EQUITY RESEARCH DEPARTMENT CONSUMER DISCRETIONARY INDUSTRY€¦ · EQUITY RESEARCH DEPARTMENT CONSUMER DISCRETIONARY INDUSTRY CONSUMER DISCRETIONARY INDUSTRY EQUITY RESEARCH ... based

EQUITY RESEARCH DEPARTMENT

CONSUMER DISCRETIONARY INDUSTRY




EQUITY RESEARCH

RESEARCH ANALYSTS

Hikmet Coskun

Kyle Looi Jie Yong

Claudia Claire Tan



Contents Page Executive Summary: Consumer Discretionary Industry 1

Industry Overview 1

Retailing Industry 1

Automobiles & Components Industry 3

Demand and Supply Analysis 3


Demand Analysis 4

Supply Analysis 5

Automobile & Components 6

Demand Analysis 6

Supply Analysis 8

Products Analysis 10


Retailing Products 10

Market Dynamics 11

Barriers to Entry 11

Shifting of Demand 12

Automobiles & Components Industry 12

Automobiles Products 13

Market Dynamics 13



Components Products 15

Market Dynamics 15



Key Drivers 16


Overview 16

Short Run Drivers: ‘Patience’ stance in interest rate hikes 16

Short Run Drivers: US-China Trade war truce 16



Long Run Drivers: Increase in e-commerce and m-commerce penetration 17

Automobiles 17

Overview 17

Short Run Drivers: Millennials growing up 17

Short Run Drivers: Trade war truce 17

Long Run Drivers: Partnerships between manufacturers 18

Long Run Drivers: Autonomous vehicles and ridesharing 18

Components 19

Overview 19

Short Run Drivers: Tariffs’ suspension in China 19

Long Run Drivers: Increasing number of old vehicles 19

Long Run Drivers: Rising complexity of auto parts 19

Case Study – LVMH Moet Hennessy Louis Vuitton SE (EPA: MC) 21

Company Description 21

Key Financials 24

Investment Thesis 24

LVMH Strategy for Luxury Experiences 24

LVMH Pioneers Untapped Super-Luxury Smartwatch Market 25

Luxury E-Commerce Has Room to Grow 25

References 27



1

Executive Summary: Consumer Discretionary Industry

Industry Overview

The consumer discretionary industry encompasses various types of companies, ranging from

automobiles to retailing. These companies create products and services which are generally

non-essential by consumers but desirable if their available income is sufficient to purchase.

Hence, consumer discretionary products and services are generally more sensitive to

economic cycles and business cycles. This industry can be broken down into smaller sub-

industries, namely Automobiles & Components, Consumer Durables & Apparel, Consumer

Services, and Retailing. Market concentration in these industries are low as there are many

substitutes available, hence companies have to compete and entice consumers to choose

their brands over competitors’. As a result, product differentiation, good marketing and

branding is imperative to a company’s success.

Retailing Industry

The retailing market is a subsector under the Consumer Discretionary Industry and it involves

both softline and hardline. Softline merchandise includes apparel or linens (sheets) products

unlike hardline merchandise which include hardware, housewares, electronics.

Figure 1: Total retail sales worldwide from 2015 to 2020 (in trillion U.S. dollars) (Source: Statista)



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In general, based on Statista, total retail sales worldwide in 2019 is expected to hit USD$27.73

trillion. Walmart remained largest retailer competitor with USD$374.80 billion, followed by

The Kroger Co. with USD$115.89 billion and Amazon with USD$102.96 billion in 2017.

Currently, internet retailers are dominating the top five largest retailers after JD’s entry to the

5th spot. Based on Deloitte’s Global Powers of Retailing 2018 report, the global retail sector

grew at CAGR of 4.8% over the past 5 years till 2016.

Figure 2: Retail m-commerce sales worldwide, 2016-2021 (Source: eMarketer.com)

The current retail standards have been disrupted with technological advances - shoppers now

participate greatly in online shopping and are demanding for better shopping experiences.

Based on eMarketer.com, retail e-commerce sales worldwide increased by 24.8% YoY to hit

USD$2.3 trillion in 2017. Mobile e-commerce (m-commerce) was a key factor as it accounted

for 58.9% of digital sales.

