Earlier this month, Paris-based Pictet-Premium Brands, an investment fund specialized in prestige brands across the beauty, fashion, spirits, hospitality and lifestyle sectors, held a press conference to discuss the state of the luxury market, the impact of the war in Ukraine and the resurgence of Covid in China on sales. Caroline Reyl, Founder and Managing Director of Pictet-Premium Brands, shares her insight on how the fund is building value in what is a highly volatile luxury environment.
Pictet-Premium Brands’ investment strategy is based on a close read and an anticipation of emerging market trends. The French fund’s portfolio of some 120 companies is built around three main criteria: companies with a clearly differentiated offer drawing on heritage and specific savoir-faire; a strong cross-channel (physical and digital) customer experience and a focus on both innovation and customization. “A brand’s ability to increase its price points without impacting volume sales is another key asset we look out for in the luxury space,” notes Caroline Reyl, Founder and Managing Director of Pictet-Premium Brands. After a rebound in sales and profits last year, Reyl notes that 2022 is shaping up to be a challenging year.
The state of luxury: 1st quarter 2022
“Since the beginning of the year, and as is typical in periods of uncertainty and crisis, the luxury sector has underperformed. At the end of March, our fund was at -8%, while the luxury market was down by double digits. This gave us leeway to acquire Hermès shares in February, for example, when its share price was down by 20%; the company now makes up 3.6% of our portfolio. Hermès is the kind of stock that we buy only in times of weakness, and it is extremely rare, but in a difficult environment if there is one company that we believe will come out on top, it’s Hermès thanks to its order pipeline for the highest-ticket items, its pricing power, but also because of its strong local production footprint, which also means lower transport costs. Moncler has also dipped by about 20% since the beginning of the year, so we moved to acquire shares there as well.
Inflation: what impact on luxury?
“Yes, interest rates are growing, but that isn’t necessarily a negative when it comes to luxury. If the inflationist environment doesn’t settle in for an extended period, it can be rather favorable for the market. After all, these products are viewed as safe-harbor values, so if consumer confidence remains relatively high, it’s not unfavorable for luxury. So far this year, we’ve seen prices increase, which is having a positive impact on margins and an absorption of the inflationary effect, which will be particularly strong on luxury stocks.
Given the resurgence of inflation and the fact that international tourism is somewhat stalled today, we are banking on brands with pricing power that are perceived as highly exclusive by the consumer. Those with a global strategy, but significant local firepower to reach the consumer in France, but also in Asia and in Europe.”
Regional variations: China under Covid, the US going strong
“The impact of the latest surge of Covid in China on consumer confidence is quite disastrous, in the short term at least. But this is a bit of déjà vu: we witnessed this scenario in 2020 during the first lockdown and it had a short-term negative impact on sales. But not only did we have a strong rebound at the end of the lockdown, the rebound was even stronger than what we could have had without a lockdown. The consumer overly compensated, so I believe the market is a bit less worried this time around.
The impact will be felt in major cities in China including Shanghai, but again, we see this as a short-term occurrence. Luxury in other regions is extremely positive; the US is seeing surprisingly dynamic consumer demand, well beyond that of 2019. Luxury’s penetration is strong among its traditional consumers, but also those that are new to the segment. Pre-2019, the market was focalized on the east and west coasts, but today there is significant demand throughout the country: Texas, Arizona… There is a decentralization going on that is principally due to the boom in digital sales.
Gauging the fallout from the war in Ukraine
“For Pictet-Premium Brands, the impact of Russia’s invasion of Ukraine will be minimal as less than 2% of the sales in our portfolio are exposed to those two countries. For the luxury market overall Russia and Ukraine represent a square 2%, which is quite surprising. This is in part because luxury products sold in Russia have a below-average level of profitability; their margins are less significant due to the local system of distribution and taxes specific to the market.
Certain regions are going to profit from what is happening in Europe, namely the Middle East, which is set to see a major boost in luxury sales. From a market segment perspective, sales in the high jewelry segment are going to increase in the short term.
What counts the most from our perspective is the war’s impact on the consumer mindset. Of course there are other factors, such as the price of raw materials and transport costs and global economic growth. Brands are telling us today that their consumer is worried about world events but is not particularly worried about their own wellbeing. The luxury consumer is resilient!”
What forecast for 2022?
“We’ve become accustomed over the years to a volatile market accentuated by crisis periods, especially exogenous crises (war, pandemic…). Following periods of crises and worry, performance generally picks up strongly due to premium brands’ resilience in the long term when it comes to growth and profitability.
In 2020, the year the pandemic hit, Pictet Brands finished the year at +18% because the consumer returned to prestige brands with such vigor, with a level of profitability per store that we had never seen before, and digital that accelerated with new consumers coming to luxury. Today we are focusing on companies that generate cash flow, with strong desirability and heritage.
Consumer sentiment and their desire to spend on brands with a truly differentiated offer is what will have an impact on our results this year, so we’re looking at that much more closely than simply the question of inflation.”