Moet Hennessy Louis Vuitton SE or LVMH is one of Europe's largest companies,
with a market capitalization of $350 billion.
As of this writing, the company's co-founder and controlling shareholder Bernard Arnault
is worth over $100 billion and is the third richest man in the world.
LVMH's fortunes have risen with the luxury boom in Asia - first in Japan and then China. In 2021,
Asia including Japan delivered 26.7 billion
euro of revenue - 60% more than the United States' 16.6 billion euro.
I have never owned a Louis Vuitton bag in my life. I thought about getting one for “research”,
but who said I can afford that?
Anyway, this story has fascinated me for a while and it has nothing to do with semiconductors so
let’s try it. In this video, I want to look at how LVMH turned Asia into its richest money machine.
## Beginnings
The luxury goods business has been big for years. During the early 20th century, new technological
changes allowed companies to mass produce certain items. Combined with brand marketing,
luxury experienced its industrialization moment.
Prior to the 1970s, however, this was mostly an American and British phenomena.
In the 1960s, the United States was France's single biggest leather
goods export market - eating 40% share from 1961 to 1967.
Following up from that was Germany with 22%,
and Switzerland, Belgium and Italy with about 10% each.
The 1970s however would see Japan - and Hong Kong to a lesser extent - take over
the luxury goods market. Its emergence goes back to both economic and social factors.
## Japan in the 1970s
First, the Japanese economy was doing extremely well.
Fueled by a massive surge in exports, Japan during the 1950s and 1960s
enjoyed a massive economic boom. Real economic expansion rates numbered nearly 10% each year.
This new-found wealth allowed Japanese to purchase the staple goods they needed
like rice. But it also gave them disposable income to spend on other things.
Japanese spending on clothing, food, and other goods increased 5 times over from 1948 to 1978.
Second, socially the Japanese experienced a cultural injection from the American occupation
after World War II. Chocolate cake, T-shirts,
jeans, chino trousers, and other scandalous things that your great grandmother probably
wouldn't like. Japanese experienced a brand new Westernized lifestyle, and they liked it.
In 1959 Choichiro Motoyama, a high-fashion shop owner, made a trip to Europe and became
entranced with European fashion brands like Hermes, Gucci, and Charles Jordan. Entranced,
Motoyama relentlessly pursued these brands to let him stock his store with their goods.
In 1961, Ferragamo allowed Motoyama to purchase some goods for resale in Japan.
Then in 1962, Gucci and Hermes gave him permission to stock his Ginza store with their product.
Department stores soon followed Motoyama’s footsteps.
Takashimya, Mitsukoshi and Seibu - they drove this consumer boom,
exhibiting and pushing the sales of Westernized clothing and luxury goods.
These department stores catered to the rich and upper middle class,
expanding globally to build sourcing networks for their next big domestic hit.
Together with Hong Kong - which also more than doubled its export share in
the 20 years after 1960 - Japan presented a tantalizing opportunity for untold riches.
## Louis Vuitton
At this time Louis Vuitton was a fairly large but still traditional luxury brand
run by descendants of its founder. Throughout the 1970s,
it started to experience growing Asian sales after launching hit products like the Papillon bag.
But while the American markets weren't too much trouble,
growing into Asia required far more resources than many companies could muster at the time.
These European luxury brands needed to expand beyond their roots as small
and medium sized businesses. Louis Vuitton was one of the first companies to make this change
with the arrival of Henri Racamier, who married into the Vuitton family.
He was appointed CEO in 1977 after making a fortune of his own in the steel business.
Racamier internationalized the sales system and focused on Japan.
In the mid-1970s, Louis Vuitton made less than 10 million euro in annual revenue. By 1981,
LV grew that to 50 million euro and established a wholly owned entity: Louis Vuitton Japan.
He also centralized Louis Vuitton product pricing and supply chain - cutting out various middlemen
and agents from the equation. Louis Vuitton then opened a wholly-owned store in Ginza,
Japan - one of the first European brands to do so.
## Luxury Brand
I think it is fair to pause a little and briefly discuss how a Louis Vuitton is made.
