LVMH doesn’t have the luxury of pulling back from China

A Louis Vuitton event in Shanghai in December. When the pandemic shut down travel, Chinese consumers shopped for luxury goods at home. (Photo: Getty Images)
A Louis Vuitton event in Shanghai in December. When the pandemic shut down travel, Chinese consumers shopped for luxury goods at home. (Photo: Getty Images)

Summary

The country’s economy is sputtering and geopolitical tensions are rising, but Chinese shoppers are the growth engine for the maker of Louis Vuitton, Dior and Hennessy.

PARIS—Over the past year, Bernard Arnault has made a habit of convening his inner circle at the headquarters of his luxury empire on the Avenue Montaigne for detailed briefings on a key topic: China.

A former economic adviser to Beijing warned Arnault and his team that China’s aging demographics presented a serious problem for LVMH, his luxury conglomerate, according to people at the meeting. The tendency of Chinese consumers to save, as opposed to splurging on luxury goods, was likely to harden as they got older, the adviser said. Another expert explored scenarios that could lead China to invade Taiwan—an event that would tear apart international trade and cause a global crisis.

Europe is the home of Arnault’s empire, but for the past three decades the engine of LVMH’s staggering growth has been China.

Chinese consumers boarded flights to Paris and other fashion capitals to hunt for handbags and—when the pandemic got in the way—flocked to museum-size boutiques for Louis Vuitton, Dior and other labels that LVMH built in recent decades across China. The rise of the big spending Chinese shopper transformed the luxury market, with China accounting for around 20% of LVMH’s global sales.

Now China’s economy is stalling, and geopolitical tensions are rising. The real-estate market, which accounts for around a quarter of China’s GDP, is teetering. Unemployment among young people hit record highs last year.

A political crackdown in Hong Kong has caused international firms to leave the city. And a growing rift between Beijing and Washington as each sizes the other up as its main political and economic rival has led firms to reduce their exposure to China.

Even though the uncertainty has whipsawed LVMH’s shares and dethroned Arnault as the richest person in the world, he has taken a different approach.

During a visit to the country last summer, Arnault asked LVMH executives to conduct a review of their planned investments, according to people familiar with the matter. Some projects were delayed, but none were canceled. The exercise, one LVMH executive said, brought to mind a rule Arnault adheres to in business: “In times of uncertainty, be patient."

For Arnault, the potential benefits of expanding in China outweigh the risks. Hundreds of millions of potential luxury consumers are expected to emerge there in the coming years, and Arnault has positioned his army of designers to target them.

“I don’t know that the world could survive without Hong Kong and mainland China, period," said Pharrell Williams, the hip-hop impresario Arnault tapped last year to become menswear designer for Louis Vuitton.

He spoke just days ahead of a fashion show along the city’s famed waterfront promenade at the end of November aimed to revive Hong Kong’s status as a fashion capital and turbocharge LVMH’s sales. The spectacle, jammed with Chinese celebrities, made plain LVMH’s commitment to courting Chinese shoppers and staking a claim in the region.

‘After China, there is China’

China is the world’s second-biggest luxury goods market, and it still has room to grow. Chinese shoppers spent $50 on luxury goods in 2022 on a per capita basis, according to Morgan Stanley. That compares with $280 in the U.S. and $325 in South Korea. Big-ticket shopping in Beijing is still mostly concentrated in a single mall.

China is expected to grow from around 23% of global luxury spending to as much as 40% by 2030, data from consultancy Bain shows. In January, LVMH’s finance chief told analysts that spending on luxury goods in mainland China has doubled since 2019. Arnault added that the conglomerate’s China boutiques were full of people—“at the maximum of what we can do to satisfy the customer."

On the subject of the next big luxury market, “I get asked the question. So what’s after China?" said Laurent Boillot, the chief executive of Hennessy, the LVMH cognac brand. “My answer all the time: after China, there is China."

LVMH’s exposure to China is relatively limited compared with automakers and other Western firms, because it doesn’t have robust manufacturing operations in the country. Its handbags, jewelry and other goods are mainly produced in European workshops. The bulk of the company’s China investments are concentrated in its 28,000 employees and 1,300 stores, the majority of which operate on five- to seven-year leases.

