Oaklands Path


Luxury as Social Stratification and LVMH

14 February 2024

The ultimate goal of investment is to participate in wonderful business model by acquiring shares of such companies when they are undervalued. An exceptional business is characterized by having a strong competitive advantage, pricing power, and the ability to thrive without relying on an extraordinary entrepreneur to manage it successfully. (Just to clarify, I believe Bernard Arnault ranks among the most outstanding businessmen of our time.)

Across various industries, increasing prices typically leads to a decrease in demand. However, the luxury industry stands out as an exception where raising prices often results in heightened demand, and customers develop stronger affinity towards the brand.

In the pre-modern era of governance, our society operated within a hierarchical structure consisting of a monarch, clergy, aristocracy, and commoners. The primary role of aristocrats was to demonstrate power and influence by showcasing their wealth, often commissioning artists to create intricate items and structures. Today, we inhabit a democratic world largely guided by capitalist principles, although in certain nations, democracy can feel more like plutocracy. Nevertheless, there persists a human inclination toward a tiered social order. While many individuals advocate for simplicity, humility, and sincerity, societal dynamics as a whole often gravitate toward notions of superiority, jealousy, envy, vanity, categorization, indulgence, hedonism, and self-gratification. Luxury products fulfill these subconscious desires and contribute to the recreation of social stratification. The symbols, patterns, and distinctive designs associated with luxury brands serve as signals that individuals use to communicate their status within their social circles.

Luxury goods often carry hefty price tags, yet merely being expensive doesn't qualify an item as luxurious. True luxury must embody culture and beliefs, akin to a cult following. A brand devoid of essence lacks the essence of luxury. It is the nation, history, culture, and the narratives surrounding legendary artists, along with their stories, myths, and associations with royalty and heroes, that elevate a brand to luxury status. Bernard Arnault, Chairman and CEO of LVMH, initially an industrialist and real estate developer, comprehends that authentic luxury status cannot be manufactured, especially by ordinary individuals. Therefore, he proceeded to acquire over 75 brands under the LVMH umbrella and divested from all non-luxury ventures.

Crafting a genuine work of luxury necessitates a remarkable artist to emerge at the precise moment and location, garnering adoration and endorsement from prominent figures of the era to cultivate the intangible allure, the taste, the myth. This represents the profound moat we speak of, a quality incredibly challenging to duplicate. If one endeavors to establish a luxury brand, the more one rushes, the less likely success becomes. In the realm of luxury, the adage "more haste, less speed" holds true, as haste can diminish the desirability of products.

Competitive Advantages

In addition to possessing over 75 influential brands, LVMH, as a luxury house, boasts several additional competitive advantages. Firstly, its extensive brand portfolio significantly enhances its leverage when negotiating with mall operators for prime locations and favorable rental rates. If you go to any luxury shopping today, you will find that a big portion of the square footage is leased to LVMH group. Secondly, its consolidated purchasing power affords it substantial bargaining leverage with advertising platforms and agencies. Lastly, and perhaps most importantly, talented designers often transition between roles once in a while. By owning numerous brands, LVMH increases the likelihood that these talents remain within the group, facilitating the creation of exceptional product lines regardless of personnel shifts.

Earnings Call

We bought into LVMH in middle of the Jan when market believes that China consumption would be very weak and, hence affecting its growth. However, the Q4 2023 results surpassed expectations, and Bernard provided a robust outlook for 2024 during the earnings call. Here are some comments by Bernard in the Q4 earnings call:

…and Loro piana, widely sought after quiet luxury, as it's known, is posting very high growth rates, to my mind, overly high we need to put the brakes on a bit, because I'm often told that growth rates, why are you only delivering 8% or 9%. Well, I find that's pretty good. And I hope that we won't exceed that, I'd rather slow than push, and in this group, I'm fortunate in having people that I need to slow down. I mean, Pietro, I spend my time slowing him, ditto for Delphine, Michael has spent 10 years trying to put the brakes on it.

But it's easy to develop this business, we have so many successful products, all we have to do is produce more, but we have to resist that there's no point, they must be of flawless quality. And you mustn't be in a hurry when you're achieving 8% or 9%, maximum 10%. That suits me fine, I don't know for the analysts, it's enough or it's never enough, they are never happy, so that's really not a problem. But at least for the brand, for the desirability of the brand, our main asset, really…

… the goal isn't to generate growth at all costs. I repeat that here. I'm very happy to be able to slow down, slow them down even if some eager horses that I have to slow them mean that's good. It's more restful than having to push them and for the desirability mustn't try and have as a goal, the top line, the revenue…

… I haven't planned to -- I don't plan to leave either in the short or medium term. So rest assured, you might be sad, but I'm here for a while yet.

Here we have a business where the CEO is saying it is easy to grow and they are trying their best to slow it down, they don’t want to grow too fast. Few businesses encounter such a fortunate dilemma. The CEO understands all too well that exclusivity and inaccessibility breeds desirability, and the absence of rarity results in a swift dissipation of desire.

In an interview that Arnault gave, he recounted a conversation where Steve Jobs told him,

“You know, Bernard, I don’t know if in 50 years’ time my iPhone will still be a success but I can tell you, I’m sure everybody will drink your Dom Pérignon.”

We hold the belief that the LVMH houses will thrive for decades, irrespective of the CEO. However, without a visionary leader like Bernard at the helm, the company may not be able to acquire additional outstanding brands at favorable prices to propel the group further. We are glad that he isn’t thinking of retiring anytime soon.

He is cool.

Notes and Disclaimers

  1. This essay and the information contained herein is not a specific offer of products or services. Information on this essay is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.

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