Luxury, Munich and the Global Recession

It is often said that the luxury industry is immune from recession; the wealthy will keep shopping no matter what the macroeconomic environment.

And there is some truth to that – not complete, but a strong element. Recent newspaper reports are rife with big upticks for the major brands, despite continuing global economic woe.

As witness I present to you a couple of recent developments in downtown Munich.

It’s well understood locally that Munich itself is almost recession-proof; economic downturns seem to skirt past this city, which is fundamentally very wealthy and enjoys a tax-base supported by successful local family-run businesses – like BMW.

Firing the starting gun for expansion is Louis Vuitton, moving from a smaller store on Maximilianstrasse to a massive new “maison” nearby, the Residenzpost, in the heart of historic Munich.


This location used to be just slightly more utilitarian – it was a Deutsche Post office until a couple of years ago, before the entire block underwent a very expensive renovation/gentrification.

This store is now a world-class LVMH expansion, with three enormous floors featuring pretty much every LV product known to mankind. There is even an LV promo video for the new store. And even at 10:05 AM on a Monday morning there were quite a few people shopping.

This move changes the dynamic of the nearby shopping district immensely. Perhaps not by coincidence, Prada, situated literally just across the street, has decided the time to expand is exactly now, and I would not be surprised to see a few other expansions, refurbishments or relocations in the near future. Belstaff (which is, in my opinion, one of the most unlikely luxury brands ever; when I was young Belstaff was what bikers bought when they couldn’t afford leathers) already opened a brand new store nearby.


But beyond the local environment, this is a telltale of the continuing global success of luxury brands, even the smaller ones in the PPR Group (now called Kering) like Stella McCartney and newly acquired Christopher Kane, about whom I will write a dedicated story later, and Giorgio Armani is no exception.

Globally the tide is lifting all luxury brands. When will it end?


A mistake and a lesson at Louis Vuitton

A few weeks ago I had a sudden rush of blood to the head and bought what seemed like a very nice jersey from Louis Vuitton, costing about US$930. It had a small LV logo on the neck, but for Vuitton it was quite discreet.


But on reflection I decided it was a mistake. After returning home I tried it on a couple more times, and realized that as nice as it was, it didn’t fit the style and direction of the wardrobe I am building.

I therefore decided to return the item – and in doing so discovered LV’s returns policy: no refunds.

Credit notes? Yes.

But refunds? No.

And that policy is clearly written both on the receipt and below the cash register, so you have very little wiggle room if all you can say is “I changed my mind” – which is all I personally had to say.

Firstly I find this interesting, as this policy partially explains Vuitton’s continually stellar and growing revenue numbers – they don’t have refunds, so cash in the bank is cash that stays in the bank, and goods go back on the shelf; other stores do return for refund, although they don’t have to do so, at least under EU law.

Secondly it is a tiny bit annoying, mainly because I blindly spent nearly $1000 without thinking about it more carefully and sticking to rules I defined publicly some time ago.

Lessons learned:-

  1. Stick to Giorgio Armani for clothes, and Prada for shoes, just like you said you would.
  2. Don’t buy anything else from Louis Vuitton unless absolutely sure you want it.

I have since used a large chunk of the credit note to buy a nice shawl as a gift for my mother-in-law, who was very happy to have it. I consider that a save.

Giorgio Armani’s €202M Sacrifice

I was recently browsing the 2009 annual accounts of Giorgio Armani S.p.A., exercising those dusty MBA skills, when something in the data jumped out at me.

Maybe it is not obvious to the casual observer, but for a business guy like me a couple of numbers leapt off the page and deserved some more analysis – those relating to the cost of making the goods Armani sells, the raw materials and services.

These high level numbers, which seem to equal 56% of revenue, need a little more interpretation, as they include things like advertising, travel and sales commissions, which throw off a direct comparison with other companies:-

When you dig further into the footnotes on COGS to break this down, and do a like-for-like analysis with a similar company, those numbers really are a very high percentage of the cost base of Armani – 42% of revenues in fact, exactly 50% higher than the percentage cost of Prada, for example, whose COGS are 28% of revenues.

What does this mean? Well, because we look at in common size (percentage), terms, it is clear that Giorgio Armani is either overpaying his suppliers, or making clothing with vastly superior raw materials, at least compared to Prada.

The numbers above and the breakdown below (page 114 in the footnotes) show that Giorgio Armani pays about 30% of revenues for just raw materials alone, and then pays another 12% of revenues on outsourced production services and related costs.

