Revolutionizing Luxury With LVMH
Part 1: How to Grow Your Business Like LVMH
In the glittering heart of Paris, where the Seine whispers tales of centuries past, there stands not just a company but an empire that has redefined luxury across the globe. Imagine a world where the essence of high fashion, the spirit of exquisite wines, and the allure of timeless jewelry come together under one umbrella.
How has one company managed to become synonymous with luxury in less than 40 years, while owning brands that are more than 400 years old?
More importantly, how can we apply these same lessons to our brands?
This piece will focus less on analyzing LVMH in isolation and more on extracting actionable lessons to foster growth in our brands.
This will be a two-part series: the first part will concentrate on the pure business side of things, from inception to the present, while the second part will explore how LVMH can leverage Web3 technology to further its objectives.
The Biggest Luxury Brand in the World
Founded only in 1987 – While we regard brands like Louis Vuitton as heritage brands (established in 1854), LVMH itself was only founded in 1987. The merger that brought the company to life was orchestrated by LVMH’s CEO, Bernard Arnault.
Source: Louis Vuitton 19th largest company in the world – As of March 2024, LVMH ranks as the 19th largest company worldwide (and the second largest in Europe) with a market cap of approximately €390B (or $419B). The company boasts some of the top luxury brands in the world, including Louis Vuitton, Dior, Tiffany & Co., Loro Piana, and many more.
Source: Finshots Margins similar to tech companies – Surprisingly, despite selling physical products, LVMH's reputation has enabled its Q4 2023 gross margin (Gross profit/Revenue) to surpass even those of tech giants like Microsoft and Alphabet. For context, the software industry typically enjoys the highest gross margins due to the theoretically infinite scalability and reproducibility of their products, i.e., software. This indicates the strong premium LVMH’s brands are able to command.
Source: The Naked Collector. Data: GuruFocus. Fashion & Leather Goods segment dominates – The Fashion & Leather Goods segment is LVMH's primary revenue driver, with its largest markets being Europe, the US, and China.
Lessons
What does it take for a company to become the world's most significant luxury brand while making its CEO the second richest person globally?
After reviewing numerous in-depth podcasts, articles, documentaries, and financial statements, I’ve distilled the LVMH secret to three crucial lessons:
Dare to Be Different
Ride the Wave
Control the Experience
1. Dare to Be Different
💡Think outside the box💡:
LVMH, established in 1987, owes much of its narrative to CEO Bernard Arnault's unconventional journey, starting with his acquisition of Dior in 1984 for $60 million. A story tells of Arnault asking a New York cab driver if he knew the French president's name. The driver didn't, but he knew Dior. Dior’s parent company Boussac was struggling at the time and the French government was looking for a buyer.
Interestingly, Arnault and his family had no background in luxury or fashion at that time, their expertise lying in construction and real estate instead. Nevertheless, Arnault capitalized on his family's wealth and their connections with Lazard, a globally renowned investment banking firm. His opportunistic and innovative mindset, which he developed in the U.S.—a hub for aggressive deal-making, including leveraged buyouts—played a crucial role. This approach, along with the subsequent developments, was considered unconventional in France, earning Arnault the name "The Terminator."
💡Focus is key💡:
What Arnault saw in Boussac, was the underpriced brand IP that came with one of is companies, Dior.
To revive the hidden gem that was Dior, Arnault initiated a campaign focused on streamlining operations:
By 1986 Arnault had laid off 9,000 Boussard workers
He got rid of Dior’s underperforming textile operations and shifted his focus to the Bon Marché department store and Christian Dior Couture
Dior’s countless licensing deals were reduced by half to avoid dilution of the brand and focused on “quality and exclusivity over quantity and accessibility."
There was a focus on opening Dior-owned boutiques in central locations like New York, Paris, Hong Kong (more on this in the distribution section)
By 1989, Dior was once again profitable, making $112M in profits and $1.9B in revenues.
