LVMH: Expanding Beyond the Closet
By: Esha Chopra
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Luxury Redefined: Navigating the Expanding Landscape of High-End Markets
The global luxury market is forecasted to grow to €540 billion by 2030 from a market size of €353 billion in 2022. This predicted growth is partially attributed to the demand for a broader range of luxury products. Luxury product offerings are expanding beyond typical areas, into industries like furniture. This product expansion is driven by the surge in demand for luxury products, attributed to a rise in global wealth, increased interest from middle-market consumers in luxury goods, and younger generations purchasing more luxury goods than generations before them. The luxury furniture market is projected to reach $42.7 billion USD by 2032 with a CAGR of 6.2 percent. This forecasted growth presents an opportunity for luxury companies to expand their product offerings.
A Glamorous History
Moët Hennessy Louis Vuitton (LVMH) is a French conglomerate that leads the global luxury industry with brands including Louis Vuitton, Dior, and Fendi. It currently has a 22 percent market share and had €86.15 billion in sales in 2023. LVMH has a long history of acquiring brands to fuel growth, notably the 2021 acquisition of the iconic American jewelry brand, Tiffany & Co (Tiffany). Tiffany was the largest contributor to LVMH’s revenue growth one year post-acquisition, with jewelry and watches revenue increasing by 18 percent. Pre-acquisition, Tiffany was stagnant despite having a rich brand history. Fortunately, with LVMH’s management expertise, Tiffany’s performance improved, highlighting one of the many successful LVMH acquisitions.
LVMH’s biggest competitor, Kering, who owns brands including Gucci and YSL, has limited diversification. They are currently experiencing financial difficulty, including an 18 percent decline in North American sales. This decline is due to a decrease in spending from aspirational consumers, who typically limit their spending to the lower end of brands' price ranges. Kering relies on these consumers more than LVMH, which maintains a more balanced mix of aspirational and high-end clientele. The spending of high-end consumers is generally less affected by economic conditions, as demonstrated by the spending gap between top luxury consumers and aspirational consumers continuing to grow over the past year. As Kering attempts to elevate Gucci’s prestige and attract wealthier consumers, LVMH could ensure they maintain their market leader position by taking advantage of emerging opportunities.
Quartz Countertops and Leather Sofas
Restoration Hardware (RH) is a high-end furniture company and has remained a market leader for decades by focusing on minimalist designs and high-quality products. RH reported net revenues of $751 million for their 2023 third quarter, a decline from the year prior. RH’s substantial debt levels, exhibited by a net debt of $2.1 billion in the third quarter of 2023 and a rising interest expense, reflect a reliance on debt financing. Their ratio of net debt to twelve-month adjusted EBITDA is 3.5 times, suggesting vulnerability in RH’s financial stability. Although most of the debt is due to expansion efforts, it could constrain other investments. In 2024, RH is focused on expanding internationally into Europe with RH Brussels, Madrid, and Paris, while its entrance into Asia is planned for early 2026. RH’s strategy is focused on growth while maintaining brand prestige. Typically, RH’s products cater to the upper-middle to high-end tier of luxury consumers.
Moving Beyond the Runway
An acquisition to expand into the luxury furniture market aligns with LVMH’s mission of diversifying its luxury portfolio to remain the industry leader. With LVMH experiencing strong growth in a tough economy, its diversified portfolio and high-end consumers have helped mitigate risks. LVMH also focuses on global market expansion, which has allowed it to effectively reach consumers and adapt to market changes, contributing to its persistent growth. An acquisition would capitalize on market trends in the growing high-end furniture sector and harness LVMH’s expertise in luxury.
Although LVMH’s companies have introduced limited furniture collections, such as Louis Vuitton’s “Art of Living,” acquiring a dedicated luxury furniture company would provide a focused avenue to harness the full potential of the growing market. The opportunity would help LVMH grow through acquisition, continue to innovate, and emerge as a leader in the evolving luxury furniture space.
Reframing Restoration Hardware
RH is currently facing a decline in topline revenue and profitability due to the challenging economic environment and struggles with international expansion.
