LVMH, Kering, Hermes and luxury consolidation

Three of France’s wealthiest families — mega billionaires behind luxury giants LVMH Moët Hennessy Louis Vuitton, Kering and L’Oreal — pledged a combined EUR500 million to help rescue a national icon after a huge fire ripped through the famous Paris cathedral in 2019. LVMH CEO Bernard Arnault put up EUR200 million, matched by the Bettencourt Meyers family, which controls L’Oreal. The Pinault family, which operates luxury conglomerate Kering, pledged EUR100 million. Other donors paid the remaining EUR200 million.

Patriarchs of Arnault, Pinault, Hermes, Bettencourt Meyers families and other owners of top-tier French luxury firms rubbed shoulders with movie stars, Presidents, Prime Ministers and other uber-wealthy from around the globe inside Notre Dame’s magnificent hall. Having helped restore the landmark in the heart of Paris, the luxury barons who sell finely crafted goods to their affluent clients worldwide might be hoping they can now convince shoppers, including those in their biggest market, China, to splurge as much on leather handbags, accessories, fashion apparel, jewellery and watches as they were before the 2020 pandemic hit. 

Several large publicly-listed European luxury conglomerates dominate the four key segments of the global luxury sector — fashion apparel, jewellery, watches and leather goods. The biggest and the most diversified among them is Paris-based LVMH, the 27th most valuable company on earth with a market capitalisation of around US$350 billion ($469.9 billion) or about the same size as the Bank of America. Aside from the eponymous Louis Vuitton luggage and Moët Chandon champagne, LVMH manages nearly 80 luxury brands, including jewellery group Tiffany, fashion houses Christian Dior, Celine, Givenchy, Bulgari, Loro Piana, Fendi, Loewe, Marc Jacobs, Kenzo as well as cosmetic group Sephora and luxury watchmaker Tag Heuer. 

LVMH’s nearest competitor is cross-town Paris rival Hermes International, the world’s 38th most valuable firm that is famous for its Birkin bags. Other rivals include Switzerland-based Compagnie Financiere Richemont, controlled by South African billionaire Johann Rupert, which owns watch and jewellery-focused Cartier, Van Cleef & Arpel, Piaget, Panerai, IWC Schaffhausen as well as A.Lange & Sohne among other brands. There is also Kering SA, which owns fashion brands Gucci, Yves Saint Laurent, Balenciaga, Bottega Veneta, Alexander McQueen, Brioni and luxury fragrance house Creed.

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For over a decade, global luxury goods sales buoyed by soaring revenues and margins from an increasingly affluent China helped grow the bottom line for big global brand owners. Robust economic growth in China led to improving living standards, and the creation of new wealth helped drive luxury industry growth from 2012 to 2019 as luxury consumption in China grew at a 9% compound annual pace (compared to 4% growth in global luxury sales).

In the aftermath of the pandemic in 2020, sales of luxury goods plummeted, only to begin rebounding sharply by mid-2021. Over the past 18 months or so, however, they have been on a slippery slope again. In Europe and the US, pandemic-related savings boosted luxury consumption, which compensated for depressed demand in China.

Look no further than the stock prices of the large listed luxury players to get a sneak peek of the ongoing carnage in the global luxury sector. Gucci’s owner Kering has seen its stock plummet 76% from its 2023 peak, fragrance giant Estee Lauder’s stock was down even more, nearly 79% from its last year’s peak to its trough last month, though it has recovered since and is now down 72% from its peak. Salvatore Ferragamo’s stock is down 64%, German fashion house Hugo Boss AG’s shares are down 46%, while Milan-based Moncler is down 24%. Watch and jewellery house Richemont is down 16% from its last year’s high. At its lowest point in October 2023, it was down nearly 46%. Hermes shares, which were down over 21% a few months ago, have since steadied and are now down just 10% from their last year’s highs. The stock of LVMH, by far the biggest luxury player, is now down just 28% from its previous year’s peak after being down 36% earlier in the year. 

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When share prices swing so massively, there is often an opportunity for stronger players to move in and consolidate their industry position. A challenging environment for discretionary spending, particularly in China, however, as well as hostile regulators seeking to block the merger of US-based firms Tapestry, which owns brands like Coach, Kate Spade New York and Stuart Weitzman and Capri Holdings, which owns Michael Kors, Jimmy Choo and Versace weighed on any consolidation in the industry. Last month, the two firms announced they would not appeal the US Federal Trade Commission’s decision to block their merger and voluntarily called off their proposed union. Shares of Tapestry, the acquirer, soared 40% after the merger was called off and are now up 124% from their last year’s lows, while shares of Capri, the takeover target, are down 68% from their previous year’s peak. 

One reason luxury players like LVMH, Hermes, Richemont and others are able to ride out slumps like the one they saw in China this past year is their strong pricing power. Every year, luxury firms quietly raise prices, keeping new price tags well above the inflation rate. “Even during the Covid-19-related downturn in 2020, pricing helped offset some of the industry’s volume decline,” notes Jelena Sokolova, Consumer Discretionary Sector analyst at Morningstar. 

