The world of

premium brands
capturing global consumers'
tastes and aspirations
December 2015

For professional investors only

Overview

The luxury industry owes a big debt to Louis XIV. Over the course of
his long reign, the Sun Kings penchant for high-end design led to the
transformation of what was a dilapidated royal lodge into the grand
Palace of Versailles. But his influence as an arbiter of good taste did
not end there. The French monarch's lifelong fascination with quality
craftsmanship and elegantly-tailored apparel led him to establish 17th
century Paris as the worlds first true style capital.
The luxury bug has since spread way beyond Parisian boulevards. Once
the preserve of the ultra-rich, high-quality goods and services have
gained traction among a broader range of affluent consumers. Simply
put, more of us place a premium on the quality and distinctiveness of
the goods and services we buy. Premium branded products those that
are aspirational, exclusive and command strong customer loyalty have
consequently evolved into a global industry of some heft. According to
consultancy Bain & Company, the number of luxury-goods consumers
worldwide has tripled to 330 million over the past two decades. Such
growth has delivered considerable rewards to companies that make
and market premium branded goods. The compounded annual growth
of earnings before interest, tax, depreciation and amortisation for
premium brand companies was 9.3 per cent in the 10 years to end 2014.
That compares to just 1.1 per cent for corporations in the MSCI world
index. Investors in these firms have also gained. Returns from shares of
premium brand companies were 166 per cent over 2005-2015 against 114
per cent for MSCI world constituents1.
In our view, the future for companies operating in the premium brand
industry remains bright. This is because the business landscape has
evolved in a way that has created new opportunities for profitable
growth. Nevertheless, the rewards will not be shared out evenly. The
firms best placed to build on past successes and deliver healthy returns
to investors are those that can differentiate their products and cater to
the needs of an ever more demanding client base.The structural trends
that will shape the industry's fortunes are the same as those that will
guide the construction of the Pictet-Premium Brand strategy - and
theyinclude:
A shift in the geographic composition of the premium brand
consumerbase
While the traditional buyers of premium goods have been high net
worth individuals based in the developed world, those with investible
assets of USD1 million and living predominantly in North America,
Europe and Japan, the industry's growth is now being fuelled by
consumers outside those regions. Of the additional 10 million luxury
goods consumers Bain expects to see emerge every year between now
and the end of this century, most if not all will come from the middle
classes of the developing world. The consultancy McKinsey expects
the number of urban households in emerging markets with incomes of
more than USD70,000 a year to treble by 2025. This will deepen the pool
of premium brand consumers by a considerable margin.

Source: Factset, Pictet Asset Management;

EBITDA and returns data for premium brands based on
returns from Pictet Premium Brands composite in US dollar
terms; index data based on total returns of MSCI World
Index; data covers period 01.06.2005 to 31.10.2015

Pictet Asset Management

The spread of social media and digital technology

The growth in emerging market consumption is just one of many new
developments premium brand companies need to pay attention to.
Another is technology. Digital technology is having and will continue
to have a material impact on how premium brands relate to their
customers. The rise of e-commerce and social media, for instance,
is forcing makers of high-end goods to come up with new ways to
communicate with their customers and to turn aspirational shopping
into an online experience. E-commerce promises to be one of the fastestgrowing segments of the premium brand market.
Enduring changes in consumer values and tastes
Companies must also confront the fact that consumers are demanding
more from the goods they buy. Shoppers are paying greater attention to
the intangible qualities of goods and services that are marketed to them
a change in behaviour that has given rise to a phenomenon known
as experiential luxury. What is more, with society placing a greater
emphasis on quality of life and health particularly in the developed
world consumers are gravitating towards products and services that
can enhance physical and mental wellbeing.
The polarisation of consumption
The expansion and the growing diversity of the premium brand
consumer base has led to a polarisation of the market affordable
luxury is thriving alongside products that command the very highest
prices. Mid-range luxury goods are struggling.
Together, these changes present premium brand companies and those
who invest in them with a number of challenges to overcome. But they
are also sure to give rise to new opportunities for profitable growth.

WHAT ARE PREMIUM BRANDS

Premium brands are high-end brands, offering quality products and services
that are aspirational in nature. Premium brands range from jewellery,
fashion, leather goods and cosmetics to cars, sporting goods, hotels and
spirits. They tend to be associated with quality, exclusivity and craftsmanship
and enjoy a strong reputation. Because of the time it takes to build the
heritage and loyalty premium brands command, barriers to entry tend to be
high, lending firms superior pricing power.

