TIP643: THE LUXURY STRATEGY

W/ CHRISTIAN BILLINGER

11 July 2024

On today’s episode, Clay is joined by Christian Billinger to discuss The Luxury Strategy by Kapferer and Bastien. Over the past 20 years, some of the best performing companies in the stock market have come from the luxury sector. For example Hermes and LVMH, which are both companies based out of France, have compounded at 21% and 16% respectively.

Christian is chairman of Billinger Förvaltnings AB, which invests in publicly listed equities. The firm seeks to generate attractive long-term total returns in real terms without employing financial leverage. Christian previously covered European equities for Cheyne Capital, Gartmore, and GAM in London.

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IN THIS EPISODE, YOU’LL LEARN:

  • The definition of luxury.
  • How luxury companies create their own demand.
  • What products are most prevalent in the luxury industry.
  • The primary differences between a premium and a luxury product.
  • What the non-return effect is, and how it can make luxury companies more resilient.
  • An overview of Kapferer’s anti-laws of marketing.
  • Why luxury companies seek to keep non-enthusiasts out of their ecosystem.
  • How higher prices can lead to higher demand from consumers in the luxury space.
  • How luxury brands approach e-commerce & pricing.
  • How to think about the valuation of luxury companies.
  • How luxury brands tend to perform during a recession.
  • And so much more!

TRANSCRIPT

Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Clay Finck: Over the past 20 years, some of the best performing companies in the stock market have come from the luxury sector. For example, Hermes and LVMH, which are both companies based out of France, have compounded at 21 percent and 16 percent respectively. The thing about these luxury brands, though, is that you need to take almost everything you learned about business and economics and essentially throw it out the window.

[00:00:22] Clay Finck: For instance, when the best luxury companies increase their prices, they oftentimes see higher demand for their products and not lower. And the Hermes CEO is on record for saying when a product sells too well, they’ll pull it off the shelves. To help break down the DNA of luxury companies, I’m joined by Christian Billinger to talk about the lessons from the book, The Luxury Strategy by Kapferer and Bastien.

[00:00:47] Clay Finck: Christian is the chairman of Billinger Förvaltnings AB, which is a privately held company based out of Sweden that invests in publicly listed equities. His firm seeks to generate attractive long term total returns without employing financial leverage. During this chat, Christian and I cover how luxury companies create their own demand.

[00:01:05] Clay Finck: The primary differences between a premium and a luxury product. What the non return effect is and how it can make luxury companies more resilient. An overview of Kapferer’s anti laws of marketing, which is definitely my favorite part of the book. How luxury brands approach e- commerce and pricing and much more.

[00:01:23] Clay Finck: I really enjoyed reading through this book and Christian is the perfect guest to bring on the show to discuss these topics as he’s been invested in the luxury sector for many years. This is a fascinating discussion, unveiling the luxury sector. So with that, I hope you enjoyed today’s episode with Christian Billinger.

[00:01:41] Intro: Celebrating 10 years and more than 150 million downloads. You are listening to The Investor’s Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Clay Finck.

[00:02:09] Clay Finck: Hey everyone. Welcome to The Investor’s Podcast. I’m your host, Clay Fink. And today we bring back Christian Billinger. Christian, it’s great to have you back on the show.

[00:02:18] Christian Billinger: Pleasure to be back. Thank you for inviting me again, Clay. Good to see you.

[00:02:22] Clay Finck: So over the past few months, Christian, as you know, I’ve taken an interest in the luxury sector, which for someone like me that grew up in the Midwest, It’s something that’s very new to me and something I don’t have a lot of real life exposure to yet I’ve heard all about it when it comes to the stock market because some of the best performing companies have been coming from the luxury sector to name a few that includes LVMH, Ferrari, and Hermes These companies, they seem to break all the standard rules of capitalism and how to succeed in business, which in my opinion, makes them very interesting companies to study.

[00:02:57] Clay Finck: So for the audience, Christian pointed me to this book called The Luxury Strategy by Kapferer and Bastien. To help me better understand the industry. And I’ve invited Christian onto the show to share with the audience what he’s learned from this sector. So to help set the stage for this conversation, Christian, how about you start by just talking about your experience with the luxury industry?

[00:03:18] Christian Billinger: Yeah, sure. Delighted to, and excited to have this conversation about the sector and the book specifically. So I’ve been investing European equities for 20 years now. So my experience is as an investor, not as an operator, but I’ve looked at the large European conglomerates, which tend to be French. So LVMH, Hermes, and we’ve been invested in those two for a number of years.

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[00:03:39] Christian Billinger: We’ve also been invested in Remy Cointreau for a few years, which although formally speaking is a spirits business. Much of their revenues and even more of their earnings generate from or derived from sales of what you would consider a true luxury product. So I’ve looked at the space for a number of years, and I think being based in Europe and being sort of predominantly focused on European equities.

[00:04:01] Christian Billinger: As you alluded to, that’s been one of the best sort of corners of the European market to be generating returns in for the last decade plus. So that’s my experience as an investor.

[00:04:12] Clay Finck: So I’m big on just getting everyone on the same page. So luxury, I think is going to mean a different thing to almost everybody.

[00:04:21] Clay Finck: How would you define it if someone were to ask you to do so?

[00:04:25] Christian Billinger: So there are so many ways of defining it and it depends on which point of view you take. Are you trying to define this as a consumer or as an operator? But I think for the purposes of this conversation, I think the most meaningful way to define it is as an investor.

[00:04:39] Christian Billinger: And I think in some ways you could argue, what does it matter whether you call it a luxury business or a premium business or a fast moving consumer goods business. But I think it does matter because it has a real impact on how durable, you know, the competitive advantage of the business is and what the metrics look like and how you should think about sustainably high returns on capital, et cetera.

[00:04:59] Christian Billinger: So I think it does matter whether a business actually operates as a true luxury business or not. So there’s a few things that I would look at to get a sense of whether we’re looking at a true luxury business. Possibly the most crucial one is are we looking at what I would call a singular product or experience?

[00:05:15] Christian Billinger: And I think we’ll get back to the comparison between luxury and premium, et cetera. But the idea of a singular product or experience is that these are tend to be products or services that cannot easily or cannot be compared to any other product or service, right? So they have a real identity as opposed to a positioning in the market.

[00:05:34] Christian Billinger: And therefore it’s often more difficult to define the competitive set. And the true competitive set would often be much broader than for most other consumer goods businesses you look at. So, singularity is one word I would keep in mind. And then I think in terms of how these businesses are run, one of the sort of main lessons I’ve taken from looking at these companies is that they tend to do the right thing most of the time, at least, so they seem to have a very long time frame.

[00:06:01] Christian Billinger: They, you know, they invest up front. Now, these are generalizations, but generally speaking, they care about product quality, even in situations or even when looking at aspects of a product or service that the customer may not be willing to pay a premium for. So there’s a real sense of companies doing the right thing over time.

