Luxury during wartime

0:00Katie Martin: Bull or bear? Trade or tariff? Future or fad? There's more than one side to every story. With the Flipside podcast from Barclays Investment Bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flipside on your favorite platform.

0:25Pushkin.

0:28Rob Armstrong: that rob armstrong has a tough life a few weeks ago he and i chatted on this very pod as he hobnobbed with energy traders on the shores of lake geneva today listeners i must inform you that he's on the shores of the adriatic in italy talking about the business of luxury yes people it's another hardship assignment for the big guy why is this a thing you may be asking Don't we have important things to worry about in the world? Today on the show, why you do actually need to think about$5 ,000 handbags while the world is burning. This is Unhedged, the markets and finance podcast. Shush! From the Financial Times, I'm Pushkin.

1:13Rob Armstrong: I'm Katie Martin, a markets columnist trapped in the grey basement of the FT in rainy London. Joining me from very fancy Puglia, Italy, is Mr. Robert Armstrong, putting in the hard yards with the high fashion set. Rob, you know, set the scene for me here. Are you, like, surrounded by Anna Winters and Derek Zoolanders and air kissing?

1:37Katie Martin: Oh, it's incredible. And I feel slightly like the ogre in the land of the elves. You know, I consider myself a good dresser and a reasonably well-groomed man. But I'm here mixing with people who really dress well and are really well put together. And I'm kind of like the gross American. Yes, they're called Europeans.

1:59Rob Armstrong: Because this is the FT's Business of Luxury Summit, right? It's like it's a fixture for us. Yeah. I love that for you.

2:09Katie Martin: It's a fixture. It's an important conference for us. And, you know, to your point about the world being on fire, and we're here talking about how to sell handbags. You know, whatever you feel about these products, whether those be handbags or luxury hotels or fancy wine, it's a very important industry, especially for Europe.

2:28Rob Armstrong: But, you know, meanwhile, while you're thinking about$850 t-shirts, the world is kind of on fire, right? The bond market is having a horrible time. We've been talking about that a bit on the pod recently. Rob, you and I were talking to Dara, our new colleague on the newsletter about this the other day. And it is a pretty kind of harem-scarum move higher in yields and borrowing costs. And in fact, it's so harem-scarum and exciting that Dara misspoke and said the Bank of England rate is 4.25%. It's only in fact 3.75%. But such is the level of lunacy going on in bond markets at the moment that people are getting ahead of themselves.

3:06Katie Martin: So are we going to fire Dara, do you think, for making a mistake on his first podcast? Off his head, I say. I think he gets off light if we just fire him. poor dara i just said that because i hope his mother's listening i wanted to see a little scare

3:22Rob Armstrong: just as i was coming here to to record this i walked past a tv screen in the newsroom and it was a bbc tv screen and it was saying bonds fall on inflation fears and i thought uh-oh yeah like the totally mainstream media is on this now that is not a good sign yeah it's breaking

3:40Katie Martin: through to the normals. And another person who has noticed that the bond market is in a tiny bit of trouble is Mr. Stock Market, which on Friday looked at 30-year yields rising and inflation expectations rising and oil prices ticking up. And it took a bit of a fall. And very importantly, the heroes of the stock market recently, meaning American AI-associated tech stocks, took it pretty hard. So that is why I had to run to Southern Italy to sit by the pool and discuss how to sell champagne to millionaires, which is how any normal person would respond to this kind of situation. And I will say, let me say in all seriousness, however trivial you might think selling baubles to the wealthy is, this is a very important industry for Europe.

4:33Katie Martin: At its peak, which was maybe three years ago and i'll talk about why it peaked there and why it's fallen off a bit since this was an industry you know widely including you know fine dining champagne hotels clothes so forth you know it's a 1.5 trillion industry that is led by europe and there just aren't that many industries that big where europe is the undisputed champion and this is one of them.

