The wealthy splurge on Ferraris, Gucci handbags and expensive champagne, while McDonald’s customers can’t afford combo meals

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  • The wealthy are better protected against inflation, which means they continue to buy luxury goods.

  • Luxury companies like LVMH, Kering, Ferrari and Hermès are reaping the benefits.

  • Still, some worry that war in Ukraine, lockdowns in China or recession could hurt their bottom line.

As inflation continues to squeeze consumers in all income brackets, the rich don’t feel the same pinch — meaning the brands they buy aren’t either.

The world’s two largest luxury conglomerates, Kering and LVMH Moët Hennessy Louis Vuitton, reported strong earnings last week as both companies saw revenue increases of more than 20% in the first half compared to 2021. These aren’t the only companies in the luxury sector doing well right now: it seems everyone from high-end automakers to designers of coveted handbags are seeing strong demand.

This means that the richest consumers in the world have not slowed down their spendingeven though many Americans are opt for cheaper options at McDonald’s Where insisting on how they will pay their bills. Now with inflation climb to new heightsthe big winners are the companies that make products for the ultra-rich.

“Healthy and high demand” for cars, clothes and champagne

Moët et Chandon champagne being poured into glasses

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At LVMH, the French mega-company headed by the third richest person in the world, Bernard Arnault – luxury products, big and small, have flown off the shelves.

Sales of champagne and cognac, in particular, experienced “exceptional momentum” in the first half of 2022; fragrances and skincare have grown rapidly, and high-end fashion continues to do well. LVMH’s fashion and leather goods category revenue rose 24% during the period, with brands including Louis Vuitton, Christian Dior, Fendi and Celine reaching “new profitability records” in the first half, the company said.

Fashion houses owned by Kering – including Gucci, Yves Saint Laurent and Bottega Veneta – also all saw significant growth in the first half of the year, the company said in its recent earnings report, although the fashion conglomerate luxury raised the prices twice this year. Hermès, which makes leather goods like the coveted Birkin bag, reports strong performance in the second quarter, with sales jumping double digits in June. And at the Italian fashion house Prada, the half-year turnover jumped 22% year over year.

Affluent Consumers Demand More Than Fashion: Italian Sports Car Maker Ferrari registers record orders in the second quarter, and Mercedes-Benz says he sees ‘healthy and high demand’ for its high-end vehicles.

These revenues are in line with recent projections from consultancy Bainwhich estimates that sales of luxury goods will increase by at least 5% in 2022, with buyers – mainly in the United States and Europe – shelling out at least 305 billion euros, or around $312 billion, just this year.

Claudia D’Arpizio, a partner at Bain, told Reuters in a recent interview that, despite inflation, “consumption doesn’t seem to be affected so far.”

This is a stark contrast to businesses that serve other types of consumers.

McDonald’s said on its second quarter investor call that customers reduce their orders against inflation. “We’re seeing customers, especially low-income customers, opting for value offerings and fewer combo meals,” said CFO Kevin Ozan.

At Walmart, customers have changed their spending habits in the face of rising food and gas prices, reducing purchases of clothing, for example, and switch to cheaper private labels. And many other companies, Bath and body care at Chipotleare bracing for slower sales, especially from low-income consumers, in the coming months.

Recession could be a ‘self-fulfilling prophecy’

Shoppers walk past the Gucci store with mannequins displayed in the window

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Still, there are signs that even the luxury sector may be starting to feel some pain due to the ongoing war in Ukraine, COVID lockdowns and economic uncertainty.

Kering chief financial officer Jean-Marc Duplaix said the company was in a “wait-and-see mood” on the economy due to the war in Ukraine, which is driving up costs.

Kering and other luxury goods companies are also grappling with ongoing lockdowns in China. Chinese consumers dominate the global luxury marketand the closures shuttered many high-end stores and reduced the number of Chinese tourists shopping overseas.

Kering said 30% of its stores in China were closed in April and May. LVMH chief financial officer Jean Jacques Guiony said sales in China fell “by double digits” in the last quarter. But both companies said they were optimistic about the resumption of activities in the region.

Kering and LVMH also expressed cautious optimism that European and American tourists will continue to spend on luxury goods.

Guiony said LVMH doesn’t have a “particularly bleak and pessimistic” outlook on the U.S. economy, but it does have a plan in place in the event of a deeper economic downturn.

“My fear is that all this commentary about recession and falling demand will become a self-fulfilling prophecy,” he said.

Read the original article at Business Intern

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