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28 February 2024

One final lap of luxury ?

By Jonathan Sibun


There was something apt about the name of the £6.5m (Dh46m) boat unveiled by yachtmaker Sunseeker at the London Boat Show recently, coming as it did against mounting fears of a recession. After La Volpe – the Italian for wolf – picked up more than 10 orders in its first week, Sunseeker’s management must have been left wondering whether economists had simply been crying wolf with their warnings of doom and gloom.

With the City of London going through its sharpest downturn in at least six years, economists are warning of the threat of a global recession. While those predictions look depressingly accurate, it seems the world’s wealthiest consumers have barely noticed.

La Volpe was not even the most expensive boat Sunseeker was selling in London last week. Tickled Pink, a 37-metre yacht with a price tag of £11.5m (Dh82.4m) also pulled in its share of interest – one US buyer flew over from New York to inspect the boat.

Reports from the Boat Show could not be more at odds with the picture from the high street, where life is becoming increasingly difficult for the world’s leading consumer companies.

Retailers including Marks & Spencer and Next have seen their share prices dive on reports of difficult trading, while the restaurant sector is suffering as consumers choose to stay at home.

That weakness appeared to be creeping into the luxury goods sector for the first time this week after Burberry, the maker of high-end handbags and clothes, said sales in the final quarter of last year were “modestly” below its expectations. That admission came after Tiffany & Co, the jewellery maker, said sales were down two per cent in the last two months of 2007 and warned its customers had adopted a more “cautious attitude” towards splashing out.

The disparity between reports of soaring yacht sales and a weakening luxury goods sector can be explained. Much of Burberry’s and Tiffany’s business is in the US where the economy has been harder hit than here.

But there is another reason. The growth of luxury goods sold on the high street in recent years amid soaring consumer confidence and a strong economy has helped bring top-end products to the masses. Burberry is no longer a brand solely for the very rich.

The disparity between Burberry and Sunseeker is the difference between a confident consumer with cash in his pocket and an ultra-high net worth individual with investments worth millions of pounds.

Peter Coe, Chief Operating Officer for James Purdey and Sons, the gunmaker that sells its firearms for as much as £200,000 (Dh1.4m), said: “In the luxury industry, the response to any downturn tends to be much slower than elsewhere. People either spend less because they have less or they spend less as part of an emotional response to the downturn.

“Our customers do not generally form part of the first category, and while they will come into the second eventually and that will effect their spending habits, it will take longer.”

It is in part that difference which explains why many UK companies in the luxury sector continue to report positive trading.

Rolls-Royce’s annual sales topped 1,000 for the first time last year, while at the small business-end of the scale, gourmet foods retailer Forman & Field saw record sales in December, up 50 per cent on the previous year. Forman said sales of lobsters were up about 60 per cent year on year.

Despite the upbeat figures, few in the luxury sector believe the good times can last.

Matthew Girling, European and Middle East Chief Executive of auction house Bonhams, said the luxury market tended to be a latecomer to a downturn and that wealthy investors often first flock to gold, diamonds or the top-end of the art market to invest their money.

“You will probably see the luxury market hold up for three to six months but if the economic downturn looks to be taking a stranglehold, then the market will start to suffer,” said Girling.

According to a recent report from Citigroup, the US investment bank, wealthy consumers are feeling the effects of the country’s housing woes and challenging equity markets. The bank warned that “higher-end consumer trends appear to be faltering” and said people were “living less large”.

Robby Hilkowitz, Executive Director of the Stonehage Group, a wealth management firm in the United Kingdom with more than $24bn (Dh88bn) under management, which specialises in advising the ultra-wealthy, claims to have already spotted a change.

“These are early days given that many of these people have made tremendous amounts of money in recent years but our more prudent clients are cutting back in terms of their planned spending,” he says.

The luxury market appears destined for a slowdown in the near future then, but the long-term health of the market should be more positive.

Levels of global wealth have reached unprecedented heights in recent years. According to Merrill Lynch, the wealth of the world’s richest people – those with more than $1m in liquid assets – hit £18,000bn in 2006, up 11 per cent on the previous year and the fastest growth in seven years. That money will not just disappear but as the downturn takes hold, it might well go underground. (The Daily Telegraph)