[00:06:18] Christian Billinger: So if you look at our mess is a good example of that Chanel is a good example of that, keeping in mind that some of the companies that are formally classified as luxury companies, I wouldn’t consider to be luxury companies. So clearly that applies to some of the American, you know, if you look at a Coach or Michael Kors, I think are good examples of that.

[00:06:36] Christian Billinger: But even if you look at some of the European names like a Burberry, and I know Kapferer sort of refers to Burberry a number of times in his book, and he says it’s not really or truly a luxury business if you look at the way they operate. So I think that’s also so important to keep in mind. So they’re probably 2 of the key things that I would look at to determine.

[00:06:53] Christian Billinger: Are we looking at a true luxury business, and then you can go into all kinds of detail. But I think they would be the two ones I’d look at. In terms of the experience from the customer point of view, I think it’s also important to remember that there needs to be a social element to the product or service for it to be a luxury in a commercial sense and in a sort of financial, you know, investor sense.

[00:07:14] Christian Billinger: And so the idea there is if you look at many artisans or makers of high quality bespoke goods. They may very well be high quality products, but there’s no social dimension, right? So there’s no element of showing off if you will, to use this slightly sort of negative connotation. And so therefore I think in a, for the purposes of our discussion, the artisans and the sort of small independent bespoke makers would not be considered luxury businesses, right?

[00:07:40] Christian Billinger: So they would probably be two or three things I would look at clay to figure out if I’m looking at a true luxury business. And then finally, the fact that these businesses and the market overall tends to be driven more by the offering than the demand side. So in some sense, these companies create, you know, their own market.

[00:07:55] Christian Billinger: They create their own demand by offering things to the consumer that the consumer may not realize they need or desire or even dream of, right? So there’s a number of unique characteristics to these businesses, which I think make them very interesting to study. Sometimes it’s difficult to determine if you’re looking at a true luxury business or not.

[00:08:13] Christian Billinger: And sometimes within these large groups, take an LVMH for instance, some of their offering for some of their brands, take cosmetics or perfumes. Some of that offering, I probably wouldn’t classify as a luxury business, right? But they’re still part of the group and they generate some revenues at group level.

[00:08:28] Christian Billinger: And then you have some parts of the business, say the LV or Dior brands, and especially leather goods and apparel, where it’s much easier to say that this operates as a true luxury business. So, you know, you can attempt to draw these distinctions, but I think sometimes the lines are blurred. Yeah. So those are probably a few things to keep in mind.

[00:08:47] Clay Finck: Yeah, that was wonderful. There’s a lot of strings are going to be pulling throughout this conversation on a lot of the points you made there. My next question is just looking at the luxury market overall, it’s a very large market. Many people might think about clothes or bags or watches or cars that Ferrari sells.

[00:09:06] Clay Finck: What product categories do you think are most prevalent within the luxury space?

[00:09:12] Christian Billinger: So I think when you talk about personal luxury goods, and that’s usually when you look at the listed groups, certainly the French conglomerates and the Italian sort of often still family controlled businesses, they will most often be active in personal luxury goods.

[00:09:26] Christian Billinger: And so these would be things like clearly handbags, apparel, what we call hard luxury, which is jewelry, right? Watches, those kinds of things. But it wouldn’t include things like, you know, depending on which definition you choose, but if you look at cars for instance, they usually wouldn’t be included in the definition of personal luxury, which I think when I look at Bain’s numbers, I think they say for 2023, the total luxury market as they define it, was something like one and a half trillion euros.

[00:09:55] Christian Billinger: And I think about a quarter of that is personal luxury, what they define as personal luxury. So say 400 billion US or so. And then, in addition, you have things like fine art, fine wine, you know, yachts, all these kinds of things, and also on the experience side, right, so luxury holidays and cruises, but they wouldn’t be sort of included in the definition that applies to the sort of European listed conglomerates, which I think is perhaps the most relevant one to think about.

[00:10:22] Christian Billinger: You know, for us as investors in these companies. So that’s probably the broad breakdown of the market.

[00:10:28] Clay Finck: And Kapferer makes it very clear that there’s a very big difference between a premium product and a luxury product. He tells one example of Ford trying to kind of weasel their way into being a luxury brand to which they failed.

[00:10:42] Clay Finck: It’s been viewed as, you know, a classical car company that provides cars to the masses. So it’s just not a market they could really get into. If you were to try and explain the difference between just a very high quality or a premium product and a luxury product, how would you describe what those main differences are?

[00:11:01] Christian Billinger: One interesting sort of categorization that I’ve heard is that luxury tends to be French, fashion tends to be Italian, premium tends to be German, and mass media prestige tends to be American. That’s obviously, I’m sure highly offensive to some people and, you know, it’s a very broad generalization, but I think it gets the idea across, right?

[00:11:21] Christian Billinger: I think most people can probably see that there are some sort of reflection of these different cultural identities in there. So I think what distinguishes luxury from premium is this idea of singularity. By which I mean that the luxury groups. You know, everything they do from their product offering to the way they market these things, to the way they price and distribute them is focused on this idea of singularity, right?

[00:11:46] Christian Billinger: So that these products aren’t easily compared to other products in the same or similar categories. When you look at premium on the other hand, and I think the classic example that Kapferer refers to is cars, right? So if you look at German cars, these would often be thought of as a premium product and the crucial point there is that you can compare them in terms of performance, right?

[00:12:07] Christian Billinger: So whether it’s in terms of speed or whether it’s in terms of boot space or whether in terms of emissions. Or range with electric vehicles or any of these things. And so, therefore, you can compare performance across a number of metrics. And therefore, you can also, as a consumer, you can take a view on whether, you know, on the equation of price versus value.

[00:12:27] Christian Billinger: But that’s much more difficult or often impossible or irrelevant when it comes to luxury goods, because the way they’re marketed, right, is much more about identity than it is about positioning. And so, for instance, you would never see our mass marketing any of their products relative to Chanel or even to make reference to any of their competitors.

[00:12:47] Christian Billinger: You rarely ever see, or I would argue, you probably never see any product claims in the advertising, right? It’s usually very. Sort of minimalist, right? It’s all about the identity and the feelings and emotions that that evokes. So hopefully that makes the idea between premium and luxury clear. Cause I think often there, if you’re not being sort of disciplined with these definitions, I think many people interchange the two or say, you know, higher end premium or, but I think from an investor and operator point of view, they’re very distinctive ways of running a business.

[00:13:19] Clay Finck: Yeah, this is really interesting because I think a key part of luxury you mentioned is sort of social signaling, signaling to others, sort of your values and signaling your wealth to some degree to even in America, you mentioned America, you can just look at brands like Apple and Starbucks, like they certainly aren’t luxury, but you’re still sort of signaling something.

[00:13:40] Clay Finck: So there’s something to it where, you know, like a Hermes handbag that costs over 10, 000 euros to purchase. There’s something to it where there’s a history behind the company and this appreciation for the way they do things, and it’s signaling something very different to your values.

[00:13:57] Christian Billinger: Yes, absolutely. Yeah, I think, I mean, you touched on the heritage point.

