What impact on the luxury industry?

After competing for the biggest and most sumptuous stores, the luxury industry is spending big to snap up the most prestigious real estate assets on the market. Over the past five years, the major luxury groups have invested almost €10 billion in real estate, having decisively stepped on the accelerator in the past 18 months. Such extravagant real estate spending is not without consequences, for the market and for the corporations themselves, as demonstrated by the Bernstein consultancy in the study 'Luxury Retail Evolution, Store Wars', carried out for Altagamma, the association of Italy's leading luxury brands.

Bernstein's report indicates that between 2020 and 2024, Hermès has invested 200 million euros in real estate, Chanel has invested 500 million euros, Prada 800 million euros, in particular by purchasing a building on Fifth Avenue in New York in December 2023, LVMH has invested 3.4 billion euros, including 1 billion last December for the building at 150 Avenue des Champs-Élysées in Paris, and Kering has invested 4 billion euros, its latest purchase, announced in April, a palace on via Montenapoleone in Milan.

According to Luca Solca, the author of the study, investments of this magnitude could have a negative impact on smaller groups. According to Bernstein's calculations, the €3.2 billion invested in real estate by LVMH between 2022 and 2023 represented 14% of its free cash flow. For smaller groups, such as Kering, which invested €1.8 billion in the same period, or Prada, which spent €800 million, the impact of these sums on cash flow was much more significant, at 35% and 59% respectively.

“This means having fewer resources that can be allocated to brand growth, investing in manufacturing facilities and other operational investments. It also has an impact on debt. In addition, such a large real estate investment ties up the group’s capital without obtaining a significant return, with a maximum return of 2%-3% per year. This, in turn, depresses the ROI, diluting it, with the risk of triggering a fall in the share price and a fall in the group’s valuation, exposing the company to a greater risk of being acquired,” says Solca.

The other result of this property rush is that it has been concentrated on a single shopping street in each of the world's fashion capitals, except in Paris, where the Champs-Élysées has been the centre of attention along with Avenue Montaigne (mainly the favourite of LVMH brands). A phenomenon clearly visible in Milan, where Via Montenapoleone has overtaken Via della Spiga, the Lombard city's other long-established luxury shopping street, and in New York, where Fifth Avenue has replaced Madison Avenue.

As a result, smaller brands, even if they are as well-known as the big luxury giants, are destined to drop out of the race for the most prestigious luxury shopping streets, unable to compete with such a large-scale investment.

However, Solca sees this phenomenon as an opportunity as well, as the scale of the investments would prevent smaller brands from mistakenly jumping into this kind of race. Solca also hinted at ways in which these brands could resist and even fight back. “The best thing to do seems to be to regroup and return to areas that have been neglected lately, such as Via della Spiga in Milan and Madison Avenue in New York,” he advised.

Another recommendation is to try to get ahead of the competition by looking for locations that could prove attractive in the near future, as Moncler did a few years ago by opening a store on the Champs Elysees, where it now finds itself in excellent company. A third idea is to invest in luxury apartments, much cheaper than properties with street-level premises, where brands can create exclusive commercial spaces well suited to their wealthiest customers.