Fading feelgood factor leaves luxury labels tarnished

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The Independent Online

As the song goes: "It's tough at the top, but tougher at the bottom, and positively boring in between." Well, going by events of the last few days – it must be really tough at the bottom.

Top-notch luxury goods firms have been queuing up to tell the market bad news. Prada, Richemont, Clarins and LVMH have all warned on their prospects – LVMH for the third time in two months – while Bulgari, the Italian jeweller considered to be above all this, published disappointing third-quarter figures that put market analysts in a spin.

So what is wrong? The obvious answer is the aftermath of the 11 September disaster. On one hand highly paid people such as investment bankers, lawyers and advertising executives found business was drying up, so they became less inclined to splash out $5,000 on a watch or $100 on a tie.

On the other hand, people are not travelling. And the fact is the one thing you do when you are on foreign shores is shop. The Prada store in Hawaii has seen a 60 per cent drop in sales in the last couple of months, as US tourists either stayed at home or left their gold cards behind.

Johann Rupert, the chief executive of Richemont, which owns the Cartier, Dunhill and Montblanc brands among others, summed it up. "We sell on the feelgood factor and there are few people in the world that feel good, especially after 11 September."

The profits warnings have all highlighted this, with most companies saying that things are not so bad in Europe, but fairly awful in the US. The problem for luxury goods firms is that without strong US sales it is impossible to justify the high market valuations that have been achieved in recent years.

The structure of luxury goods firms is largely similar. They have high fixed costs – designers, stores, glamorous advertising with spreads in Vogue or Elle. They are also almost all European – French or Italian names like Gucci, Hermès or Christian Dior predominate. If they are in the fashion trade they usually produce a couture collection that costs a fortune and sells little – though without it, it is almost impossible to push the less expensive prêt-à-porter collections.

The reason why the investment community has loved these companies in recent years is that they have shown an ability to export their name into other markets – be they brand extensions, such as perfumes or cheaper fashions, or geographically, with the success of European names in the US or Japan a major driver of profit. This is why a company like Gucci, which was virtually bankrupt a decade ago, is now worth some €10bn (£6.1bn) and has been at the heart of a massive tug-of-war between the French tycoons, Bernard Arnault of LVMH and PPR's François Pinault.

With the Japanese economy in the doldrums luxury has looked west, with America driving growth. If the US is going off the boil, then profits will slither away.

This is bad news for the quoted luxury firms – but even worse news for those wanting to come to market. Prada, which has spent over €1bn buying up brands like Fendi, Church and Byblos, pulled its planned float and hopes that GUS will be able to float Burberry are fading.

Some in the market think this could lead to a flurry of corporate activity, once the current hiatus created by the Afghan war, dissipates. "There are some luxury companies – particularly single-brand firms – which are looking pretty cheap at the moment," said a corporate financier who specialises in the area.

Luxury always seems to have its price, especially in the world's financial markets.

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