UBS Evidence Lab: Mythbusters – Top 10 client surprises so far
* We have been on the road meeting with London and US investors
Our recent sector relaunch and work with UBS Evidence Lab has thrown up several big
surprises for investors based on the results from our pricing analysis of 46,000 SKUs
and our Chinese/US surveys. This note sets out the top ten of these investor surprises
and the charts which debunk each of these common misconceptions. Burberry, LVMH
and Kering are our key Buy calls in soft luxury. We prefer Richemont in hard luxury. We
are more cautious on Prada, Ferragamo and Tod's where we have Sell ratings.
* Myth #1: Handbags are most competitive at €1,500-€2,000
Investors are worried that handbag brands have upscaled too far. But SKU distribution
analysis by UBS Evidence Lab contradicts the consensus view that the €1,500-€2,000
handbag price point is too crowded. We see the absolute luxury & entry price points as
best placed. We believe that pricing power is strongest at the absolute luxury
positioning (>€2,500), while those brands with a strong offer at c€1,000 are best
placed to gain volume share. Louis Vuitton, Gucci and Burberry have the highest offer
around €1,000. Louis Vuitton has 37% of SKU's >€2,500 (industry 22%); given the
strength of brand equity and new launches here we see this as a positive for the
brand's pricing power. We think Prada, Tod's and Ferragamo are over exposed to the
squeezed €1,500-€2,000 segment.
* Myth #2: Global price gaps are similar across all brands
Soft luxury global price gaps are considerably more stretched than Hard Luxury. Within
Soft Luxury, gaps between Mainland China and the Eurozone vary considerably by
brand – with premiums ranging between 32% and 64% according to our data. We see
price cuts in Greater China as a risk for soft luxury brands as they seek to normalise the
regional price gaps, since we believe pricing power with domestic Europeans is limited.
* Myth #3: Chinese luxury brand selection is highly price sensitive
Chinese purchases are led by core luxury brand attributes ahead of price which
reassures us that luxury consumption is not as price sensitive as the market fears.
Looking at the main purchase drivers from our survey of 1,004 Chinese luxury
consumers in November 2015, 'quality', 'timelessness' and 'exclusivity' all rank higher
than price for the Chinese. This was in sharp contrast to our US survey results.