[00:14:01] Christian Billinger: I think that’s another important aspect of these businesses. You know, most of them, of course, coming out of Europe, France, Italy, specifically. I think that’s one of the things that will hopefully mean as an investor in these companies that will hopefully mean that they can better withstand the challenge of new entrants.

[00:14:17] Christian Billinger: If you look at the Chinese market or the Indian market, there’s another good book on the sector called Selling Europe to the World, I believe, which sort of talks about this idea that in a way you’re, you know, we’re exporting this sort of cultural identity to other markets and parts of the world. That’s another very important aspect of these businesses.

[00:14:36] Christian Billinger: Most of the brands, if you look at the LVMH portfolio of 75 or 80 brands, most of these go back with some exceptions go back a long, long time. And if anything, I think somewhat unique feature of them is that they often improve over time, right? So they become more durable. There’s an element of Lindy to refer to that idea, right?

[00:14:54] Christian Billinger: So often with these brands and businesses, the longer they’ve been around, the longer their life expectancy.

[00:15:01] Clay Finck: So selling Europe to the world. I’m curious if you know geographical breakdown, obviously a lot of these French companies are going to be prevalent in France and other areas of Europe, and I know China is a very prevalent and growing market.

[00:15:14] Clay Finck: How do you look at or what are you seeing in terms of geographical breakdown and what markets accept this idea of luxury?

[00:15:21] Christian Billinger: Certainly over the last couple of decades, China has been the big, it’s been a very big part of the overall market. So if we refer to Chinese purchases, so that would include purchases, both made in China and elsewhere, predominantly in Europe by Chinese consumers.

[00:15:35] Christian Billinger: I think over the last 20 years, that’s been something like, let’s say the Chinese account for about a third of the personal luxury market. But I think over the last two decades, they’ve accounted for something like two thirds of the growth of that market. So clearly that has been the big driver of that market.

[00:15:50] Christian Billinger: And then you’ve had relatively similar proportions accounted for by European and American consumers. So that’s been the sort of broad splits. And so I think it’s right that people are concerned about any, you know, deceleration in China, but it’s a very large market fragmentation, certainly behind albium age remains, you know, very significant. So I think there are opportunities to growth both organically in terms of consolidation. And then, of course, you see these large groups entering new adjacency. So in the case of LVMH, for instance, they’ve been investing into experiences. So they’ve been acquiring hotel chains and the like.

[00:16:28] Christian Billinger: So I would like to think that there’s significant runway for growth here. And on top of that, You know, we touched on this idea that these companies effectively create the market themselves. And so I think in some ways they’re more in control of their own destiny than some other consumer groups, because, you know, assuming they can provide products and experience that consumers are willing to pay for.

[00:16:51] Christian Billinger: It’s probably wrong to say that there’s limitless growth, but I think there’s much more opportunity. If you get it right, there’s more opportunity to grow for a long period of time than there is in some other more sort of consumer demand driven industries.

[00:17:04] Clay Finck: And I think that’s an important point to get into a little bit more.

[00:17:08] Clay Finck: Hundreds of years ago, luxury was sort of reserved for the kings, the emperors. You know, extremely exclusive. And now the luxury sector is sort of seeing some tailwinds where these very wealthy people, this class has sort of grown and grown over the years. You know, they also expand internationally. They expand a new product segments.

[00:17:27] Clay Finck: So it seems like the luxury sector has a lot of wins at its back in terms of growth as well. I’m curious if you could speak more to that.

[00:17:34] Christian Billinger: Yeah. So in terms of the customer demographics, if you speak to these companies, they will say we don’t sell to the very rich. Generally, well, of course, they do sell to the very rich, but most of their revenues, they would argue are not from the very rich.

[00:17:47] Christian Billinger: It’s from the, as call them the mass affluent. Having said that the numbers I’ve seen from Bain, I think for 22 suggests that about 2 percent of customers by volume account for about 40 percent of personal luxury purchases by value. So clearly there’s a very significant skew there and I think it’s also increased that skew has increased in recent years.

[00:18:07] Christian Billinger: So through the pandemic, the rate of increase in terms of spending for the very wealthy or high spending customers has been much higher than for the low spending customers or lower value customers. So I think there’s been a bit of a polarization there. And you can also see that when you look at who’s, which of these companies have done the best in the last, say, three or five or seven years, generally speaking, the brands that sell to the wealthiest demographics.

[00:18:31] Christian Billinger: Right? So, clearly, Hermes, Chanel, Cucinelli to speak of a sort of smaller player, although listed. So that’s been one of the key trends there. And you can also see that these companies are, you know, spending more time and effort and money on entertaining these very important high spending clients, right?

[00:18:50] Christian Billinger: So there’s a real sort of battle, I think, for their attention. So there’s much more going on in terms of private events and viewings and dinners and travel, etc. So I think that’s one important thing to keep in mind. Another one is that, of course, these demographic characteristics will vary by market. So if you look at the Chinese typical, if there is one luxury consumer, they would tend to skew much younger, right?

[00:19:12] Christian Billinger: And then if you look at, say, Western European or American consumers, they will probably much more often be self made. And so there’s a number of these things to keep in mind. But yeah, they’re probably one or two of the sort of important trends in terms of customer demographics.

[00:19:26] Clay Finck: One of the interesting points that resonated with me in the book was what Kapferer called the non return effect, which very much reminded me of the hedonic treadmill that many people fall into.

[00:19:38] Clay Finck: So the hedonic treadmill explains how, once one makes more money, their expectations and their desires rise with that rise in income, and humans were kind of hardwired to always want more. But, you know, more stuff doesn’t always make us any happier because we eventually become accustomed to that new lifestyle and just want more and more things.

[00:19:57] Clay Finck: So Kapferer had written, once people have tasted luxury in whatever area, it is very difficult for them to turn away from it. Have you found this concept to be true in your research and experience in this space?

[00:20:10] Christian Billinger: Yes, I think it becomes, you know, it’s difficult to put numbers on these things or find sort of empirical data to back it up.

[00:20:17] Christian Billinger: But yes, the idea that, you know, once you’ve started moving up this ladder of consumption, that it’s very difficult to sort of step back down again, I think makes a lot of sense. And this is my personal opinion, but I would think it’s partly to do with the fact, the sort of functional aspects of these products, right?

[00:20:35] Christian Billinger: Because even though they are supposed to be singular and not to be compared to other products, often they do have, you know, superior product characteristics. So if you look at a Loro Piana cashmere sweater or many of these other products, objectively, they are very high quality. I think that’s one aspect of it.

[00:20:51] Christian Billinger: And then you have the other aspect, which is more social and to do with prestige, right? So once you’ve sort of entered into the realms of the prestige that comes with buying these products and services and, and the access you get through invites to parties and travel and exclusive events and right. I think it’s very difficult to sort of step back from that.