💡Be open minded💡:
Arnault's belief that "talent has no nationality," though widely accepted now, was revolutionary in France back then. He broke norms by appointing Gianfranco Ferré, an Italian, and later John Galliano, an Englishman, as head designers for Dior, a venerable French institution. Arnault argued, "you can't charge a premium price for giving people what they expect, and you won't ever have breakout products that way. We have those, but only because we give our artists freedom." Inicdentally, this philosophy is particularly relevant when considering Web3 products.
💡Participate in the dialogue💡:
By the late 1990s, Galliano had reinvented Dior's marketing through provocative campaigns and fashion shows, such as the "Homeless Show" and "S&M Show."
This transformation from a cherished French brand established in 1946, to its brave new identity highlights Arnault's boldness in capturing attention and distinguishing the brand. Although risky for established brands, as we saw from the Bud Light fiasco, this approach underscores the importance of staying engaged in cultural conversations. As André Gide famously said, "It is better to be hated for what you are than to be loved for what you are not.
Key takeaways:
Look beyond the fashion industry norms for inspiration. Outsiders often drive evolution within fashion.
Consider the impact of licensing on your brand. Is it enhancing or diluting your brand's value? Apply the 80-20 rule to identify which categories are truly driving your brand's success.
Seek innovative solutions beyond short-term gains.
Focus on innovation over merely catering to current customer preferences.
Key Questions:
Who is your "Dior"? This could be a company or an individual with untapped potential.
Where can you find undervalued intellectual property?
How can you market an idea or experience, rather than just the product itself?
Are your efforts too focused on meeting current customer desires at the expense of innovation?
2. Ride the Wave
💡Pick a growing sector and double down on it💡:
Warren Buffett's timeless advice, "It doesn't matter how hard you row. It matters which boat you get in," perfectly encapsulates the essence of strategic growth. Essentially, macro industry trends often outweigh the specific actions of individual companies.
Just as Amazon's rise was intertwined with the growth of the internet, LVMH's ascent is closely linked to the expansion of the personal luxury goods market. Moreover, luxury market's inherent resilience during economic recessions, evident from its swift recovery post-2007–2008 financial crisis, helped maintain steady demand throughout the years.
On the other hand, conglomerates like LVMH benefit from their ability to diversify across industries, providing a hedge against sector-specific downturns.
Committing to a sector involves not just riding its wave but actively reinvesting profits to fuel further growth. LVMH's consistent high gross margins and strategic reinvestment have kept its operating margins robust, around 20%, reflecting not a lack of profitability but a commitment to future growth.
LVMH's 2023 financials reveal increasing investments in marketing and selling, essential for sustaining growth. This contrasts with competitors like Kering, which, despite navigating the same luxury wave, hasn't matched LVMH's explosive growth — LVMH's sales surged by 401% from 2008 to 2022, significantly outpacing Kering's 18% growth.
Another testament to LVMH's proactive growth strategy is its decision not to rely solely on its primary revenue driver, Fashion & Leather Goods. Instead, the company strategically branched out into the Watches & Jewelry segment. This expansion yielded the highest annual growth rates across all of LVMH's industry sectors.
2.1. Strategies for Growth
LVMH's expansion strategy is twofold:
organic growth through scaling existing brands and
inorganic growth via acquisitions.
2.2. Organic Growth
💡Figure out what investment has multiple benefits💡:
LVMH’s organic growth has been driven by
opening new stores, and
embracing technologies
LVMH has nearly tripled its store count since 2008, however, this isn't just about short-term revenue; it strategically enhances brand visibility and distribution control.
A study on LVMH's expansion into Asia highlights its unique approach of directly investing in real estate, allowing for complete control over the customer experience — a stark contrast to competitors who partnered with local entities.
In Europe, the renovation of the iconic Samaritaine department store in Paris, which cost $1 billion and took 15 years, exemplifies this approach. Mirroring Arnault's acquisition of Dior, the department store had been operating at a loss since 1970, yet was a French icon.