WHAT ARE THE ATTRIBUTES OF A PREMIUM BRAND ?

- a strong identity
- an aspirational, emotional brand positioning
- an exclusive aura
- a highly differentiated range of products and services
- a superior pricing strategy relative to peers
- deep customer loyalty
- tight control over promotion and distribution
- a global reach

The world of premium brands capturing global consumers' tastes and asspirations

PART I
Beyond the
material
the rise of
experiential
luxury

Consumers have long valued highquality goods. But their definition of

what constitutes luxury has shifted
in recent years. According to research
by BCG-Ipsos2, affluent consumers,
in particular in the developed world,
have become less keen on owning,
and more interested in experiencing
luxury. This preference for the
experiential over the material is
beginning to make itself felt in a
number of industries. It is perhaps
in luxury travel where its effects are
most obvious.
While large four and five-star holiday
resorts are still popular, wealthier
tourists are gravitating towards
boutique hotels and those that offer
innovative, bespoke services.
Established hotel chains have
responded to these changing tastes by
customising their hotels, introducing
elements of local culture into their
properties and adding designs that
give each a more distinctive feel.

rising demand for unique travel and

luxury experiences, and as result
have record the strongest growth
in the five years to 2015 across the
experientialcategory.
The growth of the leisure cruise
industry also owes much to the rise of
experiential luxury.
Cruise lines have invested heavily to
woo younger customers. The newer
cruise liners now offer a broad range
of luxury experiences including
rock climbing, flying trapeze and
West-End standard shows.
These new-generation ships tend to
record higher yields, cost less to run
through improved fuel-efficiency,
and are more profitable as a result.
The vessels should help large cruise
groups like Royal Caribbean and
Carnival achieve a projected doubling
of earnings by 2017 as the global
economic recovery helps yields
bounce back to peaklevels.

Premium hotel groups such as W,

Sheraton and Westin have been
among the main beneficiaries of

Chinese cruise market

catching up with US

FIG 1: THE CHINESE CRUISE MARKET IS EXPECTED TO CATCH UP WITH THE US,
PORT CRUISE EMBARKATIONS, BILLIONS
2.5
2.0
1.5
1.0
0.5
0
i
i
l
r
y
e
k
s
s
e
s
a
n
n
h
a
n
a
g
a
a
le
am lade vera enic pto elon esto von Yor lean eac ngha ydne amp ouve Jua eatt eno jorc bur gele apor
G Ma am An ng
V
c an
S
T
S
Sa New Or g B ha
rg ana
am arc alv
n
e
i
h
S
a
H
S
s
a
G
w Lon
S
B
C
V
ut
Ev
Lo
lm
Ne
rt Port
So
Pa
Po
Mi

Source: GP Wild, CLIA, Morgan Stanley Research

Luxe Redux: Raising the bar from selling luxuries,

BCG, 2012

Pictet Asset Management

PART II
Polarisation in
premium brands
where exclusivity
and value for money
co-exist

As the premium brands industry

welcomes a broader range of
consumers, it has witnessed
a polarisation in consumer
buyingbehaviour.
In other words, while newly-affluent
consumers have fuelled the growth
of an affordable luxury sub-sector
within the high-end goods market, the
very wealthiest groups are gravitating
towards the opposite end of the
pricespectrum.
This polarisation has filtered through
every category of the premium
branduniverse.

High-end cars thrive

The recovery of the high-end auto
sector is one example of polarisation
at work. Over the past five years,
new registrations at the seven largest
ultra-premium car brands including
Bentley, Lamborghini and Porsche,
owned by Volkswagen have surged
154 per cent compared to a 36 per cent
gain in overall car sales worldwide.
Booming demand for six and sevenfigure vehicles has prompted brands
to build a new generation of cars,
expanding the ultra-premium auto
market. Bentley and Rolls-Royce
have built sport utility vehicles, while
Ferrari has brought out a hybrid
963-horsepower supercar with an
electric motor and a price tag of
USD1million.

Ultra high-end cars see

surge in demand

As an extension of the increasing

interest in unique cars, demand in
recreational vehicles such as three or
four-wheeled motorcycles trikes
and quads and snowmobiles is
broadening, benefiting companies
such as Polaris.