[00:21:11] Christian Billinger: And I think you see this idea as being employed in other businesses that aren’t necessarily traditional luxury businesses. So if you look at the airlines, for instance, and the idea of, you know, reward tickets and companion tickets. I think many of us have had this experience where, you know, that’s the first time you maybe get on a plane and you get a business or a first class seat.

[00:21:30] Christian Billinger: And then, you know, next time you may actually consider, should I be paying for that? Because the experience was so special. And having experienced it, I don’t want to go back to what I had before that. So yeah, I think it makes a lot of sense. And that clearly makes these businesses more robust in a way, because all these high spending consumers, I think, in fact, the example Kapferer talks about is that even when you look at sort of high and ultra high net worth individuals, they are more likely to cut back on essentials than they are on their luxury spending, because that just isn’t an option.

[00:22:00] Christian Billinger: I don’t know what the numbers are, Clay, but I think it makes a lot of sense. And it’s sort of, it fits nicely with, you know, my sort of impression and understanding of consumer dynamics in this industry.

[00:22:09] Clay Finck: So another one of the interesting things just about these world class luxury companies is that they just seem to break all the rules of business and they’re somehow able to get away with it.

[00:22:20] Clay Finck: In fact, Kapferer put together what he called the 24 anti laws of marketing that have been utilized by the world’s most profitable luxury companies. So Christian and I are going to be getting into a few of these to better understand this industry. The first anti law of marketing is forget about positioning.

[00:22:39] Clay Finck: Luxury is not comparative. And this implies that luxury is really just in a league of its own and doesn’t want the consumer to be comparing it to any other brands. You’ve got into this a little bit, so I’m not sure if there’s any other comments you have just speaking to the importance of uniqueness within a luxury product.

[00:22:58] Christian Billinger: Yeah, I think it comes back to the concept of these products being singular, right? I guess what I would add is the entire, it’s not just about the product and the advertising, but it’s the entire business model. So if you look at the way brands like LV now, Hermes and Chanel, the way they retail the product, for instance, you know, they control the value chain.

[00:23:17] Christian Billinger: They’re highly vertically integrated. So they can make sure that no competing products, so to speak, are available, right? So they can really sort of push this idea of singularity because they control that value chain. And it comes back to the way these products are being marketed. So I think yes, the rule number one fits very nicely with a few of the sort of themes or unique aspects of the luxury business that we’ve talked about.

[00:23:41] Christian Billinger: I should say that in some ways. Some of the companies you see in the luxury space may or may not be breaking one or two of these rules these days. I think since Kapferer wrote the book, some things have changed. I think with some of these groups, especially LVMH, because of the scale they’re now at, you know, some of these rules, which we may come back to, aren’t perhaps being followed quite as closely as they were.

[00:24:02] Christian Billinger: So the idea, for instance, of do not sort of use any kind of celebrity involvement or celebrity endorsement in your advertising, I think clearly If you look at brands like LV, that is no longer the case and there’s one or two other ones. I guess the internet distribution aspect, I think, is another one where you could argue that some of these companies no longer just communicate or advertise online, but they also sell meaningful volumes of products online.

[00:24:26] Christian Billinger: And so, but I think on the whole, when I go through the list of the 24, the vast majority of them still seem to hold on, especially where I would argue, you know, for the companies that we consider to be the highest quality and truest to the luxury model, almost all of them still hold. So I think they’re a very interesting set of anti rules or anti laws, and actually they’re also useful for looking at other businesses, you know, be it Apple or Ferrari or, you know, a Remy or, or many other examples of businesses that seem to be operating according to these anti laws.

[00:24:56] Clay Finck: So with regards to the celebrities, you know, you have the Nike’s of the world paying celebrities millions and millions of dollars to wear their product. But in the terms of these luxury companies, you know, ideally they want these celebrities just to be wearing their products and showcasing it without, you know, having to necessarily pay them or put their face on a commercial or whatnot.

[00:25:14] Clay Finck: Is that correct?

[00:25:16] Christian Billinger: Exactly. I think that’s what they would like. And if you look at the case of Hermes, that is what they’re getting because they don’t do any endorsements or, and they certainly wouldn’t pay anyone to sort of expose their products. I don’t know the details in Louis Vuitton’s case. You know, when you look at their campaigns with Nadal and Federer or with Messi and Ronaldo and, I don’t know what the details are in terms of the sort of financial side of things, and I’m not necessarily saying that it’s a bad thing, but I think it has changed the way the business operates or the way they sort of communicate with the consumers somewhat.

[00:25:47] Christian Billinger: And if you look at their involvement in the Olympics this summer in Paris, I think on some level, you could argue that partly at least they look a little bit more like traditional large consumer goods groups. Because also if you look at the other big sort of names that are, you know, major sponsors of the event, they are historically, there are companies like Coca Cola and P& G.

[00:26:05] Christian Billinger: And I wouldn’t want to bet against Bernard Arnault. He I’m sure he knows what he’s doing, but I think it may, for some of the brands, at least it may over time change the dynamics and the way we should analyze them. I think it’s too early for that, but it’s certainly one thing to keep an eye on. Will LVMH still be following these anti laws in five and 10 and 15 years time?

[00:26:26] Christian Billinger: Yeah. I’m more confident that the likes of Chanel and Hermes will having said that, you know, there’s other successful ways of running a business, but it may require us to change the lens we use to analyze these companies somewhat.

[00:26:39] Clay Finck: Yeah, you’re getting to kind of anti law marketing number four there, which is keep non enthusiasts out.

[00:26:45] Clay Finck: There’s this slippery slope where a luxury company is like any other company in that they want to grow, but they have to be very careful and thoughtful of their growth. And part of the appeal of luxury is being exclusive. You can’t be an exclusive company if you’re, you know, going to the Olympics and trying to appeal to a broad mass audience, because you know, if you release new products that are at say a lower price point.

[00:27:10] Clay Finck: You know, that may lose the appeal of your original product category. So could you speak more to anti law of marketing number four, which is keep non enthusiasts out?

[00:27:21] Christian Billinger: Yeah. So just to touch on what you said now, I think if you spoke to management of these companies, they would say that there’s a very sort of clear price ladder.

[00:27:29] Christian Billinger: Right, and that they’re able and segmentation and that they’re able to sell products like cosmetics and perfumes for customer recruitment, and they would sell these through different channels than the channels through which they sell their sort of very highly priced handbags and apparel, et cetera. So I think they would argue that you can do both.

[00:27:49] Christian Billinger: That remains to be seen, of course, in terms of keep the non enthusiasts out. Yeah, historically, the idea with luxury has been that you need to focus on scarcity. And if there isn’t real scarcity, you need to create scarcity, right? You need to restrict supply of these products. So there’s been a question mark around this for a long time now for brands like LV, for instance.

[00:28:11] Christian Billinger: And if you put the question to the company, they will say, we’ve been getting this question for the last 20 years. We were getting this when LV was a 500 million brand. We’re still getting this question. But of course, at some point you will run up to that sort of critical level. I think what some now argue is that it’s more about discovery than scarcity.