Still, LVMH has invested heavily in its flagships across the country to give them grandeur—including a current renovation of its Beijing store. The Chinese government is now transforming the island of Hainan, off China’s southern coast, into a hot spot for luxury travel and duty-free shopping. There, Louis Vuitton is building a glitzy facade for its flagship. LVMH is also planning a shopping and entertainment complex on the island that the company’s duty free arm says will amount to an “unprecedented investment," with the project expected to attract 1,000 luxury brands and 16 million visitors a year by 2030.

LVMH helped build China’s huge market for conspicuous consumption that has now taken hold—no easy task for a population under the rule of China’s Communist Party, which shuns displays of ostentatious wealth.

When Chinese leader Xi Jinping took aim at boozy banquets and lavish gift-giving as part of an anticorruption drive that started in 2012, sales of cognac took a major hit. Hennessy, which counts for some 45% of cognac sales worldwide, had made the French brandy a favorite luxury item for China’s growing middle class.

Sales have recovered as China’s young, upwardly mobile consumers developed a taste for the drink. But LVMH was broadsided again in January when the Chinese government launched an antidumping investigation into brandy imported from the European Union. The move was widely interpreted as retaliation after the EU opened its own investigation into China’s subsidies for electric-vehicle makers at a time when Chinese manufacturers are aiming to woo European consumers away from brands such as Renault and Peugeot.

Throughout the ups and downs, Arnault and his family have signaled their commitment to the country. In November, Arnault’s nephew Ludovic Watine-Arnault attended the China International Import Expo in Shanghai, a key forum for building business ties with the West.

Watine-Arnault told the crowd he had come bearing messages from his uncle—the first being “a message of friendship and respect first and foremost for China, its government and its people."

The other message was that LVMH wasn’t going anywhere, Watine-Arnault said, adding: “For many of our brands China is a key market and one for which they must give their all."

New shopping malls

Arnault broke ground in China when many of his rivals were still focused on Europe and the U.S.

Louis Vuitton opened a boutique at Beijing’s Palace Hotel in 1992—a daring move in an era when China’s masses still commuted to work on bicycles and displays of wealth were a foreign concept. The gambit paid off as the boutique quickly began notching more sales than some of Vuitton’s much larger stores in Europe—a Louis Vuitton item was a favourite for the gift-giving that was customary in China’s government and businesses.

In the decades that followed, shopping malls sprang up across China, and luxury brands made huge investments in stores, betting on a rising middle class. But China’s hefty luxury tax, making goods up to 40% more expensive at home than in Europe, drove Chinese shoppers to look for arbitrage deals abroad. Luxury brands drew Chinese consumers to Hong Kong, Tokyo, Paris and New York, redesigning department stores and boutiques to cater to them.

Over the years the luxury tax was reduced. When the pandemic hit, Chinese consumers who couldn’t travel bought at home, sparking a huge surge in sales on the mainland. Suddenly, malls in China became some of the most productive in the world in sales per square footage.

LVMH responded by pumping cash into China. Louis Vuitton increased its number of employees in China by around 30% during Covid. It made its stores bigger and invested in training its sales associates.

In the fall of 2020, Louis Vuitton picked Wuhan, where Covid infections had eased, to stage the first leg of its traveling exhibition “See LV," an interactive tour of the brand’s 160-year history. On opening night, hundreds of people waited outside a luxury mall in the rain to catch a glimpse of Zhu Yilong, a Wuhan-born actor whom Louis Vuitton had recently signed as a brand ambassador.

By the start of 2023, the postpandemic spike in luxury shopping among Westerners had begun to wane and China seemed poised to pick up the baton. Beijing relaxed its border restrictions, and investors bet heavily on a surge, sending luxury firms’ share prices soaring.

Executives also noticed a change in tune from Chinese officials. Once standoffish, they now appeared more open to working hand-in-hand with the luxury label, part of broader goals to boost consumer spending and spur international investment. “They really came back saying, ‘Listen, we are open for business, we want to do business, let’s do things together. We are friends,’" said one senior LVMH executive.