4:59Rob Armstrong: Yeah, so, you know, the US is big tech. US does big tech incredibly well. And you can talk about whether it's a good idea that the rest of the world has just absorbed US technology and absorbed this, you know, hegemonic power without question. That's a whole other thing. But Europe is really good at luxury, right? Some of these companies are like monsters. You know, we're talking like LVMH and Richemont and Emers and Caring. Obviously where I do my shopping.

5:26Katie Martin: I know, yeah.

5:27Rob Armstrong: goes without saying but very familiar but like you know how how important are these companies

5:32Katie Martin: well lvmh briefly was the largest company by market cap in europe you know it was the top of the stock 600 index and that is you know uh that has louis vuitton and a ton of other brands

5:45Rob Armstrong: in a conglomerate and do they do moette and hennessy they do the champagne right indeed Indeed.

5:51Katie Martin: And the one of the scions, is that how we pronounce that? Skyen?

5:58Rob Armstrong: Scions. Yeah, yeah.

5:59Katie Martin: Scion. Yeah. Anyway, one of the members of the family, Delphine Arnault, is speaking this afternoon. After I'm done talking to you, I will go listen to her talk about her family's business, which is LVMH, which is a huge business. But a bit of the interesting story here is, you know, I've been coming to this conference for four or five years every year. and I sort of do the economics talk with Martin Wolf and I interview people and et cetera, et cetera. Three years ago, when we were in Monaco, naturally, it was a wild kind of post-COVID luxury boom. We'd all been locked up in our houses, not spending money.

6:36Katie Martin: And then suddenly they let us all out and we had not spent all this money. So we'd all saved it up. And collectively as a world, we spend it on fancy stuff. and, you know, the big companies in the luxury industry were growing at like 30 % revenues, you know, it was on a tear. And I would be at that conference in Monaco and you would ask a company, how high do you think you can push your prices? And the, honestly, Katie, the answer you would get is there is no limit. And in fact, they would say things like, we're worried we're not pushing prices up fast enough. Well, fast forward three years, they were, it turns out they really raised prices way too aggressively.

7:25Katie Martin: It pissed off customers.

7:29Rob Armstrong: It pissed off rich people, man. They really take it hard. Not only have they alienated their least affluent customers,

7:39Katie Martin: the merely well-off. They've even managed to piss off the hyper-rich. You know, prices, broadly speaking, before the pandemic to after the pandemic, plus 50%, 60%, even more in some cases, for whatever, you know, your little bottle of Chanel No. 5s or your Xenia suit or your... or think of what you will. And this has really made people quite angry. And as a result, the industry growth now, 2026, as we heard from a consultant who studies the industry this morning, industry growth is zero.

8:19Rob Armstrong: So this is surprising to me because, well, I kind of don't get the economics of luxury anyway. Maybe we can talk about that in a sec. But I was just looking before I came down here at like the, I thought, God, you know, internet, tell me how much an expensive handbag costs. And I was looking at some Fendi handbags. You can spend$2 ,000,$3 ,000,$5 ,000 on these things every day of the week. They don't seem cheap to me.

8:44Katie Martin: And the$2 ,000 handbag is, by the standards of this industry, that is an entry-level handbag, right? You know what I mean? I mean, if you're talking about a top-of-the-line Hermes handbag, when you can get it, which you might not be able to at all, you know, you're talking about$20 ,000 and up for some of these things. And, you know, this, you know, whatever moral judgment you want to make on buying one of those versus, you know, feeding a family in a poor country for the rest of their lives, I'm totally open to those points. All I would say in response is this is a dream-making industry. you know, at its highest echelons and its most entry-level products.

9:26Katie Martin: This is about emotion and feeling and storytelling, right? And we all spend...

9:32Rob Armstrong: They've really done the sales pitch on you, Hayward. Well, you know, I know, but I think like, you know,

9:36Katie Martin: the point I'm trying to make is that we all indulge in this stuff in different ways, in different... When we buy an expensive ticket to the opera or we take a trip to some fancy location with our family, you know, and this is the extreme end. And that has its pluses and minuses. But they have to sell a story because the best businesses in this industry, the gross margin, which is the margin of what it costs to make that bag versus the bag, we're talking about a 65 % gross margin. So the item itself is marked up three times.

