Europe’s new success stories are based on high luxury, not high tech

The writer is the chairman of Rockefeller International

European markets have been hit hard by a global boom in luxury sales – clearly good news for the region. However, this success story also raises a troubling question: has Europe become too dependent on a sector that many see as a symbol of decadence?

Compare Europe to the US, where the 10 largest tech firms account for 65 percent of stock market returns over the past 12 months – an alarming sign of industry concentration. Similar signs of concentration are even more worrying in Europe. There, the 10 largest luxury stocks from LVMH to Ferrari have delivered nearly 30 percent returns — unmatched since records began.

Long a source of pride in Europe, the luxury industry took off in the past decade and has had its best year ever during the pandemic. The record stimulus added trillions in new wealth, much of it in the hands of the very wealthy, who spent a good portion of it on expensive goods.

As a result, Europe is finally making a lot of money from an industry it has dominated for centuries. Two-thirds of global luxury sales revenue flows into Europe, and now the continent has a stock market winner to show for it.

The list of Europe’s top 10 companies by market capitalisation, which has historically been dominated by banks, utilities and industrial conglomerates, now features four luxury names, up from zero in early 2010. Its big luxury brands are more profitable than big American tech, accounting for about 25 percent of revenue.

This may be a step forward for the luxury industry but not such a big one for Europe. Building a knowledge economy on crafts in the 17th century is arguably a step backwards at a time when Western capitalism faces weak productivity growth, rising wealth inequality and the conundrum of competition and coexistence with China.

If it’s unclear how much smartphones drive productivity growth, it’s safe to say that French perfumes and Italian handbags contribute even less. While tech tycoons are the subject of controversy in the US, luxury tycoons are the target of street protests in France. And as the West debates whether to “disengage” its ties with China, the European luxury sector is as dependent as ever on Chinese consumers, who now account for almost a third of its sales.

As American technology grew larger over the past decade, so did European luxury. Since 2010, the Big 10 tech firms have nearly quadrupled their share of the US stock market to nearly 25 percent. Over the same period, the 10 largest luxury stocks have roughly tripled their share of European markets to around 15 per cent – ​​a substantial increase over the previous year.

In luxury as in tech, power is focusing on the top. Top European brands now account for a third of global sales, up from a quarter in 2010. Europe’s top four luxury companies, by market cap, are all French: LVMH, L’Oréal, Hermès, and Christian Dior (which is owned by LVMH).

French dominance has its roots in a luxury ecosystem that dates back to the court of Louis XIV, and a culture of corporate raiding that began with Bernard Arnault. After gaining control of LVMH in 1989, he began building the first house of luxury brands through a series of acquisitions. Rivals followed their lead. Increasingly, the global luxury industry is based on goods that are still made by small Italian firms but sold by large French conglomerates. Gucci, Bulgari, Fendi – all Italian brands are now under French owners.

While American tech firms outpace all rivals, the same can be said of French luxury. Among the top luxury firms, the annual sales of the French are three times those of the Swiss, more than four times those of the Americans and the Chinese, and 12 times those of the Italians.

In April, LVMH became the first European company to pass the half-trillion dollar mark. Hermès’ margins now exceed 40 percent, up from 25 percent in 2010 and even higher than Microsoft, the most profitable of the big tech firms.

One reason for such high profits is pricing power. Luxury companies serve a clientele that is becoming increasingly price-insensitive. The price of a Chanel handbag has doubled to $10,000 in the past five years – far surpassing the surge in general consumer price inflation seen over that period.

So Europe has finally found a winner, but with an asterisk. Capitalism gains from competition more than from concentration. And given the choice between a concentration in high tech or high luxury, the answer would be clear. Europe’s luxury-based model is somewhat out of date, if not actually decadent.