2023 OCTOBER QUARTERLY ISSUE
LUXURY MARKET
CASE STUDY
LVMH LUXURY GROUP
Written by : Andrew Sia
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From the Desk of the Publisher
With this piece of writeup, we talked about the story of LVMH’s founder, Bernard Arnault, and the way he is training his children to become the company’s successors. It is such a big market and the fact that it is still growing is something that is incredible under today’s challenges from every direction.
We have also learned that when one market is not growing, in many cases you will find it growing in another market. Take for instance now the China market has slowed down, but the Middle East market is picking up.
Introduction
The luxury conglomerate, LVMH, owns 75 brands ranging for Louis Vuitton to Tiffany and in between names like Sephora and Dior, it carries leather goods and fashion, watches, beauty products and travel. It is important to know that it owns La Samaritaine, the large department in Paris, which is reopened to the public as of June 23, 2023 after being closed for renovation for 16 years.
In this article we have come to know more about the LVMH Luxury Group; the market and who would spend money on luxury goods; the potential of the China market and everything thing that comes with it.
What do we know about the Luxury Market?
It was a market that was worth €1.15 trillion in 2021 but in according to Bain & Company, they have it broken down into the last details which have included the most lavish spending and they have reached almost €1.4 trillion and they contained:
Luxury cars – €566 billion
Personal luxury goods – €353 billion
Luxury hospitality – €191 billion
Fine wines – €96 billion
Fine dining – €57 billion
High-end furniture – €53 billion
Fine art – €39 billion
Private jets and yachts – €26 billion
We have to know who are spending money in this luxury market. We have grouped them into the following:
High Net Worth Individuals (HNWIs) and Ultra High Net Worth Individuals (UHNWIs): These individuals typically have substantial wealth, very often they obtained from investments, business ventures, or inheritances. They consume luxury goods and services without any significant impact on their financial well-being.
Affluent Professionals: These include success lawyers, doctors, business executives, and entrepreneurs and they have high disposable incomes and often purchase luxury items to reflect their status and success.
Aspirational Consumers: These individuals may not be exceptionally wealthy but aspire to the lifestyle associated with luxury brands. They tend to save up and spend on luxury goods and services, and they do them occasionally.
Celebrities and Influencers: These public figures often receive luxury items as gifts or sponsorship from brands in exchange for promotion. They also spend money on them to maintain their public images.
Self-Indulged Shoppers: These individuals obtain pleasure from the sensory experience of luxury shopping. They enjoy the tactile sensations, personalized service they received, and exclusivity of luxury boutiques.
Collectors: These are passionate collectors of luxury items and they collect watches, handbags, and even rare art pieces. They view them as investments that may appreciate over time.
Status Builders: These individuals associated the luxury items with status and social recognition. They use them to show their success and gain recognition among their peers.
Gift Shoppers: These shoppers know that those luxury items make very good gift-items on special occasions like birthdays, anniversaries, and holidays. They always bring back good memories.
Tourists: These tourists when they are traveling in major cities and luxury shopping destinations would attract them to buy luxury items as souvenirs. They would also take the opportunity for comparing their prices from home and take advantage of tax benefits and exchange rate differences.
Ethical and Sustainable Shoppers: These shoppers are those who emphasize ethical and sustainable practices. They show concerns about the environment and social responsibility and they would choose brands that align with their values.
We come to the conclusion that luxury market is a diverse market with consumers’ motivations that may differed by cultural, generational, and other individual factors as aforesaid. It is also very wide and can also cover our experiences. One thing we have to remember that demographics and psychographics may change over time and across different regions and industries.
Luxury market really started to grow in 2000s and until China joined the market in 2018 and grow its demography to what it is today.
The Legacy of LVMH
The Frenchman, Bernard Arnault, is now 74, and currently the world’s richest person. His wealth was about $208 billion according to the Bloomberg Billionaire Index as of April 19, 2023. He is tightening the grip on LVMH now and ready to appoint five of his children into senior roles and empowered them to take over the empire one day. His dilemma is who will succeed him as chief executive and chairman of the world’s largest luxury conglomerate which is valued at $480 billion. In the 1990s, the family-controlled luxury conglomerates were built into a luxury juggernaut through serial acquisitions, and the combination of shrewd instinct in business and finesse earned him the name of “wolf in cashmere” by his rivals. He is still looking for rival luxury companies for corporate takeovers while nurturing generations of fashion designers to put them to lead the fashion brands.
LVMH owns 75 brands ranging for Louis Vuitton to Tiffany and in between names like Sephora and Dior. It carries leather goods and fashion, watches, beauty products and travel. It is important to know that it owns La Samaritaine, the large department in Paris, which is reopened to the public as of June 23, 2023 after being closed for renovation for 16 years.
