The year 2022 was not an easy one for the global economy. The world had not had the time to recover decently from the covid crisis, and already a crisis related to the war had emerged. The collapse of supply chains, panic in the markets, and the low interest rate policy bred for years by central banks, have resulted in high inflation in difficult years. Many companies have posted or continue to post losses, and some have even collapsed. However, in spite of this situation, the largest luxury goods conglomerate seemed that it was doing as well as ever. Let's give this situation some thought and try to answer the question why this is so.
A handful of dry facts to start
LVMH is a French conglomerate with a capitalization of more than 430 billion euros. The multi-industry conglomerate supplies clothing spirits, watches, jewelry, perfumes, cosmetics and accessories. Its catalog of brands includes: Louis Vuitton, Dior or Dom Pérignon. What is supposed to unite them is their luxury and prestige. Indeed, in the vast majority of cases, the products supplied by the entities belonging to this conglomerate are top-of-the-line.
In the difficult crisis years of 2020-2022, the company's revenue was €44.6 billion, €64.2 billion and €79 billion, respectively. In turn, net profit in those years respectively was €4.7 billion, €12 billion, and €14 billion. As you can see, the company increased its turnover and profits at a dizzying pace while the world was on fire, maintaining this trend until today. In 2023, LVMH seems to continue doing very well, even though it is a year that hard times are foreseen.
Source: Tradingview
Why is this the case?
Let's zoom in on a concept that, on the surface, doesn't fit very well with the luxury goods market and the budgets of the most affluent, but nevertheless finds an answer to the question. The Rigel effect is a phenomenon described by social science, according to which, despite a decrease in the level of household income, the size of its consumption does not decrease. This might be because people easily get used to a good thing and achieving a standard of living that allows for a certain size of standard living is something they do not want to give up,even in the face of economic and life difficulties. Lowering someone's level of consumption that they have become accustomed to, is simply difficult and psychologically demanding. People are often able to sacrifice a lot to avoid it. They are ready, for example, to reduce savings or reduce their growth, to go into debt or, if the opportunity arises, to take on additional work, as long as a given standard of living is maintainable. If the deteriorated living and economic situation inducing the rygel effect persists over a long period of time, it could lead to serious undesirable consequences, especially if the maintenance of consumption levels was financed by debt.
For the wealthiest people, the realization of the rygel effect might not be a problem and might not involve any significant sacrifices. This might be because the level of current life consumption from a certain point ceases to increase in proportion to the growth of income and wealth. Over time, the richer someone gets, the greater part of the financial surplus they allocate to investments and what we could laboriously call , "durable consumption assets", such as the expensive house someone lives in, which has its capital values too. In the case of the wealthiest people, although current consumption, in general, is very high, it accounts for a small fraction of all expenditures, consuming a relatively small portion of income and assets. Difficulties caused by the crisis seem to affect the investment ventures of such people and the prosperity of their businesses, but they do not seem to be having difficulty maintaining current consumption.
Likewise, its reduction might not make a difference to what, from their perspective, is a financial problem. It could be assumed that Jeff Bezos probably doesn't have to deny himself anything of what he has on a daily basis, or make additional efforts to maintain his current standard of living, just because the value of Amazon's stock on the stock market might fall.
In this way, the luxury goods market, where such people spend their money, tends to be quite crisis-proof. It could be said that the crisis is a situation that gives an incentive to consume more in this market, because multimillionaires and billionaires, saddened by the level of prosperity of their companies, need to somehow improve their mood, and due to the fact that even in times of crisis they could afford to increase consumption, nothing seems to prevents them from taking advantage of this option. This might explain not only the lack of decline in turnover and revenue of a company like LVMH, but also the immediate part of the increases. It is possible that the assumptions made under such home-grown psychology are true and provable. The crux of the matter, however, is not the hypothetical factor that might be potentially responsible for the increase in purchases in the luxury goods market.
The point is that since the global economic crisis seems not only to contribute to a decline in luxury consumption, but also a non obstacle to its growth, they may contribute to the opposite trend.
The Snob and Veblen Effect
The effects of snobbery and Velblen are often associated with luxury goods. Both phenomena are complementary to each other. The first consists in the fact that if a certain good becomes cheaper and is consumed more widely, a certain group of consumers reduces the reporting of demand for it, because they care about the prestige of what they consume.
The second phenomenon, on the other hand, is the inverse of the first, and consists in the fact that if a good becomes more expensive and less available, a certain group of consumers, for this reason, increases the reported demand for it.
Although it is undeniable that there are individuals who behave in this way, trying to explain the situation associated with LVMH by means of these effects, seems rather breakneck for the reason that the goods supplied by this company have always belonged to the luxury catalog and this was common knowledge, there has been no change in this regard.
In this particular situation, a factor may have been at work, that since there is a crisis and the need to tighten someone's belt seems to be becoming widespread, this might be a good opportunity to demonstrate someone's social status by increasing consumption for show.
This might become more pronounced in difficult times. It should be noted, however, that the factors leading to certain economic results are many. They are components of a certain situation, and the final result is the resultant of many interacting forces. On the psychological and social level, however, the matter is very individual, and Warren Buffet, for example, despite being one of the richest people in the world, maintains a level of current consumption at the level of the average resident of the United States. An anecdote says that how much Buffet spends on food at McDonald's on his way to work depends on the economic situation and business prosperity.
Paweł Szarmach, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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