Macroeconomic Hurdles
Economic conditions, particularly their effects on the housing market, have impacted RH’s revenue. Rising mortgage rates have led to a cooled housing market, a key driver of furniture sales. RH is forecasting the housing market to remain frozen until interest rates and home prices fall significantly. There are also broader economic uncertainties and geopolitical tensions leading to a decrease in discretionary spending. With part of RH’s target market being aspirational customers, their consumer base is impacted by economic downturns. Further, access to a higher-end consumer base would provide a more stable customer group for RH, as their spending is more immune to market conditions. A 2024 McKinsey report stated that fewer high-end consumers have reported switching to lower-priced brands than the year prior, reflecting a potential environment for RH to experience growth. Current economic conditions have created a promotional nature in the furniture market to sustain sales volume. These temporary dynamics have led to less demand for furniture at RH’s price point. This has placed pressure on RH’s historically 20 percent margin, which was aligned with luxury brands.
Failed Expansions: Going One Size Too Big
Expansion efforts have presented challenges for RH. In 2023, RH attempted, but failed, to enter Miami’s design district due to lease issues, contributing to the company's declining profitability. This reflects the many risks and complexities with expansions in high-value real estate markets. Within the next few years, RH has aggressive growth plans within Europe. Not only would an expansion into Europe help drive growth, but the continent’s strong luxury consumer base and mature markets would align well with RH’s mid to high-end position. With a significant debt burden and limited experience internationally, RH faces hurdles in executing a seamless expansion.
Looking forward, RH forecasts revenue ranging from $3.06 billion to $3.08 billion for 2024, with an operating margin of roughly 14 percent. In the long term, RH expects to open immersive stores in every major market to build an ecosystem of products, places, services, and spaces. These ambitious goals would help further strengthen its position as a leading global luxury furniture brand.
Furnishing the Future: LVMH Acquires RH
Given the strong forecasted growth of the luxury furniture market, LVMH should acquire an 80 percent stake in RH for an estimated $4.18 billion. Major shareholders of RH include CEO Gary Friedman and firms like Berkshire Hathaway and Catterton Management, suggesting strong backing. LVMH should intend to keep Friedman, who has led remarkable growth for RH. This acquisition would allow LVMH to capitalize on the growing luxury furniture industry and align with its diversification strategy by capitalizing on RH’s established market presence.
Despite LVMH’s expansive product offerings, they do not own any luxury furniture companies. Portfolio brands like Fendi, offer limited furniture pieces primarily for top clientele, but not as a core part of any company. Integrating furniture into successful fashion brands risks dilution and would also create operational challenges. Although LVMH could introduce furniture stores under current brands, for example, growing the Fendi Casa line to stores, this move could limit LVMH’s reach within the luxury furniture market as LVMH’s brands are associated with fashion. By acquiring RH, LVMH could capitalize on an existing luxury furniture market reputation without the constraints of aligning with fashion-centric branding.
Capitalizing on Craftsmanship: LVMH’s Resources in the Luxury Furniture Landscape
LVMH’s acquisition of RH would utilize LVMH’s luxury market expertise to fuel RH’s growth. An example of LVMH’s expertise in retail innovation and ability to support global expansion is through Sephora. Sephora has expanded its global presence through investments and utilizing LVMH’s management expertise, helping to create an innovative luxury retail experience. This demonstrates LVMH’s skill in supporting brand growth and highlights its ability to grow in markets beyond fashion and leather goods.
In this acquisition, RH would gain from LVMH’s history of strong financial management. LVMH has demonstrated resilience during economic downturns, as seen through the acquisition of Tiffany in 2020. Despite market volatility in 2021 due to COVID-19, Tiffany saw increased market presence and profitability. RH could also capitalize on LVMH’s extensive global supply and distribution networks, enhancing its operational efficiency and relieving pressures relating to dwindling margins.
This acquisition aims to drive sales by tapping into LVMH’s affluent consumer base and elevating RH's position in the luxury market. Kering’s struggles highlight the challenge of relying on aspirational consumers. By relying on LVMH’s expertise in elevating brands, RH is expected to capture a larger share of the premium luxury market. LVMH has a strong understanding of the high-end luxury consumer which would be crucial in selecting RH’s product offerings as they expand and create international retail experiences. LVMH successfully reinvented Tiffany’s marketing strategy to attract a younger demographic. By focusing on exclusivity and craftsmanship and downplaying sales tactics that could hurt RH’s image, LVMH could replicate Tiffany’s success with RH. Like other LVMH companies, such as Louis Vuitton, RH would continue to offer diverse products accessible to aspirational buyers while maintaining appeal to the high-end market.
