LVMH’s triumph in uncertain times

Key takeaways

• Despite uncertainties in 2022, the luxury goods market saw significant growth and is expected to continue growing till 2030, with personal luxury items being a standout performer.
• Future trends in luxury include personalization, purpose, and inclusiveness, with LVMH leading the charge, especially in personalization and inclusivity efforts.
• The luxury conglomerate LVMH has demonstrated its expertise in acquiring and enhancing big brands, showing consistent growth even in a challenging economic environment.
• LVMH faces challenges from currency fluctuations, potential weak consumer discretionary spending due to inflation, and uncertainties in the U.S. market, but its broad brand portfolio and strong leadership offer a buffer.
• LVMH stands strong among its competitors, outperforming most in terms of various parameters.

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Luxury of success

In 2022, during uncertain times, the luxury goods market grew. It also looks like it will keep growing in the next years up to 2030, even if the economy has some ups and downs. As per a report published by Bain in 2023, the luxury goods market is segmented into nine categories, with luxury vehicles, upscale hospitality, and high-end personal goods, collectively making up over 80% of the total value. While the market saw a significant downturn in 2020 because of the Covid-19 outbreak, it rebounded to reach $1.15 trillion in 2021. Impressively, in 2022, it experienced an estimated growth of 19%–21%, surpassing expectations.

Throughout this article, we primarily delve into a niche segment of luxury: personal luxury goods. Often considered the “heart” of luxury, this sector witnessed remarkable growth in 2022. Despite overarching global economic challenges and setbacks in China, the personal luxury goods market remained robust. It raked in approximately $353 billion in sales in 2022, marking a 22% increase from the previous year.

Luxury trends

Luxury goods are typically priced higher than other products for a number of reasons. First, they are often made with high-quality materials and craftsmanship. Second, they are often associated with exclusivity and status. Third, they are often marketed in a way that makes them seem more desirable. The price of luxury goods can be a barrier for some consumers. However, for many people, the high price is part of what makes luxury goods desirable. They are seen as a symbol of wealth, status, and taste.

Three key trends are shaping the future of luxury: personalization, purpose, and inclusiveness. LVMH is at the forefront of this trend.

Personalization: Luxury consumers are increasingly looking for products and experiences that are tailored to their individual needs and preferences. This is leading to a trend of personalization in the luxury goods market, with brands offering products that can be customized to the customer’s taste. Luxury brands are responding to this trend by investing in their digital presence and developing innovative ways to connect with consumers online. For example, LVMH’s Louis Vuitton brand offers a service called “Vuitton Permanent Collection: Objets Nomades” that allows customers to customize their own travel trunks (see Figure 1).

Purpose: Luxury consumers are also becoming more interested in brands that have a purpose beyond making a profit. They want to support brands that are making a positive impact on the world, such as through sustainability or social responsibility initiatives. For example, LVMH’s Dior brand has launched a line of vegan leather bags.

Inclusiveness: Luxury brands are also becoming more inclusive, with a focus on representing a wider range of cultures and identities. This is leading to a trend of inclusive luxury, with brands featuring models of all different backgrounds and sizes in their advertising campaigns. For example, LVMH’s Fenty Beauty brand is known for its inclusive marketing campaigns that feature models of all different skin tones and hair textures.

These three trends are changing the way that luxury brands operate and the way that consumers interact with them. Luxury brands that are able to embrace these trends will be well-positioned to succeed in the years to come.

The global luxury goods market is worth an estimated $350 billion and is growing at a rate of 5-7% annually. The market is driven by a number of factors, including rising incomes in emerging markets, the growing middle class in developed markets, and the increasing popularity of luxury goods as a status symbol. 

Ranked by yearly revenue, the American luxury goods industry leads all other nations by far. The Chinese luxury goods industry is ranked second. These two are followed by Japan, France, and Germany (see Figure 2). It is estimated that revenue in these markets will continue to increase. In the US, revenue is estimated to reach around $82 billion by 2025 and one group that is capable of taking advantage of this trend is the French luxury conglomerate LVMH.

A luxury conglomerate

Louis Vuitton Moët Hennessy or LVMH comprises 75 ‘Houses’ of brands rooted in five main segments – Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry, and Selective Retailing.

The various LVMH businesses benefit from a number of synergies. These synergies include:

• Shared resources: LVMH’s businesses share resources such as marketing, distribution, and logistics. This can help to reduce costs and improve efficiency.
• Cross-promotion: LVMH’s businesses can cross-promote each other. For example, a Louis Vuitton handbag might be advertised in a Dior magazine. This can help to drive sales for both brands.
• Brand awareness: LVMH’s brands are all well-known and respected. This can help to create a halo effect for other LVMH brands.
• Innovation: LVMH’s businesses are constantly innovating. This can help to keep the company ahead of the competition.

