Companies which sell luxury goods are focusing on two key areas at the moment. The first is how to attract the millennial market. Although this generation makes up 30% of the luxury space, their contribution to the overall growth in spending is much more than that. Secondly, digitalisation is becoming ever more important. Luxury brands are spending increasing amounts on social media and ‘cool’ people to endorse their products through this medium. Giving customers omni-channel choice is a priority for luxury companies too, with the aim of providing them with a seamless shopping experience whether they buy online or through traditional ‘bricks and mortar’ stores. Consumers also want more sustainable products, and the awareness of this theme is increasing. Gucci, for example, has announced it is going fur free this year.
Within the luxury brands strategy we like companies with strong brands at the upper end of the consumer goods space and those offering affordable luxury products to attract this millennial market in addition to new luxury consumers from emerging markets. Our focus is on those companies which are investing behind their brands, experts in digital developments such as social media marketing, have their ‘finger on the pulse’ of industry trends and are high cash-flow generators.
We also have a preference for companies which have low debt levels and high margins. Many offer a dividend yield of around 2%, with most in a good position to increase dividends in the future. Dividends and buy backs will increase further as capital expenditure (capex) has peaked. Many of these companies are also majority owned by families with a long-term strategy. These factors have enabled us to deliver strong returns since launch.
Luxury goods companies reported strong numbers for 2017, confirming the solid momentum of luxury demand. The Chinese bought more at home than before as price gaps of luxury products between different regions have normalised, and many companies are now happy with their global price architecture. Positive and synchronised global economic momentum supports customer sentiment, and for 2018 we expect luxury sales to again exceed 5%. Any pick-up in inflation will enable luxury brands to further increase prices going forward helped by their high pricing power.
The best-performing regions for luxury goods are China in particular, where demand for Western high-end consumer brands remains strong, and Europe. Valuations have increased, although they are offset by on-going earnings upgrades. Within the space there are both winners and losers, with iconic brands like Gucci and Louis Vuitton continuing to shine with others have been laggards. The GAM luxury strategy is structurally underweight the US as a result of the fact many luxury companies have a history in Europe.
Luxury is a growth and profitable industry but there is intense competition. Winner brands of today have not only a heritage and a story to tell, but are creative, authentic and responsive.
Digitalisation has brought new challenges to the world of luxury. Omni-channel is a must and difficult to execute well, but big data offers opportunities in knowing the customer better and customising marketing tools. The share of luxury sales through e-commerce is still small but represents the fastest growing channel by far, and is more advanced in the US and Asia than in Europe. Many have questioned the role of brands in the digital era. We are convinced that in a fast moving world the importance of brands as trusted friends have only increased.