The Business Of
LVMH | How Do They Make Money?
Morning All!
So yesterday we saw how the world’s wealthiest man, Bernard Arnault, began and grew his luxury empire. From one single brand (Christian Dior) to the 75 brands he has now, LVMH’s portfolio spans a variety of luxurious segments. Clothing. Bags. Spirits. Perfumes. Watches. Hotels. And even Cruises!
In the (slightly cluttered!) chart below, we can see how LVMH’s massive €79bn revenue is split between the 5 main segments. Fashion and Leather Goods (basically clothing and bags) make up almost half of LVMH’s revenue with Louis Vuitton and Christian Dior continuing to be the company’s most popular brands.
Okay, so that’s Where LVMH makes money. But it doesn’t answer How. Because maybe you, like me, have wondered - how do LVMH’s brands have so much demand? Who are their customers? And why are they so willing to spend so much for shoes and bags from these brands? The screenshot below shows some of the items in Louis Vuitton’s ‘New In’ section.
So today, we’ll dive into these questions. And look at 3 factors that really make a luxury brand, a luxury brand. And by doing so, we’ll get an insight into really How LVMH Makes Money.
1) Alligator Skin Isn’t Cheap…
Okay, so the first factor that makes a luxury brand, a luxury brand is the quality. The clothes and bags from Louis Vuitton, Christian Dior and the other LVMH brands are pretty good quality. And by pretty good quality, I mean the best quality!
The raw materials used to create the products are the finest around. Coated canvas and epi leather are the most commonly used materials in the LV bags. But rare materials like alligator skin is often used too! Of course, the rarer the skins are, the more expensive the bags will be. These materials make the bags incredibly durable, lightweight, and attractive.
The other element that makes the bags and other products the finest quality is the design and craftsmanship. The people employed by the LVMH brands are experts in their field. Whether it’s the best creative directors, like the late Virgil Abloh. Or the Italian craftspeople who have to undergo over a year’s worth of training before working on a Louis Vuitton item. The products that LVMH brands produce are one of a kind.
Now, these materials and craftspeople obviously cost an enormous amount and we’ll come onto this in greater detail tomorrow! But for today, great raw materials + great craftsmanship = great quality products. And people don’t mind paying £££ for great quality products!
2) The Kardashians Don’t Wear Michael Kors
The second thing that makes a luxury brand a luxury brand is the sense of exclusivity. Simply put, luxury goods aren’t found everywhere.
If people everywhere were carrying Louis Vuitton bags or wearing Tag Heuer watches, the value of those products would go down. And this is what happened to Michael Kors.
In the late 2000s, the luxury brand wanted to expand to the masses and ‘democratise luxury’. And so the company started to sell not only through their own retail stores, but through outlet stores and department stores as well. Whilst sales growth was strong initially due to there being more stores stocking Michael Kors products, the brand’s image was soon damaged badly. Michael Kors was overexposed - there was simply too much of it. And the company has struggled to recover since. Because, why did people want Michael Kors in the first place? Because it was exclusive - it was luxury. However, if everyone’s wearing it or carrying it, it’s no longer exclusive - it’s no longer luxury!
So how do LVMH’s brands maintain exclusivity? Well, one way is through distribution. For a company like Nike, we see the company sell their products directly to the consumer, through their own stores and website. But they also sell through retailers, like Footlocker and ASOS.
What about LVMH brands? Louis Vuitton bags. Christian Dior dresses. Are they sold at retailers like John Lewis or ASOS - absolutely not! For LV and Christian Dior, 100% of their sales are done DTC (direct to consumer). The graphics below illustrate the difference between how a luxury brand distributes their products vs a brand like Nike.
The other way to control distribution is to only have your stores where your target customers are. For LVMH brands, that means only having stores where the wealthy live. In the most luxurious places and cities. And yes, this brings exclusivity.
To illustrate just how low the store counts are for LVMH’s two main brands, let’s look at the chart below. Whilst H&M has nearly 4,500 stores worldwide, Christian Dior only has 250! (Remember Nike and Adidas have far more physical locations than below due to their wholesale channels - Footlocker, JD Sports, etc).
And it’s not that LVMH can’t afford to set up more stores. They just don’t want to become Michael Kors and make their products accessible to everyone. Keeping the products exclusive means their target customers will continue to cough up £££ for their goods!
3) Charge Us More… We Like It!
The third factor that makes luxury, luxury is probably the most obvious of the three. And that’s the price of luxury goods.
For most businesses, it’s safe to assume that their consumers would be happier with lower prices. In A-Level Economics talk, their consumer surplus would increase with the lower price! And that is the case with the businesses we’ve looked at over the previous 4 weeks. Tesco shoppers would prefer their groceries being cheaper. Deliveroo’s customers are happier when their orders are cheaper. Man United’s fans are happier when their season tickets don’t go up in price. And Ninety One’s clients would prefer lower AMCs (annual management charges). However, LVMH consumers don’t want prices to go down… they want them to go higher!
Why on Earth would this be the case? Well it’s what we saw with Michael Kors earlier. If these luxury goods become cheaper and more accessible for people, they become less exclusive and hence less luxury. And this is something luxury brands are well aware of. And it works to their benefit. The chart below shows how the price for the ‘Speedy 30’ (one of the most popular Louis Vuitton bags) has changed since 2002.
To go from £430 to £1,370 in 20 years means that the price of the Speedy 30 has increased by ~6% on average per year. However, the Speedy 30 price has actually been one of the more stable products in terms of price. Overall for the group, the annual price increases are usually between 6-10%. Amazingly, even during the pandemic, LVMH and other luxury players were able to increase prices for their goods by fairly sizeable percentages!
And remember, the reason why LVMH are able to pass on such significant price increases every year is simple. Their customers want that! What an incredible business model where you can lift prices every year and it doesn’t negatively impact the demand for your product.
21st Mar 2023
That’s a wrap for today. We’re back tomorrow with part 3 of LVMH where we’ll be looking at the costs required to operate this business model. Some more interesting insights in store!
Have a great day!
The Business Of Team