LVMH: Balancing Challenges and Opportunities

As 2024 unfolds, China's luxury market is witnessing significant transformations amidst an overall increase in consumer spending. The landscape is characterized by a diverse array of consumer segments, fluctuating spending power, and uneven domestic versus international expenditures. Moreover, evolving values concerning luxury consumption, preferences across categories, and the increasing prominence of online spending behavior are shaping the market dynamics. Consumers are becoming more discerning and sophisticated, leading brands to adapt their offerings accordingly.

Despite facing macroeconomic challenges, Jean-Christophe Babin, the CEO of Bulgari, shared optimistic insights regarding the luxury consumption landscape in Asia, particularly in India and Japan. He highlighted India's robust economic fundamentals, indicating a strong potential for luxury market growth. Bulgari is strategically aiming to expand its market share in second-tier cities in India through local watch retailers, marking its entry into franchising, a first for a luxury brand. Furthermore, Babin anticipates a revival in Japan's luxury market, particularly in jewelry and watches, driven primarily by the resurgence of the younger generation and the tourism industry.

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Alarming Signs of Declining Performance,

How will LVMH respond?

However, from a broader data perspective, the performance of LVMH, the parent company of Bulgari, has seen a decline this year. According to its quarterly report, LVMH's revenue fell by 2% to €60.75 billion during the first three quarters, falling short of analyst expectations. Its stock price on the New York Stock Exchange plummeted by 11%, marking the largest single-day drop in five years. In the third quarter alone, revenue dropped by 4.4% to €19.07 billion, the worst performance in three years.

LVMH's fashion and leather goods sector, which includes brands like Louis Vuitton and Dior, also reported disappointing numbers. Revenue in this category decreased by 3% to €29.92 billion for the first three quarters, with the third quarter experiencing a year-over-year decline of 5% to €9.15 billion, well below analyst expectations. The company’s CFO, Jean-Jacques Guiony, revealed that while Louis Vuitton slightly outperformed the sector average, the overall performance was dragged down significantly by Dior.

Additionally, LVMH's jewelry and watch division along with its wine and spirits business also experienced revenue declines. The jewelry and watch segment reported a 5% revenue drop to €7.54 billion during the first three quarters, heavily impacted by inflation in the U.S. market and a sluggish wedding market affecting brands like Tiffany. Meanwhile, the wine and spirits business saw an 11% decline, dropping to €4.19 billion, reflecting slowing demand trends.

Regionally, LVMH's performance in Asia, including China, has been the weakest, with organic revenue plunging by 12% and an even steeper decline of 16% in the third quarter. Guiony stated that despite the slowdown in the Chinese luxury market, LVMH will not alter its existing strategy and will continue to invest in the Chinese market through marketing activities.

Looking forward, Guiony believes that even if the global economy recovers, the luxury market may not return to its previous levels of prosperity. However, he remains hopeful that the industry can still cater to middle-class and affluent consumers. He reiterated that LVMH will not adjust its current strategies nor redistribute investments away from the Chinese market; instead, the group is committed to further investing in China through marketing initiatives. After all, the Asian market, particularly China, holds the largest share of the global personal luxury goods market with a 38% share, contributing 17% of this to China alone, illustrating its formidable purchasing power. This trend is evident not only in traditional luxury segments but significantly in the jewelry industry.

High-end Jewelry and Watches Representing Hard Luxury

Could this be a New Growth Curve?

In the face of an overall slowdown in luxury consumption, the hard luxury market, represented by high-end jewelry and watches, seems to be charting a rare growth trajectory.

This year, as many luxury brands downgraded their forecasts, established jewellers have been persistently unveiling new collections in hopes of captivating potential consumers. Brands including Cartier, Van Cleef & Arpels, Graff, and Buccellati have all hosted high-end jewelry exhibitions in China. The market shows that not only leading brands like Hermès, Louis Vuitton, and Gucci are enhancing their jewelry offerings, but even fashion brands targeting broader markets are also increasing their presence in the jewelry sector.

Babin contended that during economic downturns, the investment appeal of high-end jewelry strengthens, creating substantial growth opportunities. "Real estate prices may drop, equities may suffer losses, but a significant Bulgari necklace's value will likely hold steady or even double in the future. It offers both risk resilience and emotional value, making high-end jewelry a sound investment,” he explained.

Despite the escalating competitiveness for a larger market share, Babin maintains confidence. He asserts that in the world of high-end jewelry, where heritage, craftsmanship, and brand essence prevail, traditional jewelers hold a distinct advantage.

“It's not just a matter of money. If suppliers come across good stones, their first calls will likely be to Bulgari or Cartier because these brands are genuinely interested in purchasing them. They also have a higher probability of selling for millions of euros, although such cases are rare. Today, fashion brands that can sell fashion jewelry for over €500,000 are already doing exceptionally well. However, when it comes to commanding prices above €1 million, only two or three major brands possess that capability,” Babin stated.