For the French, luxury and fashion suit their country well. The roots of this go back far in history: the 18th century, with Versailles and its court, created an ecosystem that encouraged the emergence of supply that was adapted to the exacting demands of its customers, and the 19th century found a bourgeoisie interested in the refined creations of expert artisans (Hermès, Cartier or Louis Vuitton started their businesses around the middle of the century). The excellence of the know-how and the quality of production, which are acknowledged and even celebrated worldwide, serve as proof that France still has an economy capable of producing the best, despite a shrinking manufacturing sector and a falling share of the export market.

Behind this flattering impression, the economic figures for the fashion and luxury sector are significant: they represent 3% of GDP, with revenues of €150 billion and over 600,000 jobs, making France the number 1 player in the world. A focus on luxury alone shows an even greater hold: within the top 10 players that constitute over half of the global market, France has a market share of 68%.

Luxury: France in the lead

The finance markets have noted, and acclaimed, the importance of the French luxury sector. The four corporates listed on the key index of Paris (the CAC 40), namely LVMH, L’Oréal, Hermès and Kering, constitute today 38% of its market capitalisation. At the beginning of 2010 and 2020 respectively, their relative weight was 10% and 27%. Taking 2010 as base 100, the CAC 40 index stands at below 200 today, but its luxury component (these four entities) stands at 1,180. Earnings per share have increased much more quickly for the luxury sub-index than for the total index (almost twice as quickly since 2010). But, and in particular, the capitalisation multiples (share price in relation to profit per share) have not followed the same trends at all. Though that of the CAC 40 has been following a stable trend since 2010, or even slightly decreasing, that of the luxury components are rising.

Capitalisation multiple*: French luxury is expensive!

This domination of French luxury at the global scale and the recognition granted by the capital markets are clearly reminiscent of the trajectory of US tech. Whether in terms of global market share or in terms of the high prices of the listed shares, the resemblance is clear. One difference must be considered, however. In the United States, tech represents 9% of GDP; that is three times greater than luxury in France. The macroeconomic stakes are therefore higher. But that has no impact on the more microeconomic valuations suggested by investors and operators.

Tech: US domination

Capitalisation multiple*: US tech is not cheap either!

Can we push this parallel between US tech and French luxury further? We know that the former will profit from the accelerated development of artificial intelligence and its new so-called generative aspect. A bonus to productivity is expected, part of which should remain in the accounts of the companies that lie behind the appearance and development of this new technology.

But how can French luxury sustain its growth rate or what is its next step? Three positive, and therefore reassuring, points are visible. First, China, even though its GDP is set to slow, is showing significant progress in the weight of its middle class: according to the independent research company BCA, the Chinese middle class constitutes 30% of the total population today and possibly 50% in 2030. The Chinese consumer represented 33% of the global luxury market in 2019 and could represent close to 40% in 2030. Then, we can consider the Indian consumer. By the end of 2050, disposable household income on the sub-continent may have increased thirteenfold, and the middle class will represent a billion individuals according to the OECD’s Development Centre. So many potential buyers of luxury products, as long as customs duties pose no obstacle! Finally, it seems that millennials and generation Z-ers may desire these types of goods more than their elders. They will happily take the baton in the relay from those millions of people making purchases over the years to stand out from the crowd. And the advisory firm Bain considers that the global luxury market could double between 2019 and 2030.

Should we accept such a forecast? The difficulty behind this question lies in the apparent contradiction between exclusivity, which enables high prices, and a wider diffusion, in the wake of an increase in demand enabled by the expansion of the middle classes across the world. Will a finer segmentation, between an offer for the ‘super rich’ and another for a middle class hungry for both status markers and signs of distinction, help to overcome it?

Let us finish with a last look at France (or Europe) versus the United States. How can we position ourselves in relation to this impression of equivalence between luxury, the preserve of the Old World, and tech, the preserve of the New? Does the emphasis on the ‘art of living’ carry as much weight and open as many interesting perspectives as the priority given to the means of ‘living better’? An old debate that, by all appearances, looks set to continue!

Hervé Goulletquer – Senior Economic Adviser, Accuracy
Accuracy Talks Straight #8 – Economic point of view