The Business Of
LVMH | What Are Their Costs?
Morning All!
We covered quite a bit yesterday so let’s have a little recap on where LVMH made money in 2022:
Fashion & Leather Goods - €38.6bn
Selective Retailing - €14.9bn
Watches & Jewellery - €10.6bn
Perfumes & Cosmetics - €7.7bn
Wines & Spirits - €7.1bn
And whilst 2022 was a particularly strong year for the luxury giant, revenues have been growing at a blistering pace for the last decade. From €29bn in 2013 to €79bn in 2022.
But now, let’s turn our attention to costs and margin. Below we can see how LVMH’s costs are split into 3 segments, with 2 main segments making up over 90% of costs.
So costs of €58bn, and revenues of €79bn… that’s pretty good right? Well yes - it’s very good! The graphic below shows that even after taking out LVMH’s sizeable operating expenses, the company boasts very strong margins of 27%.
Not quite the 32% EBIT margins we saw at Ninety One - but still incredibly good. And also, LVMH is making about 100x more revenue than Ninety One!
We’ll come back to LVMH’s margins at the end of today’s newsletter. But let’s dive deeper into LVMH’s costs. Cost of Sales is the cost to manufacture the goods. And Marketing and Selling Expenses are the costs involved to sell the goods! So without further ado…!
Made in China Italy
So as we mentioned yesterday, LVMH brands sell incredibly high-quality products. And the materials used to manufacture these products are pretty pricey. For instance, for just one centimetre of crocodile leather, you have to fork over $9. This means that for a standard 30cm bag, Louis Vuitton are looking at $270 just to buy the materials to make that bag!
However, the materials aren’t the only cost when you want to make the bag. You need craftspeople to manufacture that bag! And these labour costs really differentiate LVMH brands from Zara, Nike, and most other non-luxury brands. Check out the chart below…
The chart above shows us that whilst Nike manufactures all of their products in Asia. And Inditex (Zara’s owner) manufactures 55% of their products in Asia. Louis Vuitton manufactures absolutely nothing in Asia! This is quite extraordinary. Because over the last 20 years, manufacturing has flocked to China and Vietnam. The lower labour costs in those regions helped clothing brands lower their costs.
However, this is just not the Louis Vuitton way. Check out the statement below on their website…
Why do Louis Vuitton do this? Why don’t they produce their clothes and bags in Asia like other clothing brands? Well, it’s because of their unwavering commitment to quality.
The manufacturing workers in Asia are incredibly skilled at putting together Zara t-shirts and Nike trainers. However, the complexity and skill involved in crafting a unique Louis Vuitton bag is a whole different level. The craftspeople chosen to produce Louis Vuitton’s products are trained for over a year before they can start producing items! Of course, these workers cost more. But as we saw yesterday, Louis Vuitton and the LVMH brands are easily able to absorb the higher costs by increasing their prices… because that’s what customers want!
Don’t Forget The Rent!
The second main cost for LVMH is Marketing and Selling expenses. And the first part of this expense is distribution costs. As we mentioned yesterday, LVMH brands put a lot of focus on controlling distribution so that their products are exclusive. Brands like Louis Vuitton and Christian Dior don’t sell anything through retailers. They only sell through their own stores (and a small % online).
However, whilst this seems a sensible strategy to maintain ‘luxury’ status, it’s an incredibly expensive one too! Because Louis Vuitton and Christian Dior aren’t just found on streets anywhere. They’re found on the most luxurious and expensive streets in the world. And the brands have to pay rent to occupy these stores!
According to this article, Louis Vuitton pays an astonishing $51m in annual rent to operate their store in Tsim Sha Tsui, Hong Kong. $51m for one store! And it’s not just the Hong Kong store. The flagship store in Paris (pictured below) costs $26m in rent. And the main store in Rome costs $15m in rent.
The Luxury Influencer
Okay, so we’ve covered the first part of Marketing and Selling expenses. And my gosh, those annual rent numbers are still crazy to think about! But the other main cost within Marketing and Selling is advertising (or we’ll call it marketing).
Like for most brands, the purpose of marketing for LVMH brands is to remind consumers to buy their products. However, for brands like Louis Vuitton and Christian Dior, marketing is one step further. It’s not just to remind consumers to buy their products. But to marvel at their products. Some of you may be familiar with the Fashion Weeks in London and Paris. These events are not cheap to put on! The image below shows Louis Vuitton models strutting their stuff in front of adoring fans back in 2019.
So the fashion shows are pretty unique to luxury brands. But what about ‘normal marketing’? Well, LVMH brands do their fair share of normal marketing too. I’m assuming a lot of you reading this will have seen the Dior ads below, featuring Charlize Theron and Robert Pattinson.
But what does it cost Dior to get Theron and Pattinson to partner with their brand? Answer: Quite a lot for the average person. Dior signed a whopping $55m deal with Charlize Theron so that she would represent the brand for 11 years ($5m/year). And to convince Robert to flex his guns for the sake of Dior, the brand had to give him $12m over 3 years! However, $4-5m a year really isn’t much at all for a brand like LVMH that’s making €79bn in revenue!
Of course, the brand then needs to reach their audiences with these ads across several media channels (TV, social media, etc). And LVMH spends a reported ~€260m a year through the French advertising agency, Publicis, to reach their target audiences in the UK and France. That $4m given to Robert Pattison looks even smaller when compared to the €260m budget given to Publicis!
Luxurious Margins
So, what does all the above mean in terms of margins? Well, the chart below shows us that LVMH’s margin profile really is something to admire. Gross margins have stayed strong at ~65% for the last decade and EBIT margins have actually increased post pandemic.
Just before we close, let’s really break it down. What does the 65% gross margin and 27% EBIT margin mean for one Louis Vuitton bag? Well, it means that for a bag being sold at €1,000, it costs Louis Vuitton about €350 to produce the bag. And after the costs for rent, and marketing the bag, Louis Vuitton will make about ~€270 profit from that bag.
Not bad at all…
22nd Mar 2023
Alrighty, that’s a wrap for today. We’re back tomorrow with part 4 of LVMH where we’ll be looking at how the luxury giant spends its vast profits!
Have a great day!
The Business Of Team