In addition, industry disruptors such as Amazon and JD.com are growing rapidly, with

Amazon’s sales revenue rising from #157 globally in 2001 to #3 in 2016 at a CAGR of 17.6%.

Hence, intense competition from online retailers are forcing brands with traditional brick and

mortar stores to look into experiential retailing and multi-channel to build loyal followers

through well-thought concept stores.



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Automobiles & Components Industry

Global sales of passenger cars are forecasted to hit 82 million vehicles in 2019. Along with

China, the United States is counted among the largest automobile markets worldwide, both

in terms of production and sales. About 6.1 million passenger cars were sold to U.S. customers

in 2017, and around four million cars were produced here in the same year. The United States

became a key automotive market in the early 1900s, when Ford introduced assembly line car

production to mass-manufacture its Model T. Today, the Ford Motor Company still ranks

among the leading manufacturers of passenger cars, its most popular passenger car model

currently being the Ford Focus, which was also one of 2016’s best-selling light vehicles

worldwide. In terms of revenue, Toyota, Volkswagen, and Daimler topped the list of major

automobile makers in 2016, while the automotive supplier industry was dominated by Bosch,

Continental, Denso and Magna.

Prompted by global initiatives, such as the Paris Agreement, several countries around the

globe are enacting stricter emissions controls on new vehicle models. As such, automakers

are beginning to expand their business into the electric mobility sector. Germany is expected

to lead the way with projected electric car production to reach some 1.3 million units by 2021.

Over the next decade, Internet-connected car technologies and autonomous vehicles are set

to stir up yet another revolution in the automotive sector. In 2016, some 40 percent of U.S.

respondents stated that they were willing to use fully autonomous vehicles, presumably

because they consider autonomous vehicles to be safer than conventional cars. The global

market for autonomous driving hardware components is expected to grow from 400 million

U.S. dollars in 2015 to 40 billion U.S. dollars in 2030.

Demand and Supply Analysis

Retailing Industry



4

Demand Analysis

Globally, we can expect the retail market to grow steadily, bringing in USD$26.29 trillion in

2019 from USD$24.86 trillion. E-Commerce is set to be the fastest growth channel for global

retail till 2022, according to Euromonitor. Online retailing of food and drinks is also expected

to grow the fastest at 80%.

We expect high e-commerce growth specifically in APAC and China markets, where rising

affluence in the middle class and higher mobile penetration are changing consumption habits.

Tourism will be the top online spending segment for China and slightly more developed APAC

markets such as Indonesia, Singapore and Malaysia. Digital travel sales is set to rise across all

markets through 2020, despite global uncertainty with US-China trade dispute and the falling

equities market. With 2/3 of global middle class in APAC and China’s middle class to reach 1

billion by 2030, online retail and digital tourism spending is poised to increase in the medium

to long term. In addition, there is an increasing shift from offline to online retailing, with

fashion and accessories doing well in developed and developing markets.



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Figure 3: M-commerce growth from 2016 to 2021 (Source: eMarketer, Statista)

Based on eMarketer.com, the growth in e-commerce was largely influenced by Asia-Pacific

where 14.6% of overall retail spending went toward e-commerce, unlike Central and Eastern

Europe where e-commerce accounted for less than 5% of retail sales. Global m-commerce

sales increased by 40.3% last year to USD$1.36 trillion which amounts to 6.0% of total retail

expenditures due to significant mobile spending in China, Japan, UK, US and South Korea, with

China alone making up 67.1% of m-commerce sales worldwide in 2017. Mobile as a share of

total e-commerce sales is expected to increase to 72.9% by 2021, with total m-commerce

sales estimated to reach USD$3.56 trillion.

Supply Analysis



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Traditionally, physical stores were the location where commerce occurs. Retail has an

important role to play in society where consumption figures are looked upon to determine

the current state of the economy. With rising e-commerce penetration in recent years, many

shops are creating an online presence to have additional touchpoints with their customers.

Shops such as Macy’s create their own online websites while other smaller businesses could

partner huge e-commerce players to display their products on Amazon.com or Walmart.com.