Affordable luxury
Consumers desire for more affordable
high-end goods, meanwhile, presents
as many threats as opportunities
for companies in the premium
brandmarket.
Lower priced premium labels such
as Ray Ban, Lancme or Nike have
seen consistently robust demand for
their designs, as they present ways
for consumers to indulge themselves
without having to spend excessively.
Upscale brands have also recognised
this as an opportunity and have
developed a broader range of cheaper
products. Ralph Lauren, for instance,
has launched secondary lines Polo
and Lauren. Hermes, one of the
most exclusive luxury brand, has
diversified into ties and perfumes
to capture some of this affordable
luxurydemand.
But in making changes to their
business models to accommodate
demand for more affordable items,
makers of high-end goods can land
themselves in trouble. Unchecked
expansion of product lines could lead
to brand dilution. Achieving product
expansion without dilution is going
to be key to maintaining a brand's
competitive position in the long run.

FIG 2: NEW WORLDWIDE REGISTRATIONS, HIGH-END CARS, 000'S

300
260
220
180
140
100
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015E

Source: IHS Automotive

The world of premium brands capturing global consumers' tastes and asspirations

PART III
Wellness where
luxury meets
health

The pursuit of a healthier lifestyle has

become a global obsession. A survey
conducted by Nielsen showed that
as many as three in four consumers
have changed their dietary habits and
that almost as many undertake some
form of physical exercise3. The same
study also found that three out of
five people are actively cutting down
onfat.
Goods and services associated with
wellbeing have consequently seen a
surge in popularity to the extent that
they have become their own niche
within the premium brands market.
Organic food, premium sportswear,
designer sports equipment and health
supplements are some of the products
that are part of the wellbeing boom.
Fashion sportswear is among the
fastest-growing of all.
Among the companies taking
advantage of the fusion between
sports and fashion are Nike, Under
Armour, and Lululemon Atletica, each
of which has developed a distinct new
line of athleisure clothing.

Nielsen, Global Health and Wellness Report,

January 2015
4
Deutsche Bank, Athletic Apparel & Footwear,
F.I.T.T. for investors, March 2015
3

Pictet Asset Management

In this segment, brands seek to

distinguish themselves by selling
high-quality products and advanced
levels of customisation. A digital
presence is also essential. Many
of these brands engage with their
customers on social media, and
create a community around the
brand. Lululemon, for instance, offers
free events like yoga classes and
running clubs and Under Armour has
partnered with high-profile athletes.
Euromonitor estimates that the global
athletic wear accounted for some 15
per cent of all apparel and footwear
sales in 2014, or USD269.2 billion.
While the fashion sportswear market
is expected to see continued strong
growth in the US, international
expansion should boost revenues for
athletic wear brands. Sales outside
of the US could grow 4.5 to 5.5 times
their current levels by 2030 according
to Deutsche Bank4.

PART IV
From offline to
online reaching out
to the new digital
consumer

Long resistant to the allure of

e-commerce, companies who own
premium brands have found they can
no longer ignore the opportunities
and risks that stem from the rapid
growth of social media and mobile
connectivity.

Premium brand companies are

adapting to the digital world in a
number of ways.
They have recognised that most
shoppers are influenced by what they
see on social media. New collections,
innovations, but also brand heritage
and differentiation need to be
elegantly conveyed online

According to research by Evercore

ISI, because consumers can carry
out research on the internet before
purchase, they have become more
confident in spending larger amounts
of money online for luxury goods.

Distribution channels have been

also been reconfigured. Sales are
now undertaken via a multitude of
channels: brands own brick-andmortar stores, e-stores and multibrand online retailers such as Yoox
and Net-a-Porter.

A recent study by the consultancy

firm Deloitte found that 55 per cent
of consumer buying decisions are
influenced by what they see or hear
online; this number is expected to
reach 80 per cent by 2017.
Consumers ability to use mobile
phones both for purchases and to
post product reviews on social media
is proving particularly prevalent in
the experiential segment.
This behaviour is already widespread
among young Asian consumers. The
region currently accounts for half of
the worlds mobile subscribers and
will continue to grow faster than the
global average according to the GSM
Association, a trade body.

