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How a pandemic, inflation, and war affects the business of luxury goods

By Jennifer Mason


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Russian money. Image by Anna Tis from Pexels

There may be little that economic sanctions can do to aid the valiant efforts of Ukrainians on the ground as they defend their country from Russia’s increasingly brutal invasion tactics. Still, the coalition of governments representing the West that includes members of NATO and the European Union are continuing to impose further economic hardship wherever it can and disrupt trade with the Russian Federation that could have long-term implications for many industries going forward.

Analyst Luca Solca from the Wall Street research and brokerage firm, Bernstein, told the BBC that luxury fashion in Russia makes up only about 2 percent of global revenues for most companies. But the Russians are a sybaritic people, dedicated luxury consumers, and valuable to businesses around the world. However, events of the war may prove doing business on that part of the continent to be untenable—especially if they lead to a severance of diplomatic relations and a reimplementation of an Iron Curtain between the East and the West. With the help of expert opinions offered in a Luxury Daily panel discussion on the matter earlier this month, here is a look at the current sanctions and how they will affect the luxury goods business in the short-term, in the long run, and compare the impacts of this tragedy to those of the pandemic.

US, UK, and EU luxury goods exports to Russia now officially banned

In the latest round of sanctions announced last week, the US, UK, and the EU committed to banning luxury goods exports to Russia from fashion to cars to watches. This comes in addition to the top Western economic powers, the Group of Seven (G7) and the EU, revoking Russia’s “most-favored-nation” trade status, which means Russia will face much higher tariffs on imports that are not already completely banned. The luxury goods export bans are intended to deprive Russian elites, as stated in the EU’s announcement on the new measures. While an exact list of brands or goods banned from export has yet to be defined, the EU has designated a minimum threshold of 300 euros, which can serve as a guideline for companies exporting clothing and accessories.

The minimum price was set with the intention of allowing the regular population of Russia to meet their basic needs, of which clothing is one. But of course many parent companies of fast fashion and off-price retailers, like TJ Maxx, to luxury brands, like Gucci, have halted business operations with Russia on their own. Fast Retailing, the Japanese retail holding company that owns Uniqlo, had originally announced on March 9 that they would continue doing business in Russia. The company’s founder, Tadashi Yanai, stated that "Clothing is a necessity of life. The people of Russia have the same right to live as we do." But after a strong backlash, the company reversed course the following day citing operational difficulties as the reason for suspending business. Fast Retailing announced a donation worth 10 million US dollars as well as clothing to the United Nations High Commissioner for Refugees (UNHCR) and included in their statement on the matter that the company’s European employees have been helping to deliver clothing to affected people fleeing from Ukraine.

Possible short-term effects from Inflation

“This conflict has ripple effects on several industries—it starts with energy,” Mickey Alam Khan, Chairman and Editor-in-Chief of Luxury Daily, led the panel discussion as moderator. Oil prices soared on Monday with Brent crude reaching 115 dollars a barrel as Europe considers matching the US in a Russian oil embargo. This contributes to inflation already heightened by supply chain issues from the pandemic and will continue to impact the discretionary spending of many consumers in the short-term as prices increase on essentials from groceries to vehicle fuel. Managing Director for Luxury and Retail at Coresight Research, a data-driven company focused on innovations in retail and technology, Marie Driscoll acknowledged, “For the near term, luxury is going to take a hit, as is everything. We came into this year—before we were concerned about Ukraine—worried about inflation and how that was impacting the consumer generally,” she noted. “Luxury brands are raising prices, prices are being raised across the board, and now you have this whammo effect of one hundred dollar oil, perhaps for three or four months, perhaps longer. If this doesn’t resolve itself within a month or two, I think that the growth we projected coming into the year is going to be muted.”

Driscoll also pointed to the collective psyche as an important factor; the tragic nature of the war and the uncertainty it breeds may create more conservative spenders. Omar Saad, a consumer and luxury analyst at Evercore ISI, the global investment banking advisory firm, was more skeptical that luxury businesses will feel any change. “European local spending—that’s probably going to be a little bit shakier near term because it’s so much closer to home there,” he said, but mentioned that if the war becomes drawn out over time, any hesitancy in the market will become more of a blip. “I think it’s too many degrees of separation to have any meaningful impact. If you look at the direct businesses of the companies that we cover—whether it’s luxury firms or sports companies like Adidas and Nike—the actual direct exposure to Ukraine and Russia is less than five percent and really closer to two or three percent at most."

