LVMH’s top five brands account for roughly 75% of total profits. Our research indicates the company enjoys multiple competitive advantages that reinforce each other. LVMH has achieved significant scale across the globe, which is increasing each year. Annual revenue of >€55bn and growing allows the business to support brands and deploy capital to strengthen its competitive advantages at a scale no competitor appears able to match. For example, LVMH spends ~12% of annual revenues, or approximately €7bn, on marketing to strengthen brand equity. To put this in context relative to other luxury conglomerates, Kering Group, the world’s second-largest luxury business, which owns brands like Gucci and Yves Saint Laurent, generates annual revenue of roughly €17bn. Experience is a second competitive advantage. Some brands within LVMH are hundreds of years old.
These brands offer significant experience of executing on a wellhoned playbook for nurturing and growing brands based on marketing support, heritage, quality, and uniqueness that resonates with consumers. The company has done this successfully many times, and we expect more of the same from this well-capitalized group of talented managers. Heritage is an additional competitive advantage that we feel cannot be replicated since it is supported and created by time. These brands have appeal based on decades—if not centuries—of heritage and brand story that supports the ideals of high-quality luxury. Given the uncertainty around the coronavirus’s impact on the next few quarters, we started with a small weight and have added on share price weakness.
Our overall weight remains modest as we are being patient in the current environment. That said, we think this is an excellent business and one that we would like to own for the long term.