What better way to celebrate the anniversary of the collapse of Lehman Brothers – or more importantly, the start of the global economic recovery – than by buying a beautiful brooch from one of history’s most famous luxury brands, Fabergé. Asking price? Just $US7 million.
After an absence of more than 92 years – since the Russian Revolution of 1917 curtailed the brand’s “high jewellery” design work – Fabergé has returned with a new collection, which is being sold almost entirely through its swish new website or it’s flagship boutique in Geneva.
The company which owns the Fabergé brand, Pallinghurst Resources (chaired by former BHP Billiton boss Brian Gilbertson) has bought two surviving members of the Fabergé family into the fold for the relaunch. Prices start from $US40,000 and head upwards from there.
The relaunch of Fabergé might appear to be a signal that the world of luxury toys – jewellery, fashion, prestige property, cars and art – has finally emerged from the biggest global recession in two decades.
But it appears that like the global economy, the (plush leather) wallets of the wealthy might take a bit longer to recover than some commentators would suggest.
There is certainly evidence to support that theory of a quick rebound though. Swiss private bank Julius Baer, which runs an investment fund made up entirely of investments in luxury brand companies, reported this week that the fund is up 27% so far this year, as compared with a 17% rise in the MSCI World Index.
However, the fact remains that the luxury industry is experiencing its most difficult year in decades. Consultancy Bain & Co. recently estimated luxury spending had fallen 15-20% in the first half of 2009, and it predicted to be 10% down across the whole year. In the last few months, world-renowned designer brands Christian Lacroix and Escada filed for bankruptcy.
Let’s have look at how the major luxury sub-sectors are faring:
While the collapse of Escada and Christian Lacroix have highlighted just how difficult conditions are for luxury fashion companies, the are some brands still performing reasonably well. In the first half of the year, profits at French giant PPR (home to Gucci, Bottega Veneta, and Yves Saint Laurent) were down 4.8% to $US1 billion, with revenue off just 3.8% to $13 billion. Total revenue at British icon Burberry was down 4% in the June quarter.
The Fabergé brand is unlikely to find it easy going in the current climate. In August, Tiffany & Co announced profit for the June quarter had dropped 30% to $US56 million, while revenue dropped 16% to $US612.5 million.
The travel industry has been hit hard by the global financial crisis, with luxury hotels feeling the pinch worse than the budget accommodation providers. Occupancy rates around the world are currently at around 57%, compared to 71% a year earlier, and average room rates are reportedly down around 16%.
In order to cut costs, luxury chains such as St Regis, W Hotels, Hilton and InterContinental have allowed some of their properties to reduce their level of service – and therefore number of stars – until the industry begins to recover.
Not surprisingly, it’s been a rough year for the private jet market. Business jet maker Bombardier recently reported it had 80 order cancellations in the three months ended 31 July, compared with 27 new orders. However, the company is reporting that new orders are slowly recovering, thanks to demand from China.
The performance of the luxury housing market depends very much on its location. Australia’s market is relatively strong, while the US market remains tough, with many forced sales.
One market that remains in real trouble is Dubai, where some of the world’s most glamorous residential projects are on the edge of collapse. A case in point is the famous development called The World, a series of man-made islands shaped like a map of the globe. The project is on hold, as is $US300 billion of developments across the United Arab Emirates.
Another hard hit sector. Sales in the “super luxury” segment (which includes brands such as Bentley, Lamborghini, Rolls-Royce and Maybach) are down about 52% in the United States, while ordinary luxury brands (BMW, Mercedes, Audi) are down around 10-15% over the year. As with the jet market, strong sales in China are helping to dull the pain.
The art market has perhaps been the part of the luxury market hit hardest this year. According to a report in the Wall Street Journal, Sotheby’s sales were down 87% in the first half of 2009, and Christie’s sales were down 49%. While prices have stabalised, the volume of contemporary art sales this Northern-hemisphere summer was down 80%. However, Australia’s art auction market appears to have held up a little better than the US and Europe.
So is there a recovery in sight for luxury companies? Hedge fund manager Julius Baer is, not surprisingly, predicting a big Christmas for luxury brands as the wealthy shake off their frugal attitudes and enjoy a little Yuletide cheer.
The consultants at Bain & Co. are less optimistic, predicting a slow return to health for the luxury sector: sales are tipped to increase 1% in 2010, 4% in 2011 and 7% in 2012. By 2012, the luxury market will have only recovered to the 2007 level of about $US240 billion.
The best bet for the luxury sector to beat these forecasts is, like some many other sectors of the economy, China.
According to recent research by consultancy McKinsey & Co. the number of wealthy Chinese households (classified as families with annual income of more than $US35,000, which equates to spending power of $US100,000 in America) will hit 4.4 million by 2015, making China home to the world’s fourth-largest population of wealthy households.
Even better for the luxury companies, these rich households are relatively young, with 80% aged between 18 and 45 years. The opportunity to win life-long customers – and cash in China’s still-booming economy – will be a big focus for luxury brands over the next decade.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
