14 November, 2013
We don’t make big news stating, that one foresees a stable development of the luxury market in the near future, with its’ 4-5% projected growth for 2013 and 5-6% growth for each year including 2015. Following the crisis this market turns out to be a stable and growing investment opportunity for the aspiring investor. No wonder that dramatic past few years have made more people turn their buying preferences from the lower priced items to the high quality and pricey items. Apparently they have realized that the luxury item bought today will last much longer in wearing and fashion /style qualities while a cheaper item will be out of style much faster and most likely will be worn out very fast. This is as we may say a consumer trend for the more durable clothing and accessories, illustrating their probably unconscious decision rather to invest their money in clothing than to waste them things that have a very short life span. Luxury leather goods market growth is an obvious illustration of such trend.
Interestingly enough, Asian market that has delivered a large amount of cheap goods (and some of those goods did not last longer than a day) has been gradually and steadily transforming into a largest market for luxury goods made in Europe or of European quality. Asian market is set to overgrow USA apparel market by $ 175 Billion by 2017 though that will not happen on luxury only.
Profit driven investors are looking for European quality brands with high growth potential and try to move all or part of their production line to Asia focusing on growth only. In such conditions we see some brands go into a serious reshaping of various kind, like Valentino and some other brands who have an obvious potential to get in line with Hermes and LV (who has just performed a serious creative reshaping in the company), like Salvatore Farragamo with their business minded management.
With high quality European production and deep family roots in the business, Farragamo (est. 1927) has only 25% of sales in Europe. The company that has 76.6% (2013) of it’s total sales in leather goods (including shoes) is much more focused on Asian markets where they make 38.5% (2013) of their total revenue, comparing to European share of 26.7% of total company revenue. Out of which a lion share still comes from Asia, as the European revenues are mainly produced by “luxury travelers”.
Ferragamo performs steady growth in the market with its share price raise of + 244.88% for the past two years (Nov 21, 2011 to-date). Ferragamo has a major potential for cost reduction – their labor expenses, as they have been paying the highest salaries in the industry in Europe to all their employees and have not moved production to any other cheaper labor market yet. This decision is under serious consideration in the company now.
The brands that will continue their vital development strongly focusing on organic growth should not let a good crisis go to waste. To stay competitive in the global market many European brands should reconsider some current labor trends and prices. Which is the case in Ferragamo with its current business conscious management.
Growing global population drives rapid growth of meats consumption, which in turn provides leather market with an additional opportunities for cost reduction – delivering increasing amounts of raw leather. According to the current price dynamics – this growth will finally result in the raw leather price decline. From the other side, growing especially in Asia, demand for luxury leather goods, hand bags in particular will provide the increasing demand for the company goods, providing it with the healthy growth.