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Wednesday 1 July 2015

Luxury goods market slows down

26th October, 2012 by Ron Emler

Growth in the luxury goods market, including fine wines, Champagne and premium spirits, is slowing.

Growth in the luxury goods market including fine wine and Champagne is slowing downThat is the message from an authoritative survey from Bain & Co, the international consultancy and reflected in the latest figures from global drinks producers.

Bain says the imminent change in China’s government is causing uncertainty among the country’s growing middle class, who are moderating their spending and giving fewer gifts than otherwise they might. In 2010 and 2011 demand for luxury goods in China grew by an eye-watering 30% and 35% respectively, but this year it will slow to 18% as the country’s overall economy decelerates from frenetic double-digit annual growth rates to a more sustainable rate of about 7%.

As the Chinese are the leading engines of growing demand in the luxury goods market, overall spending growth across the globe will slow to 5% this year, Bain says, compared with 13% in 2011 and 8% in 2010.

That decelerating trend is evident in the latest figures from drinks groups. Diageo, LVMH and Pernod Ricard all enjoyed less dynamic growth, particularly in Asia, over the summer than in 2011. In the three months to the end of September, organic sales growth at LVMH was 6% compared with 15% in the same period in 2011; at Diageo it was 5% ( 9% in 2011); and at Pernod Ricard 6% (11% last year).

Just as last year’s growth rates were flattered by low figures in 2010, when the American and European markets were in dire straits, the comparative strength of the 2011 rebound makes this year’s figures look weaker than they really are. The growth rates achieved are well in line with predictions and both Diageo and Pernod Ricard forecast that their overall organic sales growth in the year to next June will be in the region of 6%. That is very healthy and bodes well for profits despite the comparative slowdown in Asia.

Diageo’s latest sales figures show its Asia region growing by just 2% over the summer, while Pernod Ricard put on 13%. There were statistical peculiarities for both companies such as delayed shipments that will appear in the present quarter, but both pointed to continuing difficulties in the South Korean market, which is evidence that Asia is not a single region. Growth rates in China and India far surpassed those in more mature economies such as Japan. All companies noted that travel retail growth rates, driven largely by Asian demand, were under pressure.

It is important to note that the slowdown in China identified by Bain is from unbelievable to amazing. For instance, Pernod Ricard’s sales there were 18% ahead between June and September. But Bain now predicts that globally the total luxury goods market will grow by between 4% and 6% a year until the end of 2015, the moderation due in large part to the slowdown in China.

That prediction also reflects a slight shift in emphasis as America’s economy is picking up rapidly while Chinese demand for luxury goods stabilises at more sustainable rates. However, continued premiumisation will continue to boost drinks companies’ margins in all regions and thus overall profitability.

However, there is a bleak message for demand in the already hard-hit mature markets of Western Europe such as Britain, France, Italy and Germany. A third of all purchases of luxury goods in Western Europe last year were made by visiting Chinese nationals. Slowing sales to those tourists will make the continent look depressed in comparison as the rest of the globe enjoys slower, but still growing demand for luxury goods.

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