How Luxury Goods Might Become The Best Investments In The Future
Luxury goods might become to best assets to invest on in the coming years. Almost recession-proof, the flourishing luxury goods market is still one of the most successful industry worldwide and has a very bright future ahead. With a high profitability in a short period of time, it is and is going to be the biggest rival of real estate or stock market investments for wealthy people. It’s even more interesting for people living in emerging countries were financial markets and domestic currencies are not stable.
We will see in this article how investing in luxury goods can act as a money safe keeping, on which products to invest and how demand for secondhand luxury products will rocket in the future.
When you ask your financial advisor where to invest your money, he/she will suggest you invest in real estate or in an equity portfolio. Investments in luxury are not much considered but can yield more and over a shorter period than a real estate purchase.
Indeed, luxury is actually a very interesting market to secure your money. Beyond representing History, know-how, prestige and scarcity, it is an industry that resists crises, since luxury customers, due to their financial wealth, recover very quickly or even do not suffer when they arrive.
Meanwhile, real estate is a sector that has already experienced several crises, the most famous one being the 2008 subprime crisis. The return on investment is lower and longer, and depends on many parameters: city, district, size, lightness, type of housing, demand, etc. According to Homepilot, the leading online property manager in Paris, even if Parisian property prices have doubled or even tripled depending on the neighbourhood in 20 years, a wealthy investor who wants to buy an apartment will have a return on investment only 25 years later, while the purchase of a vintage or limited edition luxury product would allow an identical or even higher return on investment in only a few years. Luxury products are therefore a safe and reliable value, far from stereotypes of superficiality.
According to the Bain & Company report for Fondazione Altagamma, the luxury market is expected to grow by 4 to 6% in 2019, with growth driven upwards largely by Chinese consumers who accounted for 33% of total luxury industry sales in 2018, driven by the growth in luxury purchases by millenniums (85% growth in the sector, and representing 30% of luxury sales in China according to McKinsey). The luxury market in China is worth 23 billion euros in value.
This graph shows the global Luxury market revenues in million US dollars
According to Statista, the market will expand to 318,797 million on 2018 to 350,742 million on 2022. The forecast proved the real intensity and the attractiveness of the market. These different sectors composed the luxury in general, and it will be booming on few times, and opening some new opportunities for HNWI, Upper-Middle-Class and all the BRICS. In a nutshell, the health and the forecast of the market show the security and the strength of it.
In theory, investing in luxury goods is always a good choice. Why? Because, even if some luxury goods may have a decreasing perceived value over time, the largest part of the “true luxury goods” will see their perceived value increasing or, at least, remaining stable over the time. For some items, the perceived value may also skyrocket making the investments very profitable. The monetary value of any good at a given moment depends on the perceived value of it at this moment. The perceived value is “the value of a product based on how much customers want or need it, rather than on its real price” (Cambridge Dictionary’s definition). It is a fragile value that can fluctuate depending on variables like the current brand notoriety, the perceived quality of the item, its rarity, its oldness and state, but also to the current market demand, etc.
The first category of luxury goods, those that might lose value, generally gathers products that have been overproduced or that have seen their perceived value down. A decrease in luxury goods perceived value can be explained by many reasons like for instance a bad management of the brand strategy or scandals causing a fall in the brand image.
Fortunately, the perceived value of most of the luxury goods will increase, or at least will remain stable over time. In fact, by essence, a “true” luxury good is a valuable product because of its attributes: quality, craftmanship, shapes, materials, expertise, details, design, advanced technology, etc. For a same product, each year, mostly all the brands in the luxury industry tend to increase their products prices to convey the exclusivity and the “not for everyone” image but also to maintain or increase their profits. For instance, looking to the graph from Business Insider below, we can see that for a same Rolex Submariner No-date watch, the price, even with inflation adjustment, increased each year since its launch.
(Source: Europastar.com)
For instance, take a buyer with a high purchasing power buying a limited-edition Rolex. This huge investment of 8000 dollars at the beginning can be a real safety investment because in few years its value will grow and lead to a high return on investment. If you buy a Rolex Batman at this price, two years later it will grow until 14000 dollars. You have secured your money on the short term and earned money when reselling few years later.
The same phenomenon is applying for the Hermès Birkin most classic bag that had a price tag of 2000$ in 1984 but of 11,900$ in 2017. Likewise, the Chanel Jumbo Classic Flap price went from 250$ in 1950 to 6,200$ in 2018.
The most interesting category of luxury goods to invest in is obviously the one that can bring huge profits. This category gathers in general collector’s items, rare and vintage goods, limited editions, very old piece of history, discontinued products, high demanded products.
A recent example of products that bring high return on investment are limited edition sneakers. In fact, in recent years, the sneakers market boomed and is expected to grow even more in the future. The graph below from Statista show the Value of the sneakers market worldwide from 2017 to 2024 (in million U.S. dollars).
(Source: statista.com)
This market is stimulated by a big community of collectors and a high rate of collaborations between brands that are mixing the luxury world with the sporting or streetwear world. One of the latest examples of highly expected limited collaborations at the time of writing are the Dior x Jordan and the Prada x Adidas. This kind of collaboration can reach, on the resell market, returns of more than 300% right after the launch of the product and continue to grow steadily over the years.
