Last week, my wife’s sister-in-law, a wealthy Chinese lady, arrived in London. She had not visited this country before, so you might assume she would want to see Buckingham Palace, explore the Tower of London, or take a spin on the London Eye. You’d be wrong.
Instead she headed straight off to Oxford Street, and within two days had spent £20,000 on handbags. She travelled with two of her friends, and they spent a few days with us in Oxford. Never wishing to miss an opportunity for a fresh investment insight, I quizzed them about luxury brands.
I started by asking whether heritage matters. After all, this is what we hear all the time from the elder statesmen of the luxury goods trade. Companies such as Cartier and Chanel make great play of their long histories. This, they would have us believe, gives them the deepest knowledge of taste and craftsmanship that newcomers cannot match.
Their products have adorned royalty and the stars of stage and screen. But that did not cut much ice with these ladies. They were interested in the here and now. They wanted the latest fashions, and didn’t care much for history.
An environment made for luxury goods
Although there are a few highly recognisable names in the business, this is an intensely competitive industry. When I was in Hong Kong over Christmas, I was struck by the sheer number of luxury goods shops. Vast new shopping malls contain shops selling nothing but luxury goods.
The Chinese have got the money, they want the finer things in life and don’t mind others knowing that they can afford the cost. It is an environment made for luxury goods, and inevitably a host of new brands have sprung from nowhere.
Contrary to the claims of the owners of the older brands, reputation does not have to be built over several decades. The most fashionable shoe maker today is Jimmy Choo, the Malaysian Chinese who opened his first workshop in Hackney in 1986.
Successful designers such as Anya Hindmarch and Vivienne Tam can soon leverage their reputation, creating successful brands and retail outlets. And they have one other advantage. They can tap today’s zeitgeist, free of any connotations of the past.
Emeralds still conjure up images of aged aunts, Burberry of the British upper classes. Once acquired such associations are hard to shake off and attempts to extend the brand can backfire and dilute its core appeal.
Two shares to think about
Inevitably, my guests headed off to Bicester Village. Whoever came up with the idea of putting a luxury goods discount mall in Bicester of all places, deserves congratulations. It is now on the itinerary of every Chinese tourist visiting England. Coachloads of eager shoppers arrive on a daily basis.
To a skinflint like me, everything here still seems pretty expensive, but apparently prices are half those of Hong Kong and even less in relation to mainland China where the luxury brands must be making fantastic profit margins.
Rumours abound of Chinese buyers loading up at Bicester Village and turning a nice profit by selling it on back home. Inevitably, one of my guests had to buy a new suitcase to take her new purchases home. Samsonite must do a very nice business in Bicester Village.
Clearly there is a huge appetite for luxury in China, and for other newly rich peoples too. But that does not necessarily make the sector a great investment. Shares such as Burberry (BRBY) are thought to have high barriers to entry. But the barriers are actually not as high as such established players like to think, especially in fashion clothing where trends can change quickly. So I asked my guests about cars.
The BMW, they told me, is the car of choice for the Chinese. Here is an industry in which barriers to entry are very high indeed. It is mighty hard to build a global car brand and even the best efforts of the Chinese have not been successful.
But in spite of the success in emerging markets, life is always pretty tough for car makers. So a bit of lateral thinking takes us to two other shares. Inchcape (INCH) runs the car showrooms and service centres upon which the auto makers depend. And the German company Incadea (INCA) – which announced a big new contract last week – runs software for showrooms and is particularly close to VW and BMW.
Neither of these shares is especially expensive. And selling nice cars to the world’s nouveau rich has got to be a good business for the next few years.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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