I don't mean a leather good, but the luxury brand itself and its cachet.
Luxury brands allow consumers to create a favorable, prestigious social image.
These brands are not owned by everyone, so purchasing a Louis Vuitton gives people
feelings of accomplishment, self-pleasure, and pride.
At the start of Louis Vuitton in Japan, traders imported and sold Louis Vuitton goods from France
at weird and varying prices. They sold alongside official stores, diluting the brand.
After taking control of the supply chain, Kyojiro Hata - the first President of Louis
Vuitton Japan - set a single global price for every Louis Vuitton sold in the country.
Hata considered an LV bag to hold value, and that value was absolute rather than relative.
Louis Vuitton builds its customer relationships with massive,
lavish flagship stores. These massive stores are placed in prime locations.
Each such store is individualized for its particular urban location.
I think that's good for now. Let's get back to the 1980s.
## Louis Vuitton to LVMH
In 1987, Louis Vuitton - hoping to size up the company to avoid a
potential hostile takeover - merged with Moet Hennessey to create LVMH.
Moet Hennessy had started out as a champagne maker and had steadily acquired its competitors.
Soon after the merger however, the weirdness of having a leather goods and champagne business
under one roof started to come out. This conflict threatened Racamier's
control of the growing Louis Vuitton subsidiary.
Thus, the 77-year old Racamier brought Bernard Arnault into LVMH as a minority shareholder,
hoping that the younger businessman would back him in any future management kerfuffle.
But the two disagreed on strategy and Arnault spent hundreds of millions to
purchase a controlling share, ousting the CEO. The story is pretty amazing,
but let's move on. This is Asianometry not Euronometry, after all.
## Luxury Manufacturing
One of the key features of a Louis Vuitton is mass exclusivity
and excellence. Producing a luxury leather good in modern days under
these principles involves mixing traditional craftsmanship and modern production styles.
It used to take 20-30 craftsmen eight days to put together a Louis Vuitton bag.
Then in 2005, Louis Vuitton commissioned McKinsey to review how it made its products,
and they suggested a lean production system that pulled in raw goods as they were needed.
In 1997, Marc Jacobs joined Louis Vuitton as its creative director
and helped revitalize the brand’s image with exciting new designs that shook
things up. LV started producing "one-shots" - limited edition runs of specific products.
Many of these goods are retired at the peak of their popularity. For instance, a 2001 Louis
Vuitton collaboration with Steven Sprouse, which produced some of the most iconic bags around.
These production ramp downs mean a lot of wasted inventory,
sometimes as much as 7-10% of the total acquisition. If they cannot be reused
for other Louis Vuitton goods then they are destroyed - wasting hundreds of thousands of
euro. But it is worth it to maintain the product's principles of mass exclusivity.
## Japan's Stagnancy and China's Rise
The Japanese market continued to grow for the next twenty years,
taking nearly 30% of France's leather goods exports. And for LVMH itself, Japan accounted
for a significant portion of the company's sales throughout the 1990s into the 2000s.
LVMH continued to invest in the Japan region. They hired Japanese designer
Takeshi Murakami as a consultant and opened a flagship store in Omotesando, Tokyo in 2003.
But at about that same time, the Japanese luxury market reached a state of stagnancy.
Japan had entered its Lost Decade, and soon it would lose its place
at the top of the Asian luxury market to China.
The China boom started in Hong Kong. In 1997, the city was handed back to the Chinese,
and immigration policies with the mainland were loosened. Hong Kong
soon became an important destination for Chinese shoppers looking for luxury fashion products.
Long before the rise of cities like Shanghai and Beijing,
Hong Kong served as a cultural mixing zone between East and West. The experiences accumulated by the
luxury brands there allowed them to better understand what Chinese consumers wanted.
The China market presented some differences from Japan.
China did not have the same early exposure to Western culture that Japan did. Companies would
have to do a lot of education about luxury goods on the ground - usually in their flagship stores.
## Businessmen
Another big difference from the Japan market. As it turned out their first big wealthy
consumer group were men rather than women. Businessmen making their first bucket of gold
wanted to show off their wealth, usually with a piece of Louis Vuitton luggage or a luxury watch.