💡Learn through osmosis (or create a competition where the ultimate winner is you)💡:
On the technological front, LVMH Innovation Award was created in 2017 to recognize promising startups that can have an impact in the fashion/luxury space. More importantly it’s a great opportunity for LVMH to assimilate new ideas through potential collaborations with these startups or through acquisitions. In 2023, the Innovation Award Winner was a circular wardrobe app and service called Save Your Wardrobe.
2.3. Inorganic growth/Acquisitions
While organic growth has expanded the LVMH empire, it’s the inorganic growth i.e. acquisitions that’s at the heart of LVMH’s strategy. It tends to acquire recognizable brands with great but often latent IP. It currently consists of 75 brands.
Looking at the graph below, we see the scale of LVMH’s acquisitions and that many of these brands have strong standalone name recognition pre-acquisition, from Tiffany & Co. to Off-White.
💡Don’t be afraid to spend on good IP💡:
Zooming in on LVMH's strategic acquisitions since 2010 reveals that a significant portion (38%) has been concentrated in the Fashion & Leather Goods sector. However, the conglomerate's largest single acquisition occurred in 2021 with the purchase of Tiffany & Co., a Watches & Jewelry brand, for $15.8 billion. It's noteworthy that the Wines & Spirits sector did not see any new acquisitions during this timeframe.
Looking ahead, LVMH's CFO, Jean-Jacques Guiony, revealed in an interview the categories targeted for future acquisitions:
Really high-end watches — This would connect with narratives of high status and heritage.
Skincare — This would engage with youth culture, new consumers, and aspirational narratives.
Heritage whisky brands — This would, again, delve into narratives steeped in heritage.
💡LVMH's acquisition strategy centers on enhancing already esteemed brands through a process of “dream creation”💡:
Acquiring high-quality brands with a rich heritage or, occasionally, "nouveau riche" brands associated with celebrities.
Refining the brand and its offerings to craft an aura of desirability around them.
Utilizing its own distribution networks—including real estate, negotiation leverage and celebrity connections—to showcase the acquired brand in premier locations both online and offline, thereby cultivating desirability.
2.4. Case: Tiffany
A prime example is LVMH's acquisition of Tiffany & Co. for $15.8 billion, marking the conglomerate's largest purchase to date. This case exemplifies the recurring themes of "Dare to Be Different" and "Ride the Wave," while introducing a new theme, "Control the Experience."
“Dare to Be Different”
LVMH's acquisition of Tiffany & Co. for $15.8 billion demonstrates the company's commitment to investing in high-quality heritage brands. What allows LVMH to pay so much for acquisitions is its existing distribution channels that enhance the distribution and margin of these businesses. This is especially effective when acquiring smaller brands.
LVMH has rejuvenated the Tiffany & Co. brand with innovative marketing strategies, including the "About Love" campaign featuring Jay-Z and Beyoncé, the "Not Your Mother’s Tiffany" campaign and engaging with Asian influencers like Blackpink’s Rosé and the boy band TF Boys. LVMH even put Tiffany & Co. on the crypto map by partnering with CryptoPunks in August 2022.
“Ride the Wave”
The jewelry sector experienced remarkable growth in 2021, surpassing the growth rate of the personal luxury goods market from 2004 to 2020, as reported by Vogue Business. This significant growth underscores the industry's potential and LVMH's strategic positioning.
Source: Vogue Business
“Control the Experience”
LVMH aims to enhance Tiffany's retail presence and expand its geographical footprint in Europe and Asia, emphasizing the importance of a prominent presence in key cultural centers.
The reopening of "The Landmark," Tiffany’s flagship store in NYC, after four years of renovations, parallels LVMH's renovation of La Samaritaine, showcasing the company's dedication to controlling the retail environment and enriching the customer experience.
Immersive installation at The Landmark. (Source: Tiffany & Co.)
Key takeaways:
Two Critical Growth Levers:
Sector Growth: The overall growth of the industry sector your brand operates in.
Idiosyncratic Growth: The unique growth of your brand within its sector.
While predicting sector growth can be challenging, focusing on your brand's idiosyncratic growth through reinvestment and expansion is within your control. This strategy demands confidence and long-term vision, potentially spanning decades, but can yield significant rewards in brand recognition, negotiation leverage, and distribution capabilities.
