By Chantal Marx
"The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name, are leisure and a conspicuous consumption of goods." - Thorstein Veblen, The Theory of the Leisure Class
The luxury good space has seen very uneven growth over the last few years. After being the global catalyst for luxury growth pre-Covid, in China, traditional luxury brand growth has stalled and, in some cases, even reversed. This has been ascribed to several factors including a weak property sector that has strained consumer balance sheets (negative wealth effect), a rising preference for local brands (China first), as well as a maturing of consumer profiles and - as a result - their behaviour within the broader sector. The latter explains continued growth in "quiet luxury" brands that prioritise quality and craftmanship above volume and speed to market.
Indeed, brands that fit this description have not only sustained momentum in China but have also managed to do comparatively well in other more mature markets as well.
What is luxury signalling?
In a 2010 paper on brand prominence, Han, Nunes, and Drèze suggested that different consumers prefer "quiet" versus "loud" luxury branding because they seek to associate (or dissociate) with specific groups of consumers. In other words, consumers often choose brands because they desire to associate with or resemble the typical brand user.
Han, et al. divided consumers into four broad categories being patricians, parvenus, poseurs, and proletarians.
In terms of the ultimate consumers of luxury, we zone in on the patricians, parvenus and poseurs as consumers of high-priced branded goods. In rudimentary terms, patricians are typically of "old money", parvenus will be viewed as "new money", and poseurs will be categorised as "aspirational".
Patricians will pay premium prices for goods only other patricians will recognise. Han, et al. theorise that the more sophisticated your taste, the less you need external validation (outside your grouping). For patricians, brands that feel most premium - use quality materials, are hand crafted, and expensive - often whisper, rather than shout (i.e. "quiet luxury"). Patricians also value brands that demonstrate an authentic cultural contribution rather than superficial presence, again tapping into their need to feel good about what they adorn.
Parvenus, in contrast, will pay a premium for goods that others (patricians, parvenus and poseurs) will recognise as being expensive. They want to show others that they possess the wealth to spend money on luxury goods. The types of goods that allow them to show they're wealthy will have visible branding/logos on display (i.e. "loud luxury"). They are less concerned with the cultural nuance attached to certain brands, and less worried about supply chain factors such as artisanal creation and material quality.
Finally, poseurs do not possess large material wealth but want to appear as if they do. They interpret a show of wealth as being visible (such as what is put on display by parvenus). They will either buy counterfeit goods or splurge on a few luxury items. The genuine items they do buy will prominently display branding/logos ("loud luxury") so that they can appear to have good taste.
What does this have to do with the K-shaped economy?
A K-shaped growth scenario usually occurs after a recession when different parts of the economy move at starkly different rates, times, or magnitudes. The term uses the letter "K" as a visual metaphor: the upward arm represents those who thrive, while the downward arm represents those who continue to struggle, or become struggling.
In terms of our four P's - those that possess significant wealth (patricians and parvenus) will fit into the upward arm of the K - they quickly bounced back post the Covid-19 recession. This allowed them to continue consuming luxury goods. Quiet, culturally significant brands maintained a loyal customer base (the patricians) and continued to grow as the fashion cycle also favoured a more muted appearance. While loud brands maintained a loyal following (the parvenous) they lost a substantial client base (the posseurs) as their savings became depleted and they struggled to remain in the upper-middle or lower-upper class.
This has been a theme worldwide but most pronounced in the United States (US) and China. In China, the parvenous will have also been dealt a blow as a crumbling property market will have negatively impacted their overall wealth. China's patricians, it can be assumed, will have benefitted from a more diversified asset base, complimented by a generational wealth factor.
Brand implications
While luxury growth has been under pressure over the last few years, in this K-shaped world, certain brands have stood out in terms of their cultural contribution and brand identity.
In contrast, others have struggled to adapt to broader pressure, uneven growth paths and indeed the "quieter" fashion cycle.
The bottom line
While fashion cycles come and go, we are of the view that having exposure to the company's championing the brands favoured by patricians will provide investors with the smoothest returns experience over the long term. Of course, this even profile can come at a price, which means the companies in this space may be too expensive to invest in right now. There will be a few opportunities, however, to pick up these stocks at reasonable valuations in which case it will be important to maintain composure and initiate or add exposure.
There will also be times that companies with historically "louder" brands in their portfolios will offer substantial value despite them holding a less defensive product set. Tactical exposure to these names could provide a notable returns uplift in portfolios - here it will just be equally important to know when to get out.
