Valuing Compagnie Financiere Richemont Through 'The Cult Of The Luxury Brand,' Part 1

| About: Compagnie Financiere (CFRHF)

Summary

In a previous article, I described how The Cult of the Luxury Brand offers us a model for estimating the growth of luxury companies in Asia.

We will now apply that model to Richemont, one of the largest personal luxury goods companies in the world.

To apply this model, we first need to calculate where Richemont's customers come from.

This requires us to apply global trends in personal luxury goods sales to the company's sales around the world.

Once we have done so, the next step is to predict the company's growth by forecasting the development of its per capita sales in each region.

The Cult of the Luxury Brand - Cover

In my recent article on The Cult of the Luxury Brand, I described how Radha Chadha and Paul Husband’s book could be used to predict the luxury industry’s growth in Asia.

Their book describes how Asian countries’ luxury goods consumption grows through a series of stages, as detailed in their “Spread of Luxury” model. Each stage corresponds to both a different level of economic development and a different level of luxury consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the “Way of Life” stage is the end stage for Asian markets as they become fully developed.

The “Spread of Luxury” Model

Stage

Characteristics

Places at this Stage

Subjugation

  • Authoritarian Rule
  • Poverty and deprivation

Start of Money

  • Economic growth
  • Masses buy white goods
  • Elites start buying luxe

India, Indonesia, Philippines

Show Off

  • Acquire symbols of wealth
  • Display economic status

Mainland China, Malaysia, Thailand

Fit In

  • Large scale adaptation of luxe
  • Fueled by need to conform

Taiwan, South Korea

Way of Life

  • Locked into luxe habit
  • Confident, discerning buyers

Japan, Hong Kong, Singapore

Source: The Cult of the Luxury Brand

In the book, the major market that best defines the “Way of Life” stage is Japan. Japan has the highest per capita luxury goods consumption of any major market in Bain & Company’s Fall-Winter 2016 Luxury Goods Worldwide Market Study. If the “Spread of Luxury” model is accurate, per capita luxury goods consumption should increase in Asian markets outside of Japan until it approaches Japanese levels.

In my article introducing The Cult of the Luxury Brand, I described how this process of per capita luxury consumption increasing towards developed country levels is reminiscent of the rise in per capita Coca-Cola (KO) consumption between 1980 and 2010. In that case, countries’ consumption rates rose towards American levels as they became wealthier. I also mentioned how Warren Buffett predicted this trend by comparing American per capita Coke consumption to Coke consumption abroad. This trend was the basis of his investment in Coca-Cola.

It should be possible to predict a similar rise in per capita luxury goods consumption in Asian markets outside Japan. In my article introducing Chadha and Husband’s book, I estimated that Asian luxury goods consumption should reach saturation in about 32 years. By combining that result with our predictions for the rise in per capita luxury consumption, we should be able to estimate the major luxury conglomerates’ long-term growth. Knowing how fast they will grow will tell us if they will be attractive investments in the coming decades.

Valuing Compagnie Financière Richemont Using the “Spread of Luxury” Model: Attributing Sales to Regions

In my two most recent articles, I used the “Spread of Luxury” model to estimate the future growth of LVMH group (OTCPK:LVMHF) (OTCPK:LVMUY), the owner of brands such as Louis Vuitton, Bulgari, and Marc Jacobs. I projected that LVMH group would grow at around 4.6% per year for the next 30 years in my most recent article, for a total return of around 5.2% taking into account dividends and changes in valuation.

To apply the “Spread of Luxury” model to LVMH’s operations, I first had to calculate the company’s sales to customers from each of its major sales regions. This actually proved surprisingly difficult, as can be seen in my first article about the company. It required adjusting the company’s sales in each region for the proportion of those sales made to tourists from each region.

