LVMH lacking serious appeal as big brands collapse in value
Luxury goods have always sat rather oddly with me. Many seemingly ubiquitous brands that everyone knows, which are coveted around the world and command incredibly high prices. The large companies selling such products had an unbelievably good run up until 2023 but then the wheels fell off.
Despite the fact I do not own any products from the global luxury brand houses such as LVMH, Hermes and Gucci owner Kering I’ve had a vested interest in the performance of the sector through owning a modest amount of shares in the big beast of luxury goods – LVMH. It’s been the worst investment I’ve made in recent years – having bought it in May 2023 (buying at the peak is never good) it currently stands at a loss of nearly 60%. This dire performance pretty much reflects the luxury category as a whole.
Subscribe to TRBWhen you throw in Richemont, Prada and Moncler alongside LVMH, Hermes and Kering then the group has lost a collective market value of Euros 250 billion in the past year alone. Within this LVMH has declined by Euros 132 billion and Hermes Euros 93 billion.
There have been multiple drivers of this cataclysmic decline. China was a massive supporter of global luxury consumption for a good decade but then the slump in its economy put the brakes on the country’s demand. This has also gone alongside the growth in domestic luxury goods production in China. Although these brands have certainly not replaced those of their European counterparts they have been chipping away at their market shares. For younger consumers they also have a growing appeal – and are more competitively priced in many cases too.
The large global brands also benefited from massive demand during Covid-19 and as such they were able to increase their pricing to unforgiving levels. Alongside this they ramped up production to meet the insatiable global demand. Herein lies the problem for me with a lot of these brands – they cranked up production to the point whereby in some cases they are rather akin to just very expensive mainstream products. Ubiquitous no less.
Hermes chose not to go down this route by ensuring demand always outstripped supply. This ensured exclusivity that helped keep the prices of its flagship bags – notably the Birkin – at the £10,000-plus level. The rarity factor also ensured there was an incredibly strong secondary market for its bags at levels invariably higher than the price for the equivalent product bought new. To keep the top-line motoring along the company followed the playbook of the other big global brands and started flogging lower-priced items such as belts, hats, watches, perfume and other accessories.
However, even this strategy has faltered. Prices for its bags in the secondary market have fallen by more than $6,000 from their 2022 peak for the resale of new Birkins. This pulls away some of the support/demand for the incredibly high initial purchase price of its new products.
Against such a troubled backdrop at least the big luxury brand owners have been able to rely on the US market for some support but even here things have gotten a little tricky. The troubled US economy is reigning in people’s budgets and the investments of affluent consumers are under increasing pressure from the uncertainty over the gargantuan amounts of money being ploughed into building data centres for AI. The tentacles of AI have reached the luxury goods sector and are having an unexpected negative impact.
The luxury sector looks set to have plenty of rough days ahead and it certainly does not provide any incentive for me to think positively of the category. I’m more likely to be a seller – of LVMH shares certainly. If there are any buyers out there?
