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Five people will enter the global middle class every second in 2020* – that’s a lot of spending power. Many of these people will be millennials.
Chances are you’ve heard of the term ‘fast fashion’. It commonly refers to clothing, but can also be used when talking about ‘drugstore’ brands when it comes to cosmetics.
As millennials become more and more conscious consumers, often erring towards sustainable, long-lasting products, it stands to reason these cheap, plastic-heavy brands will also suffer, as millennials turn towards more luxury brands.
“Invest in your skin. It is going to represent you for a very long time.” – Linden Tyler
Luxury of course has it’s own internal hierarchy. You wouldn’t compare with Tiffany’s with Harry Winston, Coach with Hermes, or Rotary Watches with Rolex. But while China’s elite are turning their noses up at Louis Vuitton as “a brand for secretaries,”** Niall Gallagher, manager of GAM Star Continental European Equity, still sees growth potential in other luxury products of the brand’s owner. On our podcast he told us about Louis Vuitton’s parent company, LVMH:
“Probably about a third, maybe more now, of LVMH’s customers are from China and the propensity of the Chinese to consume luxury is very high. The number of Chinese people who enter middle class status will probably expand by 3-4 billion people over the next decade and of those who will be in the upper affluent segment, which will be the ones who are most interesting to LVMH, that could be up to 80-100 million people – that’s an enormous amount of consumers who have a propensity to buy high end luxury brands, consume high end cognacs and Champagnes.”
Additionally according to Swetha Ramachandran, investment manager at GAM Investments, “consumer appetite for luxury goods has also been driven by the emergence of new sub-segments in prime position – such as experiential luxury, athleisure and streetwear, as well as prestige skincare.”*
So in addition to high end cognacs and Champagnes, LVMH is set to benefit from cosmetic ranges from Dior, Givenchy and Marc Jacobs for example, alongside handbags which, as Swetha points out: “highlights the growing spending power of urban, millennial women,”* .
Kering is another French luxury group, with brands such as Gucci and Yves Saint Laurent. A holding in Legg Mason IF Martin Currie European Unconstrained*** fund, it has a longstanding reputation for sustainability in the fashion industry and was the first luxury company to create science-based goals around reducing it’s carbon footprint back in 2016^. It was also a signatory of the G7 Fashion Pact in 2019, making it a popular choice for the more conscious millennial consumer.
Estée Lauder is also changing its practices due to pressure from more sustainabilty-conscious millennials, according to David Coombs, manager of Rathbone Strategic Growth Portfolio. David shared in our Investing on the go podcast how “Estée Lauder is looking at reducing plastic use and moving towards glass, because it is seeing a huge shift in consumer behaviour. That’s a company that clearly is up to the minute in terms of what its consumer wants and desires and is moving accordingly, even if that’s going to cost it money to do so.” While many will be familiar with Estée Lauder, additional brands also include luxury skincare La Mer and its world-renowned Crème de la Mer cream, alongside more affordable luxury in Origins.
Of course, you can’t talk skincare without mentioning AmorePacific, the South Korean company famous for bringing K-beauty to the West, or Shiseido, one of the oldest cosmetics companies in the world, founded in 1872 and still the largest cosmetics company in Japan. Praveen Kumar, manager of Baillie Gifford Shin Nippon explained that “as the middle class gets more and more sophisticated and disposable incomes increase, it’s a natural progression. Not just for the women but for the men to start taking care of themselves, spending a bit more on cosmetics.”^^
*Source: Millennial ‘buy less, buy better’ ethos changing the retail sector, Investment Week 2020
**Source: Business Insider 2015
***Source: Fund factsheet, 31 December 2019
^Source: Science Based Targets 2016
^^Source: The Beauty of Japanese Cosmetics, Baillie Gifford 2019