Supply chain issues ‘not as big a factor’ for luxury retail: Fmr. LVMH exec

Pauline Brown, Former LVMH Chairman of North America and Author of 'Aesthetic Intelligence’, joins Yahoo Finance to discuss the state of luxury retail, sales growth, and supply chain issues.

Video transcript

ALEXIS CHRISTOFOROUS: Welcome back. Consumer prices inched up slightly in September, climbing 4/10 of a percent. And despite the inflationary pressures, LVMH, which owns luxury brands, including Louis Vuitton and Christian Dior, posted strong third quarter sales.

Here with a closer look at the luxury market is Pauline Brown, former chairman at LVMH of North America and also the author of "Aesthetic Intelligence." Karina Mitchell is with us as well. So good to see you. Thanks so much for joining us. I want to start with why we're seeing strength right now in the luxury market. Who is it that's buying these goods at elevated prices?

PAULINE BROWN: Well, first of all, we-- the top line shows enormous strength. If you peel the onion, there are areas of weakness. So it isn't a very consistent level of strength. Your answer-- or the answer to your question about who is buying, it continues to be the Chinese. That is also, in my mind, the biggest vulnerability for companies like LVMH and its chief competitors.

ALEXIS CHRISTOFOROUS: And how about the supply chain issues? I mean, I have to believe that these luxury goods companies are not immune to that. What are you hearing about supply chain issues for that segment of retail? And are they also experiencing a tough time with labor shortages?

PAULINE BROWN: So, on the supply chain, it's not hitting them like it hits mass market companies. For one, the bigger categories of luxury, like fashion and accessories, are made predominantly in Europe. And the gateways that seem to be most disrupted are generally between the US and Asia. And so, that hasn't been as big a factor. There are some segments of luxury, like watches and jewelry, where there's some parts scarcity. But that's a different supply chain challenge than the one that we're seeing hitting toys and other mass manufactured goods.

ALEXIS CHRISTOFOROUS: Mm-hmm.

KARINA MITCHELL: And I want to--

ALEXIS CHRISTOFOROUS: What are some of the-- oh, go ahead, Karina.

KARINA MITCHELL: Oh, sure. I was just going to say that sales actually down 20% in the quarter to almost $18 billion, and fashion and leather continued to outperform. But what other categories do well for this for LVMH? And were domestic sales stronger compared to international sales?

PAULINE BROWN: So, a few things. Number one, 20% was the top line, and it's a very, very healthy number for such a big company. It's actually pretty dramatic slowdown from the second quarter. So if you look at where the growth was, it was number one in Asia. And LVMH is defining Asia minus Japan. But China is a huge part of that. That was actually up 26% over 2019 levels, which is the baseline they're using. But if you look at Q2 growth in Asia, it was 34%, so pretty dramatic slowdown.

The second fastest region by far was the US. Growth here was up 22%. But again, in Q2, it was 31%. So you see a general softening. With regards to the categories, you're right. Fashion and accessories were a stellar segment for the company. That was really driven by their two largest brands, Vuitton and Dior. Dior especially has almost doubled in size in the last year over 2019. So they're investing a lot in the Dior brand.

But the other one that's worth talking about, because it really is moving the mark for the company, is watches and jewelry. Watches and jewelry this last quarter was up 18%. That is not because the core business was up so strong. In fact, the core business was actually only 1% up. It's because they had closed on the acquisition of Tiffany. And Tiffany accounted for the lion's share of that growth. Tiffany actually doubled LVMH's position in watches and jewelry.

ALEXIS CHRISTOFOROUS: Do you have any insight, though, on labor shortages in this segment, especially as we move closer to the holidays, and these businesses want to be ramped up and ready for customers?

PAULINE BROWN: Yeah, so on the production side, I don't think they're encountering the kind of labor shortages that we see in many other businesses. On the retail side, in terms of people working in the stores, that's a real challenge. That's a challenge for any retailer. Again, probably not as acute as what we're seeing in restaurants and hospitality. But it's still a challenge.

The other challenge that LVMH and many other luxury companies have is attracting millennials. So if you think about the next generation of workers with white collar and blue collar, they're not that inclined to go into retail. They're not inclined to go into products. They're going to technology, they're going into finance. So they have a bit of a generational gap, which is why some of the strategies they've employed are very much geared toward attracting a next generation employee into the group.

KARINA MITCHELL: And Pauline, you touched on this a little bit earlier on, but I want a little bit more insight, if you can. So LVMH is a bellwether stock for luxury brands, right? And so the stock dropped 9% when China came out with that statement about common prosperity and that it wants to redistribute wealth and make things more equal.

So I know Asia had a strong performance, but it did ease, as you say. Going forward, how does the brand deal with that sort of component? Because Asia is such a huge market. And talking about luxury products like watches and jewelry, we've seen an easing. People are pulling back right now in Asia from buying those sort of items.

PAULINE BROWN: Well, short to mid-term, that's going to be a huge challenge, arguably the biggest challenge for the group, especially as the effects of the pandemic are leveling off. Longer term, what we may see is that there's a bolstering of purchases by Asians who are traveling. So they going to be less inclined to buy at home, which has been most of where the sales have happened in the last 18 months. But they will reinvest when they get back into Europe, back into the states.

And in terms of an appetite for luxury goods, I think that on the one hand, they'll be-- I don't think that the demand to buy nice things, especially as there's general prosperity that hasn't existed for all that long in places like China. There's still an enormous interest and appetite for better products and for designer products. The issue people will have is the displays of wealth that have been so prominent these last 10 years or so.

And so, I think the kind of luxury products that they'll buy will be quieter in nature, probably less likely to buy the big, heavily labeled, you know, belts and bags and over-the-top watches and more luxury goods that will hold their value, that are a bit less obvious. But, you know, wealth will still look for quality in their lives and in their homes.

ALEXIS CHRISTOFOROUS: Pauline, when people are going out to buy these luxury goods, and they are willing to spend a pretty penny to do it, are they still choosing to do it in person at the brick and mortar store? Or have you seen a real growth in people's willingness to buy these luxury goods online?

PAULINE BROWN: You don't see nearly the adoption rates that you see in other categories. And that is especially true in fashion. I also sit on the board of Neiman Marcus. And while Neiman Marcus has a very large and fast growing online presence, there's no replacing buying things in store, discovering things that you wouldn't have had either the interest or the capability of discovering just by, you know, surfing the web.

And then, of course, trying things on. One of the major impediments to selling high-end ready-to-wear in a digital format is sizing. It's just very, very hard to know not only how things will fit until you've actually put it on your body, but also how things will look, how they drape, how they feel.

And for that reason, offline sales for high-end, ready-to-wear will continue to be, I think, the main source of where people will buy. There are other categories, like handbags, that will migrate much more easily online, especially for those brands that are already well trusted and have the kind of desirability that drives luxury in general.

ALEXIS CHRISTOFOROUS: Mm-hmm, good point. It is tough, though, to buy some of those fashion items without trying them on. Pauline Brown, former chair at LVMH, North America, thanks so much for being with us.