With unique operational synergies, the group, led by Bernard Arnault, has demonstrated its incomparable ability to acquire huge brands and improve them in the course of just a few years. Most recently, Tiffany & Co. which was acquired in 2021 has seen its sales double already. Consequently, the different segments have experienced robust growth with impressive margins. (see Figure 3 and Figure 4)

Another unique aspect of LVMH’s leadership structure is the constant changing and switching of roles. Bernard Arnault believes that his leading executives should evolve within the group and change their challenges from time to time. 

“In a large company, as in any human organization one needs to evolve. It’s not a good thing to keep a form of organization that leads to a routine mindset. I think we need to push innovation so that the executives after a certain while, after giving them time to prove their quality to succeed, they must use their management skills by changing. Musn’t get used to things.”

Bernard Arnault

Superior growth

LVMH is expected to continue to grow over 7% in 2023, despite the soft economy. As shown in Figure 4, although there does appear to be a slow down in the growth rate, growing in the high single digits is still a pretty healthy clip when it comes to a conglomerate the size of LVMH. (see Figure 5)

The company’s customer class is not as sensitive to the overall economy, as LVMH mostly targets high-net-worth individuals. Additionally, LVMH launched a limited-edition campaign with the famous Yayoi Kusama, a Japanese contemporary artist, to promote art and excellence.  The collaboration between LVMH and Yayoi Kusama is a way for the company to tap into the artist’s popularity in Asia and to appeal to a younger audience. Known for her use of polka dots and her exploration of themes such as obsession, anxiety, and the self, Kusama’s work is often described as being “psychedelic” and “surreal”, which could appeal to consumers who are looking for something different from traditional luxury brands. 

So far, the campaign has been a huge success for LVMH. Finally, the reopening growth driver, which was demonstrated in 2021-2022, is not at all over, with the return to travel trend still ongoing and the reopening in China still in its early innings (barring any major shocks to the macroeconomy).

The key growth drivers for LVMH are as follows:

• Rising middle class in China: The rising middle class in China is a major growth opportunity for LVMH. China is the world’s largest luxury market, and the middle class is growing rapidly. The Chinese middle class, defined as households with annual incomes of between $10,000 and $30,000 is expected to reach 760 million people by 2025, up from 334 million in 2018 at a CAGR of over 10%. LVMH’s brands are highly favored by Chinese consumers, who are looking for luxury products that are both affordable and status-signaling. Interestingly, luxury products sold onshore in China have an average selling price that is over 30% higher than in Europe.
• Recovery of Travel Retail: The travel retail sector is another major growth opportunity for LVMH. Duty Free Shoppers (DFS), which is a subsidiary of LVMH, is the world’s leading travel retailer. The travel retail sector was hit hard by the COVID-19 pandemic, but it is now recovering. According to McKinsey’s “Chinese Luxury Consumer” report, it is projected that China will account for 40% of global luxury spending, with over 70% of luxury purchases being made overseas. As more people travel internationally, LVMH is well-positioned to capitalize on the growth of the travel retail sector.
• Sephora: Sephora is a leading beauty retailer that is owned by LVMH. Sephora has been growing rapidly in recent years, and it is now the largest beauty retailer in the world. Sephora’s unique retail concept appeals to a wide range of consumers, and it is well-positioned to continue growing in the years to come.
• Broad Luxury Categories: LVMH has a broad portfolio of luxury brands that span multiple product categories. This diversification strategy helps LVMH to mitigate risk and capitalize on opportunities in different segments of the luxury market. LVMH is not as reliant on any one product category as other luxury companies, which makes it a more attractive investment.

The company has a strong portfolio of brands, a diverse customer base, and a clear growth strategy to continue its growth trajectory.0

Growth doesn’t come without risks

U.S. market growth and Tiffany integration

LVMH’s US market growth has been strong in recent years, despite the strength of the US dollar. In FY21, the US market grew by 44% on an organic basis, and it is expected to grow by 15% in FY22. This growth is being driven by a number of factors, including the increasing affluence of the population, the growing popularity of luxury goods among millennials, and the success of LVMH’s recent acquisitions, such as Tiffany.

The acquisition of Tiffany was a major coup for LVMH, and it has been successfully integrated into the company’s operations. Tiffany is now LVMH’s largest brand in the US, and it is expected to contribute significantly to the company’s growth in the coming years.

