Wine And Spirits Slowest Growing Category In LVMH’s Diversified Portfolio – Fitch Solutions

Key View:

  • LVMH’s product categories (made up of wine and spirits, fashion and leather goods, perfume and cosmetics, watches and jewellery, selective retailing) all reported growth in revenues, although at a slower pace than the last financial year.
  • Fashion and leather goods dominates LVMH’s revenue share and operating profits while also showing the fastest growth in revenue across the product categories.
  • Wine and spirits had the slowest growth in revenue with cognac and spirits the only sub-categories seeing positive volume growth. The category however has one of the highest operating margins due to the mark up for core namesake brands.
  • Selective retailing has the lowest operating margins across the product category and the slow down in operating investment is even more worrisome.

LVMH has the most diversified luxury goods product range of any major global company, highlighted by its six divisions: wine & spirits, fashion & leather goods, perfumes & cosmetics, watches & jewellery, selective retailing and other activities. It has 70 houses or subsidiaries that operate within these six product categories, including champagne, vodka, cognac, shoes, handbags, perfume, makeup, watches, necklaces and travel retail and beauty retail locations, lifestyle and culture. The 70 houses represent some of the most revered luxury brands in the world (see table below).

SELECT MAJOR BRANDS UNDER EACH LVMH PRODUCT CATEGORY
Wine & Spirits Fashion and Leather Goods Perfume and Cosmetics Watches and Jewellery Selective Retailing Other Activities

Dom Pérignon

Louis Vuitton Parfums Christian Dior Chaumet Le Bon Marché Rive Gauche Cova

Moët & Chandon

Christian Dior Givenchy Parfums Tag Heuer Le Grande Epicerie De Paris Royal Van Lent
Hennessy Fendi Guerlain Zenith Starboard Cruise Services Jardin D’ Acclimatation
Belvedere Celine Acqua di Parma Bvlgari Sephora La Samaritaine

Glenmorangie

Givenchy Perfumes Loewe Hublot DFS Les Echos
Krug Marc Jacobs Benefit Cosmetics Fred   La Parisien

Veuve Clicquot

Kenzo Make Up Forever     Cheval Blanc

Château d’Yquem

Rimowa Fresh     Investir

Château​​​​​​ Cheval Blanc

Berluti Fenty Beauty By Rihanna     Connaissance Des Arts
Source: LVMH Annual Reports

Fashion And Leather Goods Dominates Business Revenues

By revenue, fashion and leather goods make up the largest share of LVMH’s total revenues at 39% in FY18 (ending December 31 2018). This is the highest contribution the fashion segment has made to company revenues since 2013. Selective retailing, comprising duty-free retail (DFS) and specialist stores (Sephora and Le Bon Marche), is the next greatest contributor to revenues at 29% in FY18. These two categories have retained their dominance in their contribution to LVMH’s total revenues and are likely to do so over the coming year.

The company’s other categories of perfume and cosmetics (13%), wine and spirits (11%) and watches and jewellery (9%) make up smaller shares of total revenue, but are key in ensuring LVMH has a diversified product portfolio to help spread risk and mitigate against a downturn in one particular segment. Wine and spirits has seen the biggest drop in its contribution to total revenues between 2013 and 2018, from 14% of revenues in 2013 to 11% in 2018.

Fashion And Leather Goods Retain Dominance

LVMH Revenue By Segment (EURmn)

Source: LVMH Annual Reports

While revenue growth across individual product categories slowed slightly year-on-year in FY18 (ending December 31 2018), fashion and leather goods was a notable outperformer. The fashion and leather goods category grew the fastest of all LVMH’s business divisions, as revenues rose 19% from EUR15.5bn in FY17 to EUR18.5bn in FY18. Fashion and leather goods is also LVMH’s most profitable category, with profits of EUR5.9bn in FY18, much higher than that of wine and spirits (EUR1.6bn) and selective retailing (EUR1.4bn). The category benefited from a significant increase in investment from LVMH, which rose by 47% in FY18 to EUR827mn, up from EUR563mn in FY17. In addition, fashion and leather goods holds several key namesake brands like Louis Vuitton and Christian Dior, which completed its first full year under the LVMH banner in FY18, allowing for higher mark ups.

