Future Outlook and Long Short

skin That Rob Armstrong has a tough life. A few weeks ago, he and I chatted on this very pod as he hobnobbed with energy traders on the shores of Lake Geneva Today, listeners, I must inform you that he's on the shores of the Adriatic in Italy talking about the business of luxury Yes, people, it's another hardship assignment for the big guy Why is this a thing? you may be asking, donon't we have important things to worry about in the world? Today on the show, why you do actually need to think about five thousand dollars handbags while the world is burning. This is Unhedged, the Markets and Fance podcast. Sush. From the Financial Times, I'm Pushkin. I'm Katie Martin, a markets colconomist trapped in the greay basement of the FT in Rainy London Joining me from very fantasy Pulia, Italy is Mr Robert Armstrong putting in the hard yards with the high fashion set Rob, you know, set the scene for me here. Are you like surrounded by Anna Winters and Derek Zoollanders and Air kissing and Oh, it's incredible. And I feel slightly like the ogre in the land of the elves. you know, I consider myself a good dresser and a reasonably well groomed man But I'm here mixing with people who really dress well and are really well put together. And I'm kind of like the gross American Yes, they' called Europeans Be this is so this is this is the FT's businessiness of luxury summit, right? It's like a it's a fixture for us. Yeah. I love that for you. It's a fixure. it's an important conference for us. and You know, to your point about the world being on fire and we're here talking about howouse sell handbags Whatever you feel about these products, whether those be handbags or luxury hotels or Fancy wine It's a very important industry, especially for Europe. But you know, meanwhile, while you're thinking about eight hundred and fifty dollars t shirts. The world is kind of on fire, right? The bond market is having a horrible time. We've been talking about that a bit on the pod Recently, Rob, you and I were talking to Dara, our new colleague on the newsletter about this the other day. and it is a pretty kind of hareome scareum move higher in yields and borrowing costs. And in fact, it's so Haream scarum and exciting that Dara misspoke and said the Bank of England rate is four point two five percent It's only in fact three point seven five percent, but such is the level of lunacy going on in bob markets at the moment that people are getting ahead of themselves So are we going to fire Dorready, I think, for this making a mistake on his first podcast Oers his head, I say. I think he gets off light if we just fire him Por Dara. Ive just said that because I hope his mother's listening. I wanted to say a little scaare Just as I was coming here to record this, I walked past a TV screen in the newsroom, and it was a BBC TV screen and it was saying Bonds fall on inflation fears and I thought Uh oh Yeah like the totally mainstream media is on this now. That is not a good sign. Yeah, It's breaking through to the normals. And another person who has noticed that the bond market is in a tiny bit of trouble is Mr. Stock market which on Friday looked at thirty year yields rising and inflation expectations rising and oil prices ticking up. And it took a bit of a fall. and very importantly The heroes of the stock market recently, meaning American AI associated tech stocks took pretty hard So that is why I had to run to southern Italy. to sit by the pool and discuss how to sell champagne to millionaires which is how any normal person would respond to this kind of situation And I will and I will say let me say in all seriousness However trivial you might think selling baubles to the wealthy is. This is a very important industry for Europe at its peak which was maybe three years ago, and I'll talk about why it peaked there and why it's fallen off of it since This was an industry, you know, widely, including, you know, fine dining camp paign hotels, clothes, so forth. know, it's a one point five trillion industry that is led by Europe. And there just aren't that many indndustries that big where Europe is the undisputed champion. And this is one of them. Yeah, so you know, the US is big tech. US does big tech incredibly well. And you can talk about whether it's a good idea that the rest of the world has just absorbed US technology and absorbed this hegemonic power without question. That's a whole other thing But Europe is really good at luxury, right? Some of these companies are like monsters. You know, we're talking like LVMH and Richont and Emm' caring. Obviously where I do my shopping. I know. Yeaha for goes without saying Very familiar. But like you how important are these companies? Well, LVMH briefly was the largest company by market cap in Europe You know, it was the top of the stock six hundred index. And that is, you know that has Louis Viton and a ton of other brands in a conglomerate. And Doid they do Moette and Hennessy? they do do champagne, right? Yeah the One of the Sions. Is that that Sion Sion? Sions, ye ye Sion. Yeah. Anyway one of the members of the family, Delphine Arnaot is speaking this afternoon after I'm done talking to you I will go listen to her talk about her family's business, which is LVMH, which is a huge business. A bit of the interesting story here is, you know, I've been coming to this conference for four or five years every year and I sort of do the economics talk with Martin Wolf and I interview people and etcetera, etcetera Three years ago when we were in Monaco naturally It was a wild kind of post COVID luxury boom. We'd all been we'd all been locked up in our houses. not spending money And then