Stock in Focus: Burberry, LVMH and the strength of brands
There aren’t many train lines in the UK where announcements are made in English and a foreign language. But take the Chiltern Line from Marylebone to Oxford and you are likely to hear announcements in Mandarin and Arabic. That is because the line passes through Bicester Village - home to an outlet shopping centre for luxury goods, which is a magnet for tourists from China and the Middle East.
In fact, before the pandemic, Bicester Village was the UK’s second most popular destination for Chinese visitors (after Buckingham Palace) and custom from those tourists contributed 40% of European sales at Bicester’s parent company Value Retail. Focusing on the Asian tourist market proved a lucrative strategy for Value Line. Between 2014 and 2018, sales rose from £143m to £259m, party thanks to the opening of a new outlet location in Shanghai.
And profiting from Chinese demand for luxury western goods isn’t just a trend that has been seen among the retailers. Big brands have benefited too. British designer label Burberry generated about 10% of its sales from the Chinese market in 2010. By 2015, that had risen to 40% where it remained until 2020. Crucially, Chinese demand continued to grow, helping ensure Burberry’s sales ticked upwards between 2015 and 2019, despite challenges in the domestic market.
And the same was true for Burberry’s global peers LVMH, Kering, and Hermès. By 2019, LVMH experienced around 30% of sales from China, Kering saw approximately 35%, while Hermès' proportion reached 20%. China emerged as a pivotal market, propelling these luxury houses' revenue and global expansion strategies.
But then the pandemic hit. Bad news for Bicester, bad news for the big brands which had begun to rely on Chinese customers as a source of growth.
The makings of a luxury brand
But let us take a step back for a moment to look at the origin of these luxury brands.
Burberry was founded in 1856 as a single store in Basingstoke. Its focus on high quality outdoor clothes meant its coats were the coats of choice for Roald Amundsen when beat Robert Scott to the South Pole and then for Ernest Shackleton when he became the first explorer to cross Antarctica. Burberry trench coats were work by British soldiers in the trenches in World War I and became a fashion item in later years after the addition of its iconic tweed lining.
Origin stories for luxury brands all tend to share this history. Hennessy - the oldest brand in the LVMH wheelhouse - was founded in 1765 and began as a Cognac trading company in France where it was favoured by nobility. Louis Vuitton aimed to tackle the challenges of a burgeoning travel market in 1854. His monogrammed trunk was the first luggage to mix both style and quality. Hermes was a specialist leather goods company founded in 1837. By the end of the century it had diversified away from saddles and reins for horses owned by royals to high quality bags and accessories.
It is this history that brings with it immense brand value, providing these luxury giants with a strong protective moat. If you want the world’s most luxury trench coat, it has to be Burberry.
Burberry’s growth challenge
But the luxury sector faces two ongoing challenges.
The first is the protection of that brand. Counterfeit luxury goods have been an especially persistent problem for Burberry throughout its history. In the early 2000s, the volume of counterfeit Burberry check started to tarnish the identify of the brand and it became associated with football hooliganism, rather than high end luxury.
A major overhaul of the designs and growth strategy under the tenure of former chief executive Christopher Bailey has helped the company recover its quality identity and Burberry has returned to strength in more recent years. But the threat of counterfeiting remains, especially during a period of more stagnant economic growth when price tags for luxury goods are more prohibitive.
And the second challenge to Burberry’s ongoing success is its ability to grow. Unlike its luxury peers LVMH and Kering, Burberry has not pursued an aggressive acquisition strategy, meaning its growth is predominately hinged on its one key brand. And the price tag associated with that brand means its target market is not unlimited. Earlier this week, the company’s share price dipped sharply after analysts at HSBC cut their price target for the company amid fears that economic turbulence in China might once again stymie sales growth.
By contrast, China’s current premier fast-fashion company Shein has reinvigorated its plans for a US IPO (its original IPO was shelved during the pandemic). Shein is the antithesis of the luxury goods market. It is new, cheap and targets the fashion-conscious youth - those whose purse strings don’t likely stretch to Burberry. Shein is making waves among its consumers and potential shareholders.
But Shein was founded in 2012. It took less than a decade for the company to reach its current size and there is nothing to stop a competitor doing exactly the same. By contrast, Burberry and its peers all have over 100 years of history and prestige. Growth is challenging, but demand is not gone and this period of weakness could in fact offer a opportunity for shareholders. Besides, I would not recommend journeying to the South Pole in a Shein trench coat.