Who are the runners and riders in the luxury goods market?
Audrey Hepburn had Breakfast at Tiffany's in the 1961 film. But Tiffany & Co. doesn't just do breakfast; its main concern is luxury goods, specifically jewellery and silver items.
There are many types of luxury goods on sale worldwide from Cartier watches to Aston Martin cars and all have one factor in common; each represents an expensive alternative to other goods which perform the same function.
The luxury goods business thrives when incomes are rising because, as any economist will tell you, peoples' spending upon luxury goods increases by a greater proportion than any increases in their income. Whilst billionaires will keep on buying yachts and football clubs even in the teeth of a global recession, the high-earning part of the population does suffer a bit and thus the sales of luxury goods have taken a bashing during the global recession. Importantly for investors, luxury goods are sold all over the world so their manufacturers are not particularly exposed to the economy of any one country.
Exclusivity Is What Matters
A £3 quartz watch will give you a more accurate time check than the £20,000 designer clockwork watch, yet some people will still buy the more expensive watch. Customers will happily pay £200 for a T-Shirt with a trendy designer logo even though they could buy a better quality shirt for 1% of the price in the local market. What the consumers of these luxury goods are buying is not just a product; they're also buying exclusivity.
Luxury goods companies create this image by clever marketing, in particular by ensuring that celebrities are seen with their products and charging high prices to send out a less than subtle signal that theirs is not a product for the hoi polloi. Some firms have even used waiting lists to create an artificial queue to buy the product, so heightening consumer and media interest.
You've heard the line "if you have to ask the price, you can't afford it." In every instance "it" is a luxury good.
Well-Known Brands
The premiere luxury goods company is the French giant LVMH Moët Hennessy - Louis Vuitton whose brands includes Donna Karan New York fashions and TAG Heuer watches. Many luxury goods companies, such as Rolex and the Sex in the City girls' favourite shoe designer, Manolo Blahnik, are privately owned whilst others turn out to be subsidiaries of firms like LVMH, PPR or Switzerland's Richemont.
The producer of Guinness, Diageo (LSE: DGE), categorises many of its brands as luxuries (Johnnie Walker Blue Label whisky often sells for well over £400 a bottle). Most major car manufacturers will also sell a small line of extremely expensive cars and a considerable part of the European wine industry specifically targets the luxury market.
Chavs and Knockoffs
Luxury goods companies live by their brands. Burberry (LSE: BRBY) ran into the ultimate nightmare for a luxury goods company when its line of checked clothing became closely identified with chavs and football hooligans. Once anyone can own a luxury good the product's exclusivity evaporates along with the ability to charge a premium price. Thankfully for Burberry this problem was limited to Britain and did not affect its massive overseas sales.
The existence of counterfeit goods, knock-offs and look-alikes, all of which try to pass themselves off as originals, can seriously damage a luxury goods company. The problem is not that the company loses many sales, since people who buy knock-offs probably couldn't afford the originals, but the existence of knockoffs damages the exclusiveness of the brand.
Conspicuous And Invidious Consumption
The economist Thorstein Veblen is best known for the expression "conspicuous consumption" which describes the kind of lavish spending which is primarily performed for the purpose of displaying income and wealth. Veblen was arguably the first economist to look at luxury goods in any detail and he showed that a great deal of spending on luxury goods is for what he describes as "invidious consumption" where the purchaser intends to display the goods to create feelings of envy and resentment in those who see their purchases.
If you've sat through someone's wobbly videos and badly-shot photographs of their expensive holiday, it probably wasn't to give you any great insights into the local architecture and culture. Part of the reason for taking the holiday was for invidious consumption and the holidaymakers must tell others to make them envious! Invidious consumption can be seen everywhere from people flashing their "bling" to telling your friends about your new pair of shoes.
Human nature means that a large proportion of the population will consume luxury goods that they really cannot afford and, for some, luxury goods have become a menace that threatens their financial well-being. A record number of young women are now being bankrupted as they try to copy the spending habits of celebrities and footballers' wives. Why somebody on average wages pays £3,000 for a handbag is beyond me but they do.
Someone who spends £500 on a bottle of wine does so, in part, to convince themselves that they are in an elite club. Just don't show them the research published in the April 2008 issue of the Journal of Wine Economics which showed that that the vast majority of wine consumers cannot tell the difference between cheap and expensive wines. Most people are better off with a £4.99 bottle from Tesco (LSE: TSCO)!
More from Tony Luckett:
> Tony owns shares in Diageo
