It is Friday, and we’ve covered quite a bit this week. So let’s keep it fairly light!
With revenues growing at 12% per year. Margins high and sustainable at 27%. And strong cash reinvestment and return. It’s fair to say that things are looking pretty good for LVMH. However, before we close for the week, let’s quickly touch on some of the less rosy parts of the business. And what potential risks may lay ahead for the luxury giant. So without further ado…
As I’m sure many readers are aware, ESG (Environmental, Social, Governance) issues have become incredibly important for companies over the last 5 years. And ESG has changed the way many businesses operate. Whether it’s Unilever paying their supply chain workers more, or Adidas making biodegradable shoes. ESG considerations, have become front and centre of people’s minds because of the impact they could have on companies’ profits.
One area where ESG could play an increasing role in the luxury industry is the issue of animal cruelty. Take a look at the Louis Vuitton jacket below.
Colourful, yes. Expensive, no doubt. But what may be not so obvious is that this jacket was made with 100% crocodile skin! Not only this jacket, but a huge proportion of LVMH’s bags are made from animal skins. And this use of animal skin has got the company in hot water with PETA (People for the Ethical Treatment of Animals). The company published a scathing report on LVMH and Kering’s animal-skin production practices. It’s quite graphic reading so I’ll let anyone interested click on that link!
LVMH in response simply said that would try and ensure the species’ conservation and welfare. And then committed to a sustainability plan to use more sustainable materials and plant more trees. Original! Whilst it was a deflection from the animal skin issue, how long LVMH can hold off PETA on this issue remains to be seen. What we have seen though is certain brands give in to the pressure of other ESG issues. In 2017, we saw Gucci ban the use of fur, and they were then followed by several luxury peers. Let’s see who kicks off the ban on crocodile skin!
So in the screenshot below, you can see the Speedy 30 handbag currently being sold for £1,110 on the Louis Vuitton UK website.
But hold on, the screenshot below also shows the Speedy 30 handbag being sold on a different website - but for ‘only’ £650.
How does this happen?! I thought Louis Vuitton only sell their products in their stores or on their website. So how comes we’re seeing this bag being sold on another website. And for so much less too?!
Well, let’s try and explain this. Yes, this bag is a Louis Vuitton product. But it’s not being sold by Louis Vuitton now. It was previously sold by Louis Vuitton to someone. And that person is now re-selling the bag. And the website they’re re-selling the bag on is Vestiaire Collective.
And what we’re seeing here isn’t a one-off. Vestiaire is just one of the many players in the growing luxury resale industry. The site boasts of over 23 million buyers and sellers. And the market leader, The RealReal, has over 25 million members. But whether luxury resale is a good or bad thing for luxury companies like LVMH is yet to be seen. Opinion is split on whether the luxury resale market will cannibalise primary sales - so people buy resold items instead of directly from Louis Vuitton. Or whether the luxury resale market will serve as a nice entry point for first-time luxury buyers who can’t yet afford the primary market sales… but hope to one day!
LVMH will be hoping it’s the latter!
The Kardashians are arguably the most famous family in the world. With a net worth of over $2bn and a combined Instagram following of over 1 billion. It’s fair to say, they’ve done pretty well for themselves.
And for a long time, people loved tuning into ‘Keeping Up With The Kardashians’ and seeing how Kim and co. flaunted their wealth. But in the words of Bob Dylan, ‘Times, They Are A-Changing’.
Last November, as the world geared up for their Christmas festivities, Kylie Jenner posted a photo of her tree on social media. However, this wasn’t just any normal Christmas tree. It was a two-story tall tree! You can see it in the screenshot below.
But the social media post didn’t get quite the reaction Kylie expected. Her fans ripped into her for showing off her wealth! And for her wastefulness and greed. The reaction was so bad that Kylie ended up removing the post altogether. Why do I bring up Kylie’s tree here though?
Well, because the younger generations’ attitude to such extreme displays of wealth and extravagance is changing. Minimalism and experiences have started taking higher priority over extravagance and ‘stuff’. And for LVMH, who always have one eye on attracting the newer, younger crop of consumers, this could be a dangerous trend. What if people start buying more holidays rather than bags? Or gift more experiences rather than watches? Well, as we’ll see in the Career Talk later, this is something LVMH have really considered. And was a large part of their reasoning to acquire Belmond - the luxury hotel operator!
That’s A Wrap!
So that brings us to the end of Week 5 of The Business Of newsletter. We hope you enjoyed understanding the business of LVMH. Although we went through some of the potential speed bumps in the coming years in today’s newsletter. It’s fairly safe to say that LVMH is in an incredibly strong position. This week we’ve dug into;
(i) what LVMH actually does,
(ii) how they make money,
(iii) how much it costs to operate their business model,
(iv) what they do with their profits, and
(v) potential risks on the horizon.
But it’s not quiteee the end. Because we have a another special newsletter being released imminently!
It’s the next edition of our Career Talk newsletters and this week we’re diving into Audit & Finance.
I’ll be chatting to my friend, Lottie Kingdon (MBA student @ London Business School, ex-audit associate @ KPMG, ex-group finance manager @ Belmond) about;
how she got into her roles post-uni,
what audit work actually looks like,
what advice she’d give students wanting to get into audit,
what skills/books she’d recommend,
and then discussing the possible reasons why LVMH acquired Belmond.
It really isn’t one to miss! We hope you have a lovely weekend! And a heads up - we’re NOT back next Monday. After 5 business models, we’ll be taking a week off! Before returning the following week to analyse The Business Of Netflix.
Bye for now!
The Business Of Team