Mixture of greed and fear among merchants of glitz

Owners of Ferraris, it is said, acquire the extravagant Italian sports cars to complement existing stables of expensive vehicles. In the case of top price watches or jewellery, a first purchase can prove equally addictive.

How many Breguets are in the bank or Cartiers in the cupboard is a matter of personal choice. But the latest results from Richemont, the world’s second-biggest luxury goods group, underline the trend seen at LVMH, Swatch Group and the world’s smaller luxury goods marques: the feelgood factor is back, and big time.

Renewed confidence in Europe and North America has boosted demand in established markets. Spiralling affluence in Asia, eastern Europe and elsewhere is begetting new generations of highly brand-conscious consumers.

Aggregate data are hard to find. LVMH’s 16 per cent profits increase for 2006, announced in February, was a blunt tool in that it included big drinks and retailing businesses. Even figures from Swatch, also riding high, are somewhat distorted by its components and electronics activities. Richemont’s 24 per cent leap in operating profits for luxury goods, reported yesterday, is probably a fairer yardstick.

Statistics for Swiss watch exports, based on customs data, have also been telling. Foreign sales rose nearly 21 per cent year on year in March, the latest month available, after equally strong growth the previous year. For the first quarter of 2007 exports are up almost 19 per cent. As in 2006, the most expensive watches have been leading the way.

Inevitably, surging demand prompts the habitual mix of greed and fear among glitzy brand bosses. Initial public offerings, real or imagined, are back on the agenda as companies seek to cash in. The latest list of potential flotations includes newcomers, such as some of the independent Swiss watchmakers, alongside usual suspects such as Giorgio Armani. Unsurprisingly, private equity has also turned up, as seen in this month’s elbowing for stakes in Valentino.

But the extraordinary health of the industry is triggering caution among older hands. Neither Nick Hayek nor Johann Rupert, two luxury goods luminaries, spots significant weakness on the horizon. Swatch and Richemont bosses say that, if anything, capacity constraints, especially for their most expensive products, are their biggest current bugbear.

Seasoned executives recognise a downturn will come. Surprisingly, Richemont shares fell yesterday on concerns about China. Separately in London, Burberry’s stock took a tumble – albeit after rising by more than half in the past year.

Caution about possible hurdles ahead, rather than lack of opportunity or stratospheric prices, explains the absence of significant mergers and acquisitions activity. True, quoted luxury goods groups are returning more cash to shareholders, but many are also building reserves in expectation of that inevitable rainy day.

The consolation this time is that demand is broader based than ever before. Shanghai or Sofia’s new rich may stop shopping in the face of a global crisis. But more people in more places are richer than ever: good news for anyone peddling luxury products, whether watches, jewellery or Ferraris.

Don’t slam cabin door

One crucial outlet for luxury goods is airports. More people in aircraft – especially guilt ridden, high-earning executives – is good news for airside vendors. It is also lifeblood for airlines.

By happy coincidence, Air France-KLM, the result of the first big merger of European flag carriers, reported its annual results on Thursday as Iberia’s board met to discuss a buy-out proposed by a consortium led by Texas Pacific Group and including British Airways.

Air France-KLM, which is now the world’s largest airline by sales, demonstrated the benefits of consolidation in an expanding market with sharply higher operating profits and raised profitability targets for the next three years.

Wolfgang Mayrhuber, Lufthansa’s chief executive, has been similarly upbeat about his company’s acquisition of Swiss International Air Lines, in Europe’s second such deal. Air France-KLM has leveraged on its dominance at Paris Charles de Gaulle and Amsterdam Schiphol – two of Europe’s biggest hubs – to capture more traffic. After taking Swiss under its wing, Lufthansa has developed a three-hub strategy based on Frankfurt, Munich and Zurich.

BA’s ambitions for Iberia are much more modest – hardly surprising given the Spanish carrier’s size compared with Swiss or even KLM, and the fact that Willie Walsh, the British group’s chief executive, still has big challenges at home.

No one expects Iberia to lay out the red carpet. Its board will at the very least press for better terms. But, with consolidation in the air and the benefits so evident, Spain would be ill advised to slam the cabin door.

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