suddenly, they let us all out and we had not spent all this money. so we'd all saved it up. And collectively as a world We spend it on fancy stuff And you know, the big companies in the luxury industry were growing at like thirty percent revenues. you know, It was on a tear be at that conference in Monaco and you would ask a company How high do you think you can push your prices And the honestly, Katie, the answer you would get is there is no limit And in fact, they would say things like we're worried we're not pushing prices up fast enough Well, fast forward three years. They were It turns out They really raised prices way too aggressively pissed off customers off rich people, man. They like they really take it hard. Not only have they alienated The least affluent customers, the merely well off They've even managed to piss off the hyper rich. You know, prices broadly speaking before the pandemic to after the pandemic Plus fifty percent, sixty percent even more in some cases, for whatever, you know, your little bottle of Chanel number five or your Zenya suit or your think of what you will. And this has really made people quite angry as a result industry growth now, twenty twenty six, as we heard from a consultant who studies the industry Jbaine this morning Industry growth is zero. So this is surprising to me because Well, I kind of don't get the economics of luxury anyway. Maybe we can talk about that in a sec, but But I was just looking before I came down here at like the You know, interternet. me tellell me how much an expensive handbag costs. And I was looking at some Fndy handbags You can spend two thousand three thousand five thousand dollars on these things. Every day. They don't seem cheap to me. And the three two thousand dollars handbag. is by the standards of this industry, that is an entry level handbag. But you know what I mean? I mean, if you're talking about a top of the line Aermes handbag, when you can get it which you might not be able to at all You know, you're talking about twenty thousand dollars and up for some of these things And, you know, this it, you know Whatever moral judgment you want to make on buying one of those versus feeding a family in a poor country for the rest of their lives, I'm totally open to those points All I would say in response is This is a dream making industry. You know, at its highest echelons and its most entry level products This is about emotion and feeling and storytelling Right And we done they've really done the sales pitch on N H. Well, no no, but I think like, you know, just the point I'm trying to make is that we all indulge in this stuff in different ways in different when we buy an expensive ticket to the opera or we take a trip to some fancy location with our family You know, and this is the extreme end and That has its pluses and minuses, but they have to sell a story because the best businesses in this industry, the gross margin which is the margin of, you know, what it costs to make that bag. versus the bag, we're talking about a sixty five percent gross margin. So the item itself is marked up three times That's the tension at the heart of this whole industry, right? is that They need to maintain this exclusivity. So the need for these things to be super expensive. And there is an element whereby people seek out expensive products. It's a status symbol and all that sort of thing versus like scale. You know I've got to sell enough of these things to make it make sense. You don't want to be left with like warehouse full of ten thousand dollars handbags. So like how does this even work as a business model? I don't get it. Well, one of the challenges is You have to price under the demand curve. Let me preface this by going back to three years ago. Three years ago, the industry thought, you know what? there's enough super rich people that we can just serve them So you talk to someone who would show you a slide you know, of their business or a consultant showing a slide of the industry. And the slide would say percent of the customers are buying sixty percent of the stuff from the luxury companies And why don't you just spend all your time selling to those two percent and everybody else can kind of bugger off Right. And this turned out for the reasons you just explained, this turned out to be bad advice Right Because, you know, those customers aren't always there You know, they you won't always be cool with them and you need you need what an entry level customer, which is still buying something very expensive. But let's talk about, say, Burberry scarf. I don't know what one of those costs, but it's an expensive scarf but it's a scarf and it's something fancy you can buy for your mother at Christmas You know, and that is what they used to call in this industry aspirational purchase which is like something really fancy for a big day for somebody's buying who is not dead rich. Right. And that's the aspirational part of the market. And again For a while, the industry thought Inpirational Ew that sounds like people who work, you know But they have subsequently learned that having an aspirational customer is quite important, not least because the aspirational customer, if things go well for them becomes the high end customer at some point Right. So this is a very tricky balance for them to maintain. and Pricing challenge And it's a product design challenge, whereas can we have something that a normal, a vaguely normal person can aspire to owning keeping our brand very elite. So I make the joke that they're what they're trying to have is mass exclusivity, which is a contradiction in terms, but somehow they have to they have to square that circle in some way