What's next for LVMH?

Louis Vuitton Moet Hennessy (LVMH) has the greatest number of jewels in its treasure chest in that it holds more majority stakes in prestigious luxury  brands - from Marc Jacobs to Givenchy to TAG Heuer and of course Louis Vuitton -  than any of its competitors. 

Its strategy in recent years has been one of rampant acquisition and global expansion where the group has spent more than $10 billion in 27 transactions since the beginning of 2010. Notably, Bulgari, Fendi and Pucci have all joined the LVMH family in the last two years. The group's availability of cash and cash equivalents has certainly come in handy. Its latest 'big brand' acquisition occurred in early July where LVMH acquired a 80% stake in Loro Piana, an Italian cashmere clothing house for 2 billion Euros. For a small relatively unknown family owned business, this price is high. However, LVMH can benefit a lot from Loro Piana. Why? Loro Piana is a fairly unique business focussing only on cashmere clothing - there are not many similar players in the industry. It is also a company in its early stages and thus can accommodate much growth and expansion into the future.  For example, Loro Piana achieved a growth in sales revenues of 13.1% in 2012 to 630 million Euros and no doubt can they repeat a growth rate of around 10% into the next year. Loro Piana can also go more global and expand its leather+cashmere goods products. The fact that 30% of its sales come from Asia and the region's strong demand for the brand no doubt contributed to the attraction of acquisition. Perhaps this analysis is reflected by LVMH's share increase of around 2% at the time the deal was announced. In essence, there is much synergy between LVMH and Lora Piana. 

However, we can expect to see less fashion acquisitions by LVMH in the coming year or so as the business wishes to focus on organic growth, at least in some segments. For example, the group wishes to restructure and revamp its watch and jewellery business and the plan to achieve this by giving Bulgari a make over into the long term. Watches and jewellery are LVMH's lowest revenue and profit generating area, as seen on their half-year report. 

Having said this however, acquisitions and investments by LVMH are likely to increase in the luxury hospitality sector as Arnault seeks to move into high-end hotels and restaurants. Indeed, LVMH has realised that 'luxury goods' isn't just about what the consumer is wearing or possessing but more about an overall luxury experience to suit a lifestyle; from food to place of stay on holiday. It is not so much about a product anymore, but about a produce + service. Last week, LVMH bought the 5* Hotel Saint-Barth Isle de France in the Caribbean for an undisclosed sum, to be operated by LVMH's hotel business area. There are also similar opulent resort/hotel developments in Oman, the Maldives and the French riviera  In 2016, La Samaritaine in Paris, owned by the group since 2001 will be opened as a 5* hotel.  At the end of June, the luxury group purchased a majority stake in Pasticceria Confetteria Cova, a 200 year old high-end storied cafe of Milan. This was the LVMH's first acquisition of a luxury food business and Arnault wishes to replicate Cova's popularity globally, using its heritage as leverage. Again, they have been helped by their deep pool of cash resources in this area. 

LVMH isn't the only nor the first to expand into the full luxury spectrum. For example, Robert Cavalli is buying high-end cafes while Armani and Versace is designing hotels. Such brands' ability to shift into a new business area is what keeps them interesting in the eyes of their wealthy (and frequent) customers (as well as analysts at their desks!). 

The success of the hospitality acquisitions remains to be seen but I think given the brands Arnault has chosen above are fairly unique and niche, along with having the recognisable LVMH as a parent with an already established reputation for the customers, profit margins will be high. 

Acquisitions aside, LVMH's  quarter end results to June which were released on July 26th have been mixed. China is a big market for luxury brands but sales in the country have been underperforming whereby Chinese consumers are now buying overseas -in Macau, Hong Kong, Taiwan, Dubai and Europe - rather than in the mainland as attributed to tourism and weak European currencies. This, along with slowing European sales, however is being offset by demand from South-East Asia in the countries of Malaysia, Vietnam and Indonesia. Asia is the group's biggest revenue generating region - 28% of total revenues came from Asia while the US followed in second place with 23%.  

