Paul Theron
Paul Theron

To my mind, “luxury” is a broad term to describe all exclusive, aspirational, and branded consumer goods and services. 
So luxury encompasses everything from a good bottle of shampoo to a Van Cleef & Arpels necklace. 

Jewellery and watches are also in there, of course. So too are fashionable clothes, expensive sporting gear, leather goods, and branded sunglasses. Motor vehicles, for sure. Oh, and speciality foodstuffs and liquor too. Also expensive make up, haircare, and skin products.

Luxury services should not be forgotten either. I’d include in my definition carefully prepared meals, guided city tours, specialised beauty treatments, and all sorts of other expensive pampering. 

As more people around the world become well off, their basic needs are taken care of. We are surrounded by cheap and plentiful consumer goods. In a world of too many choices, what the rich want now is fewer possessions, of higher quality: handmade, bespoke items that feel good, smell right, and last longer. They are travelling more, and appreciating the finer things in life. 

This phenomenon has been true of the wealthier classes in rich countries for a while, but it is also increasingly observed among the emerging middle classes in developing countries. Some of the most relentless fans of luxury are those in relatively poor societies who like to differentiate themselves through 
conspicuous consumption of expensive items. 

As an investor, it is logical to position yourself to profit from this trend. Some obvious examples for the South African (rand) investor are companies such as Richemont and Woolworths. 

Internationally, the investment choices are much wider. Companies such as LVMH, Apple, Nike, Tesla, BMW, Starbucks, Diageo, Estée Lauder, L’Oreal, and Luxottica have a combined market capitalisation of trillions of dollars. 

Not that this area of investment is without its challenges. You cannot simply buy and forget — close attention is required. Management hubris is the most common problem. Companies that expand too fast, take on too much debt,
misread fashion trends, or allow their branded goods to be too readily available may battle. For example, US handbag maker Coach ran out of steam in 2012 after making all of these mistakes at the same time.

As an investor
in luxury brands,
it’s wise to be
selective — and
stocks need to be
actively managed
to capitalise
on trends

There is a clear link between luxury goods sales and tourism. When travelling, people spend much more. They have money to blow, plus they may seek to buy in regions with lower duties. About 30% of all luxury good sales occur when people are travelling. 

Sadly, tourism activity has been negatively affected by recent terrorist attacks, especially in major shopping 
destination cites such as Paris. Hong Kong, which is a major Asian luxury good sales hub, has also had a poor few years 
due to political instability. For some reason, mainland China has fared better. 

Design trends change. For example, the traditional watch market currently looks weak. While Asian buyers still swarm to complex mechanical timepieces, the trend elsewhere seems to be towards rechargeable smartwatches, such as the Apple Watch.  

Speaking of smartwatches, the category of smart home appliances seems set to boom. Keep an eye on Google’s Nest devices, or Amazon’s Echo. Your fridge wants to be connected to the internet.  

Companies to watch are those that embrace new markets and new sales channels. Social media and mobile applications are being used by companies to build brand loyalty and in-store experiences. Some of them are marketing new items through Facebook, Instagram, Snapchat, and Twitter. The really 
clever ones are crowdsourcing fashion trends. 

Big luxury goods companies want to get even bigger. Remember that sizeable companies these days essentially have access to limitless amounts of debt at ultra-low interest rates. LVMH, for example, might snap up the likes of Tod’s or Prada. 

In my view, luxury goods companies focused on a traditional sedentary, bacchanal lifestyle will face headwinds. Gluttony, overeating, and smoking fat cigars are out, but active wear and fresh organic foodstuff are in. Mind you, perhaps I’m getting ahead of myself? 

Just as the crafty shopper needs to choose a few luxury brands to focus on, the luxury investor needs to be selective. You can’t own everything. My favourites are Apple, L’Oreal, Richemont, and Nike (disclosure: I own all of these). 

Apple is already the world’s most valuable company, but its still going higher. Its dominant smartphone and smartwatch products are about to be refreshed, and its global design, manufacturing, and distribution systems are unrivalled.

L’Oreal is the world leader in haircare, cosmetics, lipsticks, and perfumes. Already a powerhouse in Europe and the US, its potential to grow in emerging markets is huge. 

Richemont is scrambling to slim down its traditional watch business in response to weak demand, so its share price is down. However, its jewellery business is second to none (Cartier is the world’s leading jewellery brand). 

Nike is the world’s largest activewear company. It sits squarely astride the huge surge in the number of people running or going to yoga and fitness classes. There is also trend towards “athleisure” or “sportsluxe” in fashion — people wearing sports gear all day.

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