and it's very interesting to see them do it If I could just take a tiny bit of a tangent here, like Luxury goods were what people used to move illicit money around the world before crypto existed. R. So You could, you know, you're traveling with your family, you know, all of your like seven year old kids are all clutching a twenty thousand dollars handbag. You move it across borders. Hey, Presto the money has moved borders I know that's a crude generalization, but is the industry aware what does he say about that as a thing? Well, one thing that the industry is very preoccupied with is to their products when they leave the company's hands Because when you're in the magic business you want to make sure that you are in control of the magic So they're very They were very worried two years ago and now they're very much trying to figure out how to control the secondary market for their watches and handbags and whatever None of their business you saw me what I can do. I can do whatever I want with it, but they want to sell you a service where they authorize the article as genuine where they maintain it for you in a certain way. and they just dont they don't like the idea about these objects running around loose. And I'm sure that one of the concerns they have is that these objects will have criminal uses. Interestingly, in this context, this may or may not be related, is that the category that is held up well in the last couple of years when a lot of the luxury business has really been struggling is jewelry And right Part of that is people think it is a store of value kind of thing where if things go the wrong direction for you, it retains its resale value The second thing and this was something I heard from someone a few days ago, actually from someone from Richau or about Richemage, I'd say, Richimo is one of the big conglomerates. they specialize in jewelry and analysts covering Risha made the following point to me As we've discussed on the show, the price of gold has gone absolutely bananas And Richemau can't actually price its jewelry in lockstep with the price of gold as it goes up because You can't bring the prices down if the price of gold were to fall Because one of the most interesting things about this industry This is an industry where you cannot cut prices. Yeah, there's no sales. There's no sales because you're betraying the customer who paid a huge amount of money for it diluting the brand. So one struggle the industry is having right now is once the price is high, you're stuck there. You can't be like, oh boy, we overdid it I guess the Burby Rincoat, Burby Rincoat now costs twenty fifty dollars. That's two thousand eight hundred and fifty dollars. That's a raincoat, ladies and gentlemen.. But you can't just say, oh we'll bring the raincoats down to twenty four hundred because then everybody who paid twenty thousand eight hundredars is mad at you But anyway, in the case of gold The fact that Richau has to be careful about increasing the prices of its jewelry means they've actually remained reasonably priced relative to the price of the gold in them If you see what old arbitrage trade by buying Richemond jewelry. I don't know if it's enough of an arbitrage And then they' melting it down. Yeah. I mean, I guess if you've got time on your hands and a smelter, that's a thing that might work. so they want to control how these things move around after people buy them It is super interesting, you know, that sort of doesn't happen with normal peopleop's I mean, this is not rice we're talking about or even, you know, normal things that normal people buy like tres for their cars. againgain goodood company here controls the narrative because that's where the value comes from And you know,, you know, at any industry conferenceces is true better at this one E every individual company says Boy, the industry is in trouble, but we're doing fine So so you kind of have to sort through you have to read the code a little bit of what these CEO's and CFOs are saying about their business But one thing they've said is A little bit we got away as an industry from quality where if you're going to sell something for a massive price, You better back it up with incredible quality and an incredible story about that quality So is that part of how they fight back from this period of declining sales growth and against fight back from this period of pissing all their customers off. Is it like really focus on the quality? Yeah, it has the quality has to be better and You know, you have to have better service and whatever because you can't bring the prices down, basically. So you have no choice but to bring quality up to try to bring people back. Another interesting part of this story that is important to the industry struggles is that the key gross market until three or four years ago, maybe even three years ago was China Where Chinese consumerin luxury is basically a China trade. If it was for a long time. It was for a long time. It's not anymore. And there's two reasons for that. Newly wealthy Chinese consumers are very interested in these luxury items. whether they're you know, handbags, wine, luxury vacations, stays in luxury hots et cetera, et cetera. T twoo things happen. One Chinese real estate bubble pops partly on purpose. partartly the government popped it on purpose. Partly it was going to happen eventually So the economy is really not what it was. The level of unemployment is not what it was And the politics changed in China. So it no longer became cool to bling around all over the place. That became politically incorrect in the original sense of that phrase to show off in a certain way And there are now Chinese luxury brands