Even though the North American economy is stagnating or slipping into a recession, some sectors of the economy believe that they are immune to any slowdown.
The luxury goods industry dismisses fears about the impact of a pending business contraction. That view is plain nonsense.
As The Economist has written, “More than any other industry, the luxury goods business needs people to feel good about spending money.” Yet, skepticism about that prevails.
The luxury goods sector has experienced extraordinarily strong demand in recent years, fueled by buyers in developing markets and the general exuberant demand from the creation (at least on paper) of new wealth in many parts of the world. Only after several years in the late 1990s did this period of strong expansion develop.
According to an industry-wide survey, the luxury goods volume climbed by nine per cent in the past year, and should increase by about the same amount in the current year. That would mean a doubling over the past decade. Can that bubbly pace be maintained?
Those in this part of the economy are optimistic, claiming that luxury goods are isolated from the overall economy. In order to continue that growth pattern, the luxury goods business has expanded its market by selling to those who are just comfortable financially, and not really rich. That makes this special market vulnerable, as their economic position obviously is somewhat precarious.
Then too, those luxury providing firms are expanding overseas, notably in Asia, based on the false belief that those regions can be decoupled from our troubles. That is another factor that adds to their jeopardy. Not only is there the currency risk in exposure to foreign markets, but many are skeptical that the quality of any production there can match the craftsmanship associated with those opulent products manufactured in North America or Western Europe. There is a great deal of concern about goods coming from China, exemplified by the frequent product recalls of their exports.
Some luxury goods makers have tried to detach themselves from the major markets by segmenting their customers selectively, with different products in different price ranges. The risks there are that a less expensive product still carrying the label of a luxury goods company will tend to demean the entire line.
Some time ago, this columnist was in Cartier, a retailer catering to the truly affluent. There a lady ordered three sterling silver tea sets, priced at more than $1,300 each. That kind of free-wheeling spending is sure to plummet. As we increasingly will feel the effects of the business decline, this industry soon will experience a more troubled era.