[00:28:32] Christian Billinger: So this comes back to the idea of making it somewhat difficult for the customer to access your product or service, right? And that is in fact, part of the appeal of these products and services. So if you look at our mess, for instance, to take an example that most people are familiar with the way you get an allocation or the way you get access to, you know, the Birkins and the Kelly’s is that you need to have, you need to establish a relationship.

[00:28:54] Christian Billinger: You need to be buying other products, right? There are certain things you need to sort of take off to get to the point where you can actually buy 1 of those bags. You know, some people would argue that process of discovery is more important than the scarcity as such. And then there’s a couple of other aspects I would touch on there.

[00:29:11] Christian Billinger: One is that for the historically, at least these brands have been able to expand geographically, right? So even if the product or the brand was becoming highly visible in some markets, they could expand into some other part of the world. I think they’re running up against a limit there. Certainly if you look at the very large brands.

[00:29:26] Christian Billinger: So if you look at LV, Dior, Chanel and Hermes I think. You know, for them, that’s becoming increasingly difficult. And then you have the question of visibility. So, you know, with some of these products, a very large proportion of purchases are made by a relatively small number of consumers. And so if you look at handbags as an example, in many cases, that means that only one of these bags will be visible at any given point in time, right?

[00:29:50] Christian Billinger: Now, some would argue that might change if you have secondhand retailers, and if you’ve had experience here, like rent the runway and all of these businesses so far, it’s been very difficult for them to sort of build any momentum. But I think it’s certainly one thing to watch. I would like to think a company like MS is better protected because simply for the fact that you cannot purchase these, the most desired products, if you haven’t gone through that sort of process.

[00:30:15] Christian Billinger: But this growth paradox, I think, is one of the key questions for any long term investor in the sector, as in, for how long can you grow at these kinds of rates and still be perceived as an exclusive or operate as a luxury kind of business model? And it’s a real question, and it’s probably one of the top two or three things that I worry about when I look at the very long term sort of outlook for these companies.

[00:30:37] Clay Finck: Yeah, the point on scarcity is quite a paradox because we really live in a world of abundance. Ferrari, for example, they produce somewhere between 7 to 10,000 cars per year. And just for reference, Ford produces north of 4 million cars per year. And then from the book, they pulled a quote from the Hermes CEO.

[00:30:58] Clay Finck: He’s been on records for saying that when a product sells too much, we stop producing it. I was actually doing some reading on Hermes before this, and I believe the Birkin bags, they stated in an earnings call that they’re producing as many as they can, but it’s just such a time intensive process. And that only so many people in the world know how to make these bags.

[00:31:17] Clay Finck: So maybe to some extent, not everybody is purposely limiting how many products they’re able to produce. But yes, scarcity is certainly a very important factor to this because if everyone has access to that, then, you know, it loses its appeal as well.

[00:31:32] Christian Billinger: I think that sort of touches on what Kapferer to refer to the book talks about.

[00:31:36] Christian Billinger: I think he calls it the dream equation where he says, you know, one of the key things in this business is to increase awareness of the brand at a higher rate than the penetration of the brand, right? So you want to make more and more not necessarily potential consumers, but you want to make more and more people aware of your brand.

[00:31:52] Christian Billinger: But you don’t necessarily want to grow consumption in volume terms at the same rate. I think with our mess, for instance, they do manage, they may be producing as much as they can, but they’re not growing capacity as much as they could. And so they managed that very carefully. Of course, there are restrictions, and especially for these highly vertically integrated businesses, right, in terms of access to skill, labor, especially, and I think with Hermes, you’ve also seen in recent years, while it’s an exceptional brand, they’ve had some issues with service levels and the sort of quality of the store network.

[00:32:21] Christian Billinger: So I think there are restrictions or constraints on the retail side of things as well that need to be managed carefully. But yes, it feels like some of these companies are doing a very good job at it still at scale. And in fact, I think most of the examples I’ve referred, I don’t think we’ve seen any of the big four have any big trip ups there so far.

[00:32:40] Christian Billinger: But yeah, I think over 10 years time, this will be one of the top things to watch.

[00:32:46] Clay Finck: So anti law number 13 is raise your prices as time goes on in order to increase demand. One would obviously think that increasing prices would generally mean you’re appealing to a smaller customer base, but the luxury customer base is much different than most companies.

[00:33:03] Clay Finck: How can increasing prices actually increase demand?

[00:33:08] Christian Billinger: So partly this comes back to the idea of selling a singular unique product, right? And I think part of the idea there is that you price your product so that it is perceived as being unique or singular in a way, right? And price is supposedly irrelevant.

[00:33:23] Christian Billinger: Having said that you’ve seen for some of these companies recently, they have been getting some pushback for what are perceived to be excessive price increases. So Chanel, I think is the most sort of visible example of this, where there’s been a lot of attention, at least paid to the price increases they’ve taken on some of their flat bags and through the pandemic.

[00:33:42] Christian Billinger: Having said that, when you look at their actual performance and the growth of the business. I must say it’s difficult to say whether this is just sort of social media noise or whether it’s actually genuine pushback from their consumer base. I mean, so far it seems to be the former, but we will have to see.

[00:34:00] Christian Billinger: I think, yeah, clearly in some cases, I think the pricing of these, and Kapferer talks about this in the book, the idea with, if you operate a true luxury business model is that you only ever increase prices, right? And certainly we’ve seen that in recent years, and especially with the sort of, let’s call it the best or strongest brands in the business, like Chanel and Hermes, and to some extent, some of the brands, LVMH brands, and including some smaller, lesser, perhaps less visible brands like Loro Piana.

[00:34:29] Christian Billinger: So yes, the way you think about price here is clearly very different from most other businesses. And I guess as you know, if you compare this to what we said about the premium idea of a premium business, for instance, there you can compare product features and you can therefore look at what you’re getting versus what you’re paying.

[00:34:43] Christian Billinger: And I think one key element of these businesses and these products is that it is very difficult to compare. And in fact, usually the consumer doesn’t even want to make that comparison. Right. So, yes, they’re very different dynamics. We will have to see whether, you know, some of these price increases we’ve seen in recent years will turn out to sort of be excessive and whether that will have any impact on the brands.

[00:35:03] Christian Billinger: But so far, I don’t see any evidence of that.

[00:35:06] Clay Finck: And an important point to tie in here is that luxury companies aren’t typically looking to reduce costs just for the sake of, you know, increasing their profit margins because typically this can lead to a lower quality product or service or experience.

[00:35:23] Clay Finck: Ideally, you know, they want to increase their price, but also increase the value that’s being provided as well. And you know, approaching it that way, looking at how can I provide more value instead of, you know, how can I increase the profit by decreasing costs?

[00:35:37] Christian Billinger: Yeah, and I think it also comes back to the idea of heritage, right?

[00:35:40] Christian Billinger: And sort of cultural identity. So if you look at these predominantly European brands, part of what you’re selling here is the idea of take some of these French brands, for instance, you know, you’re selling the idea of these, you know, French heritage and French traditions and French culture, right? So the idea that you would outsource that production or relocate that production to a low cost country, I think it just doesn’t fit with the DNA of these businesses, right?

