Premium brands poised to benefit from global reopening

May 12, 2022 10:12
Photo: Reuters

As many parts of the world reopen their borders and international air travel gradually resumes, the premium consumer sectors are expected to see strong growth momentum, driven by the pent-up demand for consumer spending including long-awaited vacations and normalized travel.

Sectors expect to enjoy the tailwind

Travel and leisure industries, including hotels and travel retail, are set to benefit from a resurgence in travel, especially international and business travel which is still slow to return in comparison to regional and leisure travel. Forwards bookings for MICE (meetings, incentives, conferences and exhibitions) have reportedly been solid and travel retail’s reprise should be accretive to the bottom line for cosmetics and spirits where margins are especially high. In turn the former return to travel, leisure and travel retail should also be positive for premium credit card brands, whose business is significantly dependent on high end travel & entertainment spending that has been relatively non-existent in recent years.

We expect the food & beverage industry to benefit the most from the reopening, as restaurants and catering outlets had more or less ceased activity in much of the world for so long. This should play into upside for on-trade spirits for example.

Europe as a region has shown strong growth in Q1 on the back of reopening trends – seen across cosmetics, hotels as well as luxury brands where Europe grew faster than the overall in each case.

Strong Q1 earnings and a positive outlook with further expansion

The premium brands delivered strong Q4 results in 2021. We have seen a polarization of consumption in the last couple of years, benefitting the luxury sector, as companies saw record sales in China and the US with strong conversion and high average selling price (ASP) more than offsetting lower traffic. We continue to see robust consumer demand for premium brands, their strong pricing power and relatively clean inventories. They are less impacted in many cases by the logistics and supply constraints plaguing other sectors, thanks to the end to end control over supply chains and local manufacturing. The pandemic has also seen rationalized cost structures and investments encouraging higher, more sustainable margins than ever, with significant investment in digital again accretive to bottom lines.

While some high-end consumer brands may experience short-term volatility due to the prolonged Covid lockdowns in China, the bellwethers of the luxury industry announced very strong Q1 results beating consensus. The US and China remain some of the strongest markets for premium brands growth in the medium term, the US, in particular, is seen to be taking centre stage in terms of growth. The US market saw an average of 30% sale growth in Q1 for some luxury conglomerates, confirming strong appetite in the US for premium brands. This growth has in part been fuelled by digital and the appetite for premium brands expanding beyond the east and west coasts but also to younger consumers and men. Meanwhile the distribution and wholesale model in the US has improved dramatically in recent years, shifting from department stores to tightly controlled own concessions and retail limiting promotions that plagues luxury brands in the US in recent years.

Further expansion for premium brands remains ripe in other emerging markets beyond China as well as new markets e.g. men for cosmetics, yoga and apparel remain ripe for expansion.

Given the stronger, more sustainable margins at hand following two years of digital investment, restructuring and continued strong demand with upside from a reopening and a return to going-out, events, travel et al, we have reason to be optimistic down the road. The key however in the current context will be monitoring consumer confidence.

Digitalization is here to stay

Digital is a structural growth driver of premium brands overall. Traditionally digital sales channels are under penetration for the luxury sector. In 2019 online sales take up only 12% of the total sales of luxury brands and it jumped to 22% in 2021.

Brands adopting efficient digital strategies both in terms of marketing and distribution such as cosmetics, sports and aspirational luxury are expected to benefit the most. Major brands have done prominent partnerships with mainstream e-commerce platforms.

Digital also played an important role in mitigating the impact of localized lockdowns, and making premium brands accessible to new groups of consumers – whether younger groups of consumers or those in lower tier Chinese cities and middle America far from the flagship boutiques of the East and West coasts. In the meantime, brands still have boutique roll-out plans. The future is clearly omnichannel – i.e. not either digital or brick and mortar – but the most successful of premium brands will no doubt be using both.

Benefiting from the premiumization trend

The 5 characteristics of a premium brand lend themselves to resilience longer term: Differentiation, Experience, Brand Integrity, Digital integration and Operational excellence (with strong pricing power, superior margins and cashflow generation) are factors contributing to the long-term and sustainable growth of these brands, benefitting from consistent re-ratings. They benefit from the premiumization among consumers around the world over offering an ecosystem of brands and products ranging from the USD 30 lipstick or small leather good through to haute couture and jewellery worth hundreds of thousands of dollars. This allows consumers to premiumize their purchases within a company’s product offering.

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Client Portfolio Manager, Thematic Equities, Pictet Asset Management