This allows companies to reassess store fleet to improve efficiency of sales by cutting stores

with low presence and sales and optimize their online resources.

In addition, many retail stores are adopting data science and artificial intelligence to provide

better services, forecast demand and improve inventory management. For example, Kohl has

a strategy of having smaller stalls to focus on having more locations and hence a wider

presence. In addition, it allows them to better manage inventories while installing and using

more flexible fixtures. Other apparel and footwear brands are increasingly adopting artificial

intelligence technology to help predict demand and reduce inventory risk. Furthermore,

brands' programmed chatbots are being tested for virtual styling, helping shoppers pick

between colors and styles. AI has applications in product design, using retailers' sales data to

generate styles and reach unmet demand. Finally, improved visual search and image

cataloging will enable brands to better expose relevant products to customers.

Automobile & Components

Demand Analysis

Automobile

Asia-Pacific to dominate global automobile sales growth with China taking the lead,

accounting for 68% of Asia-Pacific sales volume which itself is 50% of the global mix,

positioning itself as the world’s most important vehicle market.



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Figure 4: New passenger car sales 2017 (Source: OICA)

According to data from China Automobile Trading Co., Ltd., Japan was the top origin of China’s

car imports (26.8%), followed by Germany (26.5%), the U.S. (19%) and the UK (9.5%).

According to data from China’s customs administration, there were 159,000 U.S. -made cars

declared with the administration in 1-3Q18, down 27.8% YoY, comparing to a growth of 13.6%

for German-made cars, 8.7% for Japanese-made cars -12.5% for UK-made cars in the same

period.

Components

The aftermarket auto-parts industry is worth $287 billion which is on the cusp of a revenue

surge, supported by a growing U.S. automobile fleet that is the oldest and largest in history.

New vehicle sales volume is set to slow through 2019 after peaking in 2016.

Figure 5: Global light vehicle sales projections (Source; ACEA, CAAM, LMC, Moody’s estimates)



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Auto-parts retailers have some tailwinds that will help sustain top-line growth, as 2019 marks

the first year since 2015 that the number of U.S. vehicles aged more than seven years is

expected to increase. New vehicle volume above 17 million every year since 2015 means

millions of automobiles will start to come off warranty, motivating consumers to look for

independent and do-it-yourself repair and maintenance options and move away from

expensive dealership service bays.

Organic growth for the group is at its strongest level since 2016, as weather trends

complement increasingly favourable car parc demographics, and automakers are losing some

of the steam that kept consumers focused on new-vehicle deals.

Figure 6: US Retail Sales Automotive Parts (Source: Bloomberg Intelligence)

Supply Analysis

Automobile

Companies face overhanging tariff coupled with falling consumer demand which is leading to

lower auto production. The falling capacity utilization risk more cuts with the decline in car

sales in the U.S. and diesel drivetrains in Europe will force suppliers to adjust to automakers

trying to maximise capacity utilization by moving in new strategic directions. Automakers

have seen unit sales of coupes and sedans fall faster than cost could be driven out, resulting



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in first round of sweeping cuts in capacity from Ford, General Motors and Volkswagen. It will

likely take years for consumer uptake of more trucks and electric vehicles to offset the decline

in cars, causing pain to smaller suppliers that are dependent on a single automaker.

Toyota and Fiat Chrysler, whose U.S. vehicles mix is 90% haven’t restructured to be continued

to minimise the potential of battery-electric vehicles and could be exposed if the market

shifts.

Components

Suppliers will face production downshift as automakers cut capacity. Auto-part suppliers

negotiating a strategy shift to electrified vehicles face a more immediate and daunting

prospect of declining production volume as automakers eliminate large swathes of capacity,

Major cost-cutting initiatives by General Motors and Volkswagen are in preparation for a

global decline in vehicle demand to follow the current plateau.



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Products Analysis

Retailing Industry

Retailing Products

Figure 7: Examples of softline products (soft goods) (Source: Google)

Figure 8: Examples of softline retailers (Gap) (Source: Google)

Retail products include both softline and hardline. Softline merchandise includes apparel or

linens (sheets) products. Also, footwear, hats, books, and belts are also considered softline

products, which in general give the retailer more flexibility with its visual merchandising as

well since these items are smaller and hence easier to manage. Examples include clothing

retailers such as Banana Republic or Gap. There are more softline stores than hardline as

there are many clothing retailers for all ages.



