Hello and welcome to our second ever Chartr Sunday edition! Today we dive into the cashmere-coated world of luxury goods, exploring why we collectively agree to part ways with billions of dollars for things we, technically, don’t need. Buckle up your Gucci belts and straighten your Hermès ties — this is the world of global luxury.
Coco Chanel once described luxury as “a necessity that begins where necessity ends” — a maddening phrase for any old-school economists whose models can’t understand why people spend $30,000 on a timepiece that tells the same time as a $30 watch. The answer, of course, is a combination of two very human things: because they can, and because it feels good.
And both of those reasons have gotten stronger in the last decade or so. Luxury spending, understandably, tends to grow faster than the rest of the economy in the good times and collapses when things get tight — as seen in the pandemic, when spending on luxury goods plummeted 20%, despite global GDP only dropping ~3%.
But, luxury spending bounced back even stronger in 2021, capping more than a decade of growth that’s taken the market for luxury goods to more than $370bn a year (per data from Bain & Co.).
One of the biggest drivers of luxury spending in the last decade has been China, where GDP per capita has risen more than tenfold in just two decades — creating an enormous middle and upper class that are now enjoying the finer things en masse. Indeed, luxury aficionados predict that China may represent around 40% of global luxury purchases by 2030.
And luxury brands haven't missed the memo on inflation. Chanel, Dior and Hermès — a company that sometimes has a waiting list for its €20,000 handbags — have started to prefer higher prices over more volume, with ~70% of the growth in leather luxury goods driven by price increases in 2022, compared to 50% in 2019, as high-income and price-insensitive shoppers remain luxury’s top spenders.
A certain je ne sais quoi
Silicon Valley has tech. Germany’s auto industry is second to none. Scandinavia is known for its design. But when it comes to luxury, no-one does it quite like the French.
LVMH, Hermès, Dior, EssilorLuxottica, and Kering, all French, have a combined market cap of over €1 trillion, accounting for approximately 80% of the top 20 largest public luxury companies' total value. And, despite the wider malaise, those companies have seen their value soar. LVMH shares have gained 52%, Kering is up 18%, EssilorLuxottica is up 15% and Hermès has jumped 84% — helping to propel Paris's stock exchange to the largest in Europe, taking the crown from London.
French luxury has a long and storied history, dating back to the middle ages with luxury shoes, but it was arguably in the courts of King Louis XIV where haute couture was born. During Louis’ long reign French textile and jewelry industries boomed, with a strong insistence on only using French materials. In the 17th and 18th centuries the country began manufacturing high-end mirrors, symbols of opulence at the time, but it wasn't until after the July Revolution in 1830, and the rise of a middle class in France, that the first now recognizable names in luxury began to emerge. Hermès was founded in 1837, followed by Cartier in 1847 and Louis Vuitton in 1854.
Since then, the country’s luxury industry has gone from strength to strength. A study from 2012 found that, out of the 270 “prestige” luxury brands in the world, a whopping 130 were French — collectively accounting for a quarter of all luxury sales. While other luxury brands from around the world, namely German’s Hugo Boss, Italian Prada and American Tapestry, which owns Coach and Kate Spade, have struggled recently, French luxury brands have shone.
Indeed, Hermès — known for its silk scarves and iconic Birkin bags — is now worth an astonishing €209bn. That’s more than 20x the value of French carmaker Renault and almost 10x what tyre manufacturer Michelin is worth. But, even Hermès pales in comparison to the true giant of French luxury: LVMH — a company that’s made its CEO Bernard Arnault the richest person on the planet.
Enterprise de luxe
Established in 1987 after the merger of Louis Vuitton and Moët Hennessy, LVMH has grown like a giant black hole, absorbing brands and adding to its mass such that it now sits at the center of the luxury universe, its sheer gravity sucking smaller, often family-owned, luxury companies towards it.
The company's portfolio of 75 brands, or "houses", includes its original namesakes, as well as household names like Givenchy, Marc Jacobs, Fendi, Hublot, TAG Heuer, Tiffany & Co. and many more. That portfolio has largely been assembled under one roof by prolific dealmaker by Arnault, the “wolf in cashmere”, whose entry into the world of high fashion was a $15m investment in a bankrupt French textile merchant.
Wolf in cashmere
Arnault's genius was in solving the limiting constraint of luxury, desirable scarcity. His understanding that one brand can only maintain its premium placement through scarcity of distribution, but that a group of distinct brands — which could share the operational and financial benefits of scale — could grow tremendously.
In an industry with high upfront costs — retooling factories for limited runs, expensive marketing campaigns and eye-watering rents for shops — it’s obviously tempting to outsource things to cut spending. But after wrestling control of a brand, LVMH often doubles-down on doing things in-house. As Arnault put it "If you control your factories, you control your quality; if you control your distribution, you control your image". That focus, combined with an inherent trust in designers to be bold, and a ruthless knack for dealmaking, made for a potent combination.
How much further LVMH can grow in luxury goods is an interesting question. Luxury brands typically need a long history to establish themselves, and those that remain independent fiercely preserve their status. Chanel and Rolex, for example, are among the few remaining independent global luxury brands. Arnault's idea? To widen the company's scope — even entering the world of luxury travel and hotels in recent years.
Arnault's new focus is on succession. But we're not talking about the hit HBO show (which is an office favorite), but the real story at LVMH — all 5 of Arnault's children are involved in the family business.