From Fifth Avenue to Fort Worth: Luxury brands looking to expand in the US

To celebrate its new flagship store in New York recently, Hermès hosted an elaborate party, featuring Broadway singers performing a specially commissioned musical. Wealthy guests, including many women with their Birkin bags, drank champagne and ate alongside food trucks painted in Hermès’ signature orange.

While extravagant openings are commonplace for the world’s biggest luxury groups, Hermès’ latest glitzy window on Madison Avenue underscores how much the industry cares about its biggest market, even as economic fears and inflation rise.

In the United States, demand for expensive bags and clothing recovered very quickly from the coronavirus pandemic, and has since proven to be surprisingly resilient. US luxury sales grew nearly twice as fast as the global average in 2021 and one and a half times faster in the first half of 2022, according to Citi Research.

Industry leader LVMH recently reported 19% year-on-year revenue growth in the US, while Hermès grew 24%. Even the summer boom in luxury sales in Europe was driven by big-spending American tourists.

It remains to be seen whether this positive dynamic will continue in the US, given the clouds gathering over the economy. After several years of double-digit growth, analysts say a normalization with a slower pace of expansion is inevitable.

Two of the biggest players, however, still consider the US a priority for investments. Far from backing down, LVMH and Cartier told the Financial Times they plan to continue expanding in the US.

“The short-term economic outlook is difficult to predict, but we know we need more exposure in the country,” Cartier Chief Executive Cyrille Vigneron said in an interview.

Cartier, the watch and jewelry brand of Swiss luxury group Richemont, has doubled the size of its US business in five years, he added, and is confident it can attract more American customers.

For this, the brand wants to expand its number of stores from 30 to 40.

“In Texas, we’re in Dallas and Houston, so we might be in Fort Worth or Austin as well,” said Mercedes Abramo, who runs the jewelry store in North America. “We’re also looking northwest, as we’re not in Seattle yet, and more locations in Florida as well.”

With 78 billion euros (R$ 390 billion) in sales in 2021, the US luxury market is the largest in the world, ahead of China, with 60 billion euros (R$ 300 billion), according to Bain. And it’s rapidly evolving as shoppers get younger, more diverse and geographically spread beyond the traditional hubs of New York and California.

In addition to the flagship store in New York, Hermès opens two other stores this year that reflect the changes. The first is in Austin, Texas, to serve the growing population of wealthy tech workers who have moved from Silicon Valley, California. The other will soon open in Naples, Florida, a regular enclave.

Kering, which owns Gucci and Saint Laurent, intends to open more than 30 stores in the United States in the coming years, and recently opened in Columbus (Ohio) and Austin.

This kind of geographic expansion in the United States is relatively new for luxury brands, which used to rely on department stores like Saks or the now bankrupt Neiman Marcus to serve much of the country. Before the pandemic, nearly half of luxury sales in the US were made in New York City, according to Bain.

Now sales are more spread out. Wealthy people have been relocated with the rise of remote working, and luxury brands have won new customers with more personalized and US-specific marketing. LVMH’s Tiffany has worked with Jay-Z and Beyoncé on a flashy advertising campaign, and its Hennessy cognac brand has a partnership with the NBA.

The expansion of e-commerce during the pandemic has also helped luxury brands identify new pockets of demand. “Americans have long expressed status by buying a big house or multiple cars and less on luxury goods, but brands have done a lot to change that,” said Citi’s Thomas Chauvet.

LVMH is taking its smaller brands to smaller cities, said Anish Melwani, who runs the company in North America. Its biggest brands, Louis Vuitton and Tiffany, already have a large retail presence, with 110 and 93 stores respectively, but Dior has just 42, Fendi 36 and Givenchy eight. The beauty chain Sephora, an LVMH brand that is more popular, has more than 500 stores across the US.

“The US is a priority investment market for all our brands, and this was not the case a few years ago,” said Melwani. “Five years from now we will have hundreds of stores more than today.”

Luxury groups’ enthusiasm for the US also stems from the fact that the outlook for China, which has driven most of the growth over the past decade, has become more uncertain. Xi Jinping’s government is sticking to its Covid-zero approach, and Chinese who used to buy luxury goods in Europe aren’t traveling abroad much.

While luxury sales have proved resilient in China, some executives say it’s important to invest in both the US and China to hedge against unforeseen risks. Russia’s invasion of Ukraine was a wake-up call that led some to wonder what they would do if a similar scenario occurred with China attacking Taiwan.

“China was the top priority for most brands before Covid-19, and now we want to make the US and China a priority,” said Melwani.

For now, the biggest brands say they aren’t experiencing any downturn in the US, but investors are bracing for one. The S&P Global Luxury Index is down about 30% this year.

In the US, credit card data shows a slight weakening in luxury spending – a 5% to 6% drop in September year-over-year after a 2% to 4% decline in August – according to Bank of America. and Mastercard.

“Upscale consumers in the US continue to have strong purchasing power,” said Caroline Reyl, an investor at Pictet Asset Management, whose funds own LVMH, Richemont and Hermès. “I would be surprised to see a big drop in luxury consumption in the US, I see it more as a normalization”, meaning a return to mid-digit growth rather than the double-digit growth seen recently.

On a recent visit to the Cartier store on Fifth Avenue, Christian Atangana, chief executive of a London-based agribusiness company, was eager to treat himself after suffering hardships during the pandemic. “I just turned 30 and have my eye on some watches,” he said. On his shopping list, two Cartier models: Santos or Ballon watches, which cost from US$ 6,000 (R$ 30 thousand).

At ByGeorge, an upscale retailer in Austin, shoppers have been buying dresses and jewelry for charity events that are back in full swing for the first time in a while. “Every weekend there’s a gala or two… People are buying things to go out and be seen,” said store president Molly Nutter. Sales in September and October were better than last year. “We see that the appetite remains large.”

Translated by Luiz Roberto M. Gonçalves