Savour International

A typical announcement from the luxury goods industry reads something like this these days: Italian fashion designer Prada recorded a 40 percent increase in operating earnings for the first fiscal half and boosted its expectations for the entire 2007 financial year. During the six months through July 31^st, the company generated a total of €140 million in operating earnings. Particularly successful was its Miu Miu brand, where revenues surged by almost 40 percent to a level in excess of €100 million.

Merely an isolated case? By no means. Competitors - be they industry giants such as LMVH, PPR, and Richemont or comparatively small players such as Bulgari and Tod's - can join their shareholders in being pleased with similar favorable developments.

Luxury is "in"

A glance back at the past five years reveals that this trend is indeed a sustained one. As demonstrated by the MSCI Textiles, Apparel and Luxury Goods Index, the market capitalization of the companies included in that barometer index has increased almost threefold since 2002. In so doing, luxury goods makers have not only far outpaced the MSCI Consumer Discretionary Index but also the industry-overarching MSCI World Index.

This past price performance naturally leads to the conclusion that the luxury goods industry is in fine fettle and has done its homework. But it is by no means a guarantee of future success and corresponding share price increases. This is because the decisive element for success in the luxury goods market is one that is extremely delicate, takes years and years to obtain, and is therefore ruined so much the faster. It is the brand.

Luxury is unusual, elegant, chic and elitist. It represents the je ne sais quoi that distinguishes its wearer from the madding crowd. Those who choose a certain luxury brand are sending a message. And precisely the fact that only aficionados can catch it adds to the value and exclusivity of it all. It not only takes time and skillfulness to build up a luxury brand; also required is a healthy measure of financial clout. Both factors are responsible for the fact that 70 percent of all newly created, purportedly high-class brands disappear from the scene before they can ever be established.

At this point in time, luxury goods producers are between pillar and post because, just like any other company, the financial means for nurturing and expanding their brand comes from the capital markets. And in this regard revenues, yields - and above all growth - count. Abel Halpern from private equity firm HMD Partners formulates it in a soberly uncharming way: "We're not interested in pretty things here. We're interested in making money."

Stronger sales and earnings growth

In order to grow and be successful in new markets, sizeable investments are necessary. Hence growth is also a function of critical mass and financial capacity. Out of the need to grow, many of the still-private luxury goods companies will be going public in the near future. 80% of the Italian luxury goods firms have the requisite profitability, size, professionalism in brand management and growth rates. Among those are Diesel, Armani, Dolce & Gabbana, Ermenegildo Zegna and Prada.

It follows that the tightrope walk for luxury goods producers consists of generating more sales and earnings growth, while simultaneously remaining exclusive. The means of attacking that particular challenge differ widely. One possibility is to organically broaden the product palette. For example, the original designer label Giorgio Armani has in the meantime evolved into a number of additional brands that are not only limited to clothing: Armani Collezioni as a high-end brand for the older generation, Emporio Armani for young adults, Armani Jeans, Armani Junior, Armani Casa, Armani Libri, and the list goes on. Including bars, cafés and restaurants, the entire Armani universe encompasses 15 brands these days.

Companies such as LMVH and PPR take a different tack: they are broadening their brand portfolios through targeted acquisitions. For example, Swatch no longer stands the reincarnation of the Swiss watch industry, but also for a broad range of brands for large as well as small wallets: Omega is the star in the Swatch universe and is orbited by key brands such as Rado, Longines, Blancpain and Bréguel, which are supplemented by the niche brands Glashütte and the less pricey Calvin Klein and Tissot. The Swatch brand itself serves the retail trade.