Today, Bernard Arnault and the family’s net worth are about $212 billion. In fact, the company just became the first in Europe to cross the $500 million market valuation threshold, and the only one to be ranked among the top 10 biggest global companies. The group benefitted from the startling rise and resilience of the luxury sector in the past decade. It is driven by a large and still expanding U.S. market and a fast-growing upper middle class in China.
Lately, he made the eldest child, Delphine Arnault, at 48, the chief executive of Christian Dior, second largest brand of LVMH. Followed by his three sons from his second marriage, Alexandre Arnault, 30, the executive vice president of Tiffany & Co.; Frédéric Arnault, 28, to run the TAG Heuer and Jean Arnault, 24, for marketing and development at Louis Vuitton’s watches division.
He has not given any indication who would be his successor. although there were words buzzing that brother of Delphine, Antoine Arnault who is at 45, to become CEO of the listed company that holds the family stake in LVMH. Both Delphine and Antoine were from the first wife and the three from Hélène Mercier, a Canadian concert pianist, Bernard Arnault’s second wife.
Bernard Arnault was born March 5, 1949 in Roubaix near the Belgian border. His father, Jean Arnault, owned an engineering company. He studied at the Ecole Polytechnique, a highly selective engineering and science school that shaped the elite since the French revolution.
He considered educating his children from the same school he went to but only Alexandre Arnault applied to Polytechnique for undergraduate studies and was only manage to get acceptance for a master-degree program. But at LVMH, Alexandre established himself very quickly as he suggested to acquire the German luggage maker Rimowa, and later he was able to convince the owner to sell to them in 2017 and Alexandre became the CEO. Later he secured the collaboration with Virgil Abloh for his off-white brand.
Bernard Arnault sent Alexandre to do the due diligence of Tiffany & Co., and acquired it in 2021. Alexandre led a collaboration with Nike Inc. for the $400 Nike Air Force I shoe in all-black leather with a swoosh the color of Tiffany’s classic blue jewelry boxes.
Bernard Arnault’s youngest sons, Frédéric Arnault and Jean Arnault attended a Jesuit high school where they took literature classes taught by Brigitte Macron, who later became the first lady of France.
Frédéric Arnault was trained in classic piano and excelled at tennis. He studied the same courses as his father. He co-found an electronic-payment startup and sold it later.
In 2018, Bernard Arnault recruited Stéphane Bianchi, who groomed the heir of Yves Rocher cosmetics company and told him to work closely with Frédéric, who was driving TAG Heuer’s digital strategy. Two years later, Stéphane Bianchi made him CEO of the brand.
Frédéric Arnault helped to build his brother, Jean Arnault’s interest in the watch world. Jean studied at M.I.T. for financial mathematics but earned a master degree in mechanical engineering from Imperial College London and wrote the thesis on the TAG Heuer carbon balancing spring, a component of its watches. He is now with the Louis Vuitton’s watch division.
Bernard Arnault runs the company with his top lieutenants, Sidney Toledano, who led Christian Dior, and Michael Burke, chief of his biggest brand, Louis Vuitton. Michael Burke stepped down in January and spent time with his wife before she died of cancer. Sidney Toledano, who is 72, is expected to step down soon.
The Path of the Luxury Market
Since the world’s locked down in the early 2020, it brought financial crisis, inflation, geopolitical disruptions, and all these have put the squeeze on the living cost. But we have noticed that they have not setback the rise of the luxury sector. We have seen the rapid rebound to €1.15 trillion in 2021 as the shoppers were braced by savings and government checks indulged them to come out and spend. It was estimated a further growth of 19-21% growth according to Bain, the consultancy company in 2022.
At this time, LVMH leads the way and we have seen the shares trading at €81 at the start of 2021 to over €900 now.
Lately, like all companies, LVMH is facing very delicate issues facing the conglomerate and inflation happened that brought social distress. This has been fueling public anger over the wealth inequality. Bernard Arnault was worried about the public outrage that might brought to the business and the family. His eldest son, Antoine suggested him to communicate more openly with the public by letting the public know about the taxes the company paid in France and the number of jobs it created.
But in 2023 when the French President Macron announced his plan to raise the retirement age, the photo of Bernard Arnault began to appear on the “wanted” poster and protestors stormed the lobby of Louis Vuitton. He has been criticized as the avatar of inequality and protestors were calling for higher taxes on Arnault and the country’s billionaires.
But the luxury companies argued that they are the key to French economy as employers employing more than one million workforce, and they are also big tax payers and economy drive. They can argue as long as there is the demand, the luxury sector can justify their existence.
Can the luxury sector continue to sustain its growth? It is the question everyone is asking. We have to admit that it is depending on two of its biggest market—the U.S. and China.
