Luxury groups look deeper into clients’ desires

Listen to this article

00:00
00:00

Britain, a land that has long championed mass retailing, has emerged as Europe’s leading lover of luxury. In contrast, France, which is the cradle of the luxury goods industry and home to the sectors’ two largest global conglomerates, is a laggard when it comes to spending on expensive brands.

The first results of the industry’s new monitor, the World Luxury Tracking survey, show that of all people in Europe the British appreciate luxury goods the most, followed closely by the Spaniards and the Germans, with the French bringing up the rear.

After years of stunning growth, the luxury industry has decided to track its consumers more closely. It is worried about the effects of a weak dollar and yen on spending patterns around the world. Yesterday Lehman Brothers cut its rating on the sector from “positive” to “neutral”, in large part because of the risk that unfavourable foreign exchange conditions will continue next year. Indeed, the euro this week has hit new highs against both the dollar and the yen.

This is not the first time the industry has faced pressure from the dollar or yen. But increasing prices to offset currency fluctuations, which has succeeded in the past, clearly has a limit. Hermès, for example, recently warned of the impact the high euro was having on its Japanese business.

In turn, this trend has made it all the more important for luxury brands to understand why people are prepared to keep spending so much on their products. It seems that self-indulgence and self-reward are the biggest incentives. But it also seems that consumers are now living more for the moment rather than putting off spending on personal pleasures.

According to the Ipsos polling group, the September 11 terror attacks on New York and Washington created “a sense of urgency that only the moment counts”. In other words, luxury goods companies have to entice their customers with a much broader range of “dream” products far more quickly than in the past. They also face increasing competition from other forms of luxuries such as hotels, lifestyle holidays and tailored services that all respond to this need for a little bit of personal spoiling.

Then there are different cultural aspirations. The Chinese, for example, hanker after the American, not the South Korean or Japanese, lifestyle. Russians look to Europe rather than America. As for Europeans, many have still not altogether lost their reluctance to flaunt wealth. The Spanish, however, revel in the “show off” factor, according to the survey.

High-rollers in the red

Most companies would be crowing about a windfall that could add a fifth to forecast full-year profits. Not Ladbrokes – and, more surprisingly, not Ladbrokes’ shareholders.

They reacted to yesterday’s news that Europe’s biggest bookmaker is to make an extra £45m in operating profit from telephone betting by marking the shares down in morning trading.

Talk about looking a racehorse in the mouth.

Ladbrokes’ muted reaction is understandable. The big profit came from a significant increase in betting activity by high-rollers, those wealthy individuals whom gaming companies cultivate and coddle.

Casinos do this by laying on extras, right up to private jets to spirit big spenders to and from the gaming tables.

In telephone betting, the equivalent is a hotline to your own personal bookie and the implicit guarantee that a seven-figure wager will be taken without demur.

The additional £45m coming into Ladbrokes, on top of the £16m made in telephone betting in the first half last year, means a few big clients racked up huge losses on some recent big sporting events – probably including Britain’s prestige flat-race meetings at Ascot and Epsom, home of the Derby.

No wonder Ladbrokes is coy about the details. For a bookmaker to shout about its good fortune would be akin to a funeral director publicly celebrating a pandemic – worse, in fact, because undertakers don’t have to worry about discouraging repeat business.

That is another reason not to extrapolate from the exceptional first-half profits. This income is volatile (Ladbrokes prefers the word “unpredictable”), and Ladbrokes’ more dependable retail business remains sluggish.

As recently as May the group had guided investors to expect softer profits from telephone betting, following a decline in high-roller activity in the first four months of the year. So the shares really deserved more of a bounce yesterday.

But assuming the rich, like ordinary folk, pull in their horns after heavy losses, shareholders are right to conclude that this bonus is unlikely to be repeated.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.