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Figure 9: Examples of hardline products (durable goods) (Source: Google)

Figure 10: Examples of hardline retailers (Best Buy) (Source: Google)

Hardline merchandise which include hardware, housewares, electronics, sporting goods,

health and beauty aids or toys. Hardline retailers include Best Buy and HH Gregg which carry

a large array of consumer electronic goods like televisions, stereos, and refrigerators.

Market Dynamics

Barriers to Entry

For retailing, barriers to entry are generally exogenous variables, variables that are embedded

in the underlying market conditions and not created by established firms through marketing

strategy. Such exogenous variables include high capital requirements such as store rental and

infrastructure, and also economies of scale as a cost disadvantage for new entrants. For

endogenous variables, they include product differentiation which requires extensive

marketing and advertising which competes with existing retailers to attract new customers.



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Barriers to entry in traditional physical retailing is high due to capital requirements of a

physical store, economies of scale and establishing of partnerships with suppliers. However,

with e-commerce penetration and mobile retailing, barriers to entry for such online stores

are lower as they have lower capital requirements. Hence, with rise of e-commerce and online

stores, barriers to entry for retailing are lowering.

Shifting of Demand

Due to increasing in demand of online shopping, there has been a growth of online

marketplaces for retail stores, creating an additional touch-point with its customers. Many

brands continue to partner with top e-commerce players such as Amazon and Walmart or

create their own interactive websites to remain relevant and competitive, with huge

investments on online services such as website development and marketing. Stores such as

Kohl have been shrinking as part of their small-format strategy to have extensive stores and

strong online presence to serve both digital and in-store buyers.

Figure 11: Home Depot, Best Buy and Dunelm’s % of online sales (Source: Bloomberg Intelligence)

For example, according to Bloomberg Intelligence, electronics and appliance retailer Best Buy

has a growth in digital sales of more than 20% in Q4 of 2018. Softline retailers like Lululemon,

Kohl and Nordstrom have captured the shift in demand of shoppers moving online, with

Lululemon’s forward PE multiple increasing to 30x with median at 16.6x.

Automobiles & Components Industry



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Automobiles Products

Automobiles can be broken down into the following categories based on their powertrains:

Gasoline, diesel, electric and hybrid. Electric cars and hybrids are expected to see the highest

CAGR of 19% and 15% respectively as the early phase of adoption continues. Looking ahead,

gasoline powered cars are expected to gain more market share with 8% CAGR while diesel

market expected to decrease 5% in coming years.

Market Dynamics

Barriers to Entry

There are multiple barriers to entry exist in this industry, making the threat of new entrants

low. Very few new players or entrepreneurs are capable to come into the industry and have

success because of few reasons: One of the greatest barriers to entry in the automobile

industry is the extremely high amount of capital that is required to purchase physical

manufacturing plants, raw materials, as well as to hire and train employees. Given the nature

of the industry, manufacturers must be able to achieve economies of scale. Therefore,

manufacturing companies must also have the ability to mass-produce so that they can make

cars affordable to customers. Finally, because the issues of safety, reliability and durability

are so salient, buyers base their impressions of a model on the manufacturer’s previous

performance on these issues, therefore a new entrant with an unknown track record will have

extreme difficulty competing. It takes many years for a new entrant to build a strong enough

reputation to be competitive. All of these factors make the threat of new entrants in this

market very low.

Shifting of Demand

Autonomous Driving Features

First, rideshare companies are sufficiently scaled today to offer compelling services that are

not easily replicated. Autonomy’s pretenders will struggle to gain market share unless they

bring comparable fleet scale and, therefore, value propositions (albeit in city specific battles).



