Skip to main content
BoF Logo

The Business of Fashion

Agenda-setting intelligence, analysis and advice for the global fashion community.

How LVMH Dominates the Luxury Business

Above all, the French group benefits from the sheer scale of its megabrand Louis Vuitton, setting in motion a virtuous cycle that powers profit generation, explains Luca Solca.
A model walks the runway carrying a Louis Vuitton duffel.
LVMH, above all, benefits from the sheer scale of its core megabrand Louis Vuitton, setting in motion a virtuous cycle that powers profit generation, writes Luca Solca. (Getty Images)

LVMH kicked off a “super week” of luxury results with a strong second-quarter performance. Group sales grew by 19 percent to €18.73 billion, beating consensus expectations of €17.13 billion, despite soaring inflation and fresh Covid-19 lockdowns in the critical China market. EBIT also surpassed expectations by 8 percent, and the strong performance sets a high bar for luxury rivals set to report later this week.

LVMH is the world’s biggest and most diversified luxury goods conglomerate with leading positions in multiple businesses, including fashion and leather goods, jewellery and beauty distribution. Sheer scale, diversification and the exceptional resilience of its leather goods megabrand Louis Vuitton allow the group to consistently generate strong revenue and profit growth, giving the group a less cyclical profile, adding to its overall strength and valuation multiple.

Luxury conglomerates are only as strong as the megabrand at their core. Kering has Gucci, Richemont has Cartier. LVMH has Louis Vuitton, the king of the luxury jungle.

Vuitton has top consumer appeal rankings across geographies. It also has complete control over its distribution (100 percent retail), total price discipline (100 percent full-price), significant headroom for category diversification and a multi-pronged product innovation engine.

ADVERTISEMENT

But above all, it has scale, setting in motion a virtuous cycle that is critical to profit generation.

Vuitton is the biggest luxury brand in the world with approximately €18 billion in 2021 sales, about 40 percent more than pre-pandemic levels. It’s also one of the most profitable players in the luxury sector, with an EBIT margin of over 45 percent.

The Megabrand Virtuous Cycle

Much of the growth in the luxury industry is driven by new wealth creation in China and other fast-growing markets, where new middle-class consumers are naturally attracted to megabrands like Vuitton and Dior, as these are the brands they know. This gives such megabrands stronger growth tailwinds and further expands their scale advantage.

In a largely fixed-cost industry like luxury, greater scale means higher margins or discretionary cost power. More discretionary cost power, for example in marketing spend, means the strongest brands get stronger, securing even more consumer awareness.

Scale provides megabrands with other advantages in branding and marketing, too. As megabrands are bigger, they can be first movers into new markets and therefore imprint themselves on new sets of customers. Scale also brings the opportunity to dwarf competitors on absolute marketing spend, while at the same time committing a smaller slice of sales to this spend.

What’s more, scale gives megabrands an edge in securing and retaining talent: a key advantage in an industry that’s getting faster and more complex every day. LVMH has notably been able to repeatedly attract top creative talent away from peers. This drives innovation — in products, in store design, in marketing strategies — which drives more traffic to stores.

More traffic to stores provides better retail economics, which largely hinge on productivity per square metre. Furthermore, shopping mall landlords are happy to offer better rental terms, higher capital contributions and better locations to megabrand traffic magnets.

Higher retail productivity, in turn, gives a brand the ability to achieve higher downstream retail integration, which allows higher price discipline and go-to-market grip. This helps to reduce brand trivialisation risk, and allows higher pricing stretch. Greater retail integration (both in stores and online) also provides better customer data, which offers advantages in customer relationship management.

ADVERTISEMENT

Year after year, Vuitton has tapped this virtuous cycle to successfully defuse brand equity risks, while continuing to generate strong revenue and profit growth. A decade ago, Vuitton saw the risk of overwhelming the market with its popular canvas handbags and has since pushed its bag prices higher, curbing growth of handbag volumes, while offering entry-level consumers lower-priced products in small leather goods and newly introduced fragrances, with eyewear and beauty products no doubt to come.

Now, LVMH stablemate Dior is on its way to becoming a second fashion and leather goods powerhouse for the group. Our estimates suggest that, under chief executive Pietro Beccari and designer Maria Grazia Chiuri, the brand has grown revenues to almost €10 billion in 2021, while materially widening its profit margin.

A Future Jewellery Pillar

Meanwhile, LVMH’s Tiffany revamp is on the right track. After acquiring the jeweller in 2021, the group hit the ground running with a new heavyweight management team, who quickly deployed an effective “shock and awe” marketing strategy, reemphasised high-end products and pushed the brand online.

The branded jewellery category is structurally appealing, with plenty of blank space for expansion. Here, the risk of brand trivialisation is eminently manageable as jewellery is more discreet than handbags or shoes, and consumers attach higher intrinsic value to jewellery items, probably because of their connection to precious metals and gems and longer product lifespans. Jewellery has high average ticket value, doesn’t require large stores to be displayed and offers high gross margin. Plus, jewellery appeals to a broad consumer audience and has benefitted from market tailwinds through the pandemic.

LVMH’s Tiffany acquisition came on the back of the group’s successful integration of Bulgari. Between 2010 and 2019, Bulgari doubled sales while multiplying profit by five, according to LVMH chief Bernard Arnault. If Tiffany, starting from a much bigger base, follows the Bulgari blueprint, it could become one of LVMH’s top three brands, turning jewellery into another major pillar for the world’s largest luxury group.

Luca Solca is head of luxury goods research at Bernstein.

The views expressed in opinion pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.

LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholder’s documentation guaranteeing BoF’s complete editorial independence.

Further Reading

How ‘Big Luxury’ Stays on Top

Whether or not a deal goes through, LVMH’s $14.5 billion Tiffany takeover bid is another sign that the giants that dominate the luxury sector are becoming more powerful. Why is this happening? What risks do they face? And what can smaller players do to compete?

How Big Can Luxury Brands Get?

Last month, Kering set a medium-term sales target of €15 billion for flagship brand Gucci, far beyond what conventional wisdom once deemed possible.

© 2024 The Business of Fashion. All rights reserved. For more information read our Terms & Conditions

More from Luxury
How rapid change is reshaping the tradition-soaked luxury sector in Europe and beyond.

Will Dover Street Market’s Big Bet on Independent Fashion Pay Off?

The Comme des Garçons-owned retailer’s new Paris location is taking a radical — and risky — gamble on indie labels over big brand concessions at a challenging moment for the fashion market. ‘The hunger for sure is out there — I feel it,’ said CEO Adrian Joffe.


The Existential Threat to Independent Brands

This week, The Vampire’s Wife announced its closure and Dion Lee called in administrators, only days after Mara Hoffman said it was shutting down and Roksanda narrowly escaped administration. Many more may follow.


How Chopard Seizes the Red Carpet Spotlight in Cannes

The Swiss brand out-sparkles rivals with a strategy aimed at driving sales as well as image. This year the company dressed Greta Gerwig, Demi Moore and Bella Hadid as well as hosting clients to view (and purchase) its high jewellery range.


view more

Subscribe to the BoF Daily Digest

The essential daily round-up of fashion news, analysis, and breaking news alerts.

The Business of Fashion

Agenda-setting intelligence, analysis and advice for the global fashion community.
CONNECT WITH US ON
© 2024 The Business of Fashion. All rights reserved. For more information read our Terms & Conditions, Privacy Policy, Cookie Policy and Accessibility Statement.