The virtual forum “The Power of Diversity: Women at GAM,” held by GAM Investments from the 28th September to the 2nd October, was attended by Swetha Ramachandran, Investment Manager in the European Equities team and Head of the GAM Global Luxury Brands strategy, as well as responsible for research in the consumer goods sector, both in commodities and discretionary.
As Swetha Ramachandran explained during her presentation, there are three factors why the consumption of luxury goods has persisted during the pandemic. The first is that, during times of uncertainty, consumers revert to trusted brands that provide a sense of confidence and security. Secondly, the luxury sector continues to attract new consumers, with the Baby Boomer generation embracing online spending, and with growing Chinese consumerism beyond its Tier 1 and 2 cities. Thirdly, the pandemic has triggered a trend for more sustainable behavior, with consumers looking to buy less, but with better quality.
In addition to the sustainability factor and the circular economy, the luxury sector is supported by a growing middle class looking for aspirational consumption in emerging economies, particularly in the Asian region. As well as the demographic and lifestyle changes happening among the Millennial and Z generation, and among the older generations, who can devote a greater part of their income to luxury spending.
The attractiveness of these stocks lies in their ability to have exposure to the rapid growth of emerging economies and in particular to the consumer sector, a sector that has a much higher growth rate than the rest of the components of GDP. In addition, most of the stocks in which GAM Global Luxury Brands invests are listed on both European and US stock exchanges, so their capital costs are at developed economy levels, thus benefiting from very low capital costs.
The growth of the emergent consumer
Globally, the middle class spends about $35 billion and by the year 2030 could be spending an additional $29 billion to reach $64 billion, representing about a third of the global economy.
While this middle class grows at a rate of 0.5% in developed economies such as Japan, the United States or the Eurozone, in countries like China and India it shows a growth rate of 6%. If the current rate of growth continues, it is estimated that by 2030 Asia will represent two thirds of the global middle class. As such, the population of China and India will represent about 43% of the middle class by that time.
Currently, China accounts for 35% of global luxury consumption and is responsible for 90% of its growth; while Japan and other Asian countries account for 21% of the global luxury market share and 20% of its growth.
Based on age, the so-called Generation Y (Millennials) and Generation Z are the two generations that are most inclined to spend in the luxury goods sector. Particularly in regard to the Asian and Southeast Asian generations, as the average age of the Asian consumer is 28, while the European or American luxury goods consumer is 40 and 45, respectively.
It is particularly the Chinese Millennial generation consumer who is the biggest spender on luxury brands. This is mainly explained by the rapid generational change that has taken place in the country over the last 40 years. The birth control program of one child per couple, implemented in 1979 in China, makes the Chinese Millennial the only beneficiary of the wealth accumulated by previous generations. As a result, 70% of the millennial generation in China owns their own home, as opposed to 35% in the United States and Europe. This means that once they start working, most of their income is disposable income, and a large part of this is for luxury consumption.
Another reason for their increased propensity to consume is consumer sentiment. In the last 30 years, China has experienced a growth in GDP per capita from the standpoint of purchasing power growth of about 17 times, a figure that compares with less than 5 times in the United States and Europe. This represents that the attitude of Chinese Millennials towards spending is that the future is going to be better than that of their parents’ generation, which fuels their appetite for living well and for consuming premium brands. This is one of the characteristics that differentiate them from past generations that grew up in a China where there was much more economic adversity and more frugal consumption patterns.
While within the next 5 to 10 years China will be the major consumption driver in the luxury goods sector, it doesn’t mean that it will be the only growth factor. If we take into account the combined population aged under 30 of India, Southeast Asia (Thailand, Vietnam, Indonesia and the Philippines), Brazil, Russia, the Arab Emirates and Saudi Arabia, it is 2.3 times more than the population of the same age in China. The only difference is the lower purchasing power of these countries compared to the Asian giant.
However, strong growth in consumer purchasing power is expected in these countries, especially in the Asian region, so that in the long term they could become very attractive consumers for the luxury goods sector. Consumers in the “mass affluent” sector, defined as those consumers with both the income and the intention to greatly increase their consumption of luxury products, will grow to 20% of the population by 2030.
Meanwhile, India is a long-term scenario. Historically, despite having a similar population size to China in absolute terms, China accounts for one-third of global luxury consumption while India barely approaches 3% or 4%. The main reason is that household income is distributed in a pyramidal fashion with a ridiculously small upper class at the apex and a broad base with lower incomes. But this income based population pyramid is being transformed; in fact, a significant increase is expected in the upper and upper-middle class income segments, which at present represents 1 in 4 households, and by 2030 is expected to represent 1 in 2, with some 70 million fewer households in the lower income segment.