it isn’t just in Italy that the luxury goods market is beginning to look a little shaky.

The market’s worriers have this week turned their attention to Chinese jewelry firm Hengdeli – the leading retailer of Swiss watches in China.

I’ve written here before about John Hempton at Bronte Capital and his idea that sales tax receipts from Hong Kong suggest falling sales of the likes of jewelry and watches in Hong Kong. Recent results from Hengdeli back up his argument.

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In July the company said that sales growth for high-end watches was declining. But look closely at the results (variously described as “good” and “steady”) and you will see that the company’s days of sales worth of inventory have soared – from 195 days at the end of September to 230 days at the end of June.

A normal level of inventory would be more like 160-180 days in China. It is hard to see how even the bulls can think this good news for the companies whose watches Hengdeli sells – think LVMH Group (PA:MC), Richmont (VX:CFR) and Swatch (VX:UHRN) for starters.

As people turn against ostentatious wealth, luxury brands will suffer

There is a consensus view around at the moment that little is safer than a luxury goods company. The argument is that China is growing fast and the Chinese like to show their status with a bit of bling.

Better still, or so say analysts at Lombard Odier, “the luxury goods sector is one of the most attractive segments of consumer goods given its high barriers to entry, strong pricing power and its superior profitability and free cash flow generation”.  

Sounds good doesn’t it? But what if the Chinese economy isn’t going to grow fast for much longer? Note that Hengdeli blamed its poor results on “the slower growth momentum of the Chinese economy”.

And what if on top of that the Chinese stop liking bling quite as much? Think back to Italy. A few years ago a Ferrari driver was sending a message to other Italians. That message was “Look at me - I’m rich”.

Today the same car is sending a new message: “Look at me, I’m probably evading taxes and contributing to the ongoing financial crisis our nation is suffering”.

Then think about China. Only a few months ago a $500,000 watch on a wrist sent the usual message: “Look at me – I’m successful”.

Now in the wake of the Bo Xilai scandal and the crackdown on corrupt bureaucrats it says something more along the lines of “Look at me – I’m a thieving enemy of the people”.

No wonder sales growth has stalled. The fact is that all over the world ordinary people – with their constantly falling real incomes - are getting less tolerant of the conspicuous consumption and wealth of the winners from the great credit bubble, something they are happy to allow their tax and legal systems to express for them.

Back to Macro Man. We should be shorting traditional luxury companies, he says “not only on falling disposable incomes but also because we expect their very fashion to fade as a display of ostentatious wealth itself becomes unfashionable and attracts unnecessary attention”.

The luxury goods industry has consistently outperformed most indices over the last decade. I think we should all be happy to bet a few Prada handbags that it won’t over the next.

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Comments (9)

Published in European economy | More articles by Merryn Somerset Webb

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  • 1. JREwing

    (24 August 2012, 10:52AM)  Complain about this comment

    Why should a wealthy Italian pay taxes honestly when other wealthy Italians don't? Why should a wealthy Italian pay tax when no one actually goes to prison for tax evasion in Italy and corruption is rampant in the government (which means you can bribe your way out of a prison term)?

    The purpose of taxation should be to sustain a state that is necessary for civilized life to exist. What we have today isn't a state, we have a massive leviathan that swallows up half of everything produced in the economy. Rather than improving the tax take, this is going to spur the exodus of wealth out of Italy and the periphery even more.

  • 2. JREwing

    (24 August 2012, 10:57AM)  Complain about this comment

    These governments need to learn from Vladimir Putin. When he took charge in Russia, it had defaulted on its sovereign debts and was considered by the world a basket-case. Also, with rampant corruption no one paid taxes. Putin responded to this with something completely radical (which your average nincumpoop "economist" would balk at). He introduced a flat tax of 13 percent. And guess what? Tax revenues rose dramatically. Yes Russia was helped by a recovery in oil prices and all the rest of it. But the fact is that Russia now has a tax system that makes infinitely more sense than the byzantine tax codes that seem to have become the norm in most Western economies.

  • 3. Barkingmad

    (24 August 2012, 11:35AM)  Complain about this comment

    In the UK many are stuck with this idea that if you increase the tax rate you increase tax revenues - whereas the reality is that (in the long term) higher taxes encourage evasion (legal and otherwise) and discourage growth. It may be populist to 'tax the rich(er)' but it does not mean you will (long term) increase overall tax revenues...

  • 4. Benny (M/s Diane).

    (24 August 2012, 12:33PM)  Complain about this comment


    I like the phrase "high barriers to entry" e.g. you have to be very rich to buy the top end stuff.

    I get that feeling when I read your property page sometimes e.g. am I the target reader for this mag? Houses for £2m are a bit out of my price range.

    The french had a solution a few hundred years ago for the very rich and reintroducing those conditions might stop people buying luxuries for ridiculous money.It is almost an insult to Joe public these days.

  • 5. Joe Public

    (24 August 2012, 06:32PM)  Complain about this comment

    Benny, I think the 'high barriers to entry' comment was about luxury goods providers, not consumers.... e.g. it is not easy for new rival providers to set up luxury brands without facing significant setup costs - the high barrier that was mentioned.

    I get the feeling that all too often some people look at words on a screen or a page, form an opinion which they subsequently rush to express, before they have actually considered the words they were looking at. The consideration of the words is an often overlooked important step in reading. If you look at words, rather than read them, you are not a reader.

    I'm trying to think how I can make an absurd reference to public executions, and this is the best I can do......

  • 6. Boris MacDonut

    (24 August 2012, 08:19PM)  Complain about this comment

    Increase taxes. Especially those for the rich. It doesn't matter if we take in fewer quids as long as it upsets their smug applecart.

  • 7. Boris MacDonut

    (24 August 2012, 08:19PM)  Complain about this comment

    Increase taxes. Especially those for the rich. It doesn't matter if we take in fewer quids as long as it upsets their smug applecart.

  • 8. Elvis Presley

    (25 August 2012, 03:37PM)  Complain about this comment

    Not may Ferrari bargains on Ebay in Italy.

  • 9. NeutronWarp9

    (28 August 2012, 09:03PM)  Complain about this comment

    2 - Benny. MW's property for sale section fits in with the magazine's (and our) aspirational goals, I would guess.
    I do not buy this anti-luxury guff anymore than believing the selfish, materialistic yuppie mentality of the 80s is ancient history. The wealth gap is ever-widening and only political will can lead to an effective cross-border 'redistribution of wealth' - whatever that means.
    Will the likes of Putin (with his luxury $350 million private dacha) and Tony Blair lead us ALL to the promised land? One day, perhaps change will be forced upon the haves viva la revolution style?

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