The ultra-rich continue to buy luxury despite inflation and fears of recession
Prices for food, gas and travel have soared over the past year, but the wealthy seem to be shying away and still fueling sales at luxury companies, where sneakers can cost $1,200 and sports cars easily top $300,000.
Companies that cater to the ultra-rich, including Ferrari and parent companies of Dior, Louis Vuitton and Versace, are seeing strong sales or raising their profit forecasts. The upbeat results come even as recession fears weigh on the economy, with Walmart, Best Buy, Gap and others cutting their financial outlook, citing a pullback in spending by low-income consumers squeezed by inflation.
The unwavering strength of the luxury category is consistent with past economic downturns, experts say, with the wealthy often the last to feel the effects due to the cushion their extreme wealth provides. Among the jet set, ongoing spending also indicates how expensive purchases often serve as status symbols.
“Having symbols of power within your tribe is a powerful thing,” said Milton Pedraza, founder and CEO of Luxury Institute, a market research and business management firm. “These symbols of power still matter a lot among the tribes of the ultra-rich.”
Louis Vuitton, for example, offers a pair of sneakers for $1,230, as well as a bag for $2,370. The parent company of haute couture brand LVMH, which also owns Christian Dior, Fendi and Givenchy, posted organic revenue growth of 21% to 36.7 billion euros ($37.8 billion) in the first half of 2022 compared to a year ago.
At Versace, where the price of a pair of shoes or a collared shirt can easily exceed $1,000, quarterly revenue rose nearly 30% to $275 million from a year ago. , excluding the effect of currency movements. Its parent company Capri Holdings, which also owns Michael Kors and Jimmy Choo, said its overall revenue rose 15% to $1.36 billion in the period.
Despite the wider economic uncertainties, Capri CEO John Idol said the company remained confident in its long-term goals due to “the proven resilience of the luxury industry”.
“None of us know what’s going to happen in the second half of the year with the consumer, but it looks like the luxury industry is pretty robust and healthy,” Capri said during an interview. an earnings call this week.
Earlier this month, Italian supercar maker Ferrari also raised its full-year guidance after revenue hit a record 1.29 billion euros ($1.33 billion) in the second quarter. The automaker’s 75-year-old 2022 Ferrari 296 GTB, which has plug-in hybrid capabilities, starts at $322,000, according to Car and Driver, while its 2022 Ferrari 812 GTS starts at around $600,000. Even used Ferraris sell for hundreds of thousands of dollars.
Outside of the luxury world, some companies are also noting the strength of more expensive options. Delta Air Lines, for example, cited stronger revenue recovery for offerings such as business class and premium economy class, compared to its other coach tickets.
While the luxury industry has always had a degree of resilience, the growing wealth disparity fueled by the pandemic is adding to the sector’s current strength, said Amrita Banta, managing director of Agility Research & Strategy, which specializes in affluent consumers.
“The disposable income of the most affluent and wealthy (affluent) consumers increased as they spent less on travel,” she said.
Additionally, she said there has been a cultural shift since the 2008 recession and today’s affluent consumers are less guilty of spending in downturns and “feel empowered to spend their wealth.” She said that’s partly a reflection of people in developing countries, where wealth is growing.
Luxury companies could notice a slowdown in spending among the 80% of their customers who are “nearly affluent”, said Pedraza of the Luxury Institute. But he said those consumers typically account for around 30% of sales.
Instead, he said luxury brands often rely on just 20% of their customer base – the ultra-rich and the super-rich – for the majority of their sales. And because that framework is much more resilient to inflation and recession, luxury companies tend to experience a downturn last, he said.
“The type of customers and amount of sales they represent at real luxury brands makes them super resilient,” he said. “Not immune, but super tough.”