Invest in Luxary during a recession?
When people talk about the term luxury, it’s most often about brands that have stood the test of time, brands with almost a cult following around them, and with untapped pricing power. And in most cases, these high-end brands have a customer base that is not as affected by recessions, or sometimes not at all, which makes this niche quite interesting right now as we are experiencing high inflation and heading for a recession.
Warren Buffett’s 1981 Berkshire Hathaway letter to shareholders highlighted two business traits that investors should look for in companies during times of high inflation;
1) the power to increase prices easily and
2) the ability to take on more business without having to spend excessively.
These traits fit very well with high-end luxury companies like Loro Piana within LVMH, or Ferrari, as these companies can literally produce fewer items (spend less) and still earn even more money as the scarcity effect makes each item even more attractive to the deep-pocketed customer. Limited editions, if you will.
France’s LVMH Moët Hennessy Louis Vuitton is not only the most prominent luxury conglomerate in the world but also the 25th largest company by market cap. It’s impossible to talk about the luxury industry without mentioning this giant, as LVMH owns a portfolio of world-renowned brands like Louis Vuitton, Christian Dior, Krug, Tiffany’s, Fendi, Dom Pérignon, TAG Heuer, and Bulgari, to name a few. Many brands have already lived through two world wars, and one of their Burgundy vineyards was established way back in 1365.
The car manufacturing business is usually not very attractive from an investor standpoint because of the high capital intensity and the low-profit margins. Still, Ferrari’s strong brand has helped the company defy financial gravity for decades. One of the most interesting parts of Ferrari’s business model is its exclusive Owners Club, which is very hard to join, and whose primary goal is to uphold a feeling of scarcity and keep the core customer group loyal.
“A cashmere garment lasts forever; you never throw it away. You must pass it on to your children,” says Brunello Cucinelli’s founder, CEO, and creative director with the same name, about the company’s highly regarded cashmere products. Even though the company hasn't been around for approximately 45 years, the high-end luxury characteristics of its products and Mr. Cucinelli’s long-term thinking when making important business decisions make it very similar to many of the over 100-year-old brands in LVMH’s portfolio.