Luxury sales are on the rise in Europe, offering a glimmer of hope for regional markets. However, the success story has raised concerns that the continent may be relying too heavily on an industry many see as a symbol of decadence. In this digital age, building a knowledge economy on centuries-old crafts may seem like a backward move, particularly when western capitalism faces rising wealth inequality, weak productivity growth, and the challenge of competing and coexisting with China.
While the US has seen explosive growth from the tech sector, Europe has watched its luxury industry boom, culminating in record sales during the pandemic. The explosion of global wealth has benefited the very rich, and they have spent generously on high-end goods, driving two-thirds of global luxury sales revenues to Europe. As a result, four luxury names now feature in Europe's list of top 10 companies by market capitalization, up from zero at the start of the 2010s. The popularity of European luxury brands has even exceeded that of big tech, with earnings amounting to nearly 25% of revenue. While this is good news for the luxury industry, it is not necessarily positive for Europe's economy. The region faces the challenge of constructing a sustainable knowledge economy based on craft industries from past centuries. Additionally, the luxury industry's success is largely dependent on Chinese consumers, who account for a third of its sales.
The concentration of power in luxury mirrors that of the tech industry, with power resting at the very top. The top European brands account for a third of global sales, up from a quarter in 2010. The French have gained dominance in luxury, thanks to Bernard Arnault's corporate raiding of LVMH in 1989 and subsequent acquisitions. He set out to build the first house of luxury brands, inspiring other rivals to follow. Today, the global luxury industry is based on goods still made by small Italian firms but sold by big French conglomerates. Luxury businesses are increasingly serving clientele that are increasingly price-insensitive. The price of a Chanel handbag has doubled in the last five years to a whopping $10,000, far outpacing general consumer price inflation over that period. Luxury companies enjoy high profits due to their pricing power and affluent customer base.
Although the success of European luxury sales is a positive development, it comes with an asterisk. Capitalism benefits more from competition than concentration. A knowledge economy based on centuries-old crafts may seem outdated or even decadent in the modern era. As Europe debates how to compete with China and address wealth inequality, it must also consider whether the luxury sector will continue to be its sole source of economic growth.