How will luxury spending hold up in the near future?
We may indulge ourselves with a coveted electronic gadget, shoes, or some other toy when we think we deserve it, but the publicly traded luxury stocks don’t seem to be benefiting from those spends.
Hard times in China and a stronger dollar have been hitting luxury makers. Additionally, the shift from brick-and-mortar shopping to online buying is changing habits, as are millennials who seem to prefer to spend on experiences versus things—so far.
Earlier this year Bain & Company forecast slow but steady growth for the global personal luxury goods market, which includes leather accessories, fashion, hard luxury, and fragrance and cosmetics. They expect a 1% growth for 2016 as the market continues to weather challenges such as decreased tourism across Europe, instability in the Middle East, and a downturn in China.
“The luxury market is stuck in a holding pattern for the foreseeable future,” said Claudia D’Arpizio, a Bain partner and lead author of the study. “All eyes are again on mainland China, which is the key to unlock recovery around the world, and the U.S., where local consumption is failing to offset decreased tourism. Consumers’ changing purchase patterns, including a reshuffling of tourism and revitalized local spending in Europe, will likely do little to drive luxury brand growth much beyond the low single digits.”
Unity Marketing’s Luxury Consumption Index (LCI) also dropped a few points this quarter, “which signals a cautious attitude on the part of affluent consumers toward future luxury spending," said Pam Danziger, president of Unity Marketing. The LCI is a forward-looking indicator of affluent consumer confidence.
This slowdown is being reflected in key luxury stocks. The S&P Global Luxury Index is down 2.3% on a one-year annualized return. The index comprises 80 of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investment requirements.
The sector breakdown is 80% consumer discretionary and 20% consumer staples. A mix of names are in the index, including DaimlerChrysler, Nike (NKE), and Diageo (DEO).
Unity Marketing’s research suggests affluent people—those making between $100,000 and $250,000—are expecting to spend less on luxury over the next 12 months as many are concerned about the economy.
Between now and 2020, Bain expects the personal luxury goods market will grow 2% to 3% each year, but much of it depends on China. Middle-class Chinese shoppers are expected to make up approximately 34% of global luxury consumers in the next four years, well ahead of American and European consumers.
Luxury brands are trying to renew themselves, too, and are focusing on Generation X and millennials for growth.
“The luxury market will continue to receive a substantial boost from Generation Y and Generation X,” said Federica Levato, who co-authored the report. “Together with Generation Z, which will continue to make up just a sliver of luxury spending, these younger consumers will comprise three-quarters of the global luxury market by 2020. Therefore, the market cannot afford to ignore them or their preferences for accessible yet content-rich products and brands.”
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Debbie Carlson is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
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