And it is much more politically correct to shop at one of those shops Apparently, I have not been to Shanghai to where these brands are sold, but I've heard they make beautiful stuff And it's not like these are these are Chinese companies that make knockoffs or imitations or something second rate These are really good companies And one of the puzzles, the industry and This woman from Baine, who's considered one of the great consultants for the industry, Claudia Driio We spoke this morning said this is something that is growing all over the world People want local stuff. Right? The nationalism we talk about in politics appears in consumption basically And so it's not going to be in the future. It might not all be about made in France, made in Italy, made in the UK It's like, how do you get, you, local consumers the best of their local, you know, whatever it is You touched on this, but this is the other like really big obsession in luxury, isn't it? is counterfeits. Yes. L of some of them like you really really need to know what you're looking for to spot the difference here. Does the industry feel like it's getting ahead of that whole thing at all or is it still just a running battle? It is It is a running battle. and you know, they're trying to apply technology to it. So each bag is marked with a little tag. Mbe this tag. hereere's a use for crypto technology for you eachach tag is linked to a unique place on a bllock Chain Ledger and with the identifying information and you know, so you try to track each one, you try to know the customer who bought it pretty well and you can chase it down. I mean, the top end of this market, of course, is fine art And it's exactly a parallel problem Everybody gets very embarrassed. when somebody has bought the Picasso And it turns out to be a very clever fake the buyer' embarrassed, the seller's embarrassed, the auction house is embarrassed Oh yeah, And the response of the fine art industry and the luxury industry is not to shout from rooftops that everybody involved has been duped. Let me just put it that way. So it's hard to know how big a problem It has remained because the companies do not love talking about it Yeah, yeah. But broadly would you say the atmosphere at this event out there in Pulia is it pretty good? Are the companies feeling good about being able to turn some of their frowns upside down or is it kind of Lads were in trouble here. I think the atmosphere is We have a business that has had one very bad year. There is signs of stability You know, we're not shrinking And but there is a we have to give this a really serious think vibe here or thought. And this happens to every industry, Katie, in the crazy post pandemic boom People get weird stuff. A lot of weird stuff happened. and a lot of companies were like, maybe the world is just like this now Right? Maybe our sales just grow ten percent a year. I mean, an interesting analog to this is the consumer goods industry It was like, you know, the people who make Oreos in Coca Cola were like Maybe we can just raise prices ten percent a year and that'll be fine You know, it wasn't as big the price rises weren't as big as they were in luxury, but they were big And then at some point The consumer rebels. Right? And so the issue is, you know, how to manage a consumer rebellion and get back to where you were Yeah, sounds like a very fun scene. Rob, thank you for your service. Good luck, masquerading as a glamorous person while you're out there. I'm interested to see how long you can keep this pretense going for. I think you've seen through me already, Katie The game is up. Speaking of which, we're going be back in just one second with Longshort Okay Dkey, it is time for long short, that part of the show where we go long a thing we love or short a thing we hate. Rob, over there in the lap of luxury, what are you saying What I was thinking about this morning as I was reading our newspaper and thinking about There might be a proper rates crisis coming, a proper inflation slash higher rates crisis. It is a huge buzzkill, but let me say this. We live in this world where the politics doesn't really work and we're all we all feel kind of stuck as political beings. And I feel like the way you get through those moments of stuckness in politics and in the life of nations you have a crisis and things change on the other side. So I'm going to go long, whatever happens, not next nextext after next R I'm long I'm sure the crisis will be awful, but the renewal will be great. So that's what I'm long I don't know how long that's going to take, but I'm there for it when it happens. Okay, it's a voice of hope sort of I am sure it's exam season in the UK. The teenagers of the UK going through exams It's so bad and miserable and I'm so over it and it's only just started and it's all hell in the Martin household and in many other households around the country. So if you are a fellow parent of a young person doing big exams Pace out It is bad. It's I'm sure your kids are going to do great, Katie God willing. We may or may not be back in your feet on Thursday. Depending on the meltdowns we are dealing with in our household, we will be back in your ears on Thursday, so listen up then OneHedged is produced by Jacake Harper and edited by Brian Erstatt. Our executive producer is Jacob Goldstein. We had additional help from Top Forehead. Cheryl Rromley is the FT's global head of audio. Special thanks to Laura Clark, Greta Con, and Natalie Sadler. FT premium subscribers can get the unhedged newsletter for free and a thirty day free trial is available to everyone else. Just go to ft d. com slash unhedged offer I'm Katie Martin. thanks for listening