During this year’s Christmas celebrations, luxury executives may appear less splendid than usual with champagne. They have not been very bubbly six months for the sector, because wealthy consumers from the East and West have moderated the excesses of recent years. The global S index
The last two decades have been extraordinary for the sector. Global sales have tripled to nearly $400 billion, thanks largely to a rise in the ranks of ultra-wealthy Asians. The biggest beneficiaries of the boom have been European companies, which represent around two-thirds of luxury goods sales, according to the consulting firm Deloitte; and European brands are also, according to the market research company Kantar, nine of the ten most valuable luxury brands in the world. LVMH’s Bernard Arnault, a European goliath of luxury, is the second richest man in the world. The sector remains a rare bright spot for Europe at a time when the continent appears to be at risk of fading into economic and technological irrelevance. Why has it shown itself so immune to foreign competition?
Cultural heritage is one explanation. European luxury companies have taken advantage of the world’s continued fascination with the old continent, which is home to seven of the ten most visited countries in the world. Tourists flock to Europe’s historic cities to delight in the contemplation of works of art, taste local delicacies and drink excellent wines; In summer, the rich and famous gather on the Riviera to celebrate lavish parties. In his book Selling Europe to the World, business historian Pierre Yves Donzé argues that the supremacy of European luxury is due to “the powerful attraction of an idealized way of life that combines elegance, tradition and hedonism.”
In an interview with The New York Times in 1996, the famous American designer Tom Ford spoke fawningly of Europeans and said that, unlike their compatriots, they “appreciate style.” American fashion brands have had difficulty breaking into the more exclusive end of the sector. Even America’s most expensive brands, like Ralph Lauren, focus on what experts disparagingly call “accessible luxury.” In Asia, local rivals have prospered especially in categories such as jewelry (China’s Chow Tai Fook or India’s Titan) and cosmetics (Japan’s Shiseido), where local tastes are more pronounced.
Europe, meanwhile, has established itself as a center of design and craftsmanship in the luxury business. Three of the “big four” fashion weeks take place in European capitals. The exception, New York, has valiantly attempted to create a pool of high-end fashion talent, with design schools that rival those of Milan or Paris. However, it has lost the best designers to European capitals, just as Europe has lost technicians to Silicon Valley. As Ford himself perceived it, “if he wanted to become a good designer, he had to leave the United States.”
Rubbing shoulders with other fashionistas is not the only advantage that Europe offers. The continent is dotted with artisan workshops that have responded for decades to the demanding parameters of the luxury sector. Hermès bags, some of which sell for more than 10,000 euros, are produced by experienced artisans who can spend 20 hours or more on a single bag. For decades, the continent has developed specialized production hubs (from watchmaking in the Swiss Jura arc to shoemaking in Italy’s Veneto region) where techniques are passed down from generation to generation through specialized schools and coveted training practices. .
We must also recognize the European luxury champions for having followed strategies that have reinforced their dominance in the sector. They haven’t stopped buying stakes in their suppliers, giving them a competitive advantage through greater control over production, says Thomai Serdari of New York University’s Stern School of Business. In May, Chanel and Brunello Cucinelli, two luxury houses, bought a joint 49% stake in Cariaggi Lanificio, an Italian cashmere supplier. The vertical integration of the sector dates back to the alligator farms of Louisiana and the sheep farms of Australia. It has also spread in the other direction, towards distribution, with luxury brands increasingly choosing to sell directly to buyers through their own luxury stores rather than trusting others with the customer experience.
All of this has required a lot of capital, which helps explain the parallel trend towards horizontal integration in the sector. LVMH is now home to 75 luxury brands. Although most operate autonomously, the model provides economies of scale in areas such as marketing and administrative functions. It also provides the group with the financial capacity necessary to invest in first-class real estate. In July, LVMH purchased the Champs-Elysées building that houses its flagship Louis Vuitton store. Swatch, which owns watch brands ranging from Blancpain to Omega, also controls a portfolio of component suppliers. Likewise, the conglomerate model helps attract top talent by offering designers and artisans the opportunity to move between brands, says Stefania Saviolo of Bocconi University.
Enthusiasm for horizontal integration among European luxury companies has not been universal. In the early 2010s, Hermès rejected an attempted takeover by LVMH. It has done well going it alone: ??its shares have outperformed LVMH’s by more than half in the past five years. However, other independent luxury brands have struggled to keep pace. This is especially so in the case of Italian brands, which represent 23% of the top 100 luxury companies, but only 8% of combined sales, according to Deloitte. Many of them are multigenerational family businesses that have resisted joining forces with former rivals. If they want to maintain their position at the fancier end of luxury, they may have to swallow their pride.
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Translation: Juan Gabriel López Guix
