The firms targeting customers that haven’t even been born yet

When LVMH reported in October that Q3 sales growth had slowed to 9% from 17% in the preceding three-month period, some analysts hailed it as “an end to the roaring ‘20s” of premium consumption patterns¹.

Another said that it showed that “the wave of post-Covid relief spending is starting to moderate and that the luxury industry is going back to being cyclical”².

Probably the wrong time to think about launching a leading-brands fund then, right? 

We disagree. Using today’s economic environment to weigh up the prospects of luxury goods and the wider leading-brands sector represents a short-term way of thinking about a trend that only makes sense in a long-term context. How long term? Put it this way – our portfolio holdings are now targeting Generation Alpha, referring to people who will turn 18 between 2029 and 2043. As you may have noticed, some of these potential customers haven’t even been born yet.

Generational shifts in consumption

Our investable universe is made up of leading brands that aim to take advantage of generational shifts in consumption driven by changing demographics.

The global middle class is forecasted to grow from 3.5 billion in 2020 to 4.8 billion by 2030, with this group expected to drive 85% of new consumer spend over this time³. 

This is one of the largest tailwinds behind the growth in consumption of leading brands. Generation Y (more commonly known as millennials), or people born between 1982 and 1994, account for 47% of all premium brand sales⁴, up from 36% in 2019⁵. On average, people in this bracket bought their first luxury item between the ages of 18 and 20. 

For Generation Z, referring to anyone born between 1995 and 2010, this falls to the age of 15⁶. This downward trend is expected to continue as Generation Alpha (2011 to 2025) come of age – the generation expected to have the largest spending power. 

Consumers are purchasing leading brands at a younger age

Personal luxury goods market by generation (€bn)

Note: we frequently refer to the luxury goods market in this presentation as a proxy for the broader range of leading consumer brands. 

It is not just the size of the middle class that is changing, but the location as well. Asian consumers are expected to account for half of global consumption growth in the next decade⁷.

More than the money

The shift eastwards in the axis of spending power will be accompanied by other trends supportive of the further adoption of leading brands.

A report from McKinsey & Company titled ‘Beyond Income: Redrawing Asia’s Consumer Map’ cited 10 new growth themes that stand out: smaller households, ageing, women’s economic empowerment, the rise of digital natives, new channel mix, Asian brands gain share, new notions of ownership, the big convergence, segment of one and eco-responsibility.

Some of these are more important than others, with the following particularly pertinent to leading brands:

• Smaller households

The average household has become smaller in most Asian countries over the past 20 years: for example, it has declined by about 10% in Indonesia and almost 30% in China, with the latter figure partly attributable to the one-child policy. Another side effect of this policy is that 70% of Chinese millennials own their own homes, thanks to the Bank of Mum and Dad as well as grandparents. That means that once they are in employment, virtually all of their income tends to become disposable, fuelling spending on leading brands.

• Ageing

The population of older Asian consumers, defined as those aged 60 and over, is expected to grow by around 40% over the next decade, and their spending may grow twice as fast as that of the rest of the population in many countries. There is a trend among this group to spend more money on e-commerce: by 2030, more than 95% of older consumers in Australia, Japan and South Korea are expected to be online, and, under conservative projections, the share in China could exceed two-thirds. Older consumers with greater disposable income than their forebears are also seeking to ‘premiumise’ in terms of consumption habits – especially in the areas of travel, health and wellness.

• Women’s economic empowerment

Nicknamed ‘the rise of the Asian she-conomy’, women’s economic empowerment is expected to contribute $3 trillion to Asia’s consumption growth from 2020 to 2030, driven by increased participation in the labour force, rising income opportunities, increased financial and digital inclusion, the changing family structure and a larger role in purchasing decisions.

• The rise of digital natives, new channel mix and segment of one

The rise of digital natives, or people who have grown up using the internet, has led to the new channel mix, as the traditional fragmented trade that dominated Asian economies is replaced by modern store-based trade or e-commerce.

Segment of one, which refers to marketing that is tailored to the individual, is perhaps the most important of these. Asia has the perfect attributes to propel the spread of personalisation, including explosive growth in data creation, capture and replication. A 2021 Euromonitor survey found that more than 45% of respondents in China, India and Thailand said they share their data for personalised offers and deals, compared with less than 30% in France, Germany and the UK.

These three technology trends are important as younger generations are exposed to marketing influences in a way their forebears weren’t.

For example, an LVMH advertising campaign on Instagram at the end of last year brought together footballers Lionel Messi and Cristiano Ronaldo to play chess on a Louis Vuitton chequered trunk. With more than 48 million ‘likes’, it is the most popular post by a brand in the history of the social media platform⁸ and by far the most successful advert.

Brands are also using video games to create hype among players in a way that would be difficult in real life. For example, Balenciaga launched its 2020 autumn/winter collection entirely in video game format (for Afterworld); Moncler sells accessories and ‘skins’ on Fortnite for about $10; and Burberry designed outfits for the Honor of Kings characters, one of the most popular video games in China⁹.

Some of these players will be below working age, meaning they will not have their own disposable income and so account for a tiny proportion of leading brands’ revenue base.

But engaging with people at an earlier age means these brands can keep them as customers for life. If someone buys an entry-level item when they’re 18, they are likely to continue buying the same brand, at higher price points, as they progress up the earnings curve.

• Eco-responsibility

Last up is eco-responsibility, which is a growing consideration among younger generations.

Leading brands hope to benefit from this angle via a trend among consumers to buy less, but buy better: as former Hermès chief executive officer Patrick Thomas said of the 186-year-old firm: “We are not luxury. We are high-quality, based on exceptional artisanal work.”

In this way, leading brands are the antithesis of fast fashion, a recent trend that appears to be on a collision course with that of eco-responsibility: some estimates suggest that the average fast-fashion item of clothing is worn just seven or eight times¹⁰ before it ends up in landfill.

Contrast this with the rise of the re-sale market for pre-owned leading brands, via sites such as Depop and eBay. The secondary market for Swiss watches alone is expected to grow from £18bn in 2020 to more than £32.2bn by 2030¹¹.

As the strapline of one famous brand of Swiss watches says: “You never really own a Patek Philippe. You simply look after it for the next generation.”

We think investors should view the companies that own such brands in much the same way.