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Luxury sector's growth rate set to halve in 2023
“2023 will surely be a complicated year, because real inflation will be felt in the next twelve months. We must be aware of this and prepare to talk to the market in different ways.” This is the vision of the luxury industry's short-term future outlined by Moncler CEO Remo Ruffini, speaking at the Milano Fashion Global Summit 2022 symposium, held virtually on Tuesday October 25.
Exponential increases in energy costs, rising inflation, raw materials shortages, geopolitical tensions and the decline in consumers’ purchasing power have abruptly cast a very dark shadow over a global economic context that, after two years marked by the pandemic, had begun to bounce back vigorously only a year ago. The analysts and investors present at the symposium have had to revise their forecasts downwards, despite the remarkable quarterly results recently posted by leading luxury groups.
“[Leading luxury groups] recorded growth between 25 and 30%. But these results must take into account an exchange rate impact of approximately 8% owing to the rise of the US dollar,” said Chiara Rotelli, executive director and senior analyst for luxury goods at Italian merchant bank Mediobanca, who added that “to cover their growing costs, major labels have also been able to increase their prices by 10 to 15% without affecting demand. However, we are currently far below the sales peaks recorded in July and August, which prompted favourable expectations.”
“Demand has remained strong this year, but we must expect a slowdown in the fourth quarter,” said Francesca Diviccaro, head of retail and luxury at the Intesa Sanpaolo bank's IMI corporate & investment banking division. “China is still a question mark. The luxury industry was accustomed to double-digit growth in this market but, next year, growth will more likely be in the single digits,” she added.
Given this context, Rotelli, who is forecasting a sector growth of approximately 20% for 2022, is expecting for 2023 “a growth that will be half of that of 2022, of the order of 10%, with organic growth at 8%. Demand is expected to slow down, but margins should improve. The sector will continue to attract investors," said Rotelli. Despite the fact that investors’ criteria for picking companies have changed. The CEO of the Style Capital Fund, owner of MSGM, Zimmermann and LuisaViaRoma said that “until three or four years ago, it was enough for a company to have prospects in Asia. Not any more. We are now looking for brands with strong identity and the potential to grow globally.”
Mergers and acquisitions are therefore expected to multiply, especially in Italy, where the manufacturing sector mostly consists of SMEs. “There will be an increase in operations relating to medium-sized companies, which need to be active in several markets,” said the CEO of private equity firm Quadrivio Group, which has invested in the GCDS and Dondup labels, and is planning to invest €500 million in 2023 in fashion, “Italy’s oil,” as he described it.
“The problem is that international consumers do not differentiate between small family brands and major labels. When they buy a product, they expect the same type of quality and service from either type of label. Italian entrepreneurs are therefore often competing with major international groups, without having the same resources,” said Roberto Costa, managing director and head of EMEA investments in fashion and luxury at Citi Group.
“For reasons of scale, Italian companies need finance and skills. But they often become aware of this only in times of crisis,” said GianErnesto Bernardi, managing director in charge of M&A in Italy at JP Morgan, who doesn’t however associate this rise in the number of operations with the current situation. He also expressed surprise at the fact that everyone is shocked by rising interest rates. “It was the absence of interest rate increases that was the anomaly until now,” he said.
Other companies are opting for a stock exchange listing, as Zegna did recently on Wall Street, or as envisaged by Renzo Rosso, president of the OTB group. “A stock market listing is a mandatory choice, to provide transparent governance and facilitate generational handover, so that family members may be able to better manage the group in the future,” he said. “It helps clarify the roles of family members and external executives. Each must play their part, in disciplined fashion. With our listing, we have become even more accountable,” said Gildo Zegna, CEO of the Zegna Group.
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