With visitors heading to Paris for this summer’s Olympics, which French companies stand to benefit? Many look to France’s luxury powerhouses – LVMH, Hermes, Cartier, etc. But contrary to what you might expect, the overall effect of hosting the Olympics could be neutral or even negative for luxury goods demand.
Some gains may accrue from increased customer loyalty and long-term goodwill, on the part of those treated to the lavish hospitality and events, although this is hard to quantify.
Air France recently issued a profit warning, citing reduced numbers of flyers into Paris during the summer. In terms of visitors, there may well be a crowding out effect, whereby the headline number of ‘Olympic visitors’ doesn’t reflect the net number, or those who choose not to travel to Paris.
Moreover, the target audience for the Olympics skews lower down the income distribution in comparison with higher-end consumers who would be expected to spend the most on luxury products. They will likely skip the traffic and the crowds all together, and potentially shop instead on holiday in other countries.
On top of this, given increased hotel prices and flight costs, those who do travel have less scope for goods shopping – particularly high-end goods.
Where Chinese tourists were a significant factor in luxury goods demand in the European countries they visited pre-Covid, this has now changed. While the numbers of Chinese holidaying abroad have risen significantly since the end of Covid restrictions, many are choosing Japan now, given the proximity and extreme weakness of the yen.
Organised Chinese tour groups also tend to visit Europe to travel to more than one destination; if a key city like Paris is deemed less attractive, then the whole trip may be cancelled.
Furthermore, the 80/20 shift that used to exist between external luxury purchases and domestic ones has now swapped, such that 80% of Chinese luxury purchases are now domestic. Therefore, any significant gains to Paris-based luxury houses from Chinese buyers attending the Olympics is unlikely.
Add to this weaker than normal French domestic demand – with consumers staying away from Paris due to traffic, travel restrictions, crowds and higher than normal prices for experiences and accommodation, and there is a weaker short-term picture for French luxury businesses.
Events and sponsorship may have some longer-term intangible benefits. LVMH is one of the premium sponsors of the Olympics and is hosting a variety of events and exhibitions in the run up to and during the games.
Italian luxury names could be relative beneficiaries from these dynamics, with more travellers heading to Italy instead of France. Italy also recently lowered its tax-free shopping threshold to encourage tourist spending. We do not, however, hold any of these Italian names in our strategy, given other fundamental considerations to do with these businesses.
The luxury sector has had a tough time over the past 18 months. Aspirational consumer demand globally remains weak, although the wealthiest consumer segment is proving resilient.
The US remains weaker than expected, given the hoped for ‘wealth effect’ from stock market gains. Companies now sound more pessimistic about a hoped-for inflection in US demand from the second half of this year. Recovery in China has been slower than expected.
On a longer-term basis, however, we continue to like the companies we hold in this sector. We have used the recent weakness in stock prices to add to some of these names at attractive prices.
Over the past two years, we have been working hard to identify pricing power winners – those firms which can mitigate the effects of inflationary pressures through increased pricing. Products with inelastic demand such as luxury goods are a good example of this. Some may even be ‘Veblen goods’ where demand increases as price increases.
Though inflationary pressures in Europe and elsewhere are now falling, this is still an important criterion for us when selecting stocks. This pricing power protects dividend growth in times of inflation. And sustainable dividend growth is the holy grail of our approach – leading hopefully to outperformance versus regional indices over time.
Marcel Stotzel is co-portfolio manager of the Fidelity European fund and Fidelity European trust. The views expressed above should not be taken as investment advice.