Savigny Luxury Index

Market Pulse / Luxury Adapts to New Reality

The SLI continued its ascent this month on the back of broker upgrades as further good news comes from China and the sector adapts to its new reality

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The Savigny Luxury index (“SLI”) rose 2 percent, a touch less than the MSCI World Index (“MSCI”) which rose 2.6 percent, largely on positive broker comment driven by renewed optimism over China and the ability of the sector to adapt to its new reality.

Big news

Optimism has returned to mainland China in the critical period between the Christmas rush and Chinese New Year. Driven by a weaker yuan and the Chinese government’s focus on growth through consumption rather than through infrastructure investment, as well as the narrowing of the gap between prices in China and abroad, China’s wealthy are spending at home again. Bain estimates that sales of luxury goods in mainland China will grow by 4 percent in 2016, after three years of decline. Company results back this up, with Burberry, Tiffany, Hermès and Richemont all posting growth in China in their latest results. Richemont notably reported “marked” October sales growth in mainland China.

Luxury brands have watched and learned in 2016 and are adapting to a new reality by tailoring merchandising to local needs and offering more affordable price points in order to encourage middle class consumers, key in emerging markets such as China, and millennials to buy their wares. Brands such as Louis Vuitton are offering a larger selection of small leather goods as well as perfumes, whilst Cartier launched its latest watch immediately in steel, as opposed to launching it in precious metals followed by a diffusion line in steel. Other watch brands are also on it: Tag Heuer has successfully regrouped around its core price point, resulting in sales growth of 10 percent this year; Girard Perregaux has reduced the number of points of sale from 500 to around 400 in order to better service each point of sale. The brand has also entered the CHF5,000 to 10,000 segment with a strong offering.

Corporate activity was brisk this month with deals in jewellery, apparel and personal care. Italy was at the forefront of such activity with Gansu Gangtai, a Chinese conglomerate with activities in jewellery, buying 85 percent of legendary Italian jeweller Bucellati from Clessidra and the Buccellati family, valuing the business at Eur270 million; local private equity firm Armonia purchasing a majority stake in casual chic apparel brand Aspesi reportedly for Eur50 million and outdoors clothing specialist Woolrich being acquired by Italian mid-market retailer WP Lavori in Corso. Elsewhere, US private equity firm Berkshire Partners bought an undisclosed stake in affordable jewellery brand Kendra Scott, reputedly valuing the brand north of US$1 billion; Unilever acquired premium haircare brand Living Proof, and French perfume group Jacques Bogart bought German perfumery chain H.C. Again in Germany, Strenesse, one of the few German fashion brands to have known international success, was bought out of insolvency by fashion entrepreneur Juergen Gessler in concert with an undisclosed bidder.

Going up

  • Italian luxury stocks rose in the aftermath of the constitutional referendum and ensuing resignation by Italy’s Prime Minister: Tod’s led the pack with an impressive gain of 14 percent on the month, followed closely by Brunello Cucinelli at 13 percent, then Ferragamo (10 percent) and Moncler (8 percent).
  • Broker upgrades saw both Swatch and LVMH gain 6 percent on the month.

Going down

  • US luxury stocks have seen a reversal of fortunes following the Trump rally last month, with most share prices falling to the same level as before the Trump election. Ralph Lauren took a severe beating, losing 14 percent this month, as a result of an investor breakfast meeting at which the company announced its restructuring was taking longer than expected. Michael Kors and Tiffany lost 8 and 6 percent respectively. Other US stocks such as Estée Lauder and Coach fell in low single digits.

What to watch

The malaise in the US luxury sector may take a while to play out and a lot hinges on the latest Christmas trading figures. On the upside for luxury, Trump plans to significantly reduce the tax burden of the wealthy thus freeing up more disposable income; on the downside, the US department store sector is still struggling and luxury brands will have to reduce their exposure to this segment with consequent loss in revenue.

Sector valuation

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