10:10Rob Armstrong: that's the tension at the heart of this whole industry right is that they need to maintain this exclusivity so they need for these things to be super expensive and there is an element whereby you know people seek out expensive products it's a status symbol and all that sort of thing versus like scale you know you've got to sell enough of these things to make it make sense you don't want to be left with a warehouse full of ten thousand dollar handbags so like how does this even work as a business model? I don't get it.

10:41Katie Martin: Well, one of the challenges is you have to price under the demand curve. Let me preface this by going back to three years ago. Three years ago, the industry thought, you know what, there's enough super rich people that we can just serve them. So you talk to someone who would show you a slide, you know, of their business or a consultant showing a slide of the industry. And the slide would say, you know, 2 % of the customers are buying 60 % of the stuff from the luxury companies. And why don't you just spend all your time selling to those 2 % and everybody else can kind of bugger off. Right. And this turned out for reasons you just explained, this turned out to be bad advice, right?

11:24Katie Martin: Because, you know, those customers aren't always there. You know, they, you won't always be cool with them. And you need, you need what an entry-level customer, which is still buying something very expensive. But let's talk about, say, a Burberry scarf. I don't know what one of those costs, but it's an expensive scarf. But it's a scarf and it's something fancy you can buy for your mother at Christmas. And that is what they used to call in this industry an aspirational purchase, which is like something really fancy for a big day for somebody who's buying who is not dead rich. And that's the aspirational part of the market.

12:01Katie Martin: And again, for a while, the industry thought aspirational. Ew. That sounds like people who work. But they have subsequently learned that having an aspirational customer is quite important, not least because the aspirational customer, if things go well for them, becomes a high-end customer at some point. So this is a very tricky balance for them to maintain, And it's both a pricing challenge and it's a product design challenge. Whereas how can we have something that a normal, a vaguely normal person can aspire to owning while keeping our brand very elite? So I make the joke that they're what they're trying to have is mass exclusivity, which is a contradiction in terms.

12:50Katie Martin: But somehow they have to they have to square that circle in some way. And it's very interesting to see them do it.

12:56Rob Armstrong: If I could just take a tiny bit of a tangent here, like luxury goods were what people used to move illicit money around the world before crypto existed. Right. So like you could, you know, you're traveling with your family. You know, all of your like seven year old kids are all clutching a twenty thousand dollar handbag. You move it across borders. Hey, presto, the money has moved borders. I know that's a crude generalization, but is the industry aware? What does it say about that as a thing?

13:30Katie Martin: Well, one thing that the industry is very preoccupied with is what happens to their products when they leave the company's hands. Because when you're in the magic business, you want to make sure that you are in control of the magic. So they're very, they were very worried two years ago, and now they're very much trying to figure out how to control the secondary market for their watches and handbags and whatever.

13:57Rob Armstrong: It's none of their business, right? You sell me a watch, I can do whatever I want with it. I can do whatever I want with it.

14:01Katie Martin: But they want to sell you a service where they authorize the article as genuine, where they maintain it for you in a certain way. And they just don't, they don't like the idea about these objects running around loose. And I'm sure that one of the concerns they have is that these objects will have criminal uses. Interestingly, in this context, this may or may not be related, is that the category that has held up well in the last couple of years when a lot of the luxury business has really been struggling is jewelry. and part of that is people think it is a store of value the kind of thing where if things go the wrong direction for you it retains its resale value uh the second thing and this was something i heard from someone a few days ago actually from someone from richemann or about richemann i should say richemann is one of the big conglomerates they specialize in jewelry and analysts covering richmond made the following point to me as we've discussed on the show the price of gold has gone absolutely bananas and richmond can't actually price its jewelry in lockstep with the price of gold as it goes up because you can't bring the prices down if the price of gold were to fall because one of the most interesting things about this industry is this is an industry where you cannot cut prices.