Having calculated the future growth of LVMH, I will now do the same with Compagnie Financière Richemont (OTCPK:CFRHF) (OTCPK:CFRUY). Richemont, the owner of such brands as Cartier, Dunhill, and Piaget, is a logical second choice for this process. The company is one of three luxury conglomerates profiled in Chadha and Husband’s book, alongside LVMH Group and Gucci, the latter now owned by Kering SA (OTCPK:PPRUF) (OTCPK:PPRUY). It is also roughly tied with Kering for the position of the world’s second largest luxury conglomerate.

To calculate Richemont’s sales to customers from each of its sales regions, we first need to examine the company’s sales in each region:

Source: Richemont 2017 Annual Report

The problem is that these regions are where the company’s products are sold, not where their buyers come from.

This is a problem because many luxury goods buyers, especially in Europe and the U.S., are tourists. According to this chart from Bain & Company’s study, about half of all luxury goods sold in Europe are sold to tourists. Many luxury goods buyers in the Americas and Japan are also tourists.

Source: Bain & Company Fall-Winter 2016 Luxury Goods Worldwide Market Study

To use the “Spread of Luxury” model to estimate Richemont’s growth, we will need to figure out where the company’s customers come from, not just where they shop. This is because the model is based on the level of luxury goods consumption in customers’ home regions, including consumption abroad by tourists from those regions.

To do this, we can use the breakdown from Bain & Company’s study above describing where consumers from the largest luxury markets buy their luxury goods. If we assume Richemont’s customers follow a similar distribution, we can estimate where the company’s sales come from.

Richemont’s Sales in Europe

The first estimate we will need to make is an estimate of where Richemont’s Europe sales come from.

According to Bain & Company’s study, 40,770 million euros of the 82,000 million euros in luxury sales in Europe, or about half, are made to tourists from outside Europe. By considering the bar graph of “Where consumers shop for personal luxury goods, by their geographical origin” above, we can see that of that 40,770 million euros, 20,630 million comes from Chinese tourists, 1,270 million from Japanese tourists, and 2,250 million from tourists from the Americas. The rest, 16,620 million euros, come from tourists from the “Rest of Asia” and “Rest of World” regions.

However, we don’t know how much of those remaining sales can be attributed to the “Rest of Asia” versus the “Rest of World” region. To calculate this, we will assume that luxury goods sales to each region’s tourists in Europe are proportional to that region’s percentage of global luxury goods sales.

Source: Bain & Company Fall-Winter 2016 Luxury Goods Worldwide Market Study

Based on the chart above, the “Rest of Asia” makes up 56.1% of global luxury goods sales to customers from regions outside of China, Japan, Europe, and the Americas. Thus, I estimate that 56.1% of our remaining European luxury goods sales, or 9,320 million euros, goes to tourists from the “Rest of Asia.” That leaves 43.9% of those sales, or 7,300 million euros, to be attributed to tourists from the world outside of Asia, Europe, and the Americas.

In reality, sales of European luxury goods to consumers from the “Rest of Asia” and the “Rest of World” regions are probably not exactly proportional to those regions’ total luxury goods sales. The availability of luxury goods is different between those two regions, so that consumers in one region may have more incentive to travel to Europe for their luxury goods than consumers in the other. Also, obviously, those regions are in different places geographically, so one region’s customers may have easier access to Europe than the other.

That said, I do think my estimates are close enough to the truth for our purposes. Geographic positioning and local luxury product availability will affect some consumers who are thinking of buying luxury goods in Europe. However, the customers with the biggest impact on the sales statistics, those who buy thousands or tens of thousands of dollars of luxury products at a time in Europe, are much less influenced by such factors. Moreover, even a change of 10 or 20 percent in the geographic origin of tourists buying luxury goods in Europe won’t dramatically affect our overall analysis. Thus, I think these estimates are still useful.

