CGTN Europe spoke to Luca Solca, Senior Global Luxury Goods at Bernstein.
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00:00And let's get more on this with Luca Solca, an expert on the luxury goods sector.
00:04Good to have you with us, Luca. Thank you very much for being here.
00:07So, Hermes will shift the cost of tariffs in the United States to its American consumers.
00:12Are the buyers there rich enough not to feel the pinch?
00:17Well, I think so, because to this point, the extra price increase you will need in order to equalise for the tariffs impact is very moderate.
00:27Indeed, we need to take into account the tariffs will be imposed on transfer prices from European companies to their American distribution companies.
00:37And often the transfer price is a very small fraction of the retail price.
00:42In most cases, it's the industrial cost.
00:45Say it's 20 percent of the retail prices.
00:47So a 10 percent tariff would be equalised with a mere 2 percent retail price increase.
00:54We know that in the past 50 years or so, the like-for-like price inflation of luxury goods has been between 5 and 7 percent.
01:02So it's really not very much.
01:05How damaging have tariffs been so far for the global luxury goods sector more broadly, do you think?
01:10I think that the most important risk to the luxury goods industry and to other consumer cyclical industries lies very much in the impact that you have at the second, third and fourth level from the tariffs being imposed.
01:27The fact, for example, the fact that the stock market has significantly corrected down, the fact that the dollar has weakened, all of those impacts could potentially deter consumers from spending freely.
01:42And this would translate into most luggish luxury goods spend growth or even a decline if the global recession was unlocked on the back of the tariffs being introduced or confirmed.
01:58And how has Hermes dethroned LVMH, which, of course, is the longtime leader in the luxury goods market?
02:05We're talking about market cap, make no mistake, from a revenue viewpoint and from a profit viewpoint of a major store a lot bigger than Hermes.
02:17Yes, but in market capitalization, Hermes has reason, and that is because it is trading at a significantly higher profit to earnings, price to earnings, multiple.
02:31And that is because the market rewards in this sector growth, top line growth, which has been faster in the case of Hermes relative to LVMH.
02:42And that, in order to grow or in order to expand your multiple, what you want to have is constant and predictable growth.
02:54In this case, when we look at the multiples of companies like Hermes or Ferrari, for that matter, we see that these multiples are more than twice the multiple of LVMH.
03:06And that is because, on the back of waiting lists, on the back of high desirability, their sales growth progression is very stable and very predictable.
03:16Luca Solca, thank you very much indeed for your expertise today.