Spend on premium brands to revive with vengeance in 2023

Gillian Diesen February 09, 2023 09:39

Mainland Chinese are again able to enjoy life to the full following December’s sea change in government policy towards COVID-19. This market’s spend on premium brands is expected to be back with vengeance in 2023.

The same pattern has applied in Europe and in the US in recent years – where boutiques re-opened, travel resumed and a return to events, restaurants, parties spurred sales of everything from hotel rooms to luxury apparel, spirits, and makeup. In fact, the so-called “revenge spend” post-COVID in these regions has arguably been so strong as to help offset the almost non-existent sales from a locked-down China for the bulk of 2022. As one of the industry’s most important markets, it was a surprise to the upside that premium brands continued to beat consensus figures and do so well through last year given that by December 2022, Chinese spending levels were a mere 70% of what they had been in 2019. At long last, the Chinese market is set to return with gusto. Not only does this mean resumed sales in China with its open boutiques and reasons to spend, but also a mitigation in the supply chain bottlenecks that have plagued segments such as sporting goods and cosmetics. Furthermore, the end to zero COVID heralds the return of international travel, helping to pick up lackluster spending on typically high margin travel retail (especially relevant for cosmetics) and drive new business to international hotel groups.

While this first quarter is set to be a volatile one as investors rebalance their portfolios taking profits on companies that performed well last year, we would expect to see extremely favorable comparable data vs 2022 come Q2. Some of the most exposed Chinese names in the premium brands sectors – incidentally also some of the worst performers of 2022 – have already been rallying in January. One of the largest luxury icons had its China sales exposure pre-COVID at some 40%. Its investment in its online presence during COVID, selling brands through the popular Luxury Pavilion digital platform, is likely to have super-charged its exposure. Meanwhile, renowned luxury brands, along with cosmetics, sporting goods and leisure names are broadly looking at 20-30% sales exposure in China. Select leading Chinese sportswear brands which are highly profitable and directly exposed to the Chinese domestic market and the reopening, are also worth watching.

Interestingly, EPS growth figures in 2023 seem understated as demand from Chinese consumers and the return of international tourism has barely been factored in for this year. The opportunity looks ripe when valuations of most of these stocks have come down to long term historical averages that look especially attractive when compared with the 40-50% premiums paid for some of these companies pre-COVID.

With all this said, it is important to note that this is not only the short term story of a global return to consumption, nor purely about China. Sustainability trends, fears elsewhere in the world about inflation and the strengthening reputation for premium brand products as stores of value, are arguably boosting sales worldwide. China’s reopening is certainly a strong catalyst for the investment theme of premium brands, but we must not forget the long term tailwinds feeding into the success of premium brands: the consistent premiumization of spending, major growth thanks to digital investment opening new markets of younger and more remote consumers, and strict financial discipline over COVID in which costs were rationalized and prices were increased allowing margins to remain higher for longer.

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Gillian Diesen

Senior Client Portfolio Manager, Thematic Equities, Pictet Asset Management

Hong Kong

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