Live from the Morgan Stanley Luxury Conference in Paris, our
analysts Arunima Sinha and Eduoard Aubin discuss the economic and
consumer trends shaping demand for luxury goods.
Read more insights from Morgan Stanley.
----- Transcript -----
Arunima Sinha: Welcome to Thoughts on the
Market. I'm Arunima Sinha from Morgan Stanley's Global and U.S.
Economics teams.
Eduoard Aubin: And I'm Eduoard Aubin, Head
of the Luxury Goods team.
Arunima Sinha: This episode was recorded
last week when we were at the annual Morgan Stanley Luxury
Conference in Paris. In it, we bring you an overview of what we
heard from companies and investors about the hottest trends in
the luxury industry.
It's Tuesday, May 27th at 8am in Paris.
For several years now, the luxury industry has been riding a post
pandemic boom. And the top luxury brands experience 80 percent or
greater sales growth between 2019 and [20]24. So Ed, is this
trend going to continue or has it started to moderate and why?
Eduoard Aubin: No, it has already started
to moderate clearly last year. So, the growth rates of some of
the leading luxury good brands, you know, over the past, four or
five years, was clearly double digit CAGR growth.
What we've seen in 2024 – is the market, luxury goods market
worldwide has already started to contract. It was very moderate,
about 2-3 percent. But it's very unusual because over the past 30
years, the market has contracted only once or twice. So, it
started last year already. But we think it's going to, you know,
accelerate; the decline could be even a bit more significant this
year to low to mid single digit.
And there are a number as to – of reasons as to why the market
has luxury goods market has moderated. First of all, there's been
post-COVID; post pandemic. There's been a wallet shift away from
ownership of goods to more spend on experiences such as travel,
restaurants, dining out, et cetera.
The other thing is that you had a lot of, you know, closets,
which were full post the pandemic. People were at home,
disposable income was high and there were certainly a lot of, you
know, purchase, which was done during the pandemic. And then, and
we'll talk about it in a second, there is also this view that
maybe luxury good companies have increased prices maybe a bit
touch excessively during the pandemic; and potentially pricing
out the middle income consumer.
Arunima Sinha: This is an incredible
conference and we've been talking to a lot of corporates and
we've been talking to a lot of investors. What are some of the
key debates that you've been hearing about?
Eduoard Aubin: So I mean, front and center,
it's what's going on in terms of the – from a macro standpoint –
in terms of the key, two key markets for the luxury good sector,
which are China and the U.S., to put things in perspective, and
we look at it on a nationality standpoint here rather than a
geographic standpoint.
The reason is that there is a lot of cross-border shopping, which
is done when it comes to luxury. The Chinese nationals account
for about a third of total demand, total spend on the luxury
goods market, 32-33 percent. So, they are the number one
nationality today, clearly. The number two is the Americans,
which account for, who account for about 21-22 percent of the
spend.
So, combined that's more than 50 percent of the spend and
certainly more than supposedly 50 percent of the growth over the
next three to five years. So clearly a lot of focus on these two
nationalities. What's going on in terms of the wealth effect in
China and in the U.S.? What's going on in terms of the health of
the middle-income consumer in China and in the U.S.?
The other debate related to that is what's going on in terms of
international travel? What we've heard from companies during the
conference is that there are certainly less Americans now coming
to Europe, in this quarter, in the second quarter, and this had
been a key driver of the spend over the past few months partially
related to the currency.
There is also; there are also less Chinese going to Japan, which
was also a key – a factor of growth for the industry. Chinese
spend about 30 percent of their total spend outside of China, and
Japan was the number one market in terms of spend for them in
recent years ahead of Europe.
And what we've seen and what we heard from the companies
attending the conference is that these two nationalities are
spending less abroad, which is why we think, the second quarter
sales could be a bit under pressure more than in the first
quarter.
The other debate is about, you know, the middle-income consumers
we talked about. Luxury brands have raised prices quite a bit.
For some of them they doubled the sales price of the items during
the pandemic. And again, there is a debate about the fact that
they might have been pricing out the middle-income consumer. And
obviously that has come at the time where the discretionary spend
of the middle-income consumer, you know, the aspirational
customer, has been under pressure.
So, it's kind of a double whammy in terms of the propensity of
this cohort to spend on luxury goods and for the sector to grow
in the medium- to long-term, it cannot just rely on millionaires
and billionaires. It has to increase; to recruit, from the middle
class. That has been the one of the gross engines of this
industry over the past 10, 20, 30 years.
And so that's certainly one of the key debate is – when will the
products become affordable again? The challenge for the luxury
goods company is that you can; there is a cardinal rule in
luxury. You can never lower your prices. So, what you can do is
you can play a bit with the mix, or you can wait for the
discretionary spend to increase and make your product more
affordable.
But obviously that takes some time. So, these are some of the key
debates, you know, that have been discussed at the conference.
So Arunima, let's shift our focus from macro to micro concerns.
So, we've been talking a lot about the economic outlook,
uncertainty around tariffs and currency markets on this podcast.
Will these factors hurt luxury consumption?
Arunima Sinha: So, this is great timing Ed,
because we just published our economics outlooks the global, the
U.S., and for other regions. And our basic view is that tariffs,
both the levels, the uncertainty around them are going to weigh
on growth around the world. They're going to weigh on U.S.
consumers quite specifically because here now you have a couple
of different ways that tariffs will matter.
One, for the general consumer, it's going to be higher prices; so
you drive up prices, you're going to drive down real spending.
And so, we do have our real spending moderating across the
forecast horizon. We go down almost a full two percentage points
by the end of [20]25 relative to where we were in 2024. With
respect to how we think about consumers spending on discretionary
items, we think of labor income being an important factor. We
think of wealth; supportive wealth effects and that you already
mentioned. And then we also think about just how consumers are
feeling uncertain about their prospects for the economy and so
on.
So, with respect to luxury consumption, we think that it is the
last two factors, the supportive wealth effects and how
uncertainty was playing out, that's going to matter. So, between
2020 and [20]24, the United States saw some of the largest
increases in net worth for U.S. households. So, U.S. households
saw $51 trillion in additional net worth being created over this
period; that was more than what they saw over the prior decade.
And from this 51 trillion pool, about 70 percent went to the top
20 percent of the income cohort, so that's $35 trillion. So,
these guys were feeling very positively supported by wealth. And
the other factor in this is that it was really tied to financial
wealth because that's where we saw some of the largest increases
as well.
And so, how do we think it's going to weigh on luxury consumers?
To the extent that we may not see these very large increases in
wealth going forward, given where equity markets, the ride that
they've seen over this past year, so far. If we don't have these
very large increases in financial wealth, we may not have very
large increases in planned consumption for this particular
cohort.
And so that's driving some of our forecast about the moderation
and overall consumption, but it will also translate into just
growth for luxury consumption. And the other aspect, of course is
uncertainty. So, we do think that there's going to be some
resolution of tariff uncertainty this year, but there are other
factors in the U.S. that are weighing on policy uncertainty. So
where is the fiscal bill going to go? How is immigration going to
solve out? So, all of these factors are weighing on the consumer,
and they may also be weighing very well on luxury consumption.
Great talking with you Ed, we could all find little ways of
incorporating luxury in our lives and this conference has really
just been an incredible experience. So, thank you and thank you
for taking the time to talk with me today.
Eduoard Aubin: Great speaking with you,
Arunima
Arunima Sinha: And thanks for listening. If
you enjoy Thoughts on the Market, please leave us a review when
you'll listen and share with the podcast with a friend or
colleague today.
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