The lapse of luxury

tauringhuang.

Feb 24th 2009
From Economist.com

Producers of luxury goods are suffering in the downturn


COULD those who produce luxury goods escape the worst of the global economic slump? Not likely. Some had dared to hope so, suggesting that rich consumers may be insulated from the financial turmoil that has engulfed those less well off, or that shoppers’ discretionary spending may go to acquiring fewer, better quality items. In fact practice suggests that the optimists have got it mostly wrong.

Revenue in the luxury-goods industry may fall by 3-7% this year according to Bain, a consulting firm. That could prove to be a conservative estimate, as the economic slowdown begins in earnest. Bad news is pouring in. Diamonds, a byword for luxury, are not forever. On Monday February 23rd De Beers, the leading diamond producer, admitted that operations have been suspended at Debswana, a joint venture with Botswana’s government that is the world’s biggest diamond producer. Other diamond miners are taking similar measures. Americans, who buy half the world’s diamonds, are resisting the lure of the sparkle, apparently foregoing fancy engagement rings for now.

With less to celebrate, champagne exports are also suffering. In 2008 producers of the fizz shipped 4.8% less than the year before. At the beginning of February Louis Vuitton Moët Hennessy, the French luxury-goods empire, reported flat profits for last year. Its jewellery division faltered and sales of watches, wines and spirits fell. Consumers have less of a taste for quality booze in the downturn. An index of fine-wine prices compiled by Liv-Ex, a London-based exchange, has collapsed by 18% since the worst of the credit crisis took hold in September 2008. Other luxury-goods firms tell a similar story.

The battering of luxury is having far reaching effects. Prices for swanky Manhattan property fell by 20% in the last quarter of 2008 and could possibly fall by another 50% this year according to Barron’s, a weekly magazine. More shocking, Dubai, which has reinvented itself as a luxury destination (albeit of a somewhat tacky sort), has been bailed out by its neighbours within the United Arab Emirates. On Sunday its oil-rich neighbour agreed to buy $10 billion-worth of bonds to ease Dubai’s gathering liquidity problems, a result of building the country’s seven-star hotels and palm-shaped pleasure island with borrowed money.

The luxury-goods industry had, in recent years, reaped rewards from widening its base of customers to the merely well-off. But in broadening their appeal businesses have come to rely on consumers who are more sensitive to ill economic winds. The super-rich may brush off recessions; everyone else is hurting. Evidence abounds that diners can walk into fancy restaurants that previously had to be booked months in advance; the reasonably affluent are said to be withdrawing children from pricey private schools.

And yet the super-rich are still able to throw their money around. Sales of Rolls-Royce cars hit a new record of 1,212 last year. The maker of incredibly expensive carriages of the plutocracy fared far better than BMW and Aston Martin, which produce cars for the wealthy. BMW saw sales drop last year, Aston Martin saw them plunge. Demand for yachts of up to 35 metres also slumped alarmingly, yet sales of super yachts of 100m-plus, which are favoured by oligarchs and other billionaires, have held up remarkably well. Makers of hyper-luxury goods at least have something to cheer. Despite the downturn, billionaires are still more common than they used to be.