FRANCE. LVMH Chairman & CEO Bernard Arnault has underlined his determination to maintain the allure of the house’s luxury and beauty lines by rejecting the daigou sector that has seen huge volumes of product – mostly from duty free – pouring into the China local market in recent years*.
Speaking at a post-results call yesterday after LVMH posted strong full-year 2022 results, Arnault said: “We’re refusing and we’re fighting against so-called parallel exports. A number of our peers need to generate revenue and don’t hesitate to sell through resellers who buy products abroad and then sell them on at discounted prices in China. But we avoid that.
“Absolutely ditto for cosmetics and the sale of products that we see offered by a certain competitor,” he added. In a clear reference to the South Korean duty free market which has been almost solely reliant on the daigou business into China during the pandemic, Arnault commented: “I mean it’s quite fascinating to see the duty free stores where there’s nobody – because their airports were empty – [and they] were generating huge sales, huge revenues.
“Why? Because the products never arrived on the stand. They went straight from the inventory – the reserve of the seller – to the professional seller who sold them on a discount in China. I mean, for your image, there is nothing worse. It’s dreadful.”
LVMH Chief Financial Officer Jean-Jacques Guiony also referred to the daigou market when assessing the performance of the Perfumes and Cosmetics division. “It’s a more challenging situation because we deliberately decided to contain or indeed delete all parallel channels in travel retail around the world, so as to preserve the brand capital.
“This is a costly decision. This is offset by local, dynamic local markets in Europe and the US but overall this drove down profitability. Even though it comes at a cost, it was the right decision over time that will keep our brands attractive.”
{Note: In the interests of balance, while the Korean daigou sector has been the most visible, several other leading travel retailers, including at one stage DFS, generated significant similar business at varying periods of the pandemic -Ed}
“Regarding the breakdown between tourists buying and local domestic buying, it’s difficult to work out exactly,” Guiony said. “But in absolute numbers… it used to be that tourists represented a certain share of business abroad. It will take a long time to get back to the levels of before. Now 90% of the demand is in China itself.
“So now part of that demand will move out offshore when the markets reopen, but it will be a long time before the percentages change. And also, the Chinese market is bigger now than in 2019. There are more customers now than there were in 2019. All the numbers are up. So, for the proportions to change significantly amd to have much more {busiiness} offshore proportionally will take a while.”
Commenting on DFS Group’s performance, Arnault said: “DFS is slightly more challenging [than the rest of Selective Retailing]. Airports have been deserted up till now so of course it’s difficult to remain out in front… but there are green shoots in China. Macau has started again… in our stores in Macau business is back and the Chinese are buying.”
Later Arnault added: “We have every reason to be confident – indeed optimistic – on the Chinese market. In Macau, where [Mainland] Chinese can now travel to, the change is quite spectacular. The stores are full. It’s really come back at a very strong pace.”
Guiony commented, “DFS had two very different half years. H1 was not outstanding but it was alright. But H2 was a challenging half year because of the local circumstances and the fact that Macau was locked down starting in July – no Chinese visitors and so no sales in Macau from July to December.
“As Mr. Arnault pointed out, now things are back in business. Macau is one of the few places where the COVID test is not compulsory for Chinese nationals. But H2 was challenging compared to 2021 where Macau was open.”
*Look out for Martin Moodie’s forthcoming feature on the current challenges to the daigou market in South Korean duty free.
Soundbites: Bernard Arnault on the record
On trading through the crisis: “In difficult times in terms of the macro economy and of political difficulties, LVMH is gaining market share and making progress and this has been the case since 2019.”
On the keys to sustained success: “It’s creativity that enhances the brands’ desirability. And that’s what guides our teams above all. It’s the desirability, be it for our fashion & leathergoods activities or for all the other activities of the group.”
On Louis Vuitton: “We never give the figures of Louis Vuitton but … it’s a major milestone this time so we give it. We said this when we crossed the €10 billion mark [and now] Louis Vuitton has exceeded €20 billion in terms of revenue.”
On Tiffany: “Tiffany for the first time will exceed the €1 billion in profit from recurring operations. We were barely at half that when we acquired the business. Everyone said to me, ‘Why are you buying this business at that price? It’s far too much.’ Well, if the business were to be listed today… it would probably be worth twice as much.”
On Bvlgari: “The high point of this year for Bvlgari will be the opening of the flagship on 5th Avenue on the corner of 57th. But as we’re already doing over €200 million in the provisional store I think we’re going to double or even more the annual sales in this new store, which will be wonderful.”
On LVMH’s national contribution: “This magnificent group that has spectacular results is also a group that has a great economic and social footprint for France. In 2022, we recruited worldwide close to 40,000 young people. In France alone, we recruited over 15,000 people, making the group the leading recruiter in France in 2022. LVMH invested over €200 million for the training of its employees. In France, a job created by LVMH generates four with our partners or suppliers.”
On 2023: “If it continues as it is, it’ll be an excellent year. We’ll be able to continue to develop our investments, gain market share, because even when the situation is somewhat more challenging, [and something] is going to happen from one month to the next, we continue to invest.
“Whereas some of our peers may have tighter financial constraints, they stop investing or they invest less. And so, things are more difficult afterwards. We continue to invest and… it’s been quite successful for us during the difficult times when we weathered the health crisis.”
On leadership changes at Louis Vuitton and Dior: “In a large company, as in any human organisation, one needs to evolve. It’s not a good thing to keep a form of organisation that leads to a routine mindset.
“The executives… must use their management skills by changing. Mustn’t get used to things. But of course, we also need duration. I mean, it’s not like in a government which changes every two years or even more.”
On an online challenge to Sephora: “Someone said to me five years ago, ‘Be careful, be very prudent, Sephora in the US is under threat from Amazon.’ That’s what we were told. But it [Sephora] has never worked so well. I think that there’s a return to physical stores and the experience in a physical store will always be extraordinary as compared to an online purchase.”
On retirement: “I am a friend of Roger Federer and a great fan of tennis. He probably wants me to play a bit more tennis. The last time I played with Roger Federer, I think I won one point in a single set, and maybe I could do a bit better than that. And that would indeed delight me. But as to succession, you may also have noticed that the retirement age, which is very much in vogue, has been extended {from 62 to 64 by 2030 -Ed}.” ✈
