What economic consequences will the conflict in Ukraine have on luxury?

While luxury stocks rallied at the end of the week, risk perceptions may weigh on the sector in the longer run. As a result, the rise of luxury goods prices should not decrease, with the concept of “pricing power” operating in the background. Analysis.

The consumption of luxury goods for the Russian market is estimated at 5% of global consumption (Shutterstock)

Luxury stock values have risen after being strongly shaken last Thursday following the announcement of the Russian army’s military invasion of Ukraine. The general panic climate which followed on stock markets toned down, leaving room to a rise of the CAC 40, SMI and luxury index values. Yet, according to analysts, it is impossible to foresee what will follow and if a general drop of the world’s economy could be provoked by the Russian-Ukrainian crisis.

Brand equity is used as a lever to justify these increases. The more the brand is desirable, the greater will the price elasticity be from the consumer’s perspective

Olivier R. Muller, specialist in the watchmaking sector

While inflation has been economists’ main preoccupation over the last few months, today, the increase of raw material prices and of the energy sector are still ongoing. Arthur Jurus, senior strategist at the Oddo bank explains: “The sanctions are currently being implemented. Raw material prices, agriculture and energy have increased their rise and their impact on the European business is valued at 0.6 points of GDP on a quarterly growth, which is quite significant. The consensus on inflation is of 3.8% while we were at 3% in Europe a few days ago. Central banks will have to increase their rates, but without generating an economic slowdown. We are also observing a devaluation of the ruble to 11% in 2022.”

Pricing power, an obsession for luxury brands

What is the impact on the luxury sector? While pricing power monopolized the minds of luxury strategists over the past twelve months, it will become even more of an obsession with the Russian-Ukrainian crisis. Indeed, the repercussion of raw material, transportation, and energy price increases, while maintaining substantial margins without impacting demand is the sector’s main challenge. Consumers that are luxury aficionados can only observe the prices rise in boutiques. In China, in Europe and in the US, luxury brands had already proceeded with adjustments, sometimes significant.

Luxury stocks represent a significant proportion of the CAC40, for example, which underperforms the European indexes

Arthur Jurus, senior strategist at oddo bank

According to the Chinese platform Baidu, some leather accessories from Louis Vuitton have shown spectacular increases between 12% and 15%, even 20% depending on the models, and up to 54% for the Mini Pochette handbag, rising from 3,500 yuan to 5,400 yuan. Of course, the pandemic has strongly impacted supply chains in the global luxury industry and raw material prices. On January 26, the price of the Brent barrel overpassed for the first time the fatal limit of 90 dollars, with energy prices rising, which represent half of the inflation trend. Over the past few days, the price of the barrel was around 97 dollars. The Louis Vuitton brand explained in an official release that “the adjustment of prices takes into account the changes in production costs, raw materials, transport as well as inflation.”

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