Luxury goods e-commerce

market soars

FIG 3: ONLINE PERSONAL-LUXURY-GOODS MARKET, EUR BILLION

14
12
10
8
6
4
2
0

5%

Online market share

4%
3%
2%
1%
2003

Yearly growth (%)

2004
32

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E

37

27

20

12

22

31

24

33

28

24

Source: Barclays, Bain

The world of premium brands capturing global consumers' tastes and asspirations

PART IV
From offline to
online reaching
out to the new
digital consumer
(con't)

Luxury's digital laggards

and leaders

There is little doubt that, as consumers

increasingly buy goods online,
premium brand companies with
e-commerce capabilities will have a
strong competitive advantage. Online
sales are already a strong contributor
to top-line growth for digital pioneers
such as Burberry which spends 60
per cent of its marketing budget on
digital. Premium brands need to
embrace the digital world to provide
customers with a better experience
around the brand. Communication
and innovation are a must. Although

web sales only accounted for 6 per

cent of luxury companies turnover in
2014, research by Exane BNP Paribas
estimates that nearly 40 per cent of
luxury market growth will come from
online sales by 20205.

FIG 4: EXANE'S "DIGITAL COMPETITIVE MAP", HOW PREMIUM BRANDS FARE

ON THE DIGITAL SCALE
Max Score
30

E-commerce Strategic Reach (Score)

25
20
15
10
5

High-end players
Runner-up players
Premium players
Burberry
Mega-brands & challenger mega-brands
Jewerly players
Cucinelli Armani
Valentino
Balenciaga
Moncler
LV-before Zegna
LV-after
Cartier
Coach
T
Burch
BV
Average
Ralph Lauren
Tod's
Tiffany
Gucci
Loro Piana Herms
Dior Chanel
Bulgari
Givenchy
Ferragamo
Saint Laurent
M Kors Prada
Cline
Fendi
Average

0
0

10

20

30

40

50

60

70

80

90

Digital Customer Experience Proficiency (Score)

100

110

120

130

140 150
Max Score

Source: ContactLab Analysis, Exane

The Digital Frontier: Ready? Steady? Go!, Exane BNP

Paribas, September 2014

Pictet Asset Management

PART V
The emerging
consumer Chinese
consumers still top
spenders

Asian consumers and most

importantly the Chinese have been
voracious consumers of premium
brands in recent years.
Over the past decade, Chinese
consumers desire for luxury and the
tradition of gift-giving has helped
generate record profits for makers of
luxury goods.
By some estimates, China accounts
for around 40 per cent of the luxury
goods market.
On the surface, it appears that Chinas
purchases of personal high-end goods
have eased to a more sedate pace
in recent years thanks to a slowing
economy and a crackdown on graft
and gift-giving to public officials.
Luxury sales fell 1 per cent in China in
2014 compared to the previous year,
according to a report by Bain & Co.
But domestic sales are only part of the
picture. It turns out the Chinese are
still spending but increasingly, they
are doing it overseas. With the rules
for obtaining travel visas to Europe
or the US having been relaxed, the
Chinese now account for the biggest
slice of tourist spending globally, and
spend more per head on premium
brands than any other nation with a
budget of around EUR740 in 2014,
against a global average of EUR500.
Their spending power is expected

Chinese get the travel bug

to increase further, with per trip

spending projected to grow nearly
75per cent in nominal terms by 2023.
Premium brand goods are high on
their wish list primarily because
such items are cheaper abroad. Stiff
government taxes and duties levied
in China, combined with brands
higher pricing strategies and currency
fluctuations, mean a Chanel bag can
cost twice as much in Shanghai as it
would in Paris.
Cost is not the only factor behind
purchasing decisions. Chinese
consumers also prefer to buy abroad
because the product selection is
broader and there is a better guarantee
of authenticity. Buying a product in
the country where it was crafted also
adds cachet.
In another manifestation of Chinas
increased heft in the tourism industry,
cruise operators such as Carnival,
the industrys largest player, have
been redirecting ships to Asia,
where international cruises are
increasingly popular with the wealthy
middleclass.
China is expected to become the
worlds second-largest cruise market
after the US in 2017, generating
growth rates far higher than those of
North America and Europe.

FIG 5: ASIAN OUTBOUND TOURISTS SINCE RELAXATION OF TRAVEL RESTRICTIONS, % OF

TOTAL POPULATION
30
25

Japan (from 1956)

Korea (from 1972)
China (from 1994)
China projection

20

2023: 202.3m

15
2013: 98.2m
10

2009: 47.6m

5
0
Source: CEIC, HSBC

The world of premium brands capturing global consumers' tastes and asspirations

PART VI

Companies operating in the premium

brand industry have distinctive
investment characteristics.