Using these estimates and the previously calculated data for tourists from China, Japan, and the Americas, we obtain this chart:

Geographic Origin of Tourist Luxury Goods Purchases in Europe

Tourist

Region of Origin

Tourist Purchases in Europe (million euros)

Percentage of Tourist Purchases

in Europe

China

20,630

50.6%

Japan

1,270

3.1%

Americas

2,250

5.5%

Rest of Asia

9,320

22.9%

Rest of World

7,300

17.9%

Total

40,770

100%

We can apply the proportions on the right-hand column to Richemont’s sales to tourists in Europe. To do so, of course, we need to assume that those sales fit the same regional distribution as overall sales to tourists in Europe.

We also make the same assumption - that Richemont’s sales reflect overall luxury sales trends - to calculate the portion of Richemont’s European sales that went to tourists. 49.7% of European luxury goods sales went to tourists in 2016. Richemont had 3,068 million euros in 2016 European sales; 49.7% of that is 1,524.8 million euros. Applying the proportions from the table above to that 1,524.8 million euros gives these results:

Richemont Europe Sales to Tourists by Geographic Region, Assuming Same Percentages

Tourist Region of Origin

Percentage of Tourist Sales in Europe (From Previous Table)

Richemont Europe Tourist Sales Attributable to Region (million euros)

China

50.6%

771.6

Japan

3.1%

47.3

Americas

5.5%

83.9

Rest of Asia, excluding Middle East

17.0%

259.1

Middle East

5.9%

90.0

Africa

11.0%

167.1

Australia

and New Zealand

6.9%

105.9

Total

100%

1,524.8

Richemont assigns Australia and New Zealand to its Asia Pacific region rather than combining them with Africa as Bain & Company does in its “Rest of World” region. Because of this, it is necessary to break Australia and New Zealand out of the company’s sales to the “Rest of World” region for our later calculations. I did so by calculating what proportion of the “Rest of World” region’s GDP could be attributed to Australia and New Zealand and assuming the same proportion of the region’s luxury sales could be attributed to those two countries. I used this same process to estimate the Middle East’s contribution to luxury sales in the “Rest of Asia” region.

As with our previous assumptions, these ones probably are not precisely true, but I believe they are close enough to the truth for our purposes.

Richemont’s Sales in Japan and the Americas

We can apply the same process to the other regions where Richemont has significant sales to tourists.

Geographic Origin of Tourist Luxury Good Purchases in Japan

Tourist

Region of Origin

Tourist Purchases in Europe (million euros)

Percentage of Tourist Purchases in Europe

China

6,470

100%

Europe

0

0

Americas

0

0

Rest of Asia

0

0

Rest of World

0

0

Total

6,470

100%

Strikingly, according to Bain & Company’s study, essentially all luxury goods sales to tourists in Japan go to Chinese tourists. We can see this by calculating how much Chinese tourists spend in Japan based on the graph of “Where consumers shop for personal luxury goods, by their geographical origin” above. We can then calculate how much tourists spend on luxury goods in Japan in total based on the “Personal luxury goods spending by local consumers vs. tourists, by region” graph. The two numbers are roughly the same - 6,470 million euros.

29.4% of Japanese luxury sales can be attributed to tourists based on the latter graph. That percentage, when applied to Richemont’s sales in the country of 1,010 million euros, results in 296.9 million euros of sales to tourists. Because essentially all of those sales are to Chinese consumers, we will add this amount to the company’s sales in the Asia Pacific region later.