The American sneakers reselling platform Stock X is recording the reselling price evolution the most sneakers worldwide. As the capture below from the website shows, the price of the Nike Yeezy Red October, that was done in collaboration very limited quantity with the controversial and very famous American artist Kanye West, has gained 2770% of value over retail price on the reselling market.
(Source: StockX.com)
There is plenty of other examples of luxury goods on which investors can expect very high returns, as for example, the collectible vintage watches, limited edition bags, etc.
However, contrary to luxury goods with lower potential ROI margins, it is preferable to have a kind of expertise or vision in order to perform well on the high potential ROI margins of luxury goods.
In instable countries like Argentina or Venezuela, securing the money from depreciation is a high concern. That’s why investing in luxury goods such as those explained before, is a very safe and highly profitable investment.
Indeed, the currency in those countries is very volatile and knows high inflation, which means the loss of purchasing power and high durability of growth in prices of goods. We took the example of some countries trying to show the cycle of the currency according the dollars, referent currency on the market. Look at Argentina:
(Source : Xe.com)
As you can see on this graph, argentine peso loss almost 10 times its value compared to US dollar in 10 years, and these last two years, it loss 50% of its value. Inflation is always growing, and so the prices of goods on the local market.
The smartest move for an Argentinean is to convert his Argentine peso into dollars and/or euros in order to buy a luxury product in the US or Europe. He/she buys a luxury product in a stronger foreign currency (US dollar or Euro for instance) and keeps the product several years, with the aim of reselling it later. Five years later, the product value has increased. The Argentinean buyer sells it in US dollar or Euro then converts it back to peso that loss a huge amount of its value, and thus gets back far more pesos than he would have get five years ago. This process shows the simple way to make a profit from luxury products and currency depreciation.
(Source: xe.com)
Other countries like India also suffer from depreciation. As you can see on this graph, it loss almost 50% of its value against US dollar in 10 years. In addition, unpredictable events can occur in those countries. In 2016, the Indian government decided to stop the production of the Rs 500 and Rs 1000 bills to fight corruption which created lots of troubles for banks that have been taken by surprise by this announcement. Indian people had to change their 500 and 1000 bills with new ones and cash withdrawals were limited by 10.000 rupees per day and 20.000 per week. Therefore, as the economic situation in emerging countries is never stable, and as other uncertain events like these may come back in the future, investing in luxury goods for HNWI living in emerging countries in one of the safest and smartest investment they could make.
Another parameter that shows well the situation in emerging countries is the confidence index. It is a key indicator because it measures immediate spending intentions, local employment prospects and personal finances. The higher this index is, the more confident consumers are about the future and their investment is limited and reasoned. On the contrary, if the index is low then economic actors are more inclined to spend and invest because they do not have confidence in the future. An average household morale index is 100, which Nielsen says is the global index of 99% optimism.
As we can see on tradingeconomics.com, South American countries are far from being optimistic. Argentina's target is 41.40%, down from 43.80% in the previous quarter. Colombia is in negative -9.80%, which means that it has absolutely no confidence in the future. In comparison, the United States is at 90.00% also down compared to the previous quarter (95%). The instability of the currency and the mistrust of the future encourage consumers to invest in a market like luxury.
Finally, it will be more and more easy to find someone to buy your luxury acquisition. HNWIs are becoming increasingly rich: +170% expected in Vietnam by 2026, +150% in India, +140% in China according to the OECD. Luxury will therefore have more and more customers and the demand for luxury products will continue to grow
Moreover, although the Chinese economy has been slowing since 2018 due to the Sino-American trade war (6% on average from 2018 to 2019 compared to 9.7% on average between 1978 and 2015), sales increased by 20% in 2018. Also, Bain & Company predict online sales to reach 25% of the luxury sales worldwide that are led by the online second-hand market. This shows that people are more and more willing to buy second-hand luxury products on internet and so will increase the probabilities of reselling.
To conclude with, investing in a luxury good for a HNWI living in an emerging country is the safest he/she could do if an economic or currency crisis happen.
Article written by Olivier ANDREU, Maxence BOUTON & Anthony SCIACCA
SOURCES:
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https://fashionunited.fr/v1/fashion/amerique-latine-4eme-destination-du-luxe-francais/201202235121
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https://globalriskinsights.com/2018/09/peso-crisis-argentine-risk-analysis/
[3] (2015) Consommateurs à travers le globe: la confiance à son plus haut niveau depuis 2006, Nielsen.com
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https://fr.tradingeconomics.com/country-list/consumer-confidence
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[8] O. Siegle, (2018). The price performance of vintage watch icons: Rolex, Patek Philippe, Omega: EuropaStar.com
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[9] S. Jobert, (2018). Pourquoi vaut-il mieux investir dans un sac que dans l’immobilier ? Elle.com
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Assistante de direction Trilingue Anglais-Espagnol et Italien
3yCongrats for your article However in times of crisis who.are the target for this kind of articles? Most of our customers of luxury goods are foreigners mostly Asian.the market is now over there How to be sure to invest in a model that will increase its value instead of losing it because being too much copied? Would dream to have a Chanel hand bag!😁
Junior Brand Manager Schweppes 🍸 at Suntory Beverage & Food France
3yVery interesting !