Is luxury heading into recession in 2014?

30 10 2013
by Oliver Petcu (

With most luxury groups as well as independent players reporting slower sales growth in the past 9 months across all luxury sectors, the industry seems to be heading towards a more sensitive year in 2014, in some cases, certain brands likely to register decrease in sales and profitability.

The increase in prices of raw materials as well as shortage in precious materials, more expensive real estate and macroeconomic and political instability – have all been contributing to a poorer performance for most luxury sectors, some companies reporting 2013 as the worst in the past 3 years. Two other important factors leading to slower performance have been: a major change in product development, especially due to the growing influence of emerging markets and an increasingly powerful indirect competition from non-luxury sectors.

With wealthy consumers allocating a larger budget to technology, especially gadgets, spending on luxury products, especially the uber luxury ones such as watches or cars has, has taken an indirect hit. Indirect competition has also been increasing steadily from travel, Spas and beauty/wellness. Cars and yachts tend to be leased rather than acquired, the same trend being registered by residential real estate, especially seasonal – vacation destinations.

Overall, luxury brands have been seeing a growing lack of loyalty from traditional consumers in both mature and emerging markets, which has prompted many of the top players to increase advertising spending, both traditional and online. The notion of a luxury lifestyle which HNWI or UHNWI would boast is obsolete. Nowadays, social status can also be achieved through mix & match, which has become a powerful statement especially in mature markets such as the U.S., Japan or the U.K. The era of a ‘luxury consumer’ who plays golf, wear a full look of a certain luxury brand, prefers a particular watch, vacations at certain hotel chains – is gone !

Recent moves and developments in luxury fashion and accessories only come to reinforce the looming recession of 2014:

– major re-organization at the Richemont Group, world’s second largest luxury conglomerate, with the confirmed sale of Lancel, Chloe and Baume & Mercier, to which Alfred Dunhill could add within the next 6 months

– the pressure on improving financial performance and growth for the smaller luxury fashion brands of the LVMH Group – Givenchy, Emilio Pucci, Kenzo and Thomas Pink

– the weakness of LVMH’s watches and jewelry division, with pressure from the recently acquired Bulgari which has been struggling for a re-positioning of its watches division but also the lack of an haute joaillerie watches brand in the portfolio of LVMH

– the pressure on less performing brands such as Sergio RossiBalenciaga and Brioniwithin the Kering Group which is also struggling with its worst performing brand, Puma, in its Sports division

– major luxury powerhouses such as Louis VuittonGucciChanel and Giorgio Armanicould see closure of at least 10 percent of their retail network, especially in China, the U.S. and Russia

– most dynamic brands in 2013, such as Prada could see a slow down in retail development, opening less stores in 2014 – the group having already reported slower growth in 2013, not to mention the poor performance of Prada Group brands such as Car Shoe and Church’s

– medium sized groups such as Aeffe and Ittierre could also see further weakness in 2014, hence their motivation to likely offload less profitable brands

– Ralph Lauren could compensate slow down across all its markets and weaker presence in key emerging markets by new acquisitions in 2014

2014 is also likely to speed up the sale of groups such as Armani Group and Versace or otherwise decline in valuation. Democratic luxury positioned brands such as Michael Kors,BurberryLongchamp or Coach may continue the upward trend in 2014, filling in the gaps created by indirect competition.

Recently revived luxury brands such as BelstaffMulberryCourreges or Bally are also likely to continue their growth path, thanks to their positioning and lesser retail exposure and no threat of banalization. Powerhouse brands which have early understood the importance of upgrading their luxury image such as ValentinoBottega Veneta and Tod’s are likely to avoid recession in 2014.

Sectors such as hospitality and travel have also been suffering from an increasing pressure on rates, mainly from corporate sales. This pressure has been felt by both luxury and ultra luxury hotel chains, with an ebbing demand for suite product categories and a lower non-rooms revenue, such as Food & Beverage.

For new developments, most luxury hotel operators have been giving in to pressure from owners and developers, compromising on furnishings, facilities etc. That is why, luxury giants such as Starwood Hotels (St Regis, Luxury Collection, W Hotels) and Hyatt Intl(Grand Hyatt, Park Hyatt, Andaz)are likely to weather the possible 2014 better, thanks to their strategic branding positioning, which they care leverage on.

Smaller chains which boast a model of operating and investing are also less likely to be affected by the ongoing uncertain economy, their opportunity is differentiation and a product with no compromise on quality: PeninsulaSwireDorchester CollectionBulgari Hotels & Resorts and Oetker Collection.

Rosewood Hotel, London

Single brand luxury chains such as Mandarin OrientalFour SeasonsOrient-Express,Rosewood Hotels remain more exposed and in many cases with significant inconsistencies from property to property. That is why, we are likely to see growth generated especially by take-over and re-branding of existing properties, a much more feasible and cost efficient business model. Capella HotelsViceroy Hotels and Langham Hotels are likely to continue to to seek for a more defined positioning, currently oscillating between premium and luxury.




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