Beyond Organic Growth: Growth doesn't have to come from within. Instead of merely seeking partnerships, consider taking control of the entire value chain for a more integrated approach.
Strategic Associations: When acquisitions are not feasible, due to financial constraints or other reasons, strategically associating your brand with others can enhance your brand's appeal. This could involve collaborations that elevate your brand's desirability and market presence.
3. Control the Experience
To make each merger profitable, LVMH uses distribution power as its single most powerful tool.
LVMH’s expansive distribution networks and real estate ownership
Create negotiation power for the brand
Decrease the cost of introducing new products or brands
Make sure their products are displayed where they want them the way they want them.
But why is distribution in the luxury sector so important?
Well, because…
💡Luxury is theater💡:
The customer experience is everything and despite growing popularity of online shopping in-store experience is a key part of this in the luxury goods market. As I’ve written previously, brands are nothing without context or a story.
LVMH has consistently positioned itself in the most sought-after locations globally since the 1990s when it opened new Dior locations in upscale New York City, Los Angeles and Tokyo shopping districts.
The significance of luxury brands establishing themselves in key cities is underscored by the data from Bain & Co. in 2023.
When it comes to the theatrics of LVMH, a notable example unfolded in October 1997, with the grand reopening of the Dior headquarters on Avenue Montaigne, remodeled by Peter Marino. This event drew major celebrities of the era, such as Nicole Kidman, Demi Moore and Jacques Chirac. The store experienced another extensive renovation in 2020, emphasizing once more the critical role of remodeling in maintaining a brand's prestige and attraction.
To some, extensive renovations may appear excessive, yet in-store shopping remains the predominant mode of luxury purchasing. Despite the growing popularity of e-commerce within the luxury sector, physical stores provide the essential ambiance and theatricality that distinguish luxury brands, making them the ultimate marketing tool.
Furthermore, Business of Fashion (BoF) data reveals that nearly half of luxury customers seek more from stores than just a place to shop. Research indicates that the key factors contributing to a “delightful shopping experience” in luxury stores include “extraordinary service excellence, unique multi-sensory emotional stimulation conforming to the brand, and a feeling of personal importance and assurance”.
In short, theatrics aren’t only good for branding but benefit the customer directly.
It’s important to remember the theatrics not only attracts customers but celebrities and talent as well to LVMH (remember 💡”Figure out what investment has multiple benefits”💡), further creating competitive advantages for the conglomerate.
Unsurprisingly, other luxury brands are starting to follow. We’re seeing a shift to brand owned retail vs. wholesale trend in the global personal luxury market. In 2010, owned retail made up only 28% of the sales, while in 2022 it was estimated to account for 50% of the sales. This shift is one of the primary factors behind the challenges faced by luxury e-commerce platforms like Farfetch.
Luxury brands are waking up to the fact that maintaining a personal connection to the consumer is becoming increasingly important.
💡Customer Is the Protagonist, Product Is the Story💡:
From a marketing perspective, the core function of products is twofold: to generate a need and then to satisfy it. This process bears striking resemblances to the principles of screenwriting, incorporating elements of "want and need" as well as "conflict and resolution.
According to screenwriting principles, the consumer journey in the context of aspirational luxury goods unfolds like a narrative:
The consumer journey follows the structure of a story, especially if we’re talking aspirational luxury goods:
Exposition (Status Quo): This represents the current state or situation of the customer.
Conflict (Marketing): Marketing efforts introduce a challenge or desire, such as the need for a Louis Vuitton bag to symbolize success, or Tiffany jewelry to emulate the lifestyle of celebrities like Jay-Z and Beyoncé. The conflict might be sparked by exposure to new product launches in marketing materials.
Rising Action (Consumer Engagement and Action): Prompted by marketing, the consumer engages with the brand, perhaps by visiting a Tiffany & Co. store. Here, they're immersed in an environment of luxury and sensory delight.
