The writer is president of Rockefeller International
European markets have received a major boost from the global boom in luxury goods sales – a piece of unequivocally good news for the region. Yet this success story also raises a troubling question: has Europe become too dependent on a sector that many see as a symbol of decadence?
Compare Europe to the US, where 10 of the largest tech companies accounted for 65 percent of stock market returns over the past 12 months – which in itself is an alarming sign of industrial concentration. The similar signs of concentration are even more worrying in Europe. There, 10 of the largest luxury stocks, from LVMH to Ferrari, account for about 30 percent of returns — an unmatched share since records began.
The luxury industry, long a source of pride in Europe, has boomed over the past decade and enjoyed its best years ever during the pandemic. A record-breaking stimulus created trillions of new wealth, much of it in the hands of the very wealthy, who spend much of it on high-value goods.
As a result, Europe is finally making significant money from an industry it has dominated for centuries. Two-thirds of global luxury sales revenue flows to Europe, and now the continent has scholarship winners to show off.
Europe’s list of the top 10 companies by market capitalization, traditionally dominated by banks, utilities and industrial conglomerates, now includes four luxury names, up from zero in the early 2010s. The big luxury brands are even more profitable than the big US tech companies, with a profit of almost 25 percent of sales.
This may be a step forward for the luxury industry, but not so much for Europe. Building a knowledge-based economy on crafts dating back to the 17th century may well be a backward step at a time when Western capitalism faces weak productivity growth, rising wealth inequality and the conundrum of how to compete and coexist with China.
If it is not clear how much smartphones are driving productivity growth, we can say that French perfume and Italian handbags contribute even less. While tech tycoons are the subject of controversy in the US, luxury tycoons are the target of street protests in France. And while the West debates whether to “unsafe” its relationship with China, the European luxury sector is as dependent as ever on Chinese consumers, who now account for about a third of sales.
As American technology expanded over the past decade, so did European luxury. Since 2010, the 10 big tech companies have roughly quadrupled their share of the US stock market to nearly 25 percent. Over the same period, the top 10 luxury stocks have roughly tripled their share of European markets to nearly 15 percent, much of it in the past year.
In both luxury and technology, power is concentrated at the very top. Europe’s top brands now account for a third of global sales, compared to a quarter in 2010. Europe’s four largest luxury companies by market capitalization are all French: LVMH, L’Oréal, Hermès and Christian Dior (owned by LVMH ).
The roots of French dominance lie in a luxury ecosystem dating back to the court of Louis XIV, and a corporate heist culture that began with Bernard Arnault. After taking control of LVMH in 1989, he began building the first home of luxury brands through serial acquisitions. Rivals followed suit. The global luxury industry is increasingly based on goods that are still made by small Italian companies but sold by large French conglomerates. Gucci, Bulgari, Fendi – all Italian brands now under French ownership.
While US tech companies eclipse all rivals, the same can be said of French luxury. Among the top luxury companies, the French have three times the annual turnover of the Swiss, more than four times the Americans and Chinese and 12 times the Italians.
In April, LVMH became the first European company to pass the half-trillion dollar mark. Hermès now has margins of more than 40 percent, up from 25 percent in 2010 and even higher than Microsoft, the most profitable of the big tech companies.
One reason for such high profits is pricing power. Luxury companies serve a customer base that is becoming increasingly price insensitive. The price of a Chanel handbag has doubled to $10,000 in the past five years, much faster than the rise in general consumer price inflation over that period.
So Europe has finally found a winner, but with an asterisk. Capitalism benefits more from competition than from concentration. And given the choice between concentration in high-tech or high-luxury, the answer would be obvious. There’s something a little outdated, if not decadent, about Europe’s luxury-led model.