Back in the early 1990s, China did not yet have shopping malls - as hard as
that might be to believe. So this meant luxury brands targeted this businessman demographic
in boutiques in the arcades of foreign five-star hotels.
The Chinese luxury watch market grew extremely quickly.
Hong Kong-owned retail distributors entered the mainland and dominated the market.
Foreign watchmakers like Swatch Group had to enter the market through them.
It was not until Swatch signed deals in 2000 with one of those distributors - Xinyu Hengdeli
Holdings Ltd - that the company started to experience significant sales there.
Louis Vuitton opted to take a different path for their entrance and growth within the China market.
Their principles have meant having close control of the product and the way it has been sold,
without middle men and distributors.
## Flagship Stores
Like other luxury brands at the time, the first Louis Vuitton store opened in 1992
in what is now called the Beijing Peninsula Hotel - China's first luxury hotel.
The company has since then leveraged its brick and mortar stores and long history to build a massive
market in China. As the Chinese people's wealth grew, so did their desire to exhibit that wealth.
By 2004, China overtook Japan as Asia's largest luxury market. Louis Vuitton that year had 28
stores in China, including Hong Kong. As luxury malls started to appear, the company has carefully
managed its entry into them - with a preference to first own the land or the space directly.
In 2012, Louis Vuitton opened one of their biggest stores yet - a four level flagship - in
Shanghai's Plaza 66. Like Apple Stores, each Louis Vuitton flagship store is a unique
experience. It is a way for the customer to learn the brand’s values and elevate its added value.
In other words,
making Louis Vuitton feel fancy and prestigious so that you can feel fancy and prestigious too
by buying one. In August 2020, that Shanghai store alone moved $22 million of goods.
While Louis Vuitton has also worked to engage with their Chinese audience
through media and digital channels - their social influencer marketing is on
point - the company considers its stores to be the core channel of its values.
## Shandong Ruyi
The sheer size of the market has attracted competitors.
They include the usual suspects like Kering, Hermes and so on.
But one very interesting competitor is a domestic Chinese one: Shandong Ruyi
Founded in 1972 as a textile factory,
Ruyi converted into a shareholder structure and grew rapidly during the 1990s. Their main
speciality was wool and cotton spinning, but eventually decided to move up the value chain.
In 2010, Ruyi emerged into the public limelight when they acquired a majority
stake in the 100-year old Japanese apparel maker Renown - owner of brands like Arnold Palmer.
Ruyi wanted to turn the struggling company around
by tapping the Chinese market like Honma Golf and other similar stories.
Funded with cheap money from the state-owned asset fund of the city of Yinchuan,
Ruyi continued to acquire a variety of high class brands like British luxury
manufacturer Aquascutum and the French retail group SMCP for over a $1 billion.
They also spent lavishly on purchasing fabric sources like an Australian cotton farm
and the synthetic fabric maker The Lycra Company in 2019 for nearly $2 billion.
Chairman Qiu Yafu (邱亚夫) said that in the next ten years he wanted to build
the LVMH of China - a $100 billion fashion group. But the acquisitions led to the group
racking up rather large debts, and problems started to arise after the cheap money dried up.
A deal for Swiss brand Bally fell through.
Then Renown filed for bankruptcy over unpaid debts from Ruyi and then fell
into liquidations. Other failures include the 200 year old Gieves & Hawkes and Aquascutum.
Today Shandong Ruyi struggles for its life, trying to shed assets and pay back its debt.
As it turns out, building an LVMH-style conglomerate takes far longer than ten years.
## Conclusion
While the KOL models and the iconic names are important,
Louis Vuitton's success in Asia has been through its control of the product,
patient financial firepower and focus on customer experience.
The products are exquisitely made, and you shop for them in an iconic, luxurious environment.
The brand is now competing in China's Tier-Two and Tier-Three cities. Most of
whom you have never heard of but with massive populations with rising middle class incomes.
The competition remains fierce, but Louis Vuitton is the King of Kings when it comes to
luxury brands and it will continue to attract millions of Asian consumers in the future.