Glitz and glamour cannot dress up the fact that luxury retail is in a state of flux
A casual observer attending any of the fashion shows from London and Paris to Milan and New York this year could easily have been fooled into thinking that all was well in the world of luxury fashion.
However, the glitz and glamour on display at the shows belies the true state of affairs. The luxury sector is undergoing a seismic shift as its consumer base evolves and the way it markets and sells products changes – and it is not proving to be an easy transition.
In the past year Richemont, which owns brands such as Cartier and Montblanc, has issued a steep profit warning, while Hermes has abandoned its 8% annual sales growth target. Shares in most of the listed luxury groups, from LVMH and Swatch Group to Prada, have been under pressure for much of the year as global markets reacted to gloomy news.
A casual observer attending any of the fashion shows from London and Paris to Milan and New York this year could easily have been fooled into thinking that all was well in the world of luxury fashion.
However, the glitz and glamour on display at the shows belies the true state of affairs. The luxury sector is undergoing a seismic shift as its consumer base evolves and the way it markets and sells products changes – and it is not proving to be an easy transition.
In the past year Richemont, which owns brands such as Cartier and Montblanc, has issued a steep profit warning, while Hermes has abandoned its 8% annual sales growth target. Shares in most of the listed luxury groups, from LVMH and Swatch Group to Prada, have been under pressure for much of the year as global markets reacted to gloomy news.
Britain’s best-known luxury brand, Burberry, has had to weather a slowdown among its key Chinese shoppers amid a deep cost-cutting programme, investor unrest and senior management change.
It remains one of the most heavily shorted stocks in the sector. Markit, the global financial information group, said this week that the proportion of Burberry’s share “on loan” (a measure of shorted stock) was 6.3%, up from a low of 2.9% in August.
This already negative macro environment has been further aggravated by cautious buying in the wholesale market, particularly in North America, as well as terrorist attacks in France, and it is unlikely to reverse any time soon.
What does this all mean for the coming year ahead in the luxury market? One thing is certain: there is going to be more merger and acquisition activity as brands join forces and sell off non-core assets.
Burberry is already considered to be a prime target as it is one of very few European luxury stocks with no family shareholding and a relatively large free float. The group is already understood to have rebuffed several takeover attempts over the summer from its US rival Coach, which is keen to try to take its brand more upmarket while diversifying its product range.
LVMH, a titan in the industry, has also been cleaning up its portfolio, selling off the underperforming Donna Karan for $650m (£509m) and acquiring the fast-growing brand Rimowa.
Even sovereign wealth funds are getting in on the action with Temasek, the Singapore investment group, buying a stake in Montcler, the French-Italian luxury group that specialises in outerwear, in July.
Expect more of this sort of activity as well as share buy-backs as luxury companies try to boost their share price and return cash to shareholders.
But however tough trading gets, there is one thing that never changes in the luxury sector – the endless jostling for space on London’s Bond Street. And gaining a presence on the capital’s premier shopping street has never been tougher. The high premiums that were the hallmark of Bond Street property dealing a few years ago have diminished to some extent as rents have soared.
Earlier this year Hublot, the luxury watch brand that is part of the LVMH group, agreed a record rent of about £2,000 zone A at the Pollen Estate’s 14 New Bond Street, W1. This new rental record did no favours for Polo Ralph Lauren in its recent arbitration, where its rent soared to about £2,225 per sq ft following the evidence set by the Hublot deal. One imagines Ralph Lauren had rather set its sights on a more conservative £1,700-£1,800 sq ft rental level.
And the verdict is still out on what might happen with Asprey’s drawn out attempt to sublet part of its store on Bond Street to Givenchy, also part of the LVMH group, in exchange for a bumper premium.
The Asprey store is owned by Hermes, which will have to approve the deal. However, the rent Givenchy agreed with Asprey nearly two years ago is thought to be considerably lower than current zone A rents, so there is a question mark over whether Hermes will be happy to rubber stamp a sublet deal so far off the open-market rent.
All eyes will be on what will happen, and how the luxury sector will fare overall in 2017.
Deirdre Hipwell is retail and M&A editor at The Times