In April, Wang Wentao, China’s minister of commerce, traveled to Dior’s Avenue Montaigne store in Paris to meet with Arnault and top lieutenants, including Arnault’s daughter, Delphine Arnault, who runs Christian Dior. Wang told the group he expected Chinese nationals to start traveling again soon to Europe.

Pop star welcome

In June, Arnault traveled to China for the first time since the pandemic. Accompanied by his youngest son, Jean Arnault, the 74-year-old Frenchman was treated like a pop star everywhere he went. Onlookers asked him for selfies and mothers even requested he touch their babies in hopes that his good fortune would rub off on them.

“I feel like the Chinese market and the Chinese consumer is very open minded, and very happy to be opened up again," said Jean Arnault, who runs Louis Vuitton’s watch division.

The welcome contrasted with Arnault’s treatment back in France, where he was being pilloried. Tens of thousands were taking to the streets to protest a rise in the retirement age, urging the rich to pay more in taxes. Scores had stormed LVMH’s Paris headquarters.

Arnault took his time inspecting LVMH stores. He requested changes to the facade of Louis Vuitton’s flagship in Beijing that will delay its opening by several months. He lavished praise on LVMH employees in Shanghai, quipping that they no longer required managers from Paris.

“We thought we needed to send all these people from headquarters out here, and these last three years you did it without us. Obviously you don’t need us!" he said.

Still, Arnault couldn’t ignore China’s slowdown. He also struggled to get a handle on Chinese travel: Fewer were making shopping trips than in 2019, but those that did were spending much more, although that trend had begun to normalize in the months before Arnault’s visit. The company needed to decipher how that would affect sales in China.

He huddled with his daughter Delphine and his son Jean as well as Louis Vuitton CEO Pietro Beccari and some of his top executives in the region. The group agreed China would mature as a luxury market, people familiar with the discussions said, but the economic woes were going to slow down its development—perhaps by several years, compared with previous forecasts.

Arnault also decided to pump the brakes on a number of investments in the country, the people said. One project in Shanghai was pushed back, and the company moved back the completion date of one of its projects in Hainan.

By the time Louis Vuitton mounted its Hong Kong fashion show in November, the brand was on eggshells. It was the first major show in Hong Kong since Beijing crushed opposition protests in 2019, tightening its grip on the city. International firms had been trickling out of Hong Kong, uneasy about the clampdown on the financial hub.

Louis Vuitton staff pored over the list of celebrities invited to the show, including “friends of Pharrell," to determine whether anyone had publicly expressed political views on Hong Kong.

Fashion shows in China typically feature homegrown celebrities who are careful not to cross Beijing. American celebrities, however, have a history of causing problems. In 2008, LVMH jettisoned ads in China that featured Sharon Stone, who at the time was the face of Christian Dior, after she said she was “not happy" with China’s treatment of Tibet.

“We don’t need anybody to change their views. We just need them not to express them while they’re here," one LVMH executive said in the run-up to the Hong Kong show.

On the evening of the show, the city’s promenade along the waterfront was converted into a sandy shoreline. Fifty ukulele players strummed as Beccari, the Louis Vuitton CEO, hugged Pusha T, a rapper and close friend of Williams. Chinese actors Gong Jun and Bai Jingting sat nearby along with the Chinese boy band TNT.

Williams’s collection was heavy on nautical references. Models wore naval coats adorned with pearl buttons, fisherman sandals, sunglasses and bucket hats. One wore a shell-embroidered varsity jacket with a sailor’s collar that zipped into a hoodie.

After the show, Williams traveled to Chengdu, Shanghai and Beijing, donning a Louis Vuitton leather jacket handwoven with dragon embroideries and stitched with each of his city destinations.

“Our Asian brothers and sisters have been through a lot," Williams said. “Even in being quarantined and not being able to move for 3½ years, the resiliency is here and it’s so strong."

Write to Nick Kostov at nick.kostov@dowjones.com and Stacy Meichtry at Stacy.Meichtry@wsj.com

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