We can make the same calculations for Richemont’s sales in the Americas. First, we calculate the percentage of tourist purchases in the Americas that can be attributed to each region, as we’ve done before for Europe and Japan:

Geographic Origin of Tourist Luxury Good Purchases in the Americas

Tourist

Region of Origin

Tourist Purchases in the Americas (million euros)

Percentage of Tourist Purchases

in the Americas

China

11,430

41.4%

Europe

3,990

14.5%

Japan

3,310

12.0%

Rest of Asia

4,960

18.0%

Rest of World

3,890

14.1%

Total

27,580

100%

Next, we apply the same percentages to the company’s Americas sales to tourists to calculate what portion of those sales went to tourists from each region. According to Bain & Company’s report, 33.6% of 2016 luxury sales in the Americas went to tourists. Assuming the same applies to Richemont, this means that 599.1 million of its 1,781 million euros in Americas sales went to tourists in the following proportions:

Richemont Americas Sales to Tourists by Geographic Region, Assuming Same Percentages

Tourist Region of Origin

Percentage of non-Americas Tourist Sales in Americas (From Previous Table)

Richemont Tourist Sales in Americas By Region (million euros)

China

41.40%

248.0

Europe

14.50%

86.9

Japan

12.00%

71.9

Rest of Asia, excluding Middle East

13.36%

80.0

Middle East

4.64%

27.8

Africa

8.63%

51.7

Australia and New Zealand

5.47%

32.8

Total

100%

599.1

I used the same method to calculate Richemont’s Americas sales to tourists from the Middle East as well as Australia and New Zealand, as a proportion of sales to tourists from the “Rest of Asia” and “Rest of World,” that I used in my estimates of Richemont’s Europe sales.

Richemont’s Sales in the Middle East and Africa

Bain & Company’s study attributes 5% of global luxury goods sales, or 12,450 million euros, to the “Rest of World” region. That region includes Africa as well as Australia and New Zealand. In contrast, Richemont combines the Middle East and Africa into one region and places Australia and New Zealand in its Asia Pacific region.

Despite this difference, we can still calculate tourists’ contribution to the company’s sales in the Middle East and Africa, as well as what portion of those tourist sales are made to tourists from each region. To do so, we will assume that the proportion of luxury sales in the Middle East and Africa that goes to tourists is the same as the proportion for Bain & Company’s “Rest of World” region as a whole.

This assumption is, of course, not exactly true. Australia and New Zealand have a different proportion of their luxury sales go to tourists than the overall “Rest of World” region. That said, I think it is fairly accurate. A recent IBISWorld report indicated that 30% of luxury sales in Australia went to tourists. The overall proportion for Bain & Company’s “Rest of World” region is 25.1%. Given that Australia makes up only a fifth of the “Rest of World” region by GDP, it seems reasonable to believe that the figure for the rest of the “Rest of World” region - essentially, Richemont’s “Middle East and Africa” region - is fairly close to 25.1%. This is especially plausible given that tourists make up a high percentage of luxury purchases in the Middle East, up to 60% in Dubai according to a 2014 report.

Within that 25.1%, about 63.9% goes to Chinese tourists, while 36.1% goes to Europeans, according to Bain & Company’s report. Applying those proportions to Richemont’s 885 million euros in sales in the region results in the following table:

Richemont Middle East and Africa Sales to Tourists by Geographic Region

Tourist Region of Origin

Percentage of Tourist Sales in the Middle East and Africa

Richemont Middle East and Africa Tourist Sales Attributable to Region (million euros)

China

63.9%

141.9

Europe

36.1%

80.2

Total

100%

222.1

In reality, of course, Richemont’s sales to Chinese and European tourists in the Middle East and Africa are different from these numbers due to our previously discussed adjustment. However, given the fairly small numbers involved relative to Richemont’s overall sales, the effect should be negligible.

Richemont’s Sales in the Asia Pacific Region

According to Bain & Company’s report, Japanese tourists make up almost all tourist sales in Asia outside of Japan. Adding Australia and New Zealand to that region to form Richemont’s “Asia Pacific” region does not change that because most luxury-buying tourists in Australia and New Zealand are from the rest of the Asia Pacific region rather than one of Richemont’s other sales regions, such as Europe or the Americas. Thus, we can assume that 15.2% of luxury sales in the Asia Pacific region goes to tourists, essentially all of which come from Japan.

