The European Luxury Goods Industry is Back on Its Feet but Automotive Still Limps On

Two persistent questions in the European automotive industry are whether car sales have finally bottomed out in the region and if they will ever return to pre-crisis levels. As private car purchases are discretionary in nature, I thought it interesting to consider another sector that relies upon discretionary purchasing as opposed to necessity buying; luxury goods. In comparing the retail value sales growth of luxury goods per household between 2004 and 2012 against the performance of consumer expenditure per household on the purchase of motor vehicles, there were two notable findings.

First, luxury goods sales per household already recovered back to 2004 levels in 2012 in France, Germany and Italy and are only slightly down in the UK, although they are still over 20% lower in Spain. Second, the recovery of the luxury goods sector is stronger in each country than that of consumer expenditure on the purchase of motor vehicles, which remained at least 10% off the 2004 level in 2012 in the EU Big 5, with the exception of Germany, which was down by 9.9%. This naturally suggests that the propensity to spend on luxury goods has recovered from the crisis better than consumers’ inclination to purchase motor vehicles. In fact, luxury goods themselves may be partly responsible for the sluggish recovery of the European automotive sector as consumers seemingly prefer to indulge in luxury items than committing to on-going repayments for a car.

Consumer Expenditure on the Purchase of Motor Vehicles and Luxury Goods Retail Value, per Household, Percentage Change, 2004-2012

Source: Euromonitor International

Looking to 2013, France, Italy and Spain are expected to experience declines in sales of luxury goods and new car sales continue on a downward trajectory too, although the Spanish car market may yet post growth due to the PIVE incentive schemes that have been implemented. Luxury goods sales are climbing again in 2013 in Germany and the UK as too are car sales in the UK. Car sales have struggled in Germany but orders are increasing, which "demonstrates the continuing gradual stabilisation on the German market” according to Matthias Wissmann, President of the German Association of the Automotive Industry (VDA), on their website.

One concern in Europe is that there is a process of de-motorisation, whereby consumers have learned to live without their cars or at least hold on to them for longer and so replacement demand may never return to pre-crisis levels. In the context of greater caution towards debt and with car-sharing gaining momentum, I am inclined to agree with this concern. One could argue that price rises in luxury goods in Europe may even tempt some people back into spending on cars again, but maintaining the trend for affordable luxury seems more likely and the negative impact on new car sales of the cultural shift towards austerity may never be shaken off.