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- [00:00]
A
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,
- [00:26]
B
Pushkin. 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 and Pushkin. I'm Katie Martin, a markets columnist. Trapped in the grey basement of the FT in rainy London. Joining me from very fantasy 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 and oh, it's incredible.
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A
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.
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B
Yes, they're called Europeans because this is so this is, this is the FT's business of luxury Summit. Right. It's like it's a fixture for us.
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A
Yeah, I love that for you 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 were 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.
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B
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 harum scarum move higher in yields and borrowing costs and in fact, it's so harum 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.
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A
So are we going to fire Dara, do you think, for this? Making a mistake on its first podcast off his head, I say I think he gets off light if we just fire him.
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B
Poor Dara.
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A
I just said that cause I hope his mother's listening. I wanted to give her a little scare.
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B
Just as I was coming here 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, oh, the totally mainstream media is on this now. That is not a good sign.
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A
Yeah, it's breaking through to the normals. And another person who, 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, 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 at its peak, which was maybe three years ago. And I'll talk about why it peaked there and why it's fallen off of it since. This was an industry widely, including fine dining, champagne, hotels, clothes, so forth. 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.
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B
Yeah, so 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, 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 Hermes and Kering, obviously, where I do my shopping.
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A
I know every week goes without saying, but very familiar.
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B
But like, you know, how, how important are these companies?
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A
Well, LVMH briefly was the largest company by market cap in Europe. You know, it was the top of the Stoxx 600 index and that is, you know, that has Louis Vuitton and a ton of other brands in a conglomerate.
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B
And do they do Moet and Hennessy? They do champagne, right, yeah, indeed.
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A
And the. One of the scions, is that how you pronounce that? Skyen. Scion.
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B
Scions.
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A
Yeah, yeah, 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, we'd all been locked up in our houses not spending money 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 spent 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 honestly, Katie, the answer you would get is there is no limit.
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B
Wow.
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And in fact they would say things like, we're worried we're not pushing prices up fast enough. Well, fast forward three years, it turns out they really raised prices way too aggressively. It pissed off customers.
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B
Rich people, man, they like, they really take it hard.
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A
Not only have they alienated their least affluent customers, 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 number five or your Zegna suit or your 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 verbain this morning, industry growth is zero.
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B
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, but I was just looking before I came down here at like the, I thought, God, you know, Internet, tell me, tell me how much an expensive handbag costs. And I was looking at some Fendi handbags. You can spend 2000, 3000, $5000 on these things every day of the week. They don't seem cheap to me.
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A
And the three $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 at its highest echelons and its most entry level products. This is about emotion and feeling and storytelling.
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B
They've really done the sales pitch on you, Heywood.
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A
Well, no, but I think the point I'm trying to make is that we all indulge in this stuff in different ways when we buy an expensive ticket to the opera or we take a drink trip to some fancy location with our family. 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.
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B
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 $10,000 handbags. So like, how does this even work as a business model? I don't get it.
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A
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 of their business or a consultant showing a slide of the industry, and the slide would say 2% of the customers are buying 60% of this 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? Because you know, those customers aren't always there, you know, you won't always be cool with them. And 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 cost, but it's an expensive scarf. But it's a scarf and it's something fancy you can buy for your mother at Christmas, you know, 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. Right? And that's the aspirational part of the market. 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. Right? 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 what they're trying to have is mass exclusivity, which is a contradiction in terms, but somehow they have to square that circle in some way and it's very interesting to see them do it.
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B
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 7 year old kids are all clutching a $20,000 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?
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A
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.
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B
It's none of their business.
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A
Right.
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B
You sell me a watch, I can do it with you.
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A
I can do whatever I want with it. 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. The second thing, and this was something I heard from someone a few days ago, actually, from someone from Richemont, or about Richemont, I should say. Richemont is one of the big conglomerates. They specialize in jewelry. And analysts covering Richemont made the following point to me. As we've discussed on the show, the price of gold has gone absolutely bananas. And Richemont 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.
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B
Yeah, there's no sales.
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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 2850 in dollars. That's $2850. That's a raincoat, ladies and gentlemen. But you can't just say, oh, we'll. 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. If you see what I mean.
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B
Old arbitrage trade. By buying Richemont jewelry.
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A
I don't know if it's enough of an arbitrage and then melting it down.
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B
Yeah, I mean, I guess if you've got time on your hands and a smelter, that's the thing that, that might work. But so, but so they, they want to control how these things move around after people buy them. It's like, it is super interesting. You know, that sort of doesn't happen with normal people's.
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A
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 too bad at this one, every individual company says, boy, the industry is in trouble, but we're doing fine. Right? So, so you kind of have to sort through, you have to, you know, 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.
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B
So is that part of how they, 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?
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A
Yeah, it has to. 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.
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B
European luxury is basically a China trade.
- [18:19]
A
It was for a long time. 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 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 unemployment is not what it was. And the politics changed in China, so it no longer became cool to bling around all over the place. 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, 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 DePrizio, who spoke this morning, said this is something that is growing all over the world, is that people want local stuff. Right. 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.
- [20:01]
B
You touched on this, but this is the other, like, really big obsession in luxury, isn't it? Is, is counterfeits.
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A
Yes.
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B
Like some of, 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 just a running battle?
- [20:19]
A
It is, it is a running battle. And, you know, they're trying to apply technology to it. So each bag is marked with a little tag. 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, 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. The, 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.
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B
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?
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A
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 a lot of weird stuff happened. A lot of weird stuff 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.
- [22:43]
B
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 pretense going for.
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A
I think they've seen through me already. Katie.
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B
The game is up. Speaking of which, we're gonna be back in just one second with Longshot.
- [23:14]
A
From globalization to innovation sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle. To further inform your view, listen to the Flip side on your favorite platform.
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B
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 you saying?
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A
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.
- [24:03]
B
What a buzzkill.
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A
It is a huge buzzkill. But let me say this. We live in this world where the politics doesn't really work and we all feel kind of stuck as political beings. And I feel like the way you get through those moments of stuckness in politics and the life of nations is you have a crisis and things change on the other side. So I'm going to go long whatever happens. Not next, but next after next. Right? I'm long. I'm sure the crisis will be awful, but the renewal will be great. So 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.
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B
Okay. It's a voice of hope, sort of. I am sure. It's exam season in the uk. The teenagers 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.
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A
I'm sure your kids are going to do great. Katie, God willing, we may or may not be back in your feed on Thursday.
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B
Depending on 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 Bryant Urstadt. 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 unhedged offer I'm Katie Martin. Thanks for listening.