[00:36:02] Christian Billinger: Yeah. And then there’s another aspect of that, which is that the strong have been getting stronger in this industry and have therefore been able to sort of the likes of LVMH and Hermes and Chanel, et cetera, have been taking significant amounts of market share in recent years. And therefore, you know, and it’s a virtuous circle, so they’ve been better able to reinvest in product quality and branding.

[00:36:23] Christian Billinger: And, and I think they have more headroom in terms of. In the case of many of these brands producing all of their volumes in sort of high cost locations, like in France or in Italy or other parts of Western Europe.

[00:36:36] Clay Finck: So the last anti law I wanted to touch on here was number 24, which says just sell marginally on the Internet.

[00:36:43] Clay Finck: So e-commerce is, of course, a very important part of our economy today. So they’d be leaving a lot on the table if they just never set up an e commerce store. But part of the appeal of these luxury brands is, you know, the experience of going into the store and speaking with their representative that tells a story and explains that singularity that you’re talking about.

[00:37:03] Clay Finck: What’s the consensus on selling luxury online?

[00:37:07] Christian Billinger: I think part of it is that there is no real consensus, I think, so far, right? Historically, these products, as you said, have been deemed not to be a good fit for the online model, right? Having said that, Penetration of online, this will vary hugely by segment and price point and brand, but if you look at the overall personal luxury goods market, as we defined it earlier, I think that number has gone from rough numbers, but from somewhere around 10 percent 5 years ago, 5 or 7 years ago to say 25 percent now, so clearly penetration has increased hugely.

[00:37:38] Christian Billinger: There’s quite a few sort of pure play online businesses in this space, but generally they’ve had a very difficult time, especially coming out of the pandemic. So you look at Farfetch, Richemont have an investment in Yoox Net-a-Porter. They’ve also had a very difficult time. The strong brands have been very reluctant to move any of their distribution online, but they now have some of their own brand.

[00:38:02] Christian Billinger: If you look at LV, for instance, There is some distribution online of certain products, but it’s very selective and I think one of the points that Kapferer makes in his book is that it’s perfectly fine for these companies to communicate and to market or sort of engage in brand building online, but the distribution part is much more difficult or challenging.

[00:38:23] Christian Billinger: And so I’d say it’s certainly happening. Kapferer makes a point that it isn’t a very good fit because you’re missing out on a few key elements of the luxury experience and especially fiscal retail, which is still unusually, which is hugely sort of important for these brands. And if anything, I would argue you’ve seen the opposite in this space where the level of investment in, you know, the store network has been extraordinary in recent years.

[00:38:45] Christian Billinger: And you might’ve seen many of these companies spending huge amounts of money on very prime real estate. So, you know, in the case of LVMH, there’s a couple of very significant investments they’ve made in Paris and New York and similarly for Prada and Gucci, right? This has been all over the news. So I think it seems like there’s a bit of polarization here as well, where the sort of true luxury players are really holding out and they’re very selective in the way they distribute online.

[00:39:11] Christian Billinger: And so I think it’s difficult to sort of answer this generally for the whole space, but it’s certainly happening in some ways. It may also help crystallize the true luxury players from the rest of the group.

[00:39:23] Clay Finck: I wanted to transition here to talk more about just the broader luxury market. Maybe you could speak to how fast some of these markets are growing, what markets are more mature, and maybe which markets present opportunity for growth.

[00:39:38] Clay Finck: Speaking with some guests on the show, I’ve seen kind of China was like a growth story for a lot of just the broader economy throughout the two thousands and becoming more mature these days. But now India seems to be, you know, more so on the rise. So I’m curious if India has any role to play in the luxury space.

[00:39:55] Christian Billinger: I’m sure it will do. I think certainly for now. And when you speak to many of these companies, they will say that the next China is still China. So I think many of them feel that there’s a lot of opportunities still there. In terms of the big picture, you know, if you come back to the personal luxury goods market of say 400 billion or so I mean, the big growth drivers in terms of category, if you look at the last decade, for instance, has been certainly the leather goods.

[00:40:18] Christian Billinger: That’s been one of the highest growing categories. And on the other hand, if you look at watches, that’s been a much more difficult part of the sort of sector. So there’s differentials in terms of category growth rates. And then in terms of geographies, of course, as I said, Chinese consumers have accounted for something like two thirds of growth in the sector.

[00:40:36] Christian Billinger: So that remains a hugely Important part of this market and most of these companies still feel that there’s a lot of untapped potential there. India is very interesting, not just for the luxury groups, but generally speaking, I think there’s so much positive sentiment around. I mean, that may have changed somewhat, I think, depending on the way you look at it, the recent elections, but on the whole, there’s been really positive sort of momentum there.

[00:40:57] Christian Billinger: I think it’s just that the base effect means that for now that will, and for the foreseeable future, that will remain a much less significant driver. If you look at the last decade, the U. S. has been, depending on category, but mid single digit growth, or a bit less than that, and Western Europe has been relatively flattish, so there’s a lot of differential in terms of geography and category.

[00:41:19] Christian Billinger: You know, one of the nice things the large diversified conglomerates is you’re getting some sort of, well, one, you’re getting diversified exposure, right? So you’re getting different categories and different price points and geographies. But also, as I mentioned earlier, the strong have been getting stronger.

[00:41:33] Christian Billinger: So if you look at LVMH, for instance, between the financial crisis and the pandemic, they averaged about 10 percent organic growth, which is much higher than the overall market. So you’ve been getting a lot of outperformance from these big groups, right? And so there’s a number of things to consider, right?

[00:41:48] Christian Billinger: The overall market. The divergence you’re seeing between geographies and categories and also the sort of large diversified conglomerates versus the small, call it independent or family controlled players, many of which are Italian and many of which have struggled, I think, to actually have enough resource to invest in this, in the critical store network and fiscal retail.

[00:42:09] Christian Billinger: Also, There’s a number of things to consider when you sort of try to figure out where you want to be exposed.

[00:42:15] Clay Finck: So this might be a really unfair question. Who do you think is the typical luxury consumer? Maybe this would be helpful to the audience just to get a sense of proportion of the population sort of falls into this category.

[00:42:29] Christian Billinger: So as we touched on earlier that these companies will argue, certainly the large diversified groups would argue that it’s not primarily the very rich, it’s the mass affluent. But it does seem like a small proportion of their customer base accounts for a large proportion of purchases. The 2 percent of customers driving 40 percent of purchases I think speaks to that fact.

[00:42:52] Christian Billinger: And then of course you have differences between geographies. So I, I think we touched on this earlier, but the fact that for instance in China, you’re looking at a very different typical luxury consumer than you would do in Western markets. And also you have the fact that these things tend to sort of change over time.

