Friday, 21 September 2012

Is it bye bye to the bling bling?

It seems that even luxury good manufacturers are starting to feel the chill. Yesterday, Daimler AG warned that profits at its Mercedes-Benz car division would not match last year’s figure as “deteriorating” conditions in Europe and stiff competition in China were taking their toll. Up until this point, the “premium” segment of the car market, dominated by the German triumvirate of Volkswagen (owners of Audi and Porsche), Daimler and BMW, had seemed impervious to the difficulties experienced in the eurozone. In this respect, the more Eurocentric French manufacturers have found the going particularly tough as demand in the small and mid sized car segment has fallen sharply. Indeed some commentators expect this area to continue to contract for the next couple of years.

This follows, too, the recent warnings from Burberry, the purveyor of fine luxury check, and bag manufacturer Mulberry. The former announced that same-store revenue had stalled and, in an interview, Chief Financial Officer Stacy Cartwright is reported to have said “We know we are not alone in terms of what we’ve seen over the last couple of weeks”. Other luxury good manufacturers have fallen back in sympathy amidst fears that the slowdown is not just brand specific, but rather reflects a new found timidity in the shoppers of China and other Emerging Markets.

Certainly, as far as China is concerned, the economy is growing at its slowest pace in three years which, in itself, is not that surprising given that one of its major export markets – Europe – is still wrestling with its own economic problems. In fact, London based research firm, Mintel, carried out a survey recently of the Chinese middle class, indicating that over 60% of those traveling abroad were planning on buying luxury goods. High levels of tax at home and an attractive tax regime abroad – VAT can be reclaimed for overseas shoppers in the UK for example – have all helped to contribute to the externalisation of the luxury goods sector. Perhaps, then, these forecasts reflect more an environment where tourists are being put off coming to the EU as a result of the Olympics – from the UK point of view – and a seemingly ceaseless barrage of bad news from the mainland.

Competition, then, in a toughening economic environment in China is not really a surprise and this is one factor behind the Daimler announcement. It is probably too early, however, to call the top of the luxury goods sector. An emergent middle class in Asia and elsewhere will continue to look to acquire the status symbols of wealth and, in this respect, the globally recognised brands are – and are likely to remain – the “must have” items.

Rob Burgeman
Divisional Director

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