The good news is that profit margins for Louis Vuttion  - its most prized brand has increased slightly in the first half year. In recent years, profit margins for LV has fallen and operating margin has declined from 44% to 42% between 2011-2012. In line with LVMH, Louis Vuitton sales in China declined although this was compensated by optimistic sales in Japan, US and Europe suggesting that the luxury goods sector is not so down hill anymore in the West. The strategy for Louis Vuitton for the past 10-15 years has been to expand quickly and rapidly across the globe. Consequently, growth increased by 10% but the real danger of this is that such strategy for a luxury brand is not sustainable. Continued rapid expansion makes Louis Vuitton somewhat of an expensive high street retailer rather than unique, boutique and luxurious and special. Everyday, in the city where I live, I see many many Louis Vuitton monogram and canvas bags - some fake and some real. Indeed, Louis Vuttion is rather ubiquitous but regardless of the origins of the bag, this risk has been reflected by Arnault himself who is putting a halt on the opening of new Louis Vuitton stores to maintain the exclusively. 

There are signs of a rebound in the global luxury sector but China, an enormous market for luxury goods and services will certainly have retailers in the country experience a decline in sales as Xi cracks down on luxury gift-giving to battle against corruption and misuse of public funds. For example, Swiss watch imports fell by 24% in Q1 2013 although Burberry still experience soaring sales there.  Any decline within in China could be offset by Chinese tourists visiting regions outside of the country as well as by the stronger sales in Europe and the US. For the former, Chinese tourists are attracted to buy luxury goods in Europe due to the weak currency and Chinese nationals are now account for the biggest global luxury buyer market at 25% (only 0.5% in 1995) with European nationals close behind at 24%. Major luxury retailers in the West have been equipped for this for several years now with the employment of Mandarin speakers and the likes of UnionPay but there is still scope for smaller, more boutique luxury players to follow suit. 

I believe despite the recent slowdown in Asia's luxury market, the raising middle and wealthy class with their demand for status goods - not just in China but especially in South Asia (India, Bangladesh) and South East Asia (Indonesia, Philippines, Vietnam,  Thailand)  - makes Asia the most important region for luxury brands to capitalise on, for now and in the next 5 years or so. At the same time however, ongoing challenges that affect revenues aside from growth and the crackdown in China are the volatile currency market affecting exchange rates/local pricing, rising real estate prices and high import duties/taxes increasing prices by 30%-60%. This latter point nevertheless can be partially offset by tourism/spending in the West. Finally, European high street retailers of Zara and H&M have become hugely popular in Asia over the past 2-3 years. Such brands offer far more affordable fashion pieces which imitate the styles seen on catwalks. 

In Indonesia (and rest of emerging Asia) where it is happening for LVMH, Hermes, Richemont , Kering and others

JH

President Xi's 'Chinese dream'

I RECALL that the front page of 'The Economist' in early May (last month) was a rather amusing one. It was a clever illustration of Chinese President Xi Jinping, as an imperial Chinese emperor sporting some 'modernised' golden robes, a glass of champagne and a party popper that is said to have deeply offended the Communist Party: 

©The Economist

The headline was even more amusing: "Let's party like its 1793", alluding to more glorious times for China, where the country's GDP represented a third of the world's total (now represents 11%; represented 5% during mid-20th century). This triumph was not long lasting. China underwent 'the century of humiliation' that involved foreign invasion, occupation and immense suffering to Chinese citizens in their homeland, then an interim of civil war between the Communists and Nationalists and finally Maoism, where economic policies under Mao failed spectacularly - abject poverty was prevalent and tens of millions died of starvation as a result. But China, now the world's second largest economy after the USA, managed to turn itself around in 1978 beginning its path to modern economic glory under Deng. Deng's motto was in fact, "to get rich is glorious". 

This economic progress has seen hundreds of millions of the peasant class lift themselves out of poverty and another hundreds of thousands becoming a wealthy middle class citizen. China's GDP boomed and expanded by 7-15% per annum since Deng's 'open door policies' began. China's is continuing to grow at around 6-7% despite the challenges of the current global macroeconomics. Nevertheless, all this is not quite enough for Xi.

