Covid-19 considered, 2021 was a good year for luxury fashion house LVMH.
Total revenues reached €44.2 billion, growing organically 44% vs 2020 💸
Fashion and leather goods were the company’s primary mover, growing a whopping 52% year-over-year.
However, the on-going pandemic has hampered tourists travelling the globe buying big ticket fashion items, as well as local in-store shopping exerperiences, which makes this growth all the more impressive.
So what has driven this astounding growth from the world's foremost fashion luxury brand?
First, a quick summary of the blog:
Assessing LVMH’s continued leadership in the global luxury fashion market, what's clear is strength in China, along with the rest of Asia was the key driver of its success in 2022. Demand in the region rose 86% in the first quarter of 2021 and ended the year in double digit growth, driven in a big part by Chinese fashion.
This year Asia became LVMH’s single biggest fashion market, accounting for 34% of total revenues, with the U.S. trailing at 24% of sales. And further, since the second half of 2020, Asia has been in full recovery mode for LVMH, posting growth in the second-half 2020 of 17%.
The Chinese appetite for fashion luxury is so large that Bain & Company predicts China will become the world’s leading luxury fashion market by 2025.
With an economic outlook like that its no surprise luxury fashion brands are all trying to get their slice of the pie of the Chinese market. But while China presents the greatest opportunity for growth, luxury brands face a real and present danger by putting all their eggs in the China growth basket 🧺
What they risk is sacrificing their long-term future for short-term gain 💪
Ever since the global financial crisis of 2008, China became the region where most organic growth was taking place in the fashion space, but many in the fashion industry hold that view that China has become a honey trap for luxury fashion businesses 🍯
The prospects for making money in China are overwhelmingly attractive, given the large market, growth of the middle/upper classes and growing disposable households incomes. China and fashion trends in China appear to be following the western model of consumption and consumerism, especially in the younger generations.
However, the trap for fashion brands is also just as much of a treat.
In a global luxury fashion market approaching €300 billion, a balanced approach is needed. However, many fashion brands are failing in that regard, focusing all their efforts on the growing Chinese fashion market, while risking diverting attention away from traditional regions such as Europe and North America. Regions which still make up a huge percentage of their revenues, as well as being their traditional long term fashion consumer base.
The China fashion industry may be tempting to crack but also have plently of pitfalls highlighted above. One brand that seems to have cracked the China fashion industry are Chanel and Hermes, who have found the right balance in China, but many other brands are in danger by catering too much to younger Chinese consumers, where extravagant displays of luxury excess, like prominent logos, are fashion trends and valued. By contrast, in the developed Western luxury fashion markets, fashion consumers tend to favour a more understated, classical approach.
This risks alienating a huge a large chunk of consumers, whom the brand has relied on for their past growth and success.
In the China fashion industry, purchasing luxury fashion items are a symbol of prestige, social status and accumulated wealth. The more a person takes care of their appearance and lifestyle, the more they might want to show to the world their success.
While it may be easy to translate words from one language to another, it is not so easy to translate cultural norms. That’s what Dolce & Gabbana painfully learned when it created a cultural backlash through a social media campaign showing a Chinese woman trying to eat pizza with chopsticks 🥢
The danger for fashion brands is love and hate tends to be amplified in China because of the collectivist structure of the society, and with social media being the most powerful medium through which opinions are delivered.
Throw into the mix a highly polarised society increasingly driven by nationalist sentiments and a powder keg of emotions is in place.
From H&M to Versace numerous western fashion brands have felt the outcry of Chinese netizens offended by products that do not conform to China’s perception of itself, or its foreign policy goals and objectives.
With China being a controlled economy with the government freely exercising its power to turn on or off the screw when it suits certain policy objectives at the time, fashion brands have no control over diplomatic tiffs, as learned in the most recent U.S.- China trade war. Brands might find themselves blacklisted in dealing with the country, due to no fault of their own. See Australian fishmongers 🎣
Most recently Burberry, along with Nike and H&M, got on the wrong side of the government when the Better Cotton Initiative announced it would responsibly disengage from sourcing cotton from the Xinjiang region because of the alleged forced labour and mistreatment of workers.
H&M’s in store demand dropped almost 90% following the news, it was delisted from Taobao's online marketplace almost immediately and almost a year after the event consumer demand is only 30% of what it used to be. The brand is subsequently closing stores allover the country and slowly retreating its in country operations.
Furthermore, Burberry also lost a partnership with Tencent to feature virtual designs in its popular “House of Kings” mobile game, with Chinese actor Zhou Dongyu ending her contract as a Burberry ambassador.
What’s crucial for fashion brands is managing the risks associated operating in the Chinese market. Yes, the market and opportunity is huge, but the continued de-coupling between China and West, as well as the crackdown on excessive wealth within China means relying on Chinese consumers alone and the China fashion market for growth brings increasing risks.
A strategy that attempts to maximise this market opportunity, as well as mitigate some of the downside is key if brands are to thrive and grow in an increasingly volatile world.