Climax (Purchase): The consumer decides to purchase, say, a piece of Tiffany & Co. jewelry after trying it on.
Falling Action (Post-purchase): The consumer leaves the store, purchase in hand.
Resolution (Desire Fulfillment): With their new acquisition, the consumer feels a sense of accomplishment and alignment with their aspirational figures.
This cycle eventually resets, with the resolution becoming the, and the journey begins anew.
This is the reason why LVMH’s biggest client group aren’t the super rich but the upper middle class. LVMH is first and foremost an aspirational brand (although it does cater to the super wealthy via more muted brands like Loro Piana).
LVMH provides not just a temporal customer journey but also an inter-product journey/funnel, navigating through its product hierarchy. Customers can start from the $30 Dior lipstick and graduate to the million dollar Hublot watches or Tiffany & Co. jewelry.
This explains why LVMH is considering acquiring companies in the highest tier of luxury watches, such as Patek Philippe, as mentioned by CFO Jean-Jacques Guiony. Adding such a prestigious brand to its portfolio would further complete the customer lifecycle journey.
Lesson Summary
💡Dare to Be Different💡
Embrace creativity and unconventionality.
✅ Action step: Allocate time weekly to brainstorm and develop innovative ideas or products.
Prioritize focus and the pursuit of quality.
✅ Action step: Implement a 'quality over quantity' approach in your projects, with regular reviews to ensure high standards.
Maintain open-mindedness in leadership and talent selection.
✅ Action step: Foster a diverse work environment by incorporating inclusivity in hiring practices and leadership training.
Engage meaningfully in cultural and societal dialogues.
✅ Action step: Participate in or host forums, workshops, or community events to engage with current cultural and societal issues.
💡Ride the Wave💡
Identify and capitalize on flourishing sectors.
✅ Action step: Conduct quarterly industry trend analyses to identify emerging markets or sectors with growth potential.
Reinvest profits judiciously to fuel growth.
✅ Action step: Develop a financial strategy that allocates a portion of profits towards investment in new technologies or market expansion.
Balance organic and inorganic growth strategies.
✅ Action step: Evaluate your business model semi-annually to find a balance between developing new in-house capabilities and seeking external partnerships or acquisitions.
💡Control the Experience💡
Leverage distribution power effectively.
✅ Action step: Assess and enhance your distribution channels annually to ensure maximum reach and efficiency.
Create immersive customer experiences that immerse customers in your brand's ethos, fostering loyalty and connection actively.
✅ Action step: Design customer journey maps for your products or services to identify opportunities for creating more engaging and immersive experiences.
Craft compelling narratives with the customer as the protagonist.
✅ Action step: Craft marketing and communication strategies that position the customer at the center of your story, using feedback loops to refine and personalize messaging.
What Got Them Here Won’t Necessarily Get Them There
LVMH, while a leader in the personal luxury goods industry, is still facing unique challenges stemming from both internal dynamics and shifts in the broader macro environment.
Problem #1: LVMH is running out of companies to acquire
Due to LVMH’s size there are fewer and fewer companies that would move the needle for LVMH if acquired.
If we look at the market caps of the 29 largest luxury goods companies, we see that LVMH + Dior (Dior operates as a separate entity but stock is controlled by LVMH) make up roughly 48% size of the sector. If we add Hermès, this is already around 68% of the sector market cap. Hermès famously resisted a takeover attempt by LVMH. Moreover, if Kering, which also thwarted LVMH's advances, this leaves just 27% of the market cap outside LVMH's influence
This concentration exceeds even the tech industry, known for antitrust concerns, highlighting the luxury sector's consolidation.
For context, below is how the biggest 29 tech companies compare based on market cap. Moreover, there’s a longer tail of smaller tech companies not visible in the pie chart.
On the positive side of things, the personal luxury goods market has continued to grow at around 6% per year.
Problem #2: Growing sales but maintaining scarcity without diluting the brand
With fewer acquisition targets, LVMH must focus on organic growth without diluting its brands. The challenge is maintaining luxury status while expanding product sales, avoiding the perception of being just another fashion brand. Overproduction risks diminishing the allure of brands like Louis Vuitton, making them vulnerable to substitutes if they become mere “fashion” instead of “luxury” brands.
