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Can LVMH afford to distance itself from China?

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Europe is the 'home' of Arnault's empire, but for the past three decades the engine of LVMH's phenomenal growth has been China

Εχει την πολυτλε ια η LVMH να αποστασιοποιηθεi απo τ&eta ;ν Κiνα?

Over the past year, Bernard Arnault has developed a new habit: Calling meetings with confidantes at the headquarters of his luxury goods empire, LVMH, to brief him in detail about China.

A former Beijing economic adviser warned Arnault and his team that China's aging demographics were a serious problem for LVMH. Chinese consumers' tendency to save, as opposed to spend on luxury goods, was likely to grow as they age, the consultant said. Another expert explored the possibility of China invading Taiwan – an event that would have a direct impact on international trade and cause a global crisis.

Europe is the “home” of Arnault's empire, but the for the past three decades the engine of LVMH's phenomenal growth has been China.

Chinese consumers were jetting off to Paris and other fashion capitals to buy bags and other items and — when the pandemic stopped them — headed to museum-sized boutiques for Louis Vuitton, Dior and other brands made by LVMH. The rise in Chinese consumers has transformed the luxury market, with China accounting for around 20% of LVMH's global sales.

Now China's economy is stagnating and geopolitical tensions are rising. The real estate market, which accounts for about a quarter of the country's GDP, is reeling. Youth unemployment hit record highs last year.

The growing rift between Beijing and Washington has led international companies to reduce their exposure to China.

Although the uncertainty has weighed on LVMH shares, to the extent that it has dethroned Arnault as the world's richest man, the group has taken a different approach than other companies.

During a visit to the country last summer, Arnault asked LVMH executives to review their planned projects, according to people familiar with the matter. Some of them were delayed, but none were canceled. The above, brought to mind a LVMH executive, a rule that Arnault follows in business: “In times of uncertainty, be patient”.

For Arnault, the potential benefits of expanding into China outweigh the risks. After all, it is expected that in the coming years, there will be hundreds of millions of potential consumers of luxury goods there.

“After China, there is China”

Despite the fact that China is the second largest market for luxury goods in the world, it has further room for growth. Chinese consumers will spend $50 on luxury goods in 2022 on a per capita basis, according to Morgan Stanley. During the same period, Americans spent $280 and South Koreans $325.

China's population is expected to increase global spending on luxury goods from about 23% to as much as 40% by 2030, according to data from the consulting firm Bain. In January, LVMH's chief financial officer told analysts that spending on luxury goods in mainland China had doubled since 2019. Arnault added that the group's boutiques in China were full, according to the Wall Street Journal.

As for the next big luxury market, Laurent Boillot, chief executive of Hennessy, the cognac brand of the LVMH group, says: “They ask me the question. So what happens after China?” “My answer is that after China, there is China”.

LVMH's exposure to China is relatively limited compared to automakers and other Western companies because it does not have strong manufacturing operations in the country. Her bags, jewelry and other products are mainly produced in European workshops. Most of the company's investment in China is concentrated in its 28,000 employees and 1,300 stores, the majority of which operate on five- to seven-year leases.

Still, LVMH has invested heavily in its flagships around the country to give them a splash—including the current renovation of its Beijing store. The Chinese government is now turning Hainan Island, off China's southern coast, into a hot spot for luxury travel and duty-free shopping. There, Louis Vuitton builds a shiny facade for its flagship. LVMH is also planning a shopping and entertainment complex on the island, which it says will be an “unprecedented investment”, with the project expected to attract 1,000 luxury brands and 16 million visitors annually by 2030.

It should be noted that Arnault paved the way for China when many of his competitors were still focused on Europe and the US.

Louis Vuitton opened a boutique in Beijing's Palace Hotel in 1992 – a bold move. at a time when most Chinese still commuted to work by bicycle and there was no concept of displaying wealth.

The tycoon's bet paid off as the boutique quickly began to outsell some of the very largest Louis Vuitton stores in Europe.

Source: www.kathimerini.com.cy

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