Again, this is an estimate. The true proportion of sales that goes to tourists in the Asia Pacific region is probably lower than Bain & Company’s 15.2% calculation for Asia excluding Japan, since Japanese tourists probably make up less than 15.2% of tourist luxury purchases in Australia and New Zealand. We can infer the latter fact because Japanese tourist purchases outside of the Americas, Europe, and the rest of Asia are negligible according to Bain & Company’s report. That said, we can ignore this difference because Australia and New Zealand make up around 5% of the Asia Pacific region’s GDP. Therefore, they probably make up a similarly small portion of Richemont’s Asia Pacific sales. This means that modest errors in calculating Richemont’s sales to tourists there have little effect on our overall estimates.

Thus, we can assume that 15.2% of Richemont’s sales in the Asia Pacific region are to tourists, or 595.1 million euros. Based on Bain & Company’s report, we can attribute all of these tourist purchases to Japanese buyers.

Attributing Sales to Customers From Richemont’s Sales Regions

Having made these calculations, we can now estimate not only where Richemont’s sales were made but also where the customers who made those purchases came from.

To do so, though, we need to make a key adjustment in our process. Until now, we have relied on Bain & Company’s regional division of the world. That division does not overlap perfectly with Richemont’s regional breakdown. We have already considered the effects of this while discussing the company’s sales in the Middle East as well as Australia and New Zealand.

Richemont’s Sales to Asia Pacific Customers

However, this difference in geographic breakdown becomes even more important in examining the company’s Asia Pacific sales. Bain & Company’s study breaks Asia into three regions: Japan, China, and the rest of Asia. Richemont’s annual report divides Asia into only two: Japan and “Asia Pacific.”

Going forward, we will use Richemont’s division. This isn’t only because Richemont is the company we are valuing. Rather, it is also because we are using the “Spread of Luxury” model from Chadha and Husband’s book. According to that model, as they develop, Asian nations outside of Japan will progress towards Japanese luxury consumption rates. This argument implies a logical division of luxury goods sales in Asia between “Japan” and “the rest of Asia,” the latter of which largely overlaps with Richemont’s “Asia Pacific” region.

Thus, our first calculation is Richemont’s total sales attributable to customers from the Asia Pacific, including China. We can calculate this by adding the company’s sales to tourists from this region to the company’s sales in this region made to locals.

Richemont Sales to Customers from the Asia Pacific Region

Sales (million euros)

Percentage of Sales

In Asia Pacific

3,557.9

64.8%

In Europe

1,136.6

20.7%

In Japan

296.9

5.4%

In the Americas

360.8

6.6%

In the Middle East

and Africa

141.9

2.6%

Total

5,494.2

100%

It is interesting that almost 65% of Richemont’s sales to Asia Pacific customers occur in the region, since that proportion is over 10% higher than LVMH’s sales to non-Japanese Asian customers in its “Asia excluding Japan” region.

One reason for this is because Richemont includes Australia and New Zealand in the Asia Pacific region, whereas LVMH does not include those countries in its “Asia excluding Japan” region. Luxury consumers from those nations almost certainly buy fewer of their luxury goods abroad than Asian consumers. Asian consumers buy nearly half of their luxury goods abroad, whereas Europeans and Americans - with whom Australians and New Zealanders have a much stronger cultural affinity - make only about 5-15% of their luxury purchases abroad. Moreover, because many Asian tourists travel to Australia and New Zealand, combining those nations with Asia increases the proportion of sales that occur “at home” for Richemont’s Asia Pacific region versus LVMH’s “Rest of Asia” region.

That said, given that Australia and New Zealand are only a small part of Richemont’s Asia Pacific sales, this cannot be the whole reason. Another potential factor is Richemont’s relative weakness in sales in the Americas. The Americas make up 16.7% of Richemont’s overall sales, relative to more than 32% of global luxury sales. Fewer sales in the Americas for Richemont, including sales to Asians, means a larger portion of its sales takes place in other regions, including the Asia Pacific.