Louis Vuitton and other brands can push only so much product out before they lose appeal as symbols of wealth and status. This becomes more relevant when combined with the next point.
Problem #3: Increased importance but decreased loyalty of Chinese consumers
The Chinese market, essential to LVMH is rapidly growing yet experiencing a decline in brand loyalty, particularly among younger consumers.
Not only are Chinese customers important for LVMH, they’re important for the entire luxury sector, projected to make up 40% of the luxury market by 2025 according to McKinsey and 35-40% by 2030 according to Bain & Co.
Moreover, according to HSBC China will more than double its number of millionaires over the next five years and boost the size of the middle class by almost half.
On the other hand, Chinese customers are becoming less loyal. The biggest driver for this trend is age; as consumers are getting younger, they’re becoming less brand loyal.
With so many young luxury consumers, it’s no surprise that the region is one of the most online-native regions in the world when it comes to shopping.
First, e-commerce is dominated by few big brands (JD.com, Tmall) which levels the distribution playing field (one of LVMH’s competitive advantages) among all fashion companies. According to Kevin Jiang (president of international business at JD.com's fashion and lifestyle division) luxury sales on the platform have grown 200 percent year-on-year since 2019. This is one of the reasons why LVMH, in a rare display of distribution co-operation, was forced to move away from its direct to consumer strategy and partner with JD.com.
Second, luxury buyers tend to consult not only offline but also online sources. These include third-party sources like influencers and blogs (McKinsey). So instead of on relying in the impressive real estate, offline and celebrity influencer strategy that has worked so well for LVMH in the past, it will have to revamp the way it approaches its younger consumers.
Problem #4: Younger consumers require new type of marketing
Millennials and Gen Z are driving the luxury market's growth, with their preferences shaping future trends.
According to Bain & Co. 'Generation Y (millennials) and Generation Z accounted for all of the luxury goods market’s growth in 2022. Moreover, by 2030, Gen Z will account for 25-30% of luxury market purchases, while millennials will account for 50-55%.
Due to shifting generational preferences, gone are the days of unapproachable, holier-than-thou brands, replaced by socially responsible and relatable brands.
The issue for LVMH is that its flagship brands have generally not relied on being relatable. Their personas have been akin to a cool older sibling. LVMH will have to thread the needle between cool and aloof while signaling social consciousness. After all, Gen Z tends to value:"
Organic ads
UGC and interactive content
Short form video
Authenticity – All consumer age groups (including Gen Z) reported that AI generated content would limit their engagement with the content
Privacy
Research on Gen Z suggests that brands should be guided by consumer preferences. However, LVMH, and specifically Arnault, are not known for prioritizing immediate customer desires, presenting a unique challenge for LVMH.
What are the Next Steps For LVMH?
LVMH is already adapting, reshaping its traditional heritage to appeal to a younger audience. But in the evolving cultural landscape, what comes next?
In Part 2 of this piece, I’ll show you how many of the LVMH’s problems can be solved or improved by utilizing Web3 technology: increase sales without diluting, appeal to younger consumers, get closer to the customer while maintaining luxury status among others.
What are the Next Steps For You?
As the digital world evolves with Web3, assessing your brand's readiness is crucial. In the past 2.5 years, I've guided:
VC firms,
Top fashion brands, and
Web3 pioneers through this paradigm shift.
How We Can Navigate Web3 Together:
Strategy Sessions: Tailored one-on-one consultations to explore how Web3 can elevate your brand's narrative.
Customized Market Research: In-depth insights into your market's Web3 landscape.
Custom On-chain Data Retrieval: Actionable blockchain data insights for informed decisions.
Content Creation: Engaging storytelling that aligns with your brand's identity in the Web3 era.
Targeted Advertising: Advertise on this newsletter to a targeted audience of leaders from the likes of H&M, HBS, JPM, Coinbase, Dior, Adidas and many more.
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