The wealthy are splurging on Ferraris, Gucci handbags, and expensive Champagne, while McDonald's customers can't afford combo meals
- Rich people are more insulated from inflation, which means they're still shopping for luxury goods.
- Luxury companies like LVMH, Kering, Ferrari, and Hermès are reaping the benefits.
As inflation continues to squeeze consumers across income brackets, rich people aren't feeling the same pinch — which means the brands they shop for aren't either.
The world's two largest luxury conglomerates, Kering and LVMH Moët Hennessy Louis Vuitton, reported strong earnings last week, with both companies seeing revenue increases over 20% in the first half of the year compared with 2021. They're not the only companies in the luxury sector doing well right now: It seems like everyone from high-end automakers to coveted handbag designers is seeing strong demand.
This means that the wealthiest consumers across the globe haven't slowed their spending, even as many Americans are opting for cheaper options at McDonald's or stressing about how they'll pay their bills. Now, with inflation climbing to new highs, the big winners are the companies who make products for the ultra-rich.
'Healthy and high demand' for cars, clothes, and Champagne
At LVMH — the French mega-corporation run by the world's third-richest person, Bernard Arnault — luxuries big and small have been flying off the shelves.
Champagne and cognac sales, in particular, saw "exceptional momentum" in the first half of 2022; fragrances and skincare grew rapidly, and high-end fashion is still performing well. Revenue for LVMH's fashion and leather-goods category was up 24% during that period, with brands like Louis Vuitton, Christian Dior, Fendi, and Celine achieving "new record highs for profitability" in the first half of the year, the company said.
Kering-owned couture houses — including Gucci, Yves Saint Laurent, and Bottega Veneta — all saw significant growth in the first half of the year as well, the company said in its recent earnings report, though the luxury conglomerate has raised prices twice this year. Hermès, which makes leather goods like the coveted Birkin bag, reported a strong showing in the second quarter, with sales jumping by double digits in June. And at Italian fashion house Prada, half-year revenue jumped 22% year over year.
Wealthy consumers are clamoring for more than just fashion: Italian sports car maker Ferrari saw record orders in the second quarter, and Mercedes-Benz said it's seeing "healthy and high demand" for its high-end vehicles.
These earnings are in line with recent projections from the consulting firm Bain, which estimates that sales of luxury goods will rise at least 5% in 2022, with shoppers — mostly in the US and Europe — shelling out at least 305 billion euros, or about $312 billion, this year alone.
Claudia D'Arpizio, a partner at Bain, told Reuters in a recent interview that, despite inflation, "consumption doesn't seem to be affected so far."
It's a stark contrast from companies that serve other types of consumers.
McDonald's said during its second-quarter investor call that customers are paring down their orders in the face of inflation. "We're seeing customers, particularly lower-income customers, trade down to value offerings and fewer combo meals," CFO Kevin Ozan said.
At Walmart, customers have shifted their spending habits in the face of rising food and gas prices, cutting back on purchasing clothing, for instance, and switching to cheaper, private-label brands. And many other companies, from Bath & Body Works to Chipotle, are bracing for slower sales, particularly from lower-income consumers, in the months ahead.
Recession could be 'self-fulfilling prophecy'
Still, there are signs that even the luxury sector could start to feel some pain due to the ongoing war in Ukraine, COVID lockdowns, and economic uncertainty.
Kering CFO Jean-Marc Duplaix said the company is in a "wait-and-see mood" on the economy due to the war in Ukraine, which is driving up costs.
Kering and other luxury goods companies are also grappling with ongoing lockdowns in China. Chinese consumers dominate the global luxury market, and lockdowns have closed many high-end stores and slashed the number of Chinese tourists shopping abroad.
Kering said 30% of its China stores were closed in April and May. LVMH CFO Jean Jacques Guiony said sales in China dropped by "heavy double digits" in the most recent quarter. But both companies said they were optimistic that business in the region would rebound, however.
Kering and LVMH have also expressed cautious optimism that European and American tourists will continue to spend on luxury goods.
Guiony said LVMH doesn't have a "particularly gloomy and pessimistic" outlook on the US economy, but it has a plan in place in the event of a more pronounced economic downturn.
"My fear is that all these comments about recession and drop in demand would become a self-fulfilling prophecy," he said.
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