Saad did note the interesting short-term development of Russians panic buying luxury goods, especially jewelry, to invest in as a safety net while their currency diminishes. “It's an easy way to capture some value of that ruble that’s already been devalued so much. Of course, that’s just the inventory that is in state there and that will get soaked up quickly. In the law of unintended consequence, luxury goods become currency.” Bulgari reported a spike in sales at their Russian stores since the start of the war, but its parent company, LVMH, eventually decided to close stores for all its brands within the country.

The Pandemic vs Sanctions

The discussion moderator, Khan, also challenged the notion that luxury goods businesses would see any adverse effects because during the pandemic when economic stresses were much more widespread, people still spent plenty of money on luxuries. “In fact, LVMH, Richemont, Kering—they posted record results in the midst of global misery,” he said.

“Luxury is the best experience when you can’t have an experience,” Driscoll explained. “I think once we got beyond those first few months of Covid, then it was like okay, what do I want to buy? There was so much money that wasn’t being spent on experiences that consumers who had a job funneled money into luxury goods—things that maybe they didn’t normally buy. The luxury shopper was there and then there were new shoppers.” The US government also distributed several stimulus checks that likely contributed to the growth in luxury purchases. “People that shouldn’t be buying 300 dollar sunglasses were all of a sudden buying 300 dollar sunglasses.”

But without stimulus checks and with high inflation, Marci Rossell, a chief economist at Luxury Portfolio International, a network of luxury real estate brokerages, argues that businesses will see that reflected in their bottom line. “The biggest impact is energy markets and commodity markets. So as those things become more expensive, that has less of an impact on the luxury buyer, but it does filter down to that aspirational buyer. If it costs you every single day ten dollars extra to fill up your gas tank over the course of a month, that's 300 dollars that you’re not spending on the expensive sunglasses.”

Long-Term effects and the China wild card

“China is an energy intensive economy and while they may be left as the only buyer of Russia’s oil and gas by the time this is all said and done, expensive energy is going to be a further drag on the Chinese economy,” Rossell continued. CNBC reported in January that mainland Chinese consumers spent almost 74 billion dollars on luxury goods from home in 2021, although that was still below pre-pandemic levels. Leather goods was the fastest-growing category, but even that wasn’t immune to a spending slump in the second half of the year from additional Covid outbreaks.

Astrid Wendlandt, a former European luxury goods reporter at Reuters and former Financial Times Moscow correspondent, spoke to the geopolitical ripple effects of Russia’s war on the Western alliance’s relationship with China—who has notably avoided using their influence so far to push for a ceasefire. “What if China uses this as an opportunity to move into Taiwan while the West is busy with Ukraine and Russia?” Wendlandt hypothesized. “Russian business is significant but really the bottom line is, they’re not the biggest spenders. The biggest spenders are the Chinese, that's really at the top of luxury goods investors minds.”

Khan noted that the Chinese are more pragmatic, have stronger economic ties with the West and may be less willing to jeopardize the stability of their economy for a Taiwan takeover. But that is all speculative. The US continues to warn China against helping Russia bypass sanctions or aid Russia militarily—any sign of which would unravel ties with Washington even more. Rossell added, “A worst case scenario is a world where a few years from now, Russia’s only partner is China, the world reestablishes that East-West divide that we’ve all forgotten about from thirty years ago. From a brand perspective, I think we have to entertain the idea that there’s a world that used to exist that we could gravitate back toward regardless of what governments do around sanctions.”

But for now, the long-term prognosis, especially for the iconic luxury fashion brands, is positive. “This industry is resilient. They’ve weathered three centuries of wars, depressions, recessions—they’ll overcome this,” Khan said. “Luxury is one of the safer long-term bets,” Saad added. “Our entire global society is designed to create wealth—war or no war. We've been through many wars. I’ve been through many wars in my career on the stock market. There’s a fixed number of luxury brands—I don’t care what they say about Chinese luxury brands—there’s just no new luxury brands and this is the entire thesis of Bernard Arnault of LVMH: Unlimited demand over time and limited supply. We know the retail experience, especially in luxury, is super important so even in an e-commerce era, in a digital era, the stores are not going away.”

But Khan ended with words of caution. “At some point, I hope this makes us think. I hate to say this, I am a diehard capitalist, but at some point you know…be careful of the deals you make. China is watching. And if China does something like this, we won’t be so upbeat about the future of luxury.”