The luxury of long time horizons

F. Scott Fitzgerald is said to have told Ernest Hemingway, "The rich are different." And just as the rich are different, so are luxury goods companies, with features that distinguish them from other consumer segments.¹

1. Supply doesn’t equal demand²

Basic economics says supply rises to meet demand. But basic economics doesn’t apply in luxury goods. Artistry and design matter, but scarcity and exclusivity are core to the emotional pull of luxury goods. Rather than responding to demand, brands carefully manage supply.  Louis Vuitton, Hermes and Chanel don't sell through wholesalers so they can control who they sell to, how much they sell to each person and at what price (these brands almost never go on sale). Brand owners are not trying to maximise next year’s revenue. Their commitment to scarcity and the customer experience is designed to ensure steady growth for decades.

2. By royal appointment

Today, challenger brands in sportswear or beauty are pressuring incumbents. Luxury brands are much harder to disrupt. A brand like Cartier has served royal families for over 100 years. That’s a very high barrier to entry.

3. The higher price is right

American economist/sociologist Thorsten Veblen coined phrases like the “leisure class” and “conspicuous consumption.”³  Some luxury goods are ‘Veblen goods’ - raising the price can increase its perceived value and demand for that product. Superior quality, scarcity and creativity are essential for this strategy to work. Customers don’t like being taken for a ride, regardless of their net worth.

4. Top people

Assessing management is key in the Platinum investment process. I’ve worked in luxury goods and I’ve analysed luxury goods businesses. The really great management teams are ferociously disciplined about investing in and protecting the brand.

I had a few gripes with the luxury industry when I started working there as a buyer and merchandiser. Companies seemed slow moving and I kept getting pushback on my orders for more inventory. After a while I realised these were moves designed to protect the brand. You don’t need to chase every potentially brand-damaging fad when you have a 100-year time horizon, and the objective was not to match inventory to the customer demand I had so dutifully forecast. The idea is to sell out well before you reach peak demand to maintain scarcity and brand desirability.

Luxury companies often have significant family ownership and involvement. They have the luxury of long time horizons and, just as their customers want to pass on their luxury handbag or watch, luxury goods companies want to pass the brand to the next generation of owners and managers in excellent health.

• You can invest with Platinum here.
• Luxury goods companies LVMH, Kering and Richemont are holdings in the Platinum European Fund.