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The two types of wealthy (II)
The second type of wealthy and a luxury giant's record year
In my previous post talking about different types of wealthy, I noted that the wealthy consumer is quite different from the wealthy investor, looking at behavioural changes (or lack thereof) when the environment shifts to a different state from which they have been in.
The wealthy consumer, by design, is accustomed to put the status of their wealth on display. It can be seen in their tastes in the food they eat, the clothes and the goods they carry, how they travel and where they travel to, and pretty much in all spheres of their life. The status of their tastes is an integral part of their identity and how they are perceived in the society.
Not all wealthy consumers are the same though. Some are born into this lifestyle, and start acquiring these lifestyle traits right in their formative years. Others build affluence as they progress through life, steadily moving from mass produced to premium and then to luxury categories.
The global luxury market, which is largely driven by both these types of the wealthy consumers, has proved to be very resilient during economic downturns, slowdowns, and even pandemics. In another post on the global luxury giant LVMH and the luxury market last year, I observed how the underlying drivers of the growth only seem to be getting stronger.
The resilience of the market is also driven by how hard it could be to change the part of your life and your identity which the society looks up to, and which invokes both envy and aspiration. For the former segment of the wealthy consumer, it could be nigh impossible to change which would feel like a step down in the quality of life you have grown up with. For the latter, the step change in lifestyle towards luxury is a sign of progress and success. One likes to climb up the ladder but rarely wants to come back to a lower rung. Luxury consumption habits are easy to acquire but very hard to give up.
All of that was evident in LVMH’s and other luxury houses’ recent quarterly results, and feels like its a good segway to jump right into the largest one of them.
Another record quarter. Another stellar year
Building upon the record year post the pandemic, LVMH reported yet another record quarter and year in Q4 2022. Revenues were up 23% at EUR 79.1bn, with a similar growth in operating profit which is now at a record high of EUR 21bn holding operating margins steady.
The fashion and leather good segment, its growth engine and the largest contributor to revenues and profits, grew a solid 25% from a large base of EUR 31bn, and is now at a record high of EUR 39bn. Louis Vuitton alone is now a EUR 20bn brand. Other segments also delivered record revenue growth rate and reported large market share gains in respective segments.
One might attribute the performance to easing of restrictions and people travelling and spending all over the world, but the market itself is witnessing a step change in long-term growth and a cultural shift and openness towards these brands. LVMH has banked on these trends adopted a brand centric strategy that resonates with the wealthy consumer of today, promoting desirability of their products at the same time.
A business can develop its capital allocation strategy around four key pillars - reinvesting back in the business, inorganic growth via M&A, returning cash to shareholders via dividends and buying back its shares enhancing its value per share. The management has established a track record around all four of them, allocating capital with high rates of returns.
The company has reinvested the growing stream of cash flows back into the business via opening stores, streamlining supply chains and manufacturing operations and developing new products and existing brand houses.
Dividend per share has grown annually at 19% since 2017 and it also returned cash back (about EUR1bn) via repurchasing shares.
It has a stellar track record of acquiring large luxury houses and brands and making them even better.
Tiffany, the most recent large acquisition, crossed EUR 1bn in operating profit recently which was at half that amount when it was acquired in 2020.
The management and their strategy has delivered exceptionally well coming out of 2020, and has impressively grown at a high 2021 base. The share price and its outperformance is a telling tale of it all.
The new wealthy consumer
You might imagine the wealthy consumer to be a person well in their 30’s and 40’s, when one is likely to reach a level of accumulated wealth that allows one to afford luxury. But there is a new and a much younger type of wealthy consumer emerging, one that might define the next era of consumerism in this space.
According to the Economist, the GenZ and Millenials spent a combined USD 2.7tn in 2021, around 30% of the total. The younger generation of the lot does not earn as much yet, but has been increasingly spending a lot more on “self-care”. Social media has played a role, as this ‘always online’ population group wants to buy stuff that other famous personalities around the world or their peers possess.
How the young shop is clearly in flux. What they buy, too, is changing. What older generations consider discretionary, such as wellness and luxury, have become essentials. Self-care is all the rage. On the hunt for clothing that will set them apart, the young are turning to posh brands at an ever more tender age. According to Bain, a consultancy, the average Gen Z shopper makes their first luxury purchase when they are 15, compared with 19 for their 30-something counterparts. Some buy posh items as a hedge, believing that they can hold value even during tough times.
Luxury brands are paying attention too, and increasing their presence and brand awareness on social media. They are not the brands reserved for the elite with the store-only presence anymore. They have maintained their desirability and scarcity, but increased their activity in the online worlds of media, gaming and art to tap into this emerging group of the wealthy consumer.
A resilient wealthy consumer that rarely changes spending behaviour, both in good times and the bad, along with an emerging much younger consumer ready to spend on luxury bodes quite well for the market for the long-term.
And for different types of wealthy, both investors and consumers, the intention to preserve the status of their wealth remains evergreen.
Until next time,
The Atomic Investor