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Are luxury brands still the height of fashion for investors?

Tahmina Mannan
Written By:
Tahmina Mannan
Posted:
Updated:
22/04/2013

Is there still value in high-end names such as Burberry and BMW?

Investors keen to play the emerging market growth story may want to consider the luxury goods market.

Even if Brits are too hard-up to buy bags that cost twice the UK national average monthly salary or drink hundred pound bottles of wine, the developing world is continuing to show a keen interest in the luxury brand space.

Demand from the ‘new world’ accounts for nearly 50% of all luxury good sales, with bullish predictions of a 20% rise this year.

For investors, luxury brands can be a good way to play the emerging market growth story but in the knowledge they are investing in companies with Western accounting standards, corporate governance and transparency.

Arjen Los, chief investment officer of Dominion Funds, says: “The majority of luxury brands recognised the opportunities in the ‘new’ world many years ago to the point that on average, one third of revenues is already recorded in emerging markets or with clientele from there. Tourism flows had, and are having, a key role for luxury brands.”

Los, who runs a fund which aims to capture the long-term outperformance of quoted luxury goods producers, believes some of the best positioned companies are: Prada, Burberry, Salvatore Ferragamo, Samsonite, Zara, Swiss watch makers and BMW among others.

Growth potential

But as luxury brands have been in the limelight for a few years already, is there still any growth potential left?

As luxury brands are aspirational, these companies will be able to capture the discretionary income generated by the estimated new 600 million middle class population that will emerge over the next 15 years.

Not only do these companies make it their business to offer the customer a high quality of product, there is also the added personal touch of in-shop experience which draws in the wealthy. Being able to adapt to the local consumer requirements is vital to their survival in these ‘new’ markets, but without losing their superior image of quality and culture.

Of course, potential growth is not only coming from China. Brazil, Russia, India, Indonesia, Thailand, Peru and Chile are countries where luxury brands are seeing increasing demand for their products and in which they are starting to invest to create a local distribution network.

What to look for in a company

Investors should note that investing in luxury goods companies has changed in the last few years.

Los says: “Just two years ago, in order to be successful in China, a Western brand could open a shop in Shanghai and run it without big effort. This has changed. The Chinese customer has evolved and become more educated in the past few years. This is not a surprise as the Western consumer did the same decades ago.

“However, in this case the move was faster. Thanks to digital media, information is spread more rapidly and the consumer became more conscious of the differential between brands. The investor should be aware that only the companies that are able to satisfy local demand and tastes, without losing the global brand heritage, will be able to return profit to their shareholders in the long term.”

Five big names in the luxury space

Prada – Management at the Italian fashion brand has mentioned several times over the past few years that without understanding the clients’ demand a brand has no future, something that seems to be reflected in its success.

It has put a lot of effort into creating collections aimed at both the Northern and Southern hemisphere and is planning to widen its target to the Middle Eastern and Latin American markets to lessen its reliance on Asia.

Burberry – The brand’s growth in China has been key to its recent positive profit report.

Although the shares are by no means cheap, the fashion brand is ahead of the curve in its digital presence and analysts predict good returns on its shares.

Salvatore Ferragamo – The Italian shoe maker enjoyed a 30% boost to profits in the past year, driven mainly by demand from Asia Pacific.

Wealthy tourists are also helping boost revenues at shops in Europe – although mainly tourists from Asia, and analysts predict a similar set of number in the next few years.

Samsonite – Despite a mass sell-off by investors last year following issues with chemicals in the handles of its bags, the luggage maker’s shares climbed more than 40% over the past year, topping the benchmark Hang Seng Index’s 7% rise.

It reported a 71% jump in profit last month from the previous year and analysts predict that the brand is set to profit from demand from wealthy tourists travelling from the emerging market.

BMW -The world’s biggest luxury carmaker is aiming for high single-digit sales growth this year, despite seeing a 40% sales growth in China in 2012. It has been one of the fastest growing and biggest luxury car makers in China.

Management at the company has struck a cautious note for the coming 12 months, but analysts still expect profits to be healthy.


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