French $17bn luxury goods become election losers

Whoever wins next month’s French election, luxury-goods makers will be the likely losers. Frontrunners President Nicolas Sarkozy and Socialist candidate Francois Hollande have both pledged tax increases. The measures may damp the feel-good factor, a driver of luxury-goods consumption, as has happened elsewhere in Europe, according to CA Cheuvreux’s Thomas Mesmin. “France could become the next Italy,” the Paris-based analyst said. Spending on high-end goods has been under pressure there since Mario Monti was appointed prime minister in November. Higher taxes and a 1,000-euro ($1,320) limit on cash payments in particular have dented local demand at brands including Gucci as well as reducing average purchase prices. In France, Hollande has proposed raising the income tax to 45 percent for those earning more than 150,000 euros a year and imposing a 75 percent levy on income over 1 million euros. The presidential election favorite’s manifesto also includes limiting exemptions to 10,000 euros and aligning capital gains and income tax. The austerity measures are “a negative” for luxury consumption in France, according to Andrew Hughes, an analyst at UBS. Higher taxes and ending some allowances for the wealthy may hurt demand even though tourists account for a “big chunk” of sales in Paris, Hughes wrote in a Feb. 17 report. Pointing the Finger Sarkozy has said he’ll lift the value-added tax to 21 percent from 19.6 percent as well as introduce a financial tax and a levy on the worldwide revenue of large French corporations if re-elected. Jobless claims jumped to a 12-year high in January as the president implemented a second round of tax increases and spending cuts in less than six months to narrow the budget deficit after Standard & Poor’s stripped France of its AAA credit rating. “All the politicians in this election try to impress the electorate in talking taxes, in pointing their fingers at the rich,” France Telecom SA Chief Executive Officer Stephane Richard said in a March 13 interview. Top earners may not stay in France if the proposals are implemented, said Line-Alexa Glotin, a partner at Paris law firm UGGC & Associes. Officials at LVMH Moet Hennessy Louis Vuitton SA (MC), the world’s largest maker of luxury goods, and PPR SA (PP), the Paris- based owner of Gucci, declined to comment on luxury demand in France or the presidential candidates’ proposals. France accounts for about 13 billion euros of annual luxury-goods sales, or about 8 percent of the total, according to consultant Bain & Co. ‘Be Careful’ Because employment is tied to consumption, the next president “should be careful about not taking decisions which would be short-term gains but long-term negative,” said Anne Michaut-Denizeau, affiliate professor of marketing and luxury certificate coordinator at Paris business school HEC, adding that higher taxation won’t necessarily lead to lower sales. French luxury-goods makers employ more than 160,000 people in France and generate 84 percent of sales outside their domestic market, according to trade association Comite Colbert. The industry is “a cultural strength” and “has to be protected,” Michaut-Denizeau said. In Italy, local traffic is down at Gucci’s stores and the 1,000-euro cash cap that Monti introduced last year to help curb tax evasion hurt sales in December and January, CEO Patrizio Di Marco said in a Feb. 21 interview. Many would-be shoppers are hesitating, Cavalli Group Chief Executive Officer Gianluca Brozzetti said in a Feb. 24 interview. Luxury Growth Sales of luxury goods may grow 4 percent in Europe this year, excluding currency swings, said Thomas Chauvet, a Citigroup Inc. analyst. The forecast reflects a combination of weak domestic spending and robust tourist-driven demand. Sarkozy and Hollande would receive the same share of the vote in the first round of France’s presidential election on April 22, a poll published March 15 showed. In a potential runoff on May 6, Hollande leads Sarkozy 54 percent to 46 percent, according to the CSA survey for BFM TV, RMC Radio and 20 Minutes newspaper.