That amounts to 42% of revenues on making the goods. In contrast, Prada pays a total 28% of revenues for raw materials and the same categories of production-related services combined.

This implies that Giorgio Armani is making clothing from better – or at least much more expensive – raw materials, and then spending even more money to have them produced. And in absolute terms, with a business that has €1B lower revenues than Prada, Armani still pays 87% of the absolute COGS that Prada does (€638M vs. €728M).

This naturally has impact on the bottom, profit line. Giorgio Armani makes a pre-tax profit that recently has been in the neighbourhood of 9%, compared again to Prada pre-tax figures of 24%, almost three times higher. If things were in proportion, Armani would pay just €436M for COGS, potentially pushing another €202M to the bottom line, and their pre-tax percentage profit would be very similar to Prada.

As an investor this means I would be buying Prada shares. As a potential Giorgio Armani acquirer like Bernard Arnault I would be basing an acquisition price on today’s profit numbers while secretly licking my lips thinking about cost improvement opportunities. I wonder if this is one reason why Giorgio Armani is reticent to sell? Does he fear that the acquirer will seek to cut costs and impact the quality of his products?

As a customer I am quietly very happy that although Giorgio Armani charges me a lot, the money is going into product quality, not his pocket. Whether by design or by chance, Armani sacrifices profit to make better products. And I can literally feel the difference, as a future story about Louis Vuitton will reveal.

Giorgio Armani Addiction

Once again I survey the pile of receipts from recent shopping trips and wonder: is this excessive, compulsive or addictive behaviour? I don’t think so. I feel quite rational in my choices during shopping trips, constantly rejecting items the sales assistants bring for approval, carefully selecting only 1-2 items per trip – and sometimes nothing, if there is nothing that works. Frequently I will visit a boutique anonymously and leave without trying anything. But last week was a bit of splurge, for sure, the biggest since December: in total I spent around $7,500 on Giorgio Armani clothing, Prada shoes and a Louis Vuitton briefcase in just 2-3 days. While more than half of it is due to the briefcase, which I view as a one-time item, the rest seems to be related to the arrival of the new Fall/Winter collection, and the release of several new items that I liked. If this holds true, I can probably expect there will be larger waves of expenditure twice a year.

A New Robusto Briefcase from Louis Vuitton

The past week has been one of my biggest splurges yet, with several trips to Giorgio Armani and Prada. And the week culminated with the purchase of a new Robusto II briefcase at Louis Vuitton, value US$3,300.

Vuitton? Me? Have I lost my mind? What happened to the Giorgio Armani project? Fear not, gentle reader. My goals remain Giorgio Armani pure, and I will give a broad update on where that project is after the first six months in further posts next week.

With hand on heart I can say that I did not intend to shop at Louis Vuitton. But I have recently been searching for a new business briefcase, and I was looking for something that would see me through the rest of my career – another 10-20 years – and something that offered the same principles I am building through my Giorgio Armani wardrobe: elegant, stylish, timeless, with modern yet noticeably classic design.

And as I walked along Maximilianstrasse in Munich, one particular case in the window of Louis Vuitton kept catching my eye: a beautiful, simple, elegant case that seemed just right. This bag turned out to be the bigger Robusto III (three sleeves), but I was quickly informed of the Robusto I and II, and the II was simply gorgeous.

Even after careful inspection, and realization that I was unlikely to find a better case, I was still highly skeptical of purchasing from this brand. All the logos at Vuitton were a bit off-putting, not to mention the thronging, somewhat grabby customers – what looked like a mix of the offspring of Arab oil magnates, Russian oligarchs and 6’2″ Bayern Munich footballers. I returned 3 times to look again and again, never quite commiting.

But I honestly could not imagine a better quality briefcase, and after 48 hours reflection I am now the owner of a Robusto II Taiga (dark grey) in textured cow leather. It is possibly the most discreetly logo’d item in the entire Louis Vuitton range – if you are not looking for the logo you will not notice it, which for Vuitton is really saying something.

Quite funnily, as I arrived for the purchase, I was carrying bags from both Giorgio Armani and Prada (more on these trips in other reports), and the assistant – a charming young man – was most surprised that I was not noted on the customer list. This oversight was quickly corrected, and I was warmly welcomed into the marketing database of another luxury brand.

Taking the underground train home carrying a heavily-laden Louis Vuitton bag made me realize the power of this brand. I have never seen so many people looking at me in my life…