Luxury companies are defying the odds and thriving in the midst of a global cost of living crisis and the looming possibility of a recession. Despite higher interest rates, surging inflation, and an ongoing energy crisis, wealthy consumers are still willing to splurge on luxury products. Companies such as Hermes and Diageo are reporting strong sales and are confident in their ability to continue profiting from their most expensive items.

Hermes, renowned for its high-end Birkin handbags, recently announced a record-breaking quarterly profit margin. Sales have seen a significant surge in Europe, the United States, and China. Chairman Axel Dumas has stated that the company hasn’t witnessed any signs of a slowdown in any region, even after raising prices by 4% this year. Similarly, automobile manufacturer Renault, which focuses on selling fewer but more lucrative cars, has experienced positive results and has upgraded its full-year margin forecast.

Luxury brand Louis Vuitton, owned by LVMH, has also reported impressive results, particularly in the fashion and leather goods sector. Rebecca Chesworth, a senior equities strategist, highlights that consumers who now have the ability to travel have been increasing their sales of wines and spirits.

While these luxury companies are flourishing, many consumers are bracing themselves for the economic downturn, especially during the winter months. Rising energy bills and food costs have placed a financial burden on households, leaving many unable to spend on anything beyond essential items. Companies like Nestle and Unilever are in negotiations with retailers to prevent price hikes on basic necessities, as supermarkets fear alienating financially struggling shoppers.

It’s important to note that not all companies have the leeway to raise prices during this crisis. Only those with a dominant position in their sectors and strong pricing power can do so. Investors should consider focusing on quality players within the luxury sector to ensure stability and potentially higher returns.

Interestingly, despite the erosion of savings among wealthier consumers due to inflation, they are currently more focused on enjoying newfound freedoms after the easing of COVID-19 restrictions. British Airways-owner IAG has returned to profitability in the second quarter, largely driven by increased travel within Europe. Forward bookings indicate no signs of weakness, suggesting that pent-up demand for travel outweighs the impact of the cost-of-living crisis.

Diageo, known for its popular alcoholic beverages such as Don Julio tequila and Johnnie Walker whisky, has also surpassed full-year sales expectations, thanks to the recovery of the travel retail sector. However, CEO Ivan Menezes cautions that it may take another two years or longer for a full recovery.

While some European lenders have reported positive profits, investors remain cautious about the repercussions of a weaker economy, surging inflation, and the ongoing war in Ukraine. Eurozone inflation hit a record high in July, and the European Central Bank may need to consider another interest rate increase in September.

Despite these concerns, French bank BNP Paribas has announced better-than-expected quarterly profits, driven by lower bad loan provisions and strong performance in both investment and retail banking.

In conclusion, luxury companies are thriving despite the challenges posed by the cost of living crisis and the looming economic uncertainties. Wealthier consumers continue to indulge in luxury goods, and companies with pricing power and dominant positions in their sectors are capitalizing on this trend by increasing prices and maintaining profits. Although challenges remain, there are signs of resilience and opportunities for growth in certain sectors.

Useful Links:
1. Cost of Living Crisis – Financial Times
2. Preparing for the Cost of Living Crisis – CNBC