6. Costs equal losses.
The costs of investment - such as share dealing fees and professional management charges - can be a serious drag. But be prepared to pay for services that enhance performance. Money spent on good information is rarely wasted because good investors are informed investors.
7. Tip top tips.
Read newspapers and stockbrokers’ research for the information first, and investment recommendations second. Journalists and analysts’ key skill is information gathering and this is where they add most value. Treat tips for what they are: advice, not instructions. The position of tipsters does not guarantee the wisdom of their views and ask what axes they have to grind. Are stockbrokers independent? If tipsters are so good why are they trying to make a living telling others their secrets, rather than investing themselves? Make up your own mind and take responsibility for your decisions - better decisions lie that way.
8. Keep a distance.
Do not be too proud to recognise mistakes and learn from experience. Refrain from personalising your relationship with equities. Shares do not reciprocate affection so there is no need to invest loyalty as well as cash.
9. A taxing thought.
No tax break in the world is worth anything if the underlying investment is bum. And if an investment needs a tax incentive, does it mean it cannot justify itself on its own?
10. Rules are rubbish.
The stock market does not adhere to immutable laws of behaviour. Good rules may be contradicted by other good rules in a way which is perfectly consistent in the context of the wider picture. Investors need to be flexible in the analysis of opportunity.
‘New tech is always superseded by newer tech. Product cycles continue to shorten, and competition will remain excruciating. As in the past, today’s new tech gizmos will become tomorrow’s profitless commodities.’
Gary Shilling
Antoine Colonna
Antoine Colonna is the head of Merrill Lynch’s Luxury Goods Equity Research team. He joined Merrill Lynch in 1999 from Crédit Lyonnais, where he held a similar position for eight years. Antoine and his team were named #3 in Institutional Investor’s Global Equity Research on the sector this year and #2 for the second consecutive year as best analyst on Reuters’ European Survey on Textile & Apparel.
The luxury goods sector
Introduction
The world luxury goods market is estimated to be worth $68bn in the broad sense, including wines and spirits selling at about $20 per bottle, with the market growing at an annual rate of 8%-12%. The sector is expected to continue growing at rates in excess of GNP in most developed nations in the foreseeable future, provided that no major world conflict reduces consumer confidence and air travel.
Ready-to-wear designer clothing is the largest segment (26%), followed by Leather & Accessories (17%), Wines & Spirits (15%), Cosmetics (12%), Fragrances (12%), Watches (9%), Jewellery (5%) and Tableware (4%). Geographically, the industry is now quite well balanced between the different continents: North America 30%, Asia 36% and Europe 34%.
1. Note the strong correlation between global GDP growth and sales for the luxury goods sector.
The dynamics of the luxury goods sector are strongly correlated to the macro-economic environment. 1999 was marked by a stronger than expected rebound of Asian economies (excluding Japan) and by vigorous growth in the US. The millennium effect also boosted demand especially in segments like jewellery, watches and tableware. Equity markets exert a strong influence on the fortunes of the sector, especially in the US.
2. Value for money has always been important.
The purchase of luxury goods is often associated with the desire for higher social and/or economic status. This may well be one of the motives, but ironically customers are also motivated to buy luxury goods because they feel that they offer value for money.
Many of the brands that are seen as fashion or status icons - for example Hermes leather goods, Louis Vuitton luggage, and even Chanel’s classic designs - built their reputations by offering value for money. Their high quality seemed to justify their comparatively high price. Looking forward, consumers will continue to pay very high prices for quality and for top design, but will disregard brands that cannot fulfil these criteria.
3. Value for money is becoming more important.
Capacity to provide goods that seem to offer value for money will be a crucial factor in determining likely levels of profitability. Some segments of the industry - for example, watches and leather goods - are much more profitable than others. Because most of the established luxury brand companies are likely to move into these highly profitable areas, customers should have a plethora of choice - and will opt for the brand which seems to offer the best quality and value for money.
4. Consolidation is inevitable.
The luxury goods market is extremely fragmented and there is powerful pressure for consolidation. The biggest companies in the sector will reinforce their market share significantly in the coming years, both through organic and external growth.
Unlike other consumer goods, it is difficult - near impossible - to replicate the established success of a luxury brand, so companies that want to establish a presence in a segment quickly have little choice but to buy their way in. Vertical integration both downstream into retail and upstream into manufacturing also enables groups to capture larger margins and exercise more precise management of the brand.
5. Control over distribution is a major factor in competitive advantage.
Over the past few years, distribution control and its corollary - ‘measured product scarcity’ - have progressively emerged as the key factors for success within the industry. There is a clear correlation between the performance of the most successful brands (Vuitton, Cartier, Gucci, Prada, etc.) and the degree of control they exercise over their boutiques, stores, franchises and wholesale accounts.
The benefits of strong distribution are not only in making sure the products reach the right market, but also in protecting the value of the brand and the pricing policy.
6. Traditionally high levels of profitability may come under pressure.
One of the features that singles out the luxury goods industry from other consumer businesses is the high level of profitability that most of its segments enjoy. Over the next five years, margins could come under pressure as established companies penetrate all segments and tempt younger and less well-established companies to overspend to improve their brand awareness.
Having said that, a number of companies have scope for better margins as free cashflow is often used to buy out franchisees, and the ongoing consolidation allows multi-brand conglomerates to jump-start cross-selling initiatives. This should help margins or at least balance out the possible pressure coming from higher levels of marketing spending.
7. Japanese consumers are key.
The