The acquisition would position RH for growth, help strengthen its financial position, and expand its high-end customer reach.
Global Growth: LVMH’s Role in RH’s Market Reach
LVMH’s acquisition of RH is an opportunity for accelerated international expansion, particularly in Europe. Using LVMH’s knowledge of European markets, brand prestige, and well-established infrastructure, RH is positioned to have the necessary resources for a successful expansion. LVMH has experience in helping brands expand to large cities and could assist RH. For example, LVMH acquired Marc Jacobs in the 1990s, and with LVMH’s distribution network, financial resources, and retail expertise, Marc Jacobs now has 280 stores internationally, including stores in Shanghai, Paris, and London.
By placing RH stores near LVMH’s existing stores, RH could take advantage of high foot traffic and the associated prestige. This would enhance RH’s brand visibility and appeal to affluent European consumers. RH should locate its European stores in internationally renowned design districts like Milan’s Via Montenapoleone. On these streets, RH stores would be next to iconic luxury brands like Louis Vuitton and Dior, as well as non-LVMH brands like Chanel and Hermès. This strategy would help foster a sense of prestige around RH and enable a smoother market entry by boosting brand recognition. Stores in high-demand luxury shopping areas like Via Montenapoleone are expensive with an average rent of $1,766 per square foot. For an 8,000-square-foot RH store, annual rent would be approximately $14 million, reflecting the premium for access to high-end clientele and a potential need for financial support from an industry titan, like LVMH, due to RH’s constrained finances. Although expensive, co-location has a record of improving store performance, research has shown that collocating positively impacts sales by attracting more customers due to the variety and convenience of closely located stores. A clustering effect within a 325-meter radius has been shown to increase foot traffic and lead to higher sales for retailers, benefiting both RH and LVMH.
RH would also take advantage of LVMH’s global supply chain to minimize inventory challenges and capitalize on LVMH’s design expertise to adjust product offerings to European tastes. This acquisition would catalyze RH’s growth and allow LVMH to diversify its portfolio.
Elevating Interiors: New Product Lines for RH
This acquisition presents the opportunity for cross-selling by introducing LVMH-branded “mini-boutiques” within RH’s retail environments. This integration would increase RH’s brand visibility among LVMH’s clientele. In a world of ever-changing trends, high-end luxury consumers value heritage and tradition, which tend to increase their willingness to purchase. Aligning with heritage brands that have a high level of trust with consumers could elevate RH’s perception among high-end luxury consumers, harnessing LVMH’s reputation of quality and luxury.
These spaces would showcase a rotating mix of collaboration collections with brands like Louis Vuitton and understated brands like Celine. Involving a range of LVMH brands in cross-selling, rather than solely focusing on the biggest names, aims to attract a broad spectrum of luxury consumers. The successful cross-selling collaboration between Louis Vuitton and Supreme in 2017 exemplifies this tactic's power. The collaboration consisted of products with both brands’ iconic logos and led to a surge in online interest, with a 75 percent increase in searches for Louis Vuitton and an 89 percent increase for Supreme in the month following the collaboration. Louis Vuitton also reported a 13 percent revenue growth in 2017, a boost partially credited to its partnership with Supreme. Cross-selling would lead to an increase in interest and brand visibility for RH. Cross-selling opportunities would not only create revenue synergies and foster interest in the brands, but it would also further the sense of prestige around RH through exclusive product selections.
In a move that redefines the contours of luxury, LVMH's strategic acquisition of Restoration Hardware could bring in a new era in the luxury market. This is a testament to LVMH's visionary approach in the luxury segment and a move that caters to the evolving tastes of its clientele. By integrating RH's legacy in refined furnishings with LVMH's unparalleled expertise in luxury, this acquisition would bring elegance and exclusivity to the very spaces we inhabit. LVMH could offer its consumers an immersive luxury experience by bringing in its iconic heritage of craftsmanship and innovation, setting a gold standard for a lavish lifestyle that is as exclusive as it is exquisite.
