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July 11, 2011

Globalisation and Luxury Goods

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Conspicuous consumption

Luxury goods are said to have a high-income elasticity, meaning that as people become wealthier, they buy an ever-increasing amount of luxury goods. In respect to investment grade wine there are two forces that create its luxury cache. The first is that compared to other wines it is far superior in quality and durability, otherwise known as having the capacity for long bottle aging. This makes fine wine an unusual commodity, with the capacity to improve in quality considerably as it ages.

The second is that it signifies the purchasing power of those who acquire it to drink. This is a growing global trend and has been coined as conspicuous consumption. Goods that behave like this are often referred to as Veblen good, or goods that increase in perceived value the more expensive they become. For those who once enjoyed a first growth with Sunday lunch this is bad news, but the super rich will continue to consume the best products man and nature has to offer.

Historically, as developing markets expand their wealthy classes gain huge financial rewards and so look to buy luxury goods with their incomes. The easiest way to do this is to buy the most famous luxury brands and in respect to wine the world has a very limited supply. The recent and rapid expansion of high-net worth individuals in particular within the emerging market economies has created new increasing consumer demand for investible wines. This consistent increase in the global demand has greatly strained Bordeaux’s reserves.

Rapid wealth creation

Globalisation continues to create new concentrations of private wealth, driving prices up in the luxury goods market. According to Forbes Billionaires report in 2011 the worlds billionaires rose to 1,210, up from 744 five years ago. 332 billionaires are now from Asia-Pacific region, an annual increase of 42%. The world’s billionaires now have a combined wealth of $4.5 trillion, with an average net worth of $3.3 billion.

Luxury brands benefitting

One of the biggest brand winners behind this rapid growth has been Lafite Rothschild, followed by the other four 1st growths. With fast moving globalisation and wealth creation prices are predicted to continue rising, with competition for these wines reaching breakneck speed. Many predict that as developing markets increase product knowledge and broaden market awareness most top Grand Vin Bordeaux will become target brands, but what will the rest of the world drink?