Wine And Spirits Struggle, But Hopes for Improved 2019

Showing the weakest growth in revenues in FY18 (ending December 31 2018) is the wine and spirits segment, with revenues remaining almost flat at EUR5.1bn. This contrasts with other categories such as perfume and cosmetics and watches and jewellery which reported growth of 10% and 8% respectively year-on-year (y-o-y) in FY18.

Looking more closely within the wine and spirit category, cognac and spirits accounted for 54% of LVMH’s wine and spirits revenues in FY18, compared to 46% for Champagne and wine.  In volume terms, champagne and wine witnessed a drop in bottles sold, while Cognac and other spirits reported stronger volume growth.The drop in bottles of wine sold can be attributed to the poor European grape harvest in 2017 caused by extreme weather conditions of frost and hailstorms, which impacted production and sales in 2018. Another likely reason for the fall in champagne volumes is China’s ongoing corruption crackdown, with more state officials under greater scrutiny and unable to buy LVMH’s core namesake brand Moët & Chandon champagne and other luxury wines for gift giving purposes.

Meanwhile, Cognac’s premium brand positioning bodes well for the category, with volume sales rising to 93.3mn in FY18 from 90.9mn in FY17. Cognac has gone through a resurgence over the past two years, driven by a global trend towards premiumisation and also new, younger and more affluent drinkers coming into the category. With the dominance of Cognac and other spirits, we highlight that premium brands like Volcan De Mu Tierra (Tequila), Belvedere (Vodka) and Hennessy (Cognac) will continue to do well in 2019. In February 2019, media reports suggested LVMH was considering a joint bid with Diageo to acquire rival spirits producer Pernod Ricard, and while we do not believe a deal will transpire, one of the main motivating factors for LVMH is that a deal would strengthen its position in the Cognac market via the Martell brand or by gaining full control of Hennessy (which Diageo has a 37.5% stake). 

Cognac And Spirits Volume Growth To Buoy Category

Growth In Volume By Drink Category (% y-o-y)

Source: LVMH Annual Reports

While the wine and spirits category reported the slowest growth in revenue, the category has one of the highest operating margins across LVMH’s product categories at 31.7% in FY18, which is up from the 30.6% in FY17. Wines and spirits is among the two most profitable divisions along with fashion and leather goods. Wine and Spirits are higher margin areas of the business due to higher mark ups on the products and lower cost inputs. They represent some of LVMH’s core namesake brands Moët & Chandon and Hennessy. Moët & Chandon for example is globally synonymous with luxury for its rich heritage with over 270 years of history behind the brand. 

Low Margins Worrisome For Selective Retailing

Selective retailing is one of the greatest contributors to revenue for LVMH, second only to fashion and leather goods. The selective retailing operates in two segments: the retail store channel through which LVMH sells its perfumes and cosmetics brands (Sephora and Le Bon Marché) and travel retail (sales to international travellers in airports, aboard cruises, etc) through its DFS Group (duty free shops) and Starboard Cruise Services brands.

Sephora has been a key driver behind the rapid revenue generation of this segment, opening more than 60 new stores in the same year including locations in Shanghai, Frankfurt, Paris as well as online sales in Germany and a revamped website for France and Canada. The strong performance of Sephora and its contribution to growth can be attributed to the brand’s appeal among millennial consumers who are willing to pay a premium for cosmetics products with natural ingredients and convenient easy-to use properties. Sephora has also been innovative in bringing consumers to its stores through the introduction of technologies such as augmented reality make-up testing mirrors.

Core Brands See Higher Margins, While Selective Retailing Has Lowest

Operating Profit Margin By Sector (%)

Source: LVMH Annual Reports

While the selective retailing unit contributes strongly to LVMH’s revenues, this division is the least profitable for the company. In FY18, it had an operating profit margin of 10.1%, far lower than LVMH’s other divisions. As a retail network, the division deals with tighter margins due to building rentals, cost of staff, maintenance and other factors making it a less profitable business. We do note that LVMH has been slowing down its investment in selective retailing, with operating investments falling from USD570mn in FY17 to USD537mn in FY18, the only category to see a drop in investment. We believe this is a strategic decision based on the category not being the most profitable for the company, hence the decision to cut costs and direct resources elsewhere.

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