However, there are some risks associated with LVMH’s US market growth. The strength of the US dollar could continue to make it more attractive for American tourists to purchase luxury goods in Europe. This could lead to a revenue growth imbalance between Europe and the U.S. Additionally, LVMH needs to be careful not to overextend itself in the US market given the consumer is weakening. The company has a strong portfolio of brands, but it is important to manage its growth in a sustainable way.

Weak Consumer Discretionary Spending

The recent surge in inflation is a major concern for many businesses, including LVMH. Inflation can lead to a decline in consumer spending, as people have less disposable income to spend on luxury goods. In addition, the percentage of savings to income ratio has been falling. This ratio for consumers in the United States is currently at 6.9% (7-8% on a histoical basis), according to the U.S. Bureau of Economic Analysis.

However, it is important to note that the impact of inflation on luxury spending may vary across different income segments. While high inflation may put pressure on low-income families, the shopping patterns of middle-class and high-net-worth individuals, who are LVMH’s primary customer base, may be less affected.

Foreign Exchange

A weak Euro currency can impact the stock price of LVMH for US investors who hold the company’s over-the-counter stock. A weakening Euro relative to the U.S. dollar can result in lower returns for U.S. investors when the value of their Euro-denominated investments is converted back into dollars.

To mitigate the potential risk associated with currency fluctuations, investors have the option to use foreign exchange hedging strategies. This involves using derivatives to lock in the exchange rate between the Euro and the U.S. dollar, thereby protecting investors from losses due to currency fluctuations.

Key man risk

The Arnault family is heavily involved in LVMH. Delphine Arnault, the daughter of Bernard Arnault, is the CEO of Christian Dior. Alexandre Arnault, Bernard’s son, is also a leading executive in the group. Some people might argue that family-led businesses are prone to key man risks, but the results at LVMH speak for themselves. Operations that have been led by an Arnault family member have shown extreme growth performance.

All of the above executives are likely successors, however, LVMH has not yet announced a formal succession plan. 

The most obvious and common risk associated with LVMH is the retirement of Bernard Arnault (As the successor is not announced). Very similar to Warren Buffet and Charlie Munger at Berkshire Hathaway (BRK.A and BRK.B), the success of LVMH is attributed, and rightfully so, to its long-time leader. Well, when asked about his retirement, Arnault usually jokes around and shows no sign of a desire to leave.

“I am friends with Roger Federer and a great fan of tennis. He probably wants me to play a bit more tennis. And the last time I played with Roger Federer, I think I won one point in a single set, and maybe I could do a bit better than that. And that would indeed delight me. But as to succession, you may also have noticed that the retirement age has been extended.”

Bernard Arnault

Outdoing the competition

LVMH’s competitors are mainly other luxury goods companies, such as Hermès, Kering, Richemont, and Burberry. In the past ten years, LVMH has outperformed all of its peers in terms of total return, dividend growth, and profit growth. The only company that has outperformed LVMH in terms of growth and margins is Hermès, which is much smaller than LVMH in terms of revenue. This speaks to the impressive growth numbers of LVMH. (see Figure 6)

Figure 6: Comparing LVMH with competition. Source: Company reports.

As you can see, LVMH has stayed competitive with its peers on every metric. Burberry is dragging the average down, but even excluding Burberry, LVMH has outperformed or has come very close to the average.

Bottom line

LVMH is one of the world’s most successful companies. It has a sticky demand for its products, strong pricing power coupled with credible management, a unique brand portfolio, and geographic diversification. 

Portfolio fit

Might be for

• Investors with a growth mindset. LVMH is a growth company with a strong track record of revenue and earnings growth. The company is well-positioned to continue to grow in the years to come, as the global luxury market is expected to grow at a CAGR of 5-7% from 2022 to 2027.
• Investors who desire income. LVMH is a dividend-paying company and has a history of increasing its dividend payments, and it is likely to continue to do so in the future. Annually, LVMH typically declares a dividend of approximately 3% for its shareholders.
• Investors who are shopping for value. LVMH trades at a conglomerate discount, which is below the average valuation for the luxury goods sector.

Might not be for

• Investors who are risk-averse. The company is exposed to a number of risks, including economic downturns, currency fluctuations, and competition from other luxury goods companies.
• Investors who are looking for diversification. LVMH is not a very diversified company. The company’s revenue is heavily concentrated in the luxury goods sector. This could make the company more vulnerable to changes in the luxury goods market.
• Investors who are concerned about environmental, social, and governance (ESG) factors. LVMH has been criticized for its environmental impact and its labor practices. The company has made some progress in addressing these concerns, but it is still a work in progress.

Overall, LVMH is a good investment for investors who are looking for growth, income, and value. However, the company is not a good investment for investors who are looking for low-risk, short-term gains, or diversification.