Can anyone bar Europe do luxury?

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Ait's this year The luxury bosses of holiday parties are likely to be more stingy than usual when it comes to champagne. The last six months have not been great for the industry, as affluent consumers in both East and West have tempered the excesses of recent years. THE S&P. The global luxury index, which tracks industry performance, is down 9% since mid-year. Yet purveyors of splendor need not forgo revelry altogether. The global market for personal luxury items, from handbags to haute couture and watches, has grown 4% this year, consultancy Bain estimates. That's disappointing compared to 20% last year, but nothing to scoff at amid fears of a slowing global economy.

The last two decades have been remarkable for the industry. Global sales have tripled to nearly $400 billion, thanks in large part to the swelling ranks of crazy rich Asians. The biggest beneficiaries of this boom have been European companies. These account for about two-thirds of luxury sales, according to Deloitte, another consultancy, and nine of the world's ten most valuable luxury brands, according to Kantar, a market research firm. Bernard Arnault of LVMH, a European luxury goliath, is the second richest man in the world. The industry remains a rare bright spot for Europe at a time when the continent appears at risk of sliding into economic and technological irrelevance. Why has it been so immune to foreign competition?

Heritage is an explanation. European luxury companies have capitalized on the world's enduring fascination with the old continent. It is home to seven of the ten most visited countries in the world. Tourists flock to Europe's historic cities to admire its works of art, taste its local specialties and drink its fine wines; The rich and famous gather in summer for lavish parties on the Riviera. In his book “Selling Europe to the World”, business historian Pierre Yves Donzé states that the rise of European luxury is due to “the powerful appeal of an idealized way of life, combining elegance, tradition and hedonism “.

In an interview with the New York Times In 1996, Tom Ford, a famous American designer, said that Europeans, unlike his compatriots, “appreciate style.” American fashion brands have struggled to penetrate the industry's most exclusive segment. Even America's most expensive brands, like Ralph Lauren, focus on what insiders scornfully call “accessible luxury.” In Asia, local competitors have thrived especially in categories like jewelry (Chow Tai Fook in China or Titan in India) and cosmetics (Shiseido in Japan), where local tastes are more pronounced.

Europe, for its part, has established itself as the center of design and craftsmanship in the luxury sector. Three of the “big four” fashion weeks take place in European capitals. New York, an exception, has valiantly attempted to constitute a center of high-end fashion talent, with design schools rivaling those of Milan or Paris. Yet it has lost the best designers to European capitals, just as Europe has lost its technicians to Silicon Valley. According to Mr. Ford, “if I ever wanted to become a good designer, I had to leave America.”

Meeting other fashionistas isn't the only benefit offered in Europe. The continent is dotted with artisanal workshops that have met the rigorous standards of the luxury industry for decades. Hermès handbags, some of which sell for more than $10,000, are made by experienced artisans who can spend 20 hours or more on a single bag. Over the decades, the continent has developed specialized production hubs, from watchmaking in the Arc du Jura in Switzerland to shoemaking in the Veneto region of Italy, where techniques are passed down from generation to generation to through specialized schools and coveted apprenticeships.

Europe's luxury champions also deserve credit for pursuing strategies that have solidified their dominance of the sector. They have continued to acquire stakes in their suppliers, which gives them a competitive advantage through better control of production, notes Thomai Serdari of New York University's Stern Business School. In May, Chanel and Brunello Cucinelli, two luxury houses, acquired a joint 49% stake in Cariaggi Lanificio, an Italian cashmere supplier. Vertical integration in the industry dates back to alligator farms in Louisiana and sheep ranches in Australia. This trend has also extended in the other direction, to retail, with luxury companies increasingly choosing to sell directly to buyers through their own swanky stores, rather than outsourcing the customer experience to others.

All of this required a lot of capital, which partly explains the parallel trend toward horizontal integration in the industry. LVMH is now home to 75 luxury brands. Although these operate mostly autonomously, the model allows for economies of scale in areas such as marketing and back-office functions. It also gives the group the financial muscle to invest in prime real estate. In July LVMH bought the Champs Elysées building which houses its flagship Louis Vuitton store. Swatch, which owns watch brands ranging from Blancpain to Omega, also controls a portfolio of component suppliers. The conglomerate model also helps attract top talent by giving designers and artisans the opportunity to move from one brand to another, notes Stefania Savoloo of Bocconi University.

Continental Drift

Enthusiasm for horizontal integration among European luxury companies is not universal. In the early 2010s, Hermès rebuffed a takeover attempt by LVMH. He did very well on his own: his stocks outperformed LVMHThat's more than half in the last five years. Other independent luxury brands, however, have struggled to keep pace. This is particularly true for Italian companies, which represent 23% of the 100 largest luxury companies, but only 8% of their combined sales, according to Deloitte. Many of them are multi-generational family businesses that have been reluctant to partner with former rivals. If they want to maintain their position in the classiest luxury, they may have to swallow their pride.

Learn more about Schumpeter, our global trade columnist:
Stupid anti-immigration politicians are holding back globalization (December 14)
Elon Musk's messianic complex could bring him down (December 5)
Charlie Munger was much more than Warren Buffett's sidekick (November 29)

Also: If you would like to write to Schumpeter directly, email him at [email protected]. And here's an explanation of how Schumpeter's Column got its name.

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