In an era of huge wealth inequality and slow economic growth, this raises difficult questions for the continent.
The global luxury sales boom has been a boon for European markets. This is a positive development. This success story raises the troubling question of whether Europe has become too dependent on a sector that many view as a sign of decadence.
Compare Europe with the US where, over the last 12 months, 10 of the largest tech companies accounted for 65% of stock returns. This is an alarming indication of concentration in the industry. Similar signs of concentration in Europe are more alarming. The 10 biggest luxury stocks from LVMH and Ferrari have accounted about 30% of the returns, a share that has never been matched in history.
The luxury industry, which was a long-standing source of pride for Europe, has seen a boom in the last decade. It had its best ever years during the pandemic. The record stimulus created trillions of dollars in new wealth. Much of that money went to the rich who used it for high-end products.
Europe has finally made a lot of money in an industry it has controlled for centuries. Europe is responsible for two-thirds the global luxury sales revenue. The continent now has stock market winners as a result.
The list of Europe’s top 10 companies ranked by market capitalisation now includes four luxury brands, up from zero in the early 2010s. The big luxury brands in Europe are more profitable than the big US tech companies, with earnings of nearly 25% of revenues.
It may be a positive step for the luxury sector, but not for Europe. It is difficult to argue that building a knowledge-based economy based on crafts from the 17th century was a step backwards at a moment when western capitalism is struggling with weak productivity growth, increasing wealth inequality, and the dilemma of how to coexist and compete with China.
It’s safe to say, if it’s unclear how smartphones contribute to productivity growth that French perfumes and Italian handbags are even less important. In the US, tech tycoons have been a source of controversy. However, in France luxury tycoons have become targets of protests. While the west is debating whether or not to “derisk its relationship with China”, the European luxury industry remains as dependent on Chinese consumers as ever, who account for approximately a third its sales.
The US tech industry grew over the last decade and so did European luxury. Since 2010, the 10 biggest tech companies have quadrupled the share they hold in the US stock exchange to almost 25 percent. In the same time period, 10 of the biggest luxury stocks tripled their market share in Europe to 15 per cent.
Power is concentrated at the top, in both luxury and tech. In 2010, the top European brands accounted for only a quarter of global sales. The top European brands now account for a third of global sales, up from a quarter in 2010.
The French dominant position is rooted in a luxury eco-system that dates back to Louis XIV’s court, as well as a culture that started with Bernard Arnault. He began building the first luxury brand house through serial acquisitions after gaining control of LVMH. Rivals quickly followed in his footsteps. The global luxury industry increasingly relies on products that are made by small Italian companies but sold by large French conglomerates. Gucci, Bulgari and Fendi are all Italian brands that now have French owners.
The US tech companies are the biggest in the world, but French luxury is not far behind. The French luxury companies have sales that are three times greater than Swiss firms, four times more than American and Chinese firms and 12 times more than Italians.
LVMH was the first European company in April to surpass the half-trillion dollar mark. Hermes has margins of over 40%, up from 25% in 2010, and even above Microsoft, one of the biggest tech companies.
Pricing power is one reason for the high profits. Luxury companies cater to a customer base that is becoming increasingly insensitive to price. The price of Chanel handbags has increased by more than doubled in the last five years, to $10,000. This is far above the general increase in consumer prices.
The European Union has found its winner. But with a asterisk. Competition is more beneficial to capitalism than concentration. If you had to choose between high-tech concentration or high-luxury, your answer would be obvious. The European luxury model is a little outdated, if it’s not even decadent.