Louis Vuitton’s formula for world domination

The guest list was designed to attract global attention: Hong Kong pop singer Jackson Wang, Los Angeles rapper Tyga and Mia Khalifa, a Lebanese-born pornographic actress turned social-media influencer. J-Hope, Usher and “Emily in Paris" actor Lucien Laviscount took their front-row seats not far from Bernard Arnault, the chairman and chief executive of LVMH Moët Hennessy Louis Vuitton SA, together with his wife and four of his five children, all of whom work for the company.

The show was kick-started by a short coming-of-age film directed by celebrated French movie director Michel Gondry and his brother, Olivier. Grammy-winning pop star Rosalía then climbed on top of a bright-yellow lowrider car in the center of the stage and delivered a searing set of rap, flamenco and pop. Models filed across the stage, in formal wear, in tracksuits, and plenty in between, many carrying bags.

Even by the standards of the fashion world, the show was an over-the-top spectacle—one that paid off handsomely for the company. The show generated more lucrative attention than any other brand during the January men’s fashion week in Paris, according to Launchmetrics, which assigns a monetary value to every article, post or interaction about a brand or event. The $27.2 million in so-called media impact value was 91% more than Vuitton’s show last year. Rosalía’s performance alone generated $4.3 million worth of conversations, Launchmetrics said. It was proof that the business strategy was succeeding: A luggage and handbag company was entrenched as the most powerful luxury-goods brand in the world, the crown jewel in an empire controlled by the newly coronated world’s richest person.

Last month, the handbag maker’s owner said Louis Vuitton hit $20 billion in revenue in 2022. That was just four years after the brand became the luxury industry’s first to hit $10 billion in annual sales. Louis Vuitton benefited from a boom in luxury spending since the pandemic. Shoppers, many of whom had saved up money as they stayed indoors during lockdowns and other restrictions, let loose on bags and shoes. Regular price increases helped further power Vuitton’s revenue growth.

 

Vuitton announced the $20 billion milestone shortly after it launched a more than 450-piece collection from Japanese artist Yayoi Kusama, the highest-grossing female artist at auction of all time who is known for her colorful polka dots. The collaboration is one of the most extensive ever for a brand that started as a French maker of trunks. The marketing campaign included a takeover of major landmarks in Tokyo such as the Tokyo Tower, Zojoji Temple and Tokyo station, with a mix of physical installations and augmented-reality activations.

Louis Vuitton—famous for its brown LV-monogram canvas bags—is the biggest brand owned by LVMH, which also includes Tiffany & Co., Dom Pérignon Champagne and fashion house Christian Dior. LVMH doesn’t break out individual brands’ financial results, but analysts say Vuitton’s profit margin came in at around 50% last year, up several percentage points since 2019 and representing one of the highest in the industry. It leveraged its popularity in bags into a much broader fashion empire, including suits, dresses, athleticwear and perfume—maintaining an air of exclusivity even as it expanded on a massive global scale. Its sales represented almost a quarter of the parent company’s $86 billion in revenue last year.

The torrid growth at Louis Vuitton has helped propel the brand’s parent company to the largest stock-market valuation in Europe. It has also turned Mr. Arnault, a press-shy 73-year-old, into the world’s richest person, recently outdistancing Elon Musk.

The brand is now entering a critical phase. Former Louis Vuitton CEO Michael Burke and Executive Vice President Delphine Arnault, Mr. Arnault’s daughter, handed off leadership at the beginning of this month. Taking over is Italian executive Pietro Beccari, the outgoing boss at Dior, LVMH’s second-biggest brand.

The leadership change comes amid new economic pressures. Many analysts are expecting an economic softening in many key markets, including the U.S. and Europe.

So far, Vuitton has upset the conventional wisdom of the luxury industry, where skittishness around bigger scale is widespread—a sharp contrast to sectors such as aviation, technology and banking.

Its scale allowed it to plow ahead with store renovations and expansions in the pandemic years of 2020 and 2021, including new locations in Tokyo and Miami. It kept its marketing machine humming, rolling out major ad campaigns at a time when many of its competitors were cutting costs.

But Vuitton’s scale also comes with risks. Luxury brands are able to command higher prices by creating an aura of exclusivity and uniqueness around their products, often linked to the heritage of the brand. That can be harder to do as brands grow into giants.

Mr. Arnault addressed the challenge when he presented LVMH results last month in Paris. “Don’t be overly impressed by size," he said. “What counts above all is quality."

Founded as a trunk manufacturer by a French carpenter in 1854, Louis Vuitton expanded into London and New York by the end of the 19th century. The brand developed a global reputation for luggage and handbags in the 1960s and 1970s when its previous owner, the businessman Henry Racamier, pushed further into Europe, and into Japan. In 1987, Louis Vuitton merged with the Moët Hennessy Champagne company. Mr. Arnault used his Christian Dior SA fashion house as a vehicle to buy control of the combined operation. A businessman from northern France, Mr. Arnault got his start in industrial construction and property development. In 1984, he took over Boussac Saint-Frères, a bankrupt textile group that owned Dior.

Within a decade, under Mr. Arnault’s tenure, Vuitton more than doubled its number of stores, spreading its distinctive bags, with their omnipresent LV logo, around the world.

The brand excelled in the 1990s and 2000s by selling a relatively small number of designs. Consumers lined up to buy its Monogram and Damier handbags year after year. But increasingly, affluent consumers also moved to other higher-end brands like Chanel and Hermès.

Louis Vuitton recognized the threat and headed further upmarket itself. In 2014, almost half its handbags cost less than 1,500 euros, or about $1,600. By 2021, around one in five of its handbags were below that price point, according to analysts at Bernstein.

