Luxury Market Surges While the Rest of the Economy Sputters

Job growth may be anemic but China is snapping up all sorts of expensive goods

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Economic news these days is pretty bleak: job growth is anemic, retail sales are stagnating, and consumer confidence is plummeting. But the luxury goods market is another story. Today, the French company Hermes raised its 2011 revenue forecast by 12 to 14 percent on growing demand in the U.S. and China for its silk scarves and leather handbags. Last week, Burberry, which makes raincoats and leather goods, beat its revenue forecast for the first quarter of 2011. According to Reuters, investors are now pouring money into luxury stocks. What's behind the surging luxury goods market?  Reports suggest three primary factors:

  • Rebound in U.S. and Europe In a May report, Bain & Company predicted that global luxury goods sales would increase 8 percent in 2011 in part because of renewed demand in the U.S., where department store sales are increasing and Europe, where tourism is strong (Bain expected the large Japanese luxury goods markets to recover soon from the effects of its recent earthquake). "If customers tightened their purse strings in 2009, spooked by the financial crisis, and 2010 was the year they started loosening them again, 2011 should see a return to normal luxury goods consumption," Reuters wrote at the time. The luxury goods industry experienced its worst year on record in 2009 because of slackening demand in the U.S. and Southern Europe.
  • Growth of Emerging Markets The Bain report also cited continuing growth in emerging markets like China, Russia, Brazil, and the Middle East. The Financial Times points out that China, which is expected to become the biggest luxury goods consumer within five years, is a bellwether for the luxury goods industry. The Chinese market "skews very young (the average Chinese luxury consumer is around 30, where as the average western luxury consumer is around 55)," the paper explains. "Thus, what happens there often affects what will happen in older (i.e. European and American) markets later." Not all emerging markets are as promising, however. French cosmetics maker L'Oreal recently reported lower-than-expected revenue because of weak sales in eastern Europe. Bain partner Claudia D'Arpizio also told Reuters that India was proving impenetrable for European brands because of its "lack of retail space and preference for traditional dress and homemade jewelry."
  • End of 'Luxury Shame' As a Northeastern University report showed earlier this year, many affluent Americans sidestepped the recent recession. And according to David Arnold, publisher of the luxury magazine Robb Report, the wealthy are no longer as embarrassed about flaunting their wealth as they were in 2009. Or, as Bain's D'Arpizio put it, "Luxury shame is now over." These high-end consumers and their counterparts around the world aren't particularly price sensitive; as Reuters observes, luxury companies are able to raise prices to pass on higher raw material costs without adversely affecting demand, which only boosts their sales figures.
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