Rising consumer confidence, particularly in emerging markets such as China, could make 2013 a good year for luxury goods companies.
Credit Suisse’s European luxury goods team recently said that the sector’s exposure to emerging markets, where growth is high and consumer confidence appears to be back on the rise, is key to its expected success this year.
“Put simply, we see luxury as the purest play on the China consumer,” analysts wrote in a recent outlook on the luxury goods sector for 2013.
The outlook aligns with the results of the third annual Emerging Consumer Survey recently released by the Credit Suisse Research Institute. The survey notes that the shift toward discretionary spending seems to be back on track in many emerging markets, including Brazil, China and Indonesia, after a slowdown last year.
Consumers with the highest incomes, perhaps unsurprisingly, had the most upbeat outlook on their financial futures in all 14 countries surveyed. That bodes well for luxury goods companies, which make nearly 54 percent of sales to emerging market consumers, many of whom buy products in Europe.
In China, the key market for the luxury goods sector, the survey showed that 39 percent of respondents expected their financial prospects to improve in the next six months, up from 31 percent in 2011. A separate proprietary survey by Credit Suisse showed that Chinese consumers’ spending expectations rose sharply in January.
Credit Suisse analysts also track some surprising bellwethers that indicate healthy demand for luxury goods, such as the financial fortunes of both Asia’s prime gambling hotspot and fancy timepiece-makers.
“The Macau casino stocks, which also tend to lead the sector’s performance, have outperformed in recent months, suggesting catch-up potential for luxury,” the 2013 forecast note said, though also noting that casino revenues appear to have plateaued to a more realistic level in the last several months.
“The Swiss watch manufacturers survey shows a pick-up in production in comparison to the previous year,” it also says.
Z. John Zhang, a marketing professor at The University of Pennsylvania’s Wharton School, said the growth of affordable luxuries like cosmetics, accessories and “anything the consumer might consume in public” has been particularly strong in China.
“Many Chinese households are very brand-conscious and save up to make a big statement purchase, and a luxury item is a way to make that statement,” Zhang said. “[Luxury brands] are going to ride on this new wave of Chinese consumers.”
Young Chinese consumers are particularly optimistic about their financial prospects. They prefer foreign brands and are increasingly eager to trade up to more prestigious names, according to an in-depth report Credit Suisse produced on Chinese consumers’ responses to the emerging market survey.
“With higher incomes and optimism at the young demographic, the aspirational draw of brands becomes even more prevalent,” the report says.
Customers are also growing more discerning, especially in wealthy urban hubs such as Beijing and Shanghai, where some high net worth individuals no longer see luxury as something to be flashed around like a badge of honor.
“While we think that first luxury purchases in China are still driven by the desire for social recognition, with logo items remaining important, the Chinese consumer is moving toward more sophisticated and more exclusive products,” Credit Suisse’s European luxury goods team said in a recent note.
The most desired brands by Chinese consumers include Chanel (in leather goods and perfumes), Omega (in watches), Lacoste and Burberry (in fashion) and Chow Tai Fook (in jewelry), according to the Credit Suisse luxury team’s in-depth report on the emerging market survey.
China isn’t the only country where luxury seems poised for success this year. Brazilian consumers, who especially favored the Lacoste and Calvin Klein brands, reported a particularly optimistic outlook in the emerging market survey. A higher percentage of respondents than last year said they intended to buy more high-quality leather goods, perfumes and watches in the next 12 months.