Luxury handbags are now an investment

On October 11, the same day the International Monetary Fund warned of darker economic clouds on the horizon, the world’s biggest luxury company posted surprisingly strong sales, suggesting that wealthy shoppers’ appetite for high-end goods was nowhere near sated.

LVMH Moët Hennessy Louis Vuitton beat analyst estimates at four of its five main divisions. The biggest and most profitable, which includes houses such as Christian Dior, where a dress can command nosebleed prices, led its growth march once again.

In a call with analysts, CFO Jean-Jacques Guiony was asked about the “divorce” between global economic fundamentals — sharply rising interest rates, widespread inflation, and looming recession — and the resilience of the luxury industry.

“Luxury is not a proxy for the general economy,” Guiony said. “We end up selling to affluent people and they have a behaviour on their own, which is not necessarily totally aligned with economics.”

In other words, while grocers see their customers become penny-wise when inflation strikes, Louis Vuitton can boost prices without immediately hurting demand.

More evidence of the trend came on Thursday, when Hermès International said it has seen growth of 24% this year, excluding currency swings. And that’s after the company increased prices by an average of 4%, giving it the confidence to announce price hikes of as much as 10% next year. 

The immense growth in affluence worldwide partly explains the increasing demand for luxury goods. Global financial wealth grew 10.6% last year, the fastest rate in more than a decade, according to a June report from Boston Consulting Group, meaning an extra $26-trillion (about R476-trillion) in wealth.

Other factors have been at play, too, especially the easing of Covid-related restrictions in most places after more than two years of lockdowns, virus tests and vaccine checks.

“Post-Covid, there’s been a lot of revenge shopping as consumers tell themselves ‘I’m mortal and life is short',” says Gachoucha Kretz, associate marketing professor at business school HEC Paris.

“‘I might as well enjoy today since I don’t know what’s going to happen tomorrow.’”

That’s very much the case for affluent Americans who’ve been travelling to Europe this year.

With the dollar trading for more than a euro for the first time in two decades, they haven’t minded waiting in line to buy €9,000 (R161,000) Chanel flap bags on Rue Cambon in Paris. And some of the wealthiest shoppers are staying at LVMH’s Cheval Blanc Paris hotel — which can charge €55,000 (R986,500) a night for the so-called apartment, a combination of the top two suites, which includes a private lift and pool.

The spending frenzy has extended to the second-hand market for luxury handbags, which are increasingly seen as long-term investments and drawing new buyers, according to Lucile Andreani, Christie’s head of handbags in Europe, the Middle East and Africa. She estimates that about two-thirds of handbag buyers at auction are now women, and the average age is 43, vs 54 for the rest of Christie’s departments.

Once unheard-of sums are now being paid for luxe items. For example, a Hermès Kelly bag sold for €352,800 (R6.3m) at a Sotheby’s auction in Paris last month, a record for the auction house owned by telecom mogul Patrick Drahi. (The record, HK$4m — R9m, set last November — is still held by Christie’s.)

Since 2007, LVMH has seen just two years when its organic revenue fell: 2009, right after the financial crisis, and 2020 when the pandemic struck. In both cases, the ensuing years saw strong recoveries in sales.

This time around, the unfolding financial crisis may play out slightly differently, according to Federica Levato, a partner at Bain & Company, who expects 2022 to be another record year for luxury. “It’s affecting more the base-of-the-pyramid of consumers — the poorer and middle class, not luxury consumers,” she says.

“We don’t see any relevant bump in the near months and near future,” but rather a softening of growth for brands that cater to the truly well-off.

HEC’s Kretz says luxury houses could be even more resilient than in the global financial crisis, since they’ve become more global, with some booming geographic markets potentially offsetting slowdowns elsewhere. And the continued investments the brands have put into burnishing the allure of their most sought-after products are paying off, she says.

“There’s a perception for some of the top products that they’re estate-like assets,” which can be transferred, Kretz says. “For timeless products, some customers are OK to pay the price.” A case in point: Sotheby’s sold a rare Cartier Cheich watch for €1m (R17.9m) last month in Paris.

Still, there are signs that some products are more recession-proof than others. Gold items have become particularly popular in this inflationary moment, which could partly explain why Tiffany & Co — whose silver offerings represent about a quarter of its business, according to Citigroup — saw slowing growth in the third quarter, LVMH’s Guiony said.

By comparison, demand for watches is doing better, according to Guiony, whose company owns Rome-based Bulgari, maker of the Serpenti watch.

“People fear that prices of watches could go up,” he says. “And they have the willingness to buy now in fear of buying later at a higher price.”

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