This year, luxury players vowed not to resort to price increases but also made sure that despite a softer market, there would be no discounts either to boost revenues over the short term. Gross margins in the luxury sector are now in the 75% range, akin to gross margins in the enterprise software sector. The world’s top chip maker, Nvidia, which makes chips to train large language models for artificial intelligence, has margins similar to those currently enjoyed by LVMH and Hermes. In comparison, affordable, fast fashion players like Zara’s owner Inditex and H&M Hennes & Mauritz AB have gross margins of around 55% to 57%. 

Sokolova believes most luxury firms should be able to retain their pricing power “thanks to the strength of their brands, supported by conspicuousness of consumption, investment value of their products, and control over distribution.” That would enable the industry to generate strong returns on investment through the cycle. “There is some cyclicality in pricing, so we expect less aggressive pricing in the next five years after steep price increases since the pandemic,” she adds.

The Morningstar analyst is of the view that the investment value of a brand’s products is another pillar for luxury brand owners like LVMH, Hermes and Richemont. “Many iconic luxury products retain their value over time and can be seen as so-called investments of passion,” she wrote in her recent report on Luxury players. That’s particularly true in emerging economies with less-developed capital markets. “The longer a product is kept and the better it retains, or even increases, its value, the more a consumer is likely to pay for it,” she writes. 

It is not surprising, then, that investments in watches, jewellery and handbags have yielded returns similar to or above the European stock market index over the last 10 years. On The RealReal, the preowned luxury distribution platform, top luxury handbags are discounted on average from 30% to 45% compared with retail prices even after use. Given that retail prices for luxury goods are increasing, buying a top-brand handbag can be an attractive “investment”. The analysis excludes Hermès’ Kelly and Birkin handbags, which can often be resold for more than the retail price because of supply limitations. The demand for Hermès bags is such that one bag estimated at EUR6,500 can sell for as much as EUR35,000. Signature brands like Cartier and Van Cleef & Arpels can sometimes add 50% to 100% or, indeed, even up to 300% to the auctioned jewellery value, depending on the rarity of the piece.

The top 10 firms make up 86% of the global luxury watch market and 74% of the leather goods like handbags. Rolex has a 29.1% share of the luxury market, Richemont’s brands have 19.8%, Swatch Group 15.7% and Tag Heuer owner LVMH 8%. In leather goods, LVMH is a clear leader with a 28.1% share of the market, Kering with 15.4%, Birkin maker Hermes 8% and Coach owner Tapestry with 7.1%. In jewellery, Richemont has a 23.9% lion’s share of the market, with LVMH not too far behind with a 21.6% market share. Fashion apparel, with its lower prices and shorter use, is highly competitive and has low barriers to entry. LVMH has a 12.8% share of the market, Kering has a 6.8% market share, and Ralph Lauren has a 4.2% share of the market. 

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Most luxury sector executives have been preparing investors for a sluggish year with clearer signs of recovery in the second half of next year. China has been tinkering with a fiscal stimulus to kick-start its economy in 2025 as incoming President Trump prepares to slap hefty tariffs on imported goods. Beijing is also grappling with a moribund real estate sector and huge local government debts that have racked up over the years to help real estate projects. The anti-corruption crackdown in China in recent years has kept Chinese customers away from luxury boutiques in Shanghai or Beijing. In the July-September quarter, sales of luxury goods ballooned in Japan even as they declined in China. That surge came in the wake of a weaker yen. Chinese customers may not be buying Birkin bags in upmarket malls in Shanghai, but they are travelling and snapping up whatever they can find in LVMH or Hermes stores in Ginza or Shibuya. 

Sokolova notes that luxury downcycles over the past 30 years have not lasted longer than one year and have almost always been followed by a strong recovery. There is plenty of pent-up demand for luxury goods in China, Asia, the US, and Europe as consumers benefit from interest rate cuts and, in the US, a booming stock market. 

Look out for more industry consolidation as well. LVMH’s owner, Arnault, has turned what was once a small French construction company into a global federation of brands by buying troubled luxury companies and turning them around. Unless it seems like a dramatic reversal in fortunes, Kering would need to sell some of its less profitable brands to turn itself around. An obvious buyer of those assets is likely to be LVMH, which is also eyeing some of the jewellery and watch brands. Arnault recently revealed that he owns a small stake in Kering but insisted that he doesn’t plan to take over the rival firm. He bought the shares because they had fallen a lot and looked like a bargain. LVMH also owns a 20.2% stake in Hermes (the Hermes family owns a 58% economic stake in the eponymous firm but controls 74.8% of the voting shares).

Expect luxury purchases to continue to shift online, albeit very gradually. Morningstar’s Sokolova believes online luxury purchases will reach 25% over the next decade or about half of 40% to 50% for general apparel that would be sold through online channels in 2034. Big luxury brands that had previously shunned the aggressive embrace of online channels are now warming up to online sales, particularly in China. Shoppers are willing to buy big-ticket luxury items online without expecting discounts. Richemont’s jewellery brand Cartier, as well as brands like Gucci and Ferragamo, have in recent months opened flagship web stores on Alibaba’s TMall’s luxury Pavilion. Online shopping will boost sales of luxury goods in China. Luxury buying in the world’s number two economy is likely to account for 34% of total global luxury sector sales by 2032, up from 22% in 2023.   

 Assif Shameen is a technology and business writer based in North America