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Second, rideshare firms are attractive potential partners for autonomy solutions needing

passengers, so they should have sufficient opportunities to ensure a future role in what will

be a growing market. Roadblocks and catalysts Our interviewees do not see technology as the

major hurdle. Progress has, if anything, exceeded their expectations. They argue Uber’s fatal

accident earlier this year, while tragic, has increased, not decreased, investment in developing

solutions. They believe the core risks to commercialisation are regulation and agreeing on

liability with insurers in the case of future accidents, which are evolving more slowly than the

technology itself. While they see 5G as a valuable enabler, they do not see it as a precondition

to launching fully automated, city specific services.

Electric Vehicle

As the plug-in technology has passed the tipping point, the electric vehicles are approaching

profitability. Some manufacturers that are mostly producing in the middle segment are likely

to avoid developing battery-electric vehicles for a while, as plug-in hybrids do not incur

additional costs while still providing the positive images associated with the battery-powered

electric vehicles.

Electric vehicles will be on the headlines in the U.S. in 2019, as Tesla approaching to

sustainable profitability for its portfolio of battery-electric vehicles, though the larger growth

on basis of number of units produced will be in plug-in hybrids. As battery-powered autos

requires a much higher price tag for a profitable price point, many automakers would prefer

to invest in something that would serve their segment’s expectations, making plug-in hybrids

the more feasible pursuit. Unit sales of plug-in hybrids have grown 27% in 2018 in U.S. and

roughly 50% for the rest of the world; the segment has more diversity as it includes 30 models

across 15 different brands. Brands close to higher segment and maintaining a low volume

have been quicker to move to plug-in options across the portfolio. For instance, BMW offers

six models (and one from Mini) and Mercedes-Benz has another five plug-in vehicles.



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Figure 11: USA Plug-in Sales by Make/Model (Source: EV-volumes.com)

Components Products

Automotive parts include, but are not limited to the following: bodies and parts,

windshields, chassis and drivetrain parts, electrical components (fans, compressors, storage

batteries, signalling equipment, etc.), engines and parts, miscellaneous parts (brake fluid,

anti-freeze, lifting machinery, etc .), automotive tires and parts.

Market Dynamics

Barriers to Entry

There are less barriers to entry in this industry compared to automobile manufacturing

industry. One frequently cited barrier is the protected national industries which are

subsidized by governments (Malaysia and some EU countries). In addition, there are

additional regulatory and safety requirements for each market that could be a deterrent for

new entrants.



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Shifting of Demand

OE to Aftermarket

As the number of older vehicles increase and the demand for new vehicle are expected to

decrease in the two largest markets (China and U.S.) the demand is expected to shift from

original equipment (OE) to aftermarket. Although the total vehicle sales are likely to drop,

auto part sales can see a sustained growth.

New Drivetrains and Electric Components

Increasing demand for EV requires continuous innovation as the tipping point for EV is

approaching. In order to compete with diesel and gasoline vehicles in terms of performance

and cost, there will be an increasing demand from auto manufacturers for state-of-the-art

systems for battery and motor components.

Key Drivers

Retailing Industry

Overview

Retailing industry is driven in the short run by the hiatus in interest rate hikes and US-China

Trade war truce. In the long run, retailing industry is driven by e-commerce and m-commerce

penetration.

Short Run Drivers: ‘Patience’ stance in interest rate hikes

Federal Reserve has recently adopted a cautious and ‘patience’ stance on interest hikes due

to slowing global economy, increasing the discretionary income of consumers and

encouraging consumption. Hence, consumers would continue to purchase both hardline and

softline items, boosting retailing sales in both physical and online stores.

Short Run Drivers: US-China Trade war truce

With the recent truce of US-China Trade war, there are lower risks of future tariffs on goods

imposed by either party. This boost both businesses and consumers confidence as they



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expect a more stable demand of their products and services, boosting their demand in the

short run.

Long Run Drivers: Increase in e-commerce and m-commerce penetration

With ease of integration to online platforms for both businesses and consumers, there would

be an increase in both e-commerce and m-commerce sales in the long run. Based on

eMarketer.com, with growing e-commerce in Asia-Pacific, Central and Eastern Europe, e-

commerce is expected to reach USD$4.88 trillion by 2021, with m-commerce sales

contributing 72.9% of total e-commerce sales of estimated USD$3.56 trillion.