We learned that most luxury companies have suffered drop in their business in China after the end of last year due to the sudden dropped of the COVID control of the restrictions. But for the two biggest luxury group by market value, LVMH and Hermès, indicated s slight recovery from the lingering effects of the strict zero-COVID policy. It has been expected to accelerate in the second half of the year when the traveling would pick up. We have to know that China used to represent about a third of those luxury revenues.
For the U.S. and Europe, analysts have expected a single-digit growth during 2023.
On the whole, the analysts and those investors would expect some kind of moderation, and it is only logical to think that the growth would have to slow down. Nevertheless, they still expect the industry to grow for another 10% in 2024 for reasons that the spending in the Middle East is expected to rise at 15% in 2023 and South Korea and Japan are all recording single-digit growth.
We have to realize that the luxury sector is one of the few that is truly global. The successful brands are performing well everywhere. Even if there is a lack of demand in one place, there is a demand somewhere. But not all luxury brands are equal and the top-end of the sector is led by brands such as Louis Vuitton, Dior, Gucci – owned by Kering, and the independent luxury houses such as Chanel and Hermès. But the mid-class brands, such as Coach and Ralph Lauren, are feeling the market pressure. Brands growth is disproportionately allocated to stronger brands and there can be some polarization.
LVMH admitted that their products are not mainly selling to the rich clients but to those who have money and would want to indulge themselves by buying branded merchandise. This cohort is bigger than the upper crust of the market and they have tailored products for them.
This is especially true when you are referring to the China market where the middle-class demography is about 350 million people. This is about 25% of the country’s total population. We have to take note that the total U.S. population is only 332 million. We have to know that in 2018 the middle-class demography was only 1%. The growth from China is astonishing.
The luxury brands are very clever in cultivating the desire for their clients. Not only they put limits on the availabilities of certain products, but they also increase the offerings of more accessible items and cap them at around $3,000 range. They are also not afraid in raising their prices citing for cost of materials and keeping quality at the foremost criteria. This brings total customer satisfaction.
The U.S. has been the luxury’s largest market but it is beginning to slow down now. The market has experienced the pinch from the inflation. And due to the strong dollar, more Americans are buying luxury goods in Europe for instance. Earlier during the year, we have seen Bernard Arnault in New York for the reopening of Tiffany’s 10-story flagship store on Fifth Avenue. It was LVMH’s largest ever acquisition with the price-tag of $15.8 billion.
It is said that the market is expected to have a high single-digit growth in 2024 and 2025. And once again if there is still the demand for the luxury goods, the luxury sector can justify their existence.
The China Demography
China has a rapid growth of its middle class, from 2018’s 1% to today’s 25%. We are talking about 350 million people and it is already bigger than the U.S. total population.
In general, we can categorize China’s middle class into three subgroups as the following:
Upper Middle Class: This segment consists of individuals and households with higher incomes. You can find them in major cities like Beijing – its capital, Shanghai – its commercial hub, and Shenzhen – its high-tech hub. They enjoy a relatively high standard of living, own properties, and can afford luxury goods. They are also international travelers.
Middle Class: These are the broader middle class which include individuals and families with moderate incomes and who have been benefited from significant improvements in their living standards over the past three decades. Some of them own houses, have received better education and have healthcare. They have a more comfortable lifestyles compared to previous generations.
Lower Middle Class: They have a lifestyle which is one level lower than the middle class and they have lower incomes. But they have noticeable improvement of their life.
The size of China’s middle class is supposed to grow and it is driven by urbanization, economic growth, but it is very much depending on China government’s policy. But the latest we have learned from the burst of the real estate market, the shrinking of the export market, and the importation has also been very much subsided.
China has been caught in the conflicts of geopolitical issues, the fear of the war with Taiwan, the unemployment of the younger generation, and the receding of the foreign investments, all these news have not been really helping China for going forward into 2025. We have to keep our fingers cross for China who is already an important player in the world today.
Conclusion
“To be or not to be, that’s a question.” We have to realize that the drive is still expected to come from the Chinese shoppers globally. This time it has come from the growth of 40-45% in comparison with the same period in 2021 when everything was locked down. For the moment, the Chinese tourists are not traveling in Europe and the U.S., but they are traveling in Japan and Korea and they are making up something.
For the many types of shoppers, many of those are established clients in terms of financially and habitually. The growth will still be depending on China and the Arabic world.
I personally would consider luxury goods to be more dependable, they tend to hold the value, never going out-of-date, higher durability and unlike the cheaper items. They are certainly not like those fast fashion that is trying to grow in the market, and it is something I would consider as “garbage in garbage out.” They can never be observing the environmental and global responsibility’s need. If they would want to build these elements into their business model, they have to invest and spend more on their products in order to become sustainable.