[00:43:08] Christian Billinger: So, you know, the average age and other sort of characteristics of the consumer base here will have changed over time. So I think apart from that play, it’s probably difficult to say much about who the typical consumer is because within that sort of mass affluent group, there’s such a wide variety. What you can say is that some of these companies, if we speak about for our purposes, I guess, the focus is on the listed groups.

[00:43:32] Christian Billinger: What you can say is they certainly sell to different kinds of demographics, right? So I mentioned Chanel, Hermes and Cucinelli. Certainly they will sell to you know, if you look at average earnings and net worth and age, that will look very different, right? From many of the brands in the LVMH group. So that’s probably also as an investor, I think that’s relevant to keep in mind when you’re trying to figure out where do I want to be exposed here.

[00:43:54] Clay Finck: Circling back to pricing, I wanted to share a piece here from the book from Kapfer. When we evoke the word luxury, the adjective expensive immediately comes to mind, and yet it is probably the relationship between luxury and price that things become most complex and surprising. At a conceptual level, we know that luxury is translated in a product through a high symbolic value.

[00:44:18] Clay Finck: The symbolic value essential to luxury is very difficult to quantify and in any case is highly relative. It cannot be given a precise figure and yet luxury must be paid for and therefore it must have a price. How do you think about the pricing of luxury products?

[00:44:35] Christian Billinger: I think generally speaking, it comes back to the points we’ve made earlier about the fact that these products are not prone to comparison, right?

[00:44:42] Christian Billinger: And the other thing to keep in mind is probably speaking that the competitive set is very broad for these products or services, right? So I think one of the examples. Kapferer makes this, if you’re looking at some of the prestige champagnes, for instance, what is the competitive set there? If you’re looking to purchase one of these as a gift, you know, you may also be looking at a piece of jewelry, or you may be looking at a painting or an experience of some kind.

[00:45:08] Christian Billinger: So I think it’s much, but he actually puts a number on this, I think. I can’t speak to whether, you know, how, sort of, what the empirical basis is here. I think he talks about a minimum for somewhat comparable products, a minimum price premium of 30 percent for a luxury product, but it probably should be no more than 100%, I think he says.

[00:45:26] Christian Billinger: I don’t know how he gets to those numbers. It seems very sort of precise. I mean, what’s the empirical evidence? Well, one thing to keep in mind is that, of course, some of these are seen as stores of value. So if you look at resale values for some of these for some of the strongest brands, of course, they’re trading at a premium or trading at sort of par in the resale market.

[00:45:47] Christian Billinger: So if you look at the Birkins and the Kelly’s and, but also of course, when you look at some of the prestige or, or I should say luxury watches. And so that has a real significance for the way you price your product, right? Because to many consumers, you know, that means that these are seen as investments or at least that sort of eliminates the downside risk, because if you want to offload some of your collection, you can do so at perhaps even with a gain.

[00:46:12] Christian Billinger: So I think that matters. And then for the global brands, they also need to manage these price sort of interregional price differences, right? Because of course, for many years, we’ve had the phenomenon of the Chinese professional shoppers, you know, coming over to Europe and other parts of Asia to bring a lot of product back to China.

[00:46:30] Christian Billinger: So the European brands have had to be very careful about how they managed that as well. So some of these are more to do with brand and identity and the broad competitive set. Some of it is to do with resale values and sort of managing that equation. And some of it is more, say, call it operational or more short to medium term commercial.

[00:46:49] Christian Billinger: So, you know, without being able to put numbers on these things, I think these are some of the considerations of managing these brands successfully from a pricing point of view.

[00:46:58] Clay Finck: Yes, certainly signals pricing power when your customers can sell what it is you’re selling in the secondary market at a price higher, you know, the next day.

[00:47:08] Clay Finck: So the well known luxury brands are very large companies and it leads me to want to potentially look at some of the smaller names, but this can be a difficult line to cross and a bit dangerous because there’s a fine line between true luxury and we’ll call it the rest of the pack. Okay. When looking at a smaller name, do you think there’s maybe some pitfalls you’d watch out for to maybe help distinguish other than some of the things we’ve mentioned already in trying to identify true luxury versus the rest of the pack?

[00:47:40] Christian Billinger: Yeah, so one of the difficulties I think is heritage and track record. So small doesn’t necessarily mean that it’s a recent brand, right? But if it is, then I think that’s a real something to keep in mind here, right? And many of these are first generation still. So if you look at a Cuccinelli, for instance, which, you know, where you haven’t seen, and in fact, LVMH, although very large is in a similar situation where they still haven’t proven themselves as multi generational businesses.

[00:48:06] Christian Billinger: Another, so I think governance and succession is one thing to keep in mind when you look at some of the smaller, call them independent players. I think another one is, and we’ve seen many of the Italian groups, several of whom are now part of the large French conglomerates, which like a Bulgari, for instance, have struggled, I think, to fund, you know, both in terms of financial and sort of human resources to fund the certainly international expansion of their store networks.

[00:48:31] Christian Billinger: So I think that’s another thing to keep in mind, or do they have the resource and sort of ability to grow internationally? And then thirdly, the risk profile of these companies will vary depending on if you’re looking at, so when you say, you know, smaller independent player, most probably you’re looking at a much more focused portfolio, both in terms of geography, but also in terms of product range, right?

[00:48:53] Christian Billinger: So, of course, you know, if you get it right on the upside, there’s much more opportunity, but equally, you would probably be much more dependent on often their model brand. So they, you know, you look at LVMH with 75 or 80 brands in there, right. Many of these smaller independent groups will have, you know, one brand and a very narrow product range, and they may also be quite limited or focused geographically.

[00:49:15] Christian Billinger: That’s not to say that they’re not equally good businesses, but it can have a real impact on the risk profile. I would probably focus on those aspects.

[00:49:23] Clay Finck: So one of the things that sparked the idea for this episode was that my co host, Stig Brodersen, he had told me that Hermes was probably the best company he’s ever analyzed.

[00:49:35] Clay Finck: And when he says something like that, it really grabs my attention. This is a company that essentially sells one of their main products is the Birkin bag, which sells for 10 or 20, 000 euros plus. I’ll just be clear that him or I don’t own this stock. We’re just talking about the business itself. And the valuation is a whole nother discussion.

[00:49:52] Clay Finck: And you talked about the heritage and sort of the family ownership of some of these luxury companies. Hermes, they’re on their sixth generation of family ownership. And they were started all the way back in 1837, which in itself is another interesting aspect of this company. But it can be painful for value investors to see a company like Hermes trading at a PE of around 50.

[00:50:15] Clay Finck: What are some of the things investors should take into consideration when looking at the valuation of luxury companies in particular that, you know, make them just fundamentally different than when you’re analyzing other companies?

[00:50:29] Christian Billinger: So personally, I don’t necessarily think Hermes is the best business I’ve ever looked at.

[00:50:33] Christian Billinger: I think it’s very good. I think it’s an exceptional brand. I think the business actually, although very good, I think potentially isn’t being run as well as it could be, which is, you know, an interesting conversation in itself. But if you look at the store network and the customer experience, and I think some of that is intentional coming back to Kapferer.

