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Luxury is booming. In the past few days, LVMH – the initials stand for Louis Vuitton Moët Hennessy – became the first European company to be worth more than $500bn. That cemented the position of its chairman, Bernard Arnault, who controls roughly half of its shares, as the richest person in the world. According to the Bloomberg index of billionaires he comes in at $209bn, up $47bn so far this year.
Bernard Arnault is French. All the other people bar one in the top 10 are American, the familiar names of Jeff Bezos, Bill Gates, Warren Buffett and so on. The exception is also French, for the highest-placed woman at number nine, is Françoise Bettencourt Meyers, who owns one-third of L’Oréal, the world’s largest cosmetics company.
So, both the richest man in the world and the richest woman are French, and both owe their fortunes to the world’s enduring appetite for luxury.
For many people, under pressure from higher prices for basics including food, and from rising interest rates, this must seem strange, even distasteful. These are tough times. So how is it that so many people around the world are prepared to drop thousands of pounds on a handbag or a wristwatch? What does this tell us about global values? And how come France dominates this market?
China’s new middle-class
A large part of the story is China, and its new great middle-class. Chinese consumers are the largest cohort for luxury spending, according to the US investment bank Morgan Stanley. They reckon that demand will be up 20 per cent this year as the economy there reopens, that Chinese people will account for 60 per cent of the growth in demand for luxury goods through to 2030, and that the top-end of the market will benefit the most.
Why Chinese people should hanker after the success symbols of Western capitalism is one of those puzzles that are hard for outsiders to unpick, but it may have something to do with small families and relatively limited living space. Shanghai, China’s largest and wealthiest city has one of the lowest fertility rates in the world, an average of 0.7 babies per woman. The average living space for a family in the major cities is less than 90 square meters. Whereas Europeans and particularly Americans use their money to furnish and maintain their houses, Chinese people are more likely to focus on physically small symbols of their new wealth.
Higher wealth inequality
Another part of the answer is high wealth inequality, and that applies pretty much across the world. Here in the UK income inequality has been broadly stable for the past 20 years – the most recent ONS figures show it is actually lower than it was 2007, though a little higher than in 2012 – but wealth inequality has risen sharply. The rich, unsurprisingly, spend money on luxury. Sales at Harrods in London are now higher than their pre-pandemic levels, with the store focusing on local shoppers rather than tourists. According to its managing director Michael Ward, shoppers increasingly wanted to buy the very top brands, such as Louis Vuitton and Hermès (also a French family business). He told the Financial Times: “The constant trend is people going for more and more and more premium items. The rise of the superbrands is getting absolute, so that middle ground of the market is becoming tougher and tougher.”
So in that sense, in terms of the desire to buy top-end luxury, Britons may not be so different from the Chinese.
French bourgeoisie
There is a final element to the puzzle: why does France do so well? Italy does luxury too, but its largest enterprises, Prada and Armani, are much smaller than LVMH. The UK has Burberry and some others, but again, much smaller than the big Paris brands. The best answer is that this dominance goes back a long way. France currently has six of the world’s top 10 brands.
It is extraordinary that any single country should dominate the luxury business in this way, but it is even more extraordinary that this dominance should date back to the 17th century. Louis XIV’s minister of finance, Jean-Baptiste Colbert, is best known for his quip: “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.”
But he also observed in 1665 that: “Fashion is to France what the gold mines of Peru are to Spain,” a reflection on the way the country generated its wealth.
Old money vs new money
It’s a strange clash that is very embedded in Europe, particularly France. Old wealth can create the products that new wealth wants to buy, but actually feels a little ambivalent about displaying wealth itself. To many of us, this desire of the “new money” of the emerging world to lap up the symbols of the West is troubling. It is a long way from what might be called the “John Lewis attitude” of the British middle class – you buy good quality, unflashy products that will do the job well, but do not scream “I am rich” to everyone else.
France (and the rest of Europe including the UK) can create these products but we feel a little uneasy about displaying our wealth too obviously. Rich French people live quite understated lives. Most Bentleys are for export. But for a long time yet, the new rich will want to go on buying, and if the world economy as a whole continues to grow, there will be many more new rich in the emerging world.
Will this dominance continue? Will luxury continue to be so big a deal if times get tougher? I don’t know whether Bernard Arnault will stay on top of the billionaires index, for that is a fickle chart, driven mainly by current stock market valuations. But I have a feeling that if the lust for luxury has been so important to humankind for past millennia, and that France has dominated this game for the past 300 centuries and more, people will still be buying expensive handbags and watches for a long time yet.
Need to know
Scott Fitzgerald famously wrote: “Let me tell you about the very rich. They are different from you and me.” To which Ernest Hemingway supposedly retorted: “Yes, they have more money”.
Actually, the interchange never happened, for though the initial quote is correct – it comes from a 1926 short story by Fitzgerald called The Rich Boy – Hemingway wrote a mocking response some 10 years later (there is a good discussion here). But Fitzgerald’s exploration of the distinctions between old money and new money – people with old money were different from those with new – is relevant to the success of France now.
It will not be dislodged from pole position in the luxury sphere, and that will be very profitable while the wealth of Chinese people continues to rise. But the French luxury business was gravely damaged by the revolution, for the wealthy families that came through found they had to sell many of their possessions to survive. The UK, or rather England, was a beneficiary in that our rich families were able to buy stuff at knock-down prices. The Wallace Collection in London is a great example of that.
Decline of import culture
As far as investors are concerned, the key question now for the future of luxury is how long will this trend run? We all know at some stage there will be a reversal. I am not suggesting that there will be a Chinese revolution akin to the French one. But at some stage there will be a push back, perhaps led by the Chinese authorities wanting to reduce the influence of imported culture. China, after all, had a long tradition of producing luxury items for its ruling classes before the incursions by European colonial powers and communist era that followed the Second World War.
My guess is that we will see this push-back within the next five years, and that Europe’s luxury businesses will have to adapt to that. The top end will be fine, but the middle-ranked luxury brands will struggle. In other words, what seems to be happening to Harrods’ business, noted above, will happen more widely. The boom has a solid base, but it will change its shape. Displays of wealth will continue, but they will be more understated. To rephrase Fitzgerald’s observation: “The rich will still be different from you and me, but they will learn to hide their wealth better.”
Investment implications? The great brands with a long history are still worth backing, so the current valuation of LVMH is justified. But be careful about companies that have a collection of OK brands, because once these become tired it is very hard to revive them.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