The Chinese Dream 

(Political) slogans are big in China. Xi, who took office in March 2013 recently launched his slogan as the 'Chinese dream'. And no doubt even in the West, we will be hearing these two words over and over again as Xi progresses deeper into his ten year rule. Xi's slogan is a play on the 'American dream'. But unlike the American dream (that anything is possible with hard work), the definition of the Chinese dream is more blurred partly because of the overt political spin: 

"national rejuvenation, improvement of people’s livelihoods, prosperity, construction of a better society and military strengthening...that young people should dare to dream, work assiduously to fulfill the dreams and contribute to the revitalization of the nation...the Chinese dream is about Chinese prosperity, collective effort, socialism and national glory"

To me, at its basic meaning, the Chinese dream is about reverting and rejuvenating the country back to its former 1793 glory. It is understandable that in a country with a proud 5000 year civilization and one with a century of humiliation and pain, Xi (and also undoubtedly Chinese people) wants the country to rise strong again. Thus, the Chinese dream emphasises collective efforts and uniting Chinese citizens to achieve so. 

With effective propaganda and in a country where slogans matter, it is little surprise to me that the Chinese dream notion is big in China already. Firstly, Xi's doctrine of the Chinese dream and even the concept of 'dreams' has  hardly been out of national newspapers and the general media. 'Dream walls' have appeared in universities and public spaces for people to share their dreams and hopes for the future. Research into the 'Chinese dream' by the Chinese Academy of Social Sciences is due to be undertaken and believe it or not, the slogan has even inspired a chart topping song, entitled 'Chinese dream'. These effects are probably a passing fad but I for one, am concerned about where this dream can take China. 


Dreams fulfilled or nightmares created? 

The launching of the Chinese dream took place with an exhibition entitled the 'Road to Revival' at the National Museum next to Tiananmen Square, Beijing. A display of the oppression of Chinese people under colonial powers in the 19th-20th century and the (continued) restoration of China under communism in 1949, the exhibition is designed to evoke strong senses of nationalism. There is nothing wrong with nationalism and also nothing wrong with Chinese nationalism but given that both this centrepiece launch and that the Chinese dream itself is founded on nationalist principles, there is a real danger for China of losing sight of solving internal problems and instead focusing all efforts on battling for world domination. 

Further, whereas the American dream focuses on the individual and achieving individual wealth, the Chinese dream is focused on achieving national wealth thereby aggregating over individuals. The trouble with this is that the poorest or those citizens who are not benefiting from growth and national wealth, are not helped, much like the present situation.  

With the slowing economy, widespread and (increasingly reported corruption with the likes of Weibo), graduate unemployment, food safety scandals, pollution (a solution to these are far more likely to be the actual dreams of Chinese people), it seems like this slogan launch is plausibly an effort for Xi to win over some public affection and popularity for the time being. Xi, known for being straight talking and a 'man of the people', should have taken this opportunity to address directly and in plain language the real dreams and hopes of many Chinese people as individuals and not collectively as a nation. Doing so could leave Xi the same level of legacy akin to that of Deng. 

In the meantime, despite all the fuss, there isn't that much detail or policy unveiling on how Xi will go ahead to fulfill this Chinese dream. Apparently it will be fulfilled by the mid-21st century. It is not clear whether this means China becoming the world's largest economy or becoming a nation with the most advanced army, or even if Chinese Mandarin will become the new international language. Whether Xi can do so remains another interesting question. If Xi can successfully do so, the Communist Party would enjoy its cling on power for longer. But this Chinese dream, given it has no sincere objectives to benefit the individual, and that Chinese people are growing increasingly dissatisfied with pollution, corruption, social injustice and food safety scandals, won't this Chinese dream spark a wave of eventual backlash against the party who should be given credit to make China the way it is today? 

Finally, the Chinese dream very much also has a goal of revival to the past, to what China sees as its rightful position on the international stage. The Chinese dream is flawed because it should be a consideration of the future and the new challenges present and ahead in China's bid to become the greatest nation of the 21st and into 22nd century...and beyond?


JH