15:28Rob Armstrong: Yeah, there's no sales.

15:30Katie Martin: There's no sales because you're betraying the customer who paid a huge amount of money for it. You're diluting the brand. So one struggle the industry is having right now is once the price is high, you're stuck there. You can't be like, oh boy, we overdid it. I guess the Burberry raincoat, Burberry raincoat now costs$28.50. dollars. That's$2 ,850. That's a raincoat, ladies and gentlemen. But you can't just say, oh, we'll bring the raincoats down to$2 ,400 because then everybody who paid$2 ,800 is mad at you, right? But anyway, in the case of gold, the fact that Richemont has to be careful about increasing the prices of its jewelry means they've actually remained reasonably priced relative to the price of the gold in them.

16:14Katie Martin: If you see what I mean.

16:15Rob Armstrong: It's called arbitrage trade by buying Richemont jewelry.

16:20Katie Martin: I don't know if it's enough of an arbitrage. And then melting it down.

16:24Rob Armstrong: Yeah. I mean, I guess if you've got time on your hands and a smelter, that's a thing that might work. But so they want to control how these things move around after people buy them. Yes. It is super interesting. You know, that sort of doesn't happen with normal people's.

16:40Katie Martin: I mean, this is not rice we're talking about or even, you know, normal things that normal people buy like tires for their cars. Again, a good company here controls the narrative because that's where the value comes from. And, you know, you know, at any industry conferences, it's true, but at this one, every individual company says, boy, the industry is in trouble, but we're doing fine. Right. So you kind of have to sort through, you have to read the code a little bit of what these CEOs and CFOs are saying about their business. But one thing they've said is, a little bit, we got away as an industry from quality, where if you're going to sell something for a massive price, you better back it up with incredible quality and an incredible story about that quality.

17:33Rob Armstrong: So is that part of how they fight back from this period of declining sales growth and against, fight back from this period of pissing all their customers off? Is it like really focus on the quality?

17:45Katie Martin: Yeah, the quality has to be better. And, you know, you have to have better service and whatever, because you can't bring the prices down, basically. So you have no choice but to bring quality up to try to bring people back. Another interesting part of this story that is important to the industry struggles is that the key growth market until three or four years ago, maybe even three years ago, was China, where Chinese consumers…

18:15Rob Armstrong: European luxury is basically a China trade. It was for a long time.

18:19Katie Martin: It was for a long time. It's not anymore. And there's two reasons for that. newly wealthy Chinese consumers are very interested in these luxury items, whether they're, you know, handbags, wine, luxury vacations, stays in luxury hotels, et cetera, et cetera. Two things happen. One, Chinese real estate bubble pops, partly on purpose. Partly the government popped it on purpose. Partly it was going to happen eventually. So the economy is really not what it was. The level of employment is not what it was. And the politics changed in China. So it no longer became cool to bling around all over the place.

18:56Katie Martin: That became politically incorrect in the original sense of that phrase to show off in a certain way. And there are now Chinese luxury brands. And it is much more politically correct to shop at one of those shops. and apparently I have not been to Shanghai to where these brands are sold, but I've heard they make beautiful stuff. And it's not like these are Chinese companies that make knockoffs or imitations or something second rate. These are really good companies. And one of the puzzles, the industry, and this woman from Bain, who's considered one of the great consultants for the industry, Claudia DiPrizio, who spoke this morning said, this is something that is growing all over the world is that people want local stuff right there that the nationalism we talk about in politics appears in consumption basically and so it's not going to be in the future it might not all be about made in france made in italy made in the uk it's like how do you get you know local consumers the best of their local you know whatever it is you touched on this but this is the other

20:02Rob Armstrong: like really big obsession in luxury isn't it is is counterfeits yes like some of the some of them like you really really need to know what you're looking for to spot the difference here like does does the industry feel like it's getting ahead of that whole thing at all or is it still