[00:50:51] Christian Billinger: He talks about dominate your customer and make it difficult for the customer to buy the product and all these things. So, and I think people inside the business would acknowledge this, that, you know, there are some aspects of the business that could probably be better managed. But having said that in terms of valuation, so generally speaking, valuations reflect, I think on the whole relatively well, the sort of differentials you see in growth rates and resilience, to some extent, the strength of the balance sheets of these companies.

[00:51:17] Christian Billinger: And so of course, if you look at the top end, you look at Hermes trading on 45 or 50 times earnings, right? And then you have the large conglomerates. If you take LVMH trading in the low twenties, and then you have at the sort of lower end, you have companies like Burberry and a number of other examples that are, you know, call them turnaround candidates or less well mannered and some wouldn’t even include them as being true luxury businesses, but for reference.

[00:51:43] Christian Billinger: They’re trading in the low teams, perhaps. So, you know, there are significant differences within this group. And I should say, you know, we’ve been invested in these for a long time, but we haven’t been buying Hermes or LVMH for a long time. And in fact, if anything, we’ve slightly reduced these holdings in the last year or so.

[00:51:59] Christian Billinger: Clearly, they’re not as attractively valued as they were. Yeah, I think on the whole, the market sort of clearly gets the ranking in terms of quality and in terms of how well they operate a luxury business model. I think that’s reflected in their valuations. The other thing to say is that, and this is also something the book touches on is, you know, if you look at reinvestment rates, these aren’t necessarily businesses where you should just be looking at the capex statement to get a sense of how much they reinvest because of course much of their spending.

[00:52:29] Christian Billinger: Goals through OPEX go through the income statement. So you get to the question of, you know, are these companies over or under earning? And I think it’s fair to say that certainly LVMH and now Chanel is obviously not listed on the exchange, but these tend to be businesses that invest for the long term because of their shareholder structures and the culture at these companies.

[00:52:48] Christian Billinger: So I think that’s worth keeping in mind, having said that, I think they’ve had a lot of things going their way in recent years, right? Certainly through and coming out of the pandemic, we have some companies in our portfolio where we strongly feel they’re under earning. I wouldn’t include the luxury goods companies there, right?

[00:53:03] Christian Billinger: I think they’ve had a pretty good time. And on top of that, they’ve been rated quite highly by the market. So those are the broad sort of considerations. I think when it comes to valuation, of course, our mess always looks expensive, despite that it’s been an incredible investment over one and two decades and longer.

[00:53:21] Christian Billinger: Some of these companies like Burberry has, has looked inexpensive for a long time, but it’s not been a good place to be invested. And in fact, it probably in some ways it’s, it’s interesting because we’re discussing this book, I think in some ways, the valuations seem to reflect how well they follow many of these concepts and strategies.

[00:53:38] Christian Billinger: Now, I’m sure they were doing that long before the book came out, but that does mean that this is a good sort of book to be going through. I think for anyone looking to invest in the sector, because it can also give you a sense of, you know, where the real quality in this sector is.

[00:53:52] Clay Finck: You mentioned earlier the importance of, you know, the transition of ownership over time and transition to managers.

[00:54:00] Clay Finck: And when you have, say in the case of their meds, for example, they’re on their sixth generation. There’s more confidence with investors on, you know, where this business will be 25 plus years from now in terms of the new ownership and who’s going to be running the company and how the brand is going to be taken care of over time.

[00:54:16] Clay Finck: So not only is the company building trust with customers and the long tenure of that heritage, but it’s also building that trust with shareholders as well. And, you know, having that longterm mindset that endures and, you know, that is essentially implied in, in the terminal value for investors.

[00:54:33] Christian Billinger: Yeah, I agree.

[00:54:34] Christian Billinger: I think Hermes is probably the best example. If you look at the listed groups of business where you can have some confidence in the sort of succession and the future governance of that business. And then I think with most of the others, to some extent with LVMH, certainly with some of the other businesses in this sector where you have a much more institutional shareholder structure, I think you’re much more dependent on external professional management coming in to run the business.

[00:54:57] Christian Billinger: Yeah. And so you look at Burberry, for instance, and the sort of turnover they’ve seen when it comes to management and creative lead. And so that’s something else to consider. But yeah, I think the big one to watch here is of course the, you know, what will happen at LVMH when you look at the list of groups, but you’re right.

[00:55:11] Christian Billinger: I mean, they haven’t so far, haven’t proven themselves as a multi generational business. So we’ll have to see having said that it’s a large diversified group. So I think in some ways the nature of that business provides some protection. Yes, certainly. That’s a big, important question for anyone investing in this industry.

[00:55:28] Clay Finck: Historically, what have you seen in the luxury space during recessions? Is there cases where there’s a sharp pullback in demand for these types of products or how has that looked historically?

[00:55:40] Christian Billinger: It’s no doubt a cyclical industry. And so the most recent example would be, I mean, it’s a very unusual experience, but if you look at 2020, I think for LVMH, their top line was down something like 15 percent and their EBIT was down almost 30%, right?

[00:55:54] Christian Billinger: So clearly now that’s an unusual, that’s perhaps not a normal recession, but I think it does show you that there’s also a lot of operating leverage in these businesses because they have a meaningful, you know, they have production facilities, but especially they have a store network, right? And so you certainly have an earnings cycle in these businesses.

[00:56:13] Christian Billinger: The other thing to keep in mind is it doesn’t sort of hit everyone, but the same magnitude or impact. So I think we mentioned this earlier that if you look at recent experience is that the strong have been getting stronger and certainly the brand selling to the wealthier consumer. Like the Chanels and Hermes, and Cucinelli.

[00:56:30] Christian Billinger: They have been much better able to weather any downturn. So yes, it’s cyclical. I think as an investor, that’s part of the opportunity, right? You get earning cycles, you’re exposed to the economy, to asset values. And also you get cycles of sentiment here, right? Whether people are concerned about tariffs or what have you, but I think as a long term investor, if you’re confident in the quality of these businesses, that’s welcome.

[00:56:52] Christian Billinger: That’s where the opportunities are.

[00:56:54] Clay Finck: Great. Well, that’s all we had for this first episode on a luxury primer. Christian and I will be talking in next week’s episode on some of his holdings in the luxury space. So be sure to come back and tune into that next episode that comes out a week from now. So Christian, before I let you go, I want to give you a chance to let the audience know how they can connect with you if they’d like and learn more about what you’re up to.

[00:57:18] Christian Billinger: Yeah, sure. I think the best place to go is to our website, which is billingerforvaltning.se/ and there’s articles and podcasts and you can see our holdings and you can find contact details. So yeah, I’d love it if anyone wants to discuss this or other topics.

[00:57:33] Clay Finck: Wonderful. All of that linked in the show notes for those that are interested.

[00:57:36] Clay Finck: Christian, thanks so much. I look forward to chatting again soon.

[00:57:40] Christian Billinger: Thank you. Look forward to it. Thanks again.

[00:57:42] Outro: Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.

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