Automobiles

Overview

Automobile industry is driven in the short run by robust demand from millennials with their

rising income and a short period of high demand spurred by trade war truce. In the long run,

it is fuelled by increasing consolidation in industry and technology driven trends of ridesharing

and autonomous vehicles.

Short Run Drivers: Millennials growing up

Another driver of the industry comes from the emergence of millennials as active car buyers.

For a while, consensus was that millennials do not care about cars anymore, and that is a

generational shift, which will shake up the auto industry. As millennials get older, more of

them are getting married, they are buying cars with an increased rate and their finances allow

them to do larger purchases like cars that would not be possible few years ago.

Short Run Drivers: Trade war truce

Deal of a truce on U.S. – China trade war slightly eased up the concerns about the impact of

additional tariffs that President Trump has threatened to impose on car imports from China



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as well as European Union. In China front, the tariff suspension will benefit US carmakers like

Tesla and Ford, which have seen China sales tumble amid the trade tensions.

Long Run Drivers: Partnerships between manufacturers

One key trend to boost profitability of industry is alliances between automakers. Recent

examples include: the Ford-VW partnership to make commercial vans and pick-up trucks, the

Honda-General Motors partnership for autonomous vehicles, and the Toyota-Mazda joint

venture. However, it is not likely that many of these alliances become full time partnerships

or mergers. Others include Toyota’s partnership with Panasonic to develop electric batteries,

which also happens to have partnered with Tesla.

Sergio Marchionne, the former CEO of Fiat Chrysler, offered a strong case for consolidation in

the auto industry. He had predicted that the industry was inevitably going to have to

consolidate to a small number of big players to reach economies of scale.

Long Run Drivers: Autonomous vehicles and ridesharing

One significant development of the past year came from Waymo, a spin-off from Google’s

parent Alphabet, when it announced the launch of its robotaxi service Waymo One. It is not

yet revealed whether it would be “truly autonomous” or have “backup operators” behind the

wheel.

An industry expert commented that: “If they’re able to make this work, and if the drivers don’t

have to constantly intervene, they may get approval within the next year or two to start

fielding completely driverless vehicles.” The biggest cost of a ride sharing vehicle comes from

the driver and without the driver it is possible for companies like Waymo One, Uber, Grab and

some of the others that are coming to undercut the idea of owning a vehicle, may purchase

such automobiles in large volumes. However, this development can decrease the overall

demand in the longer run as owning a vehicle would become increasingly unnecessary for

city-dwellers.



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Components

Overview

Increasing number of old vehicles that creates a demand for car parts will be a strong driver

for both short and long term. The demand will be supported by China’s suspension of

additional tariffs in the next few months. Long term profitability growth is expected from auto

part producers that produce derivative products for more limited number of models to come

in next years.

Short Run Drivers: Tariffs’ suspension in China

China pressed on with its trade war truce with the United States, suspending 25% additional

tariffs added to US-made cars and auto parts for three months from Jan 1.

Long Run Drivers: Increasing number of old vehicles

Auto-parts retailers have some tailwinds that will help sustain top-line growth, as 2019 marks

the first year since 2015 that the number of U.S. vehicles aged more than seven years is

expected to increase. New vehicle volume above 17 million every year since 2015 means

millions of automobiles will start to come off warranty, motivating consumers to look for

independent and do-it-yourself repair and maintenance options and move away from

expensive dealership service bays.

Long Run Drivers: Rising complexity of auto parts

Car buyers worldwide continue to be more and more demanding, seeking region-specific

features, performance, and styling as well as an element of uniqueness even in mass market

products as a way of differentiating and emphasizing individual taste and status. Most

automakers respond to this demand with an increasing number of derivatives which are

priced in a premium compared with standard models.



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In the entry and value segments, the pace of introduction of new derivatives will likely peak,

and the number of new models will level off which creates a favourable environment for part

producers. In the premium segment, there are also some remaining market niches that offer

opportunities.

