Luxury’s grand illusion needs the wealthy to keep faith

The green and yellow Rolex signs by Lake Geneva will no longer be lit at night this winter. As energy costs rise and recession looms in the US and Europe, the luxury industry is cutting back.

You would not know it from this week’s results at LVMH, owner of Louis Vuitton and Christian Dior. Revenues at the world’s largest luxury and fashion group rose by 19 per cent in the third quarter of this year as American tourists flocked to Europe bearing strong dollars to snap up Vuitton and Loewe leather bags, Dior clothes and Tiffany jewellery.

Bernard Arnault’s luxury empire has rebounded from the pandemic, despite the continuing disruption in China. For the moment, it still surfs the wave of global wealth and aspiration to have the right bag or watch. “The luxury industry is not immune to recession or shocks . . . [but] it usually doesn’t last very long,” said Jean Jacques Guiony, chief financial officer.

This has been especially true of Vuitton and Chanel, the labels that have become megabrands, with Dior, Gucci and Hermès close behind. Barring the odd interruption, they have kept selling more to the emerging middle class and wealthy across the world. From leather goods to watches, jewellery and perfumes, they confer social cachet.

But nothing is immutable and this economic downturn may expose the vulnerability behind luxury’s relentless expansion. What happens when an industry that trades on exclusivity becomes so big? LVMH’s fashion and leather goods division is more than five times the size it was two decades ago, with annual revenues in 2021 of €31bn. That is a lot of fancy handbags.

“Abundant rarity” is the term coined by the luxury consultant Jean-Noël Kapferer. To engineer it, Arnault and others built product pyramids, with their most costly, glamorous and hard to obtain goods at the top, and widening layers of more accessible items below. The latter offer entry to the club without the need to be so wealthy.

Thus, you can buy a Vuitton Carmel Hobo bag for £3,650, or settle for a Varsity Beanie for £275. The Hermès pyramid is even taller. It is extremely hard to get a Birkin bag (Sotheby’s sold one for $64,230 in April), but there are many accessories online, including a lacquered wood bracelet for £180.

The luxury houses meanwhile emphasise their devotion to history and artisanry, as if conspicuous consumption is the last thing on their minds. “The freedom to create, the constant quest for beautiful materials, and the transmission of exceptional knowhow,” is how Hermès pitches itself.

The mythmaking works: in surveys, luxury consumers often cite design, quality and craftsmanship as what attract them. In reality, they are seeking higher status and so gravitate towards the best-known names, observes Edouard Aubin, a Morgan Stanley analyst. The top seven labels are up to 18 times larger than the average brand, according to the consultancy Bain.

A recession need not be the worst thing for LVMH or for Kering, which owns Gucci. They may benefit from a flight to quality from other brands, and even from being forced to prune some of the fripperies into which they have expanded over the years. Looking over their catalogues, I wonder why they sell a bunch of this stuff, apart from the fact that they can.

The part of the pyramid they need to protect is right at the top, among the wealthy who will not have to economise on shopping. “The rich remain rich, even in a recession,” says Pierre Mallevays, a partner at Stanhope Capital. The world has enough high luxury buyers for LVMH get through any downturn without worrying too much about sacrificing bag charm sales.

The true danger, to which the megabrands are exposed by sheer size, is trading down. They have made it easier for the world’s aspiring luxury consumers to afford their logos, and more could take up the offer in a downturn. If you cannot stretch to a Karl Lagerfeld-designed Chanel chain handbag, why not a pair of Chanel sunglasses?

This effect occurred in the early 2000s, as sales of affordable cosmetics such as lipstick rose, while fashion suffered. “When lipstick sales go up, people don’t want to buy dresses,” said Leonard Lauder, Estee Lauder’s chair, in 2001. LVMH is at the top end of luxury, but some customers may be tempted by a cheaper fix in hard times.

Having spent years artfully constructing desire for expensive goods, this is the last thing that these houses want. If the pyramid flattens and they become closer to other fashion brands, their mystique evaporates. Burberry suffered from overexposure in the early 2000s, and took a long time to recover.

There is little sign of that happening yet. Arnault has piloted LVMH’s labels steadily upmarket and carefully reinvested in their allure. But investors are not convinced that luxury is untouchable. The S&P Global luxury index has fallen by a third this year, which is hardly a sign of confidence.

Luxury’s grand illusion of rarity and abundance has conquered the world for decades. Soon, it may be tested.

john.gapper@ft.com