One example of this was the Capucines bag, launched in 2013 as part of an effort to de-emphasize cheaper, canvas handbags in favor of ones that were made from leather or exotic skins. Today, a new Capucines is about $6,900. A polka-dot model that’s part of the Kusama collaboration is priced at $7,100. Limited numbers of python and lizard skin models are kept in stores but rarely exhibited. Sales assistants don gloves to handle the bags, which cost around $7,500 apiece.

At the same time, Louis Vuitton launched new product lines to serve aspirational consumers at lower prices. Today, a polo shirt emblazoned with the LV logo costs $530, wallets are about $700 and a small container of a fragrance such as Rose des Vents costs $285.

This entailed a change in strategy, from trying to be the dominant leather-goods company to aiming to be the pre-eminent luxury-goods company. A decade ago, Louis Vuitton stores sold mostly leather goods like bags, wallets and small accessories. Today, the majority have added categories like women’s ready-to-wear, men’s ready-to-wear, shoes, watches, jewelry and perfumes. The company even sells dog carriers designed to look like miniature versions of its classic trunks. Vuitton stores today are on average 30% bigger than they were 10 years ago.

Vuitton’s strategy also entailed a rapidly accelerating fusion of culture and commerce. That work started under Marc Jacobs, the American designer who was the brand’s creative director from 1997 to 2013. Vuitton went in a radical direction, away from the traditional confines of exclusive luxury goods and toward a more inclusive, mainstream orientation. Mr. Jacobs pursued high-profile collaborations with the likes of Kanye West, Japanese artist Takashi Murakami and American artist and designer Stephen Sprouse, yielding limited runs of co-branded products.

In 2017, Vuitton’s collaboration with cult streetwear brand Supreme “was the first big moment where the things that were previously thought impossible became possible," said Jian DeLeon, Nordstrom‘s men’s fashion and editorial director. This successful bridge between the worlds of heirloom luxury and youth-oriented street fashion was followed by similar tie-ups between rival luxury firms and streetwear labels. The products from the collaboration were exclusively sold in pop-up stores.

In 2018, Louis Vuitton hired Virgil Abloh, the American designer behind the luxe streetwear label Off-White, as its creative director of menswear. Mr. Abloh, said Mr. DeLeon, was able to continue cultivating desire via his designs for the bigger brand: “He never lost that perspective of what it was like to be the aspirational customer that’s like, ‘I can’t wait to make Louis Vuitton money.’ " Mr. Abloh successfully broadened Louis Vuitton’s customer base, bringing in crypto millionaires, Chinese male fashion aficionados and a general younger clientele that was less afraid of flashy aesthetics.

The brand has yet to replace Mr. Abloh, who died of cancer in November 2021. But it is continuing to draw on streetwear for inspiration. Its latest menswear collection, exhibited last month at the Louvre, was designed in part by Colm Dillane, a 31-year-old New Yorker who runs the streetwear brand KidSuper.

That strategy continues to resonate with the kind of tastemakers Louis Vuitton will need on its side if it is to maintain its position. Russ, an Atlanta rapper who is friends with Mr. Dillane, responded enthusiastically to the Paris men’s show last month.

“When a lot of people think of designer clothes and designer fashion they think of bougie, classism, uppity people," he said. “KidSuper’s brand is very much man of the people, free-spirited, and very loose. So, I think it’s cool for Louis to get that energy into the brand. I think collabbing with KidSuper, from Louis Vuitton’s perspective, really makes it feel fresh, new, exciting, adventurous, fun. Not so stiff."

Vuitton’s embrace of fashion, particularly street fashion, gives the brand a greater aura of modernity than other traditional luxury companies, such as Hermès, said Benjamin Simmenauer, director of research at the Institut Français de la Mode: “This balance between tradition and fashion modernity is a very attractive position in the market for Vuitton."

The company also cultivates art-world connections to burnish its cultural bona fides, a halo that extends to even its most humble products. The Fondation Louis Vuitton, the company’s museum in Paris, is currently holding a major exhibition exploring the connection between impressionist painter Claude Monet and American painter Joan Mitchell.

Meanwhile, the designs of the French brand’s women’s artistic director, Nicolas Ghesquière, often appear on the red carpet, worn by celebrities like Emma Stone and Gemma Chan.

“If you buy Vuitton, you buy this part of this superpowerful universe where all the celebrities are showcased, where they partner with the most exclusive events, the best artists," said Mr. Simmenauer. “You can go to a Vuitton store, you can buy a small wallet, and you can feel that you are part of this ultra-elite world."

While Louis Vuitton’s sales are still chiefly driven by leather goods, its fashion revenue has been growing in recent years. Executives at the company say that both men and women’s ready to wear topped €1 billion in sales last year, and that their profitability is in line with Louis Vuitton’s overall. Mr. Dillane’s stint only lasted one season, and the next creative director will face pressure to continue his success in selling ready-to-wear apparel.

Even as it took steps to broaden its appeal, the brand put in place measures to manage the risks associated with becoming too widespread and easy to get.

Its number of stores has changed little over the past 10 years, closing some as it opens others. Vuitton doesn’t sell through wholesalers and it doesn’t license its designs. There are no end-of-season sales.

Its perfume production is limited to small batches, available only at Louis Vuitton retailers and on the brand’s website. Its fragrances aren’t available in the LVMH-owned retailer Sephora.

Louis Vuitton has also intentionally limited supply to retain a sense of exclusivity. The brand makes small production runs for products in each collection. The idea is to always make slightly less than demand.

“The product remains desirable if it is limited," said one former Louis Vuitton executive. “The difficulty as time passes when you have a war machine like Louis Vuitton is to restrict yourself—to resist the temptation to make easy sales."

Write to Nick Kostov at nick.kostov@dowjones.com