LVMH Moët Hennessy Louis Vuitton SE (LVHM), the world’s largest luxury retailer, owner of Louis Vuitton, recently experienced an 11% decline in Q2 to Q3 results, sending its share price down by 7%. This was a trend seen across the sector, as competitor Kering, owner of Gucci, saw its shares fall by 10%.
These bearish results are down to declining sales within China, a factor which may well be exacerbated by recent news of further Chinese economic stagnation. Fashion chain ‘New Look’ announced that it is pulling out of China due to a decline in consumer spending within China. Increasing trade tensions and protectionism also raises concerns, with Trump threatening a further $200 Billion in tariffs. The key question is- will this lead to a further slump in consumer spending? If the answer is yes, it may force the likes of LVHM to re-evaluate their approach to the expansive Chinese market.
Concern was also expressed when social media showed Chinese officials stepping up border checks, with the aim to limit ‘Diagou’ markets, where Chinese tourists buy products overseas and sell it for cheaper prices in Chinese shops. LVMH CFO Jean-Jacques Guiony stated that he was glad Chinese authorities were moving in this direction.
One approach to remain competitive is e-commerce. With high street retail seemingly faltering due to currency fluctuations and other factors, e-commerce might be the saving grace for luxury retailers. The e-commerce realm has exploded in the past few years, demonstrated by the success ASOS and others. LVHM has a strong competence with e-commerce, especially within China, having been the first Luxury company to partner with WeChat and ranked 2nd out of 91 brands in China (Digital IQ Index 2018). The brand has seen a 14% rise in online sales within China this year, making this one of its biggest revenue streams within the country. LVHM was an early adopter of investing in SEO and social search strategies, deploying targeted ad posts on Weibo as early as 2014. Shortly after, the brand experimented with WeChat moment ads. From April 2017 to April 2018, Louis Vuitton was the brand most likely to appear at the top of non-specific fashion searches on Baidu mobile.
But a major concern, as raised by Marco Bizarre, CEO of Kering, is how extending your e-commerce within China means further exposure to the issue of counterfeits, which was the rationale for Kering’s decision to no longer work with Alibaba and JD.com
China is the world’s largest luxury goods market, valued at $20.5bn, according to Bain., which means it cannot be ignored. So, what next for LVMH? Ever since the Kering lawsuit against Alibaba, there has been an increased effort among the major platforms to deal with counterfeit products –the Alibaba Anti-Counterfeiting Alliance (AACA) has 105 members, including L’Oréal, Bose, Samsung and Canada Goose. JD.COM has implemented a stricter regime in terms of IP, and has recently struck a partnership with luxury e-commerce retailer Farfetch.
The key for LVHM could be millennials. Estimates show that 85% of the sectors growth last year was driven by millennials, and 33% of LVHM profits are bought by consumers aged 21-37, according to a report by UBS. Young Chinese millennials make up 20% of discretionary income within the region, which may be a saving grace for LVMH. The top 5 luxury fashion labels in China are Hermès, Chanel, Cartier, Gucci and Dior (owned by LVHM) – providing an exciting prospect.
With recent Q3 reports showing strong results within Fashion and Leather goods (a 14% increase), and Cosmetic and Perfume (a 11% increase) – the answer could be increased focus on product proliferation. DFS, the selective retail division of LVHM, also posted strong results – increases of 5% in revenue, in comparison to last year, with the strongest markets being Hong Kong and Italy.
References:
Rachel Sanderson.2018. ‘How Europe has become a powerhouse in luxury’ [Financial Times]- https://www.ft.com/content/76c28cc0-cc90-11e8-9fe5-24ad351828ab
Matthew Dalton.2018. ‘LVMH Sparks Fears of Chinese Slowdown Across Luxury Industry’ [Wall Street Journal]- https://www.wsj.com/articles/luxury-stocks-slip-on-china-fears-1539167831
Lex.2018. ‘LVMH/China: the bag short’ [Financial Times]- https://www.ft.com/content/d3db3438-cc7d-11e8-b276-b9069bde0956
Ruonan Zheng.2018. ‘How Louis Vuitton Upped Its Digital Game in China’[Jing Daily]- https://jingdaily.com/louis-vuitton-digital-china/
Liam Coleman. 2018. ‘Strong DFS performance helps Q3 growth for LVMH’ [DFNI Frontier]- https://www.dfnionline.com/lead-stories/strong-dfs-performance-helps-q3-growth-lvmh-09-10-2018/
Bloomberg.2018. ‘LVMH falls after confirming China border crackdown on luxury items’ [Business Times]- https://www.businesstimes.com.sg/companies-markets/lvmh-falls-after-confirming-china-border-crackdown-on-luxury-items