20:18Katie Martin: just a running battle it is it is a running battle and uh you know they're trying to apply technology to it so each bag is marked with a little tag uh maybe this tag here's a use for crypto technology for you. Each tag is linked to a unique place on a blockchain ledger, right? And with the identifying information and, you know, so you try to track each one, you try to know the customer who bought it pretty well, and you can chase it down. I mean, the top end of this market, of course, is fine art. And it's exactly a parallel problem. everybody gets very embarrassed when somebody has bought the picasso and it turns out to be a very clever fake uh the buyer's embarrassed the seller's embarrassed the auction house is embarrassed so yeah and the response of the fine art industry and the luxury industry is not to shout from rooftops that everybody involved has been duped let me just put it that way so it's hard to know how big a problem it has remained because the companies do not love talking about it.

21:27Rob Armstrong: Yeah, yeah. But broadly, would you say the atmosphere at this event out there in Puglia, is it pretty good? Are the companies feeling good about being able to turn some of their frowns upside down? Or is it kind of, lads, we're in trouble here?

21:39Katie Martin: I think the atmosphere is, we have a business that has had one very bad year, there is signs of stability. You know, we're not shrinking. And but there is a we have to give this a really serious think vibe here that, you know, people thought and this happens to every industry, Katie, in the crazy post pandemic boom, you know, people get weird stuff.

22:07Rob Armstrong: A lot of weird stuff

22:08Katie Martin: happened. And a lot of companies were like, maybe the world is just like this now. Right. Maybe our sales just grow 10 % a year. I mean, an interesting analog to this is the consumer goods industry. It was like, you know, the people who make Oreos and Coca-Cola were like, maybe we can just raise prices 10 % a year and that'll be fine. You know, it wasn't as big, the price rises weren't as big as they were in luxury, but they were big. And then at some point the consumer rebels, right? And so the issue is, you know, how to manage a consumer rebellion and get back to where you were.

22:42Rob Armstrong: yeah sounds like a very fun scene rob thank you for your service good luck masquerading as a glamorous person while you're out there i'm interested to see how long you can keep this

22:52Katie Martin: pretense going for i think they've seen through me already katie the game is up speaking of which

22:59Rob Armstrong: we're gonna be back in just one second with long shot

23:12Katie Martin: bull or bear trade or tariff future or fad there's more than one side to every story with the flip side podcast from barclays investment bank you'll hear two research analysts having a provocative debate on hot topics in business and markets listen to the flip side on your favorite platform

23:33Rob Armstrong: okie dokie it is time for long short that part of the show where we go long a thing we love or short a thing we hate. Rob, over there in the lap of luxury, what are you saying?

23:45Katie Martin: What I was thinking about this morning as I was reading our newspaper and thinking about there might be a proper rates crisis coming, a proper inflation slash higher rates crisis.

23:56Rob Armstrong: What a buzzkill.

23:57Katie Martin: It is a huge buzzkill. But let me say this. We live in this world where the politics doesn't really work and we're all we all feel kind of stuck uh as political beings and i feel like the way you get through those moments of stuckness in politics and in the life of nations is you have a crisis and things change on the other side so i'm gonna go long whatever happens not next but next after next right i'm long the cry i'm sure the crisis will be awful but the renewal will be great so uh that's what i'm long i don't know how long that's going to take but i'm there for it when it happens okay it's a voice of hope sort of i am sure it's exam season in the uk the teenagers

24:45Rob Armstrong: of the uk are going through exams it's so bad and miserable and i'm so over it and it's only just started and it's all hell in the martin household and in many other households around the country So if you are a fellow parent of a young person doing big exams, peace out. It is bad. I'm sure your kids are going to do great, Katie. God willing.

25:11Katie Martin: We may or may not be back in your feed on Thursday.

25:15Rob Armstrong: Depending on the meltdowns we are dealing with in our household, we will be back in your ears on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.