Also, combining the Middle East with Africa rather than with Asia lowers the percentage of sales made abroad for the Asia Pacific region. Like other Asian consumers, Middle Easterners make about half of their luxury purchases aboard, according to a May 2017 report.

Finally, an observant reader of this article will notice that my estimate for luxury sales to Asia Pacific consumers in this table does not match the numbers that would result from the regional calculations in the first part of this article. This is due to an issue with my estimate for sales to Japanese customers

Richemont’s Sales to Japanese Customers

The regional calculations above result in these numbers for sales to Japanese customers:

Richemont Sales to Customers from Japan

Sales (million euros)

Percentage of Sales

In Japan

713.1

50.0%

In Europe

47.3

3.3%

In Asia Pacific

595.1

41.7%

In the Americas

71.9

5.0%

In the Middle East

and Africa

0

0.0%

Total

1,427.3

100%

There is a problem with these numbers. The proportion of Richemont’s sales to Japanese customers in the Asia Pacific is much higher than what the Bain & Company study would predict:

Source: Bain & Company Fall-Winter 2016 Luxury Goods Worldwide Market Study

According to the study, sales in the Asia Pacific region should only be about 28% of sales to Japanese consumers, not the over 42% we have estimated. The comparison is not an exact one, since Richemont’s Asia Pacific region includes Australia and New Zealand, while Bain & Company’s “Rest of Asia” region does not, but as we have mentioned earlier, luxury sales to Japanese tourists in Australia and New Zealand are negligible.

Thus, it is hard to see why this discrepancy might be. When we encountered the same issue for LVMH, we assumed it was because that company’s sales in Japan are disproportionately low as a percentage of its global sales. Japanese sales make up about 11% of global luxury sales, but only 7% of LVMH’s sales. This affected our entire chain of calculations, leading to a low value for the company’s sales to Japanese customers in Japan relative to the rest of Asia.

However, this is not true for Richemont. About 10% of Richemont’s sales are in Japan, similar to the global average.

Regardless, there are three things we can do with our Japanese customer estimates:

  1. We can assume they are accurate and that the global percentages don’t apply in this case.
  2. We can adjust the sales in Japan upward to bring the relative percentages into line with global trends.
  3. We can adjust sales to Japanese customers in the rest of Asia downward to bring the relative percentages into line with global trends.
  4. A combination of 2 and 3.

Option 2 by itself isn’t really an option. Even if all of Richemont’s sales in Japan went to Japanese consumers - which is unlikely - sales to Japanese customers in the Asia Pacific would still be too high relative to sales in Japan. Indeed, it seems most likely to me that the proportion of Richemont’s sales in Japan to tourists is similar to the proportion for the industry as a whole. Thus, neither option 2 nor 4 are feasible.

I disagree with option 1 as well. Many educated guesses have been necessary in this exercise because some of the data we have needed is unavailable to the public. However, I think it would be presumptuous to trust one of my guesses if it contradicts the data we do have.

Thus, I think the logical option is option 3. This is the same option I chose in my estimate of LVMH’s sales to Japanese customers, though I am more hesitant to choose it here. With LVMH, it made sense to believe that our estimate for sales in the rest of Asia to Japanese customers was too high, given LVMH’s aforementioned relative weakness in Japan. However, Richemont lacks the same weakness. That said, I still think that it is the best option for our situation.

For the luxury industry as a whole, sales to Japanese customers in the rest of Asia are about half of sales to Japanese customers in Japan. I think we should assume that this is true for Richemont as well. This means revising our estimate for the company’s sales to Japanese customers in the rest of Asia to 345.1 million euros:

Richemont Sales to Customers from Japan (Adjusted)

Sales (million euros)

Percentage of Sales

In Japan

713.1

60.6%

In Europe

47.3

4.0%

In Asia Pacific

345.1

29.3%

In the Americas

71.9

6.1%

In the Middle East

and Africa

0

0.00%

Total

1,177.4

100%

I don’t think these numbers exactly reflect Richemont’s sales to Japanese customers. However, I do think they are close enough for our purposes. Fortunately, the strength of Buffett’s valuation model, the one we will combine with the “Spread of Luxury” model to see if Richemont is an attractive investment, is that we don’t need precise estimates of the company’s future growth. Rather, we merely need to know the broad path of that growth.