Why invest in
premium brands

Chief among their distinguishing

features is that their growth
prospects are more closely tied to
deep-rooted structural trends than
shifts in the economic climate. This
means they have the potential to
generate faster rates of profit growth
than their counterparts in more
cyclicalindustries.

In addition to superior earnings,

premium brand companies typically
exhibit solid balance sheets. Strong
cash flow generation means
firms arein a position to improve
shareholder returns through
dividends and sharebuybacks.
Also boosting the industry's
investment appeal is the prospect
ofconsolidation.
With companies such as Louboutin,
Audemars Piguet and Balmain either
family-owned or in private equity
hands, the success of past IPOs
such as Moncler may yet encourage
these private owners to exit their
investments. This, in turn, could
provide established publicly-owned
premium brand companies with
avenues for profitable growth.

Margins may have come under

pressure in the past three years due to
a slowdown in Greater China, some
over-investment in the Asia region
and unfavorable currency moves but
they are expected to resume their long
term trend.
Profit margins for premium brands
have risen persistently since 1999, and
have also been consistently higher
than the aggregate for consumer
goods companies over that period.

What is more, valuations for the

premium brand universe look
reasonable at 18 times 12-month
forward earnings, which is below the
long-term average of 19.3 times.

FIG 6: PROFIT MARGINS, %, PREMIUM BRANDS VS OTHER SECTORS

%
25
20

20%

18%
14.7%

15
10
5
0
MSCI World

Premium Brands
Universe

MSCI Consumer
Discretionary

Source: Pictet Asset Management, FactSet in USD, based on premium brands universe as of 30.09.2015

Premium brand companies

boast attractive margins,
valuations

FIG 7: PRICE-EARNINGS RATIO, PREMIUM BRAND COMPANIES

450

35

Premium brands performance (lhs)

Premium brand price-earnings ratio, 12-month forward (rhs)

400

30

350

25

300
250

20

200

15

150

10

100

15

14
.20

.20
06

13

05

12

.20
04

11

.20
03

10

.20
02

08
.20

.20
01

07

12

06

.20
11

05

.20
10

04

.20
09

03

.20
08

02

.20
07

01

.20
06

00

.20
05

.20
04

.19
03

.19

.19
02

01

99

98

97

50

Source: Pictet Asset Management, FactSet in USD, based on Pictet AM's Premium Brands universe as of 30.09.2015;
Data for Figure 7 covers period 31.01.1997-31.10.2015

10

Pictet Asset Management

Conclusion
A new experience
of luxury

Whether it is in travel, autos, clothing or fine wines, premium brands

have gained momentum worldwide as emerging markets spending
power has risen.
But the industrys prospects will not be shaped by conspicuous
consumption. The emergence of a more diverse, sophisticated and
health-conscious consumer base, particularly in the developed world
means buyers of premium brands place a higher premium on the more
intangible qualities of products and services.
At the same time, consumers enhanced ability to research products and
services online is opening up new opportunities for premium brand
companies to appeal to customers and build loyalty.
Greater product differentiation and customisation and the growth of
the experiential luxury sector bear testimony to these changes in buyer
behaviour.
Taken together, such shifts present opportunities and challenges for
premium brand companies. The firms that can deliver a distinctive
customer experience and embrace the digital world should be in a good
position to deliver profit and sales growth that is superior to firms
operating in other consumer-facing sectors. These are the firms that
in our view present a potentially attractive long-term investment
opportunity.

INVESTING IN PREMIUM BRANDS WITH PICTET ASSET MANAGEMENT

The strategy allows investors to capitalise on the growing demand for highend goods and services worldwide.
The investment universe is composed of companies that demonstrate
superior pricing power, a high-end positioning, a strong brand heritage,
innovation and control over every aspect of their brand from production to
distribution. Within that universe, investment managers look for companies
with the highest scores and the strongest prospects that trade at reasonable
valuations. Fifty per cent of sales or profits must come from premium
brands.
The strategy is a concentrated portfolio of 30-40 stocks, with investments in
firms operating in sectors such as retail and luxury goods, travel, sporting
goods, automobiles, cosmetics and food & beverage.

The world of premium brands capturing global consumers' tastes and asspirations

11

Contacts
For further information,
please visit our websites:
www.pictet.com
www.pictetfunds.com
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