Investing in Luxury

Luxury is not accessible to everyone and goes beyond price.

As a rule: if you walk into a store and you can afford everything, or you see discounts, it is not luxury.

Three attributes that define it:

• Value — History — Scarcity

If one is missing, it is not luxury.

Real luxury is artisanal, with history and in limited quantities: demand far exceeds supply.

Luxury brands do not sell best sellers, they sell long sellers; managing that scarcity well increases desire and turns products into investment assets for the buyer, which further reinforces demand.

There are very few pure luxury companies in the world; far fewer are listed. Do not confuse LUXURY with PREMIUM: that mistake can be very costly when valuing and choosing investments.

Sector characteristics

• Demand resilience: Buyers typically have high incomes; luxury spending remains relatively stable even in recession.
• Brand as an asset: Global recognition, exclusivity and reputation allow high prices and wide margins.
• Social media: Has increased recognition of the tangible value of brands and, with it, demand.
• Growth in emerging markets: China and India, among others, are driving luxury consumption.
• Inflation resistance: Luxury products tend to hold their value over time and are less sensitive to inflation.

The sector has been one of the most attractive to invest in over the last decade thanks to a better understanding of these businesses and their strong performance, which has expanded their multiples.

Hermès (RMS)

Let us take this company as an example.

Hermès started as a manufacturer of harnesses and equestrian equipment, with clients among the wealthiest families in France. Its move into fashion came with Jane Birkin and Grace Kelly.

Today it is one of the companies considered among the world’s most luxurious, centred on two bag models: Birkin and Kelly, the hardest and most valuable to obtain.

• The company is valued on the market at around €220bn.
• The business is not just about selling Birkin and Kelly; it is selling the value of the bag through the rest of the store: to access a Kelly in store (with a cost of, say, €10,000) they often require prior spending equal to the bag’s market value (e.g. €20,000 on other items).

The company has exceptional margins on those products. It has recently faced a legal complaint over this practice; the outcome remains to be seen (and it has generated publicity).

Here is a YouTube video, in case anyone wants to see what Hermès is like inside and the corresponding prices.

What to analyse in luxury companies

It is advisable to track the evolution of HNWI (High Net Worth Individuals) and UHNWI (Ultra High Net Worth Individuals), the main clients of luxury.

An increase of 30–40% was expected by 2025. In addition, lower-income segments seek social validation through luxury goods, which broadens the demand base for the sector.