Richemont’s Sales to European Customers

Richemont Sales to Customers from Europe

Sales (million euros)

Percentage of Sales

In Europe

1,543.2

90.2%

In Japan

0.00

0.00%

In Asia Pacific

0.00

0.00%

In the Americas

86.9

6.1%

In the Middle East

and Africa

80.2

5.6%

Total

1,710.3

100%

Our estimate of Richemont’s sales to Europeans roughly fits what we would expect based on Bain & Company’s study.

Richemont’s Sales to Customers from the Americas

Richemont Sales to Customers from the Americas

Sales (million euros)

Percentage of Sales

In the Americas

1,181.9

93.37%

In Japan

0.00

0.00%

In Asia Pacific

0.00

0.00%

In Europe

83.9

6.63%

In the Middle East

and Africa

0

0.00%

Total

1,265.7

100%

Similarly, our estimate of Richemont’s sales in the Americas is similar to what we would expect based on Bain & Company’s report.

Richemont’s Sales to Customers from the Middle East and Africa

Richemont Sales to Customers from the Middle East and Africa

Sales (million euros)

Percentage of Sales

In the Middle East

and Africa

662.9

66.3%

In Japan

0.00

0.00%

In Asia Pacific

0.00

0.00%

In Europe

257.1

25.7%

In the U.S.

79.5

8.0%

Total

999.50

100%

As expected, most luxury purchases by Middle Eastern and African tourists occur in the geographically nearby region of Europe.

On Estimates and Going Forward

Having calculated how much of Richemont’s sales can be attributed to customers from each of its major sales regions, we can now use these numbers to project the company’s growth over the upcoming years.

Before doing so, however, we must discuss the issues of estimates. To obtain these numbers, we have made many estimates. Those estimates have been built on many assumptions. Because of that, it is reasonable to ask how we can know our estimates are accurate.

The simple answer is that we can’t. Richemont does not reveal where its customers in each region come from. Thus, we can only make educated guesses on how much of its sales can be attributed to customers from each region. Those guesses will not be absolutely correct.

However, I do believe they are approximately correct. This is because these guesses reflect what we do know about general trends in the luxury industry. For example, our estimates of how much in sales to Europeans and Americans occurs in Europe and the U.S., versus abroad, fit the data in Bain & Company’s study. In the one case where the results did not fit, regarding sales to Japanese customers, we adjusted our estimate to reflect the data we did have.

More importantly, our guesses do not need to be 100% accurate to be useful. We will use the “Spread of Luxury” model to calculate Richemont’s future growth. To do so, we will find the company’s per capita sales in each region, estimate what they might be once its markets are fully saturated and calculate what growth is necessary to reach those saturation levels.

We do not need exact numbers to make these calculations. Indeed, as I noted in my first article about The Cult of the Luxury Brand, there is no way to predict exact numbers for an industry’s sales decades from now, much less a single company’s sales.

However, we can estimate the general trend of the company’s growth, and, importantly, quantify that estimate to see if the company will be an attractive investment over the coming years. This is the power of Buffett’s thought process for Coca-Cola, which we are now applying to the luxury industry - if we know the rough growth trend for a company, we will be able to tell if it is an attractive investment. We will figure out that growth trend in my next article.

Disclaimer: The content here is not meant as investment advice. Do not rely on it in making an investment decision. Do your own research. The content here reflects only the author's opinions. Those opinions might be wrong. This content is meant solely for the entertainment of the reader and its author.

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