by Chhavi Daga
Inflation is soaring, Ukraine is under war, natural calamities are happening worldwide, and China's zero COVID policy is turning the faces of global markets and sending many into recession. The markets are uncertain, and so are the people. But will it affect luxury consumption?
Luxury has been one of the industries that have been immune to short-term slowdowns, but now things have started to take a turn, and sooner or later, the aftermath of this recession will impact the numbers.
Inflation in Europe and North America is soaring, leading to rises in fuel and food prices, leaving households with less disposable income. But luxury tends to fare better than other sectors during a downturn because of its exposure to high-income consumers. Moreover, so far, luxury seems to be insulating the economic deterioration. Even with the soaring prices, luxury brands like LVMH, Ferrari, and Versace have reported strong sales. LVMH has reported revenue growth of 21% in the first half of 2022 compared to last year.
This year has not just been a blessing for the luxury fashion industry but has also given enticing revenues to the luxury automobile industry. Ferrari sales doubled from 166 to 358 and surged by 62% to 1,053 in America, and Lamborghini and Bentley's shipments rose 29% to 3,455 units in the three months to the end of June. This is most likely the aftermath of the pandemic, leading to revenge spending' with the resumption of travel, events and socializing fueling a desire to splurge. Getting out of the pandemic now, consumers are accumulating a YOLO attitude towards luxury, creating a considerable demand wave.
Even if this dynamic continues to enhance sales through the summer, eventually, the share of people who wish to spend $3000 on a bag or $400 on sunglasses will decline. Luxury items are discretionary purchases and do correlate with GDP growth. Of course, a recession will eventually impact sales, but how soon?
But what does this recession mean for luxury?
Luxury has been mostly dependent on the 20% of the population who are provided with a wealth cushion which cushions their fall during recessions. But wealthy shoppers pay attention to their net worth, which means they are less likely to invest when the markets are down, but the impact is often less dramatic than in other sectors. Personal luxuries like designer handbags or expensive skin care are often the last things they give up.
The Recession of 2008 affected luxury more, as income distribution was comparatively more even than it is now. Still, luxury brands are not dependent on ultra-rich clients: middle-class and aspirational shoppers also make up a significant share of sales. So in recent years, brands have ramped up their business to develop more accessible categories like streetwear, sneakers, eyewear, and small accessories to appeal to those groups.
In 2008, luxury was not subcategorized into absolute luxury and accessible luxury, and there was a clear distinction between luxury and accessible brands. Still, the lines are starting to blur now. Moreover, even luxury brands are beginning to target different segments of customers.
Brands that have strong appeal among high-income clients and can activate the top end of their business will likely fare the best during the recession, while those who rely most on aspirational consumers to drive growth will be hit the hardest.
It is impossible to predict the economic future or how long the recession will last. Similarly, the exact impact on luxury is hard to predict. However, the luxury industry is expected to grow anywhere between 5% to 15% this year, depending on how and when China's market recovers and how inflation bites the Western region.
But the industries are much more ready to face what's coming ahead than in 2008. Companies have control over their supply chains and can respond to both negative and positive demands. For listed luxury companies, 75% of sales came from direct distribution last year, compared with 57% in 2007. This gives companies a higher margin on each sale, padding their bottom lines.
At times of lumpy demand, a strategic approach towards inventory can be undertaken, focusing on classic items that can be carried over from season to season. In the eyes of consumers, they are better investments as they mark heritage and value. As seen over the pandemic, even amid price increases, demand for Chanel flap bags and Cartier love bangles soared.
And the end, its survival of the fittest.