Figure 12: Rising number of derivatives of automobile components (Source: McKinsey)



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Case Study – LVMH Moet Hennessy Louis Vuitton SE (EPA: MC)

Company Description

LVMH Moët Hennessy Louis Vuitton SE (LVMH) manufacture of luxury goods. It operates

through the following business segments: Wines and Spirits, Fashion and Leather Goods,

Perfumes and Cosmetics, Watches and Jewellery, Selective Retailing, and Other Activities and

Eliminations. The company was founded on January 1, 1987 and is headquartered in Paris,

France and has approximately 70 brands and over 4000 stores around the world.

Figure 13: Total number of stores of LVMH Group worldwide (Source: Statista)

The Wines and Spirits segment produces and sells high quality champagne wines and

sparkling wines. It also distributes vodka and white liquor. The Fashion and Leather Goods

segment engages in the manufacture of luggage items, bags, accessories, shoes and clothes.

The Perfumes and Cosmetics segment engages in the production and distribution of make-

up, perfume and skin care products. The Watches and Jewellery segment manufactures luxury

watches and accessories form men and women. It specializes in the field of chronographs and

ultimate precision. The Selective Retailing segment is organized to promote an environment



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that is appropriate to the image and status of the luxury brands. It engages in the sale of

luxury products to international travellers and on-board cruise ships. This segment also

manages beauty stores that combine direct access and customer assistance to customers. The

Other Activities and Eliminations segment includes media division. It publishes newspapers

and magazines, manages business and financial websites and holds radio stations. This

segment also engages in the real estate industry and builds luxury yachts.

Figure 14: Revenue of LVMH Group by segment (Source: LVMH, Statista)

Products of brands held by LVMH amount to an estimated 12.1% of the Luxury Goods market

in the selected segment and region in 2019.



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Figure 15: Luxury Goods Markets by Brands (Source: Statista)



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Key Financials

Figure 16: LVMH Key Financials (Source: MarketWatch)

Investment Thesis

LVMH Strategy for Luxury Experiences

The purchase of Belmond allows LVMH to meet the rising demand for ultra-luxurious hotel

stays and experiences. This is a strategy for profitable growth as under LVMH's ownership,

Belmond is expected to maintain double-digit sales growth, raising EBITDA margin in the mid-

20s. But earnings impact is expected to be neutral in the first year. With Belmond, provides

LVHM with a global reach enabling the company to capture more luxury Asian spenders.



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LVMH Pioneers Untapped Super-Luxury Smartwatch Market

With the rise of luxury wearables, LVMH is testing the waters with a $200,000, five-unit

limited edition of its TAG Heuer Connected watch, in both a marketing stunt and an

experiment on extending luxury wearables. The emphasis on craftsmanship, exclusivity and

uniqueness, and an auxiliary mechanism, could allay concerns that smartwatches can't match

traditional high-end watches' generations-long investment value. LVMH will also produce a

limited 2,000 units of Hublot smartwatches, drawing on its watchmaking strengths to justify

a $5,000 price tag, a range so far occupied by Breitling's Exospace. Both brands seek to raise

wearable luxury price points, retailing at more than 2x Richemont's Montblanc Summit and

TAG Heuer's main smartwatch line, priced in the $1,000-$3,000 range. Apple's $17,000 gold

watch was discontinued in 2016.

Figure 17: Smart Watch Shipments and Revenues (Source: Forbes)

Luxury E-Commerce Has Room to Grow

E-commerce sales of luxury goods expanded at a double-digit pace in 2018 vs. 8% for the

overall luxury-goods market.



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Figure 18: E-commerce fashion industry worldwide revenue (Source: Shopify)

This trend is set to continue in the medium term as these companies prioritize increased

spending to invest in digital development, advancing analytical tools for customer-data

capture and organizing brand infrastructure to anytime-anywhere purchasing. As the major

catalyst to superior growth, online spending also captures the majority of new marketing

budgets. Hurdles specific to luxury-goods makers, such as protecting brand image, are being

overcome. Meanwhile, for some, digital adoption remains in its infancy. In recent years, social

media has played a significant role in the luxury goods and cosmetics market. Several brands

belonging to LVMH Group have developed strong online presences. Louis Vuitton, for

example, has the most followers on Facebook of any other luxury brand as of June 2017.

Figure 19: Value of online personal luxury goods market (Source: Statista)



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28

Research Analysts

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