The June 23 “Brexit vote” in the UK brings to mind a well-known quote from Winston Churchill: “Democracy is the worst form of government, except for all the others that have been tried.”
But, regardless of whether one thinks the vote is a good idea or not, the pertinent question for us as investors is, how would a British exit from the European Union impact our portfolio?
As long-term equity investors who hold companies in our portfolio for an average of eight to 10 years, and who have held nearly half of our companies for over a decade, an even more relevant question is, how would a Brexit affect the operations of the companies we own?
Last week I described what, in my opinion, the implications would be for our consumer staples companies. Well, what about our consumer discretionary names? Nearly 5% of our portfolio’s assets are invested in five luxury companies: Hermes, LVMH, Richemont, Burberry and Swatch.1
How a Brexit Might Impact Luxury Retailers
The demand for luxury goods is being driven by rising wealth, particularly in emerging markets. What better way to display your success than with a very expensive watch, pen or piece of jewelry? And the more expensive it is, the better it does the job. These are not price-sensitive products and costs are not much of a concern for producers. Competitive advantage in the luxury goods industry is dependent upon the glamour of the brand; that is the barrier to entry. And the barrier for all of these companies is deep and wide.
Let’s take Richemont and just two of the brands they own – Cartier and Van Cleef & Arpels – as examples. What brand other than Cartier can show photographs of the Duchess of Windsor wearing a diamond leopard pin that their house designed specifically for her? None. How many brands can launch a museum exhibit showcasing jewelry their firm has designed for over a century as Van Cleef & Arpels did five years ago in New York? Very few, if any.
The same holds for Hermes. Who else can show pictures of Grace Kelly using the bags they named after her? What other company could unveil a $300,000 handbag, as Hermes did this past weekend, and start drawing up a waiting list for it?
LVMH applies the same brand mystique marketing to its Louis Vuitton luggage, its single biggest money earner, as well as its Hennessy cognac; its champagne houses Veuve Cliquot, Dom Perignon, Moet & Chandon and Krug, and its fashion brands such as Yves Saint Laurent.
Swatch benefits from this too. Swatch is not a luxury watch brand company, but the supplier upon which they must depend. It controls production in the Swiss watch movement industry.
Burberry, inventor of the trench coat in World War I, has done a remarkable job of turning a raincoat lining pattern into an iconic brand pillar and extender.
As the only British company in the bunch, Burberry’s earnings would be flattened in the near term by the translation effect should the pound weaken. For the other companies, British sales are too small a portion of the whole to make much of a difference, either to the translation of their earnings or to their operations.
Powerful Brands Will Trump a Possible Brexit
Each of these companies relies upon brand mystique and the pricing power it confers, deliberately driving revenue growth by increasing prices more than volumes. These companies have taken decades to build their market-leading positions. They have maintained their relevance through dramatically changing fashion waves (Belle Epoque, Flappers, Swinging Sixties, to name a few), fluctuating economies (the Roaring Twenties, the Great Depression) and two World Wars.
In our opinion, a “Brexit”, for them, would be just this side of irrelevant.
For additional insights on potentially profitable long-term trends, view the full archive of George Evans’ GrowthSpotting series.
1 0.91% of the Oppenheimer International Growth Fund is invested in Hermes as of 3/31/16. As of that date, 0.96% of the Fund is invested in LVMH, 0.89% in Richemont, 1.01% in Burberry and 0.77% in Swatch.
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