Sustaining Louis Vuitton’s Growth
By: Brendan Adamo & Marwan Yousif
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The First Cut of the Cloth
Following decades of strong growth, Louis Vuitton (LV) has become the world’s most valuable fashion brand with a market valuation of over €32 billion. Revenues for the fashion and leather goods segment of Moët Hennessy Louis Vuitton (LVMH), LV’s parent company, grew 79 percent from €12.37B in 2015 to €22.24B in 2019, with LV contributing the majority of revenues; profit margins for LVMH during the same period increased from 28 percent to 33 percent. While the company’s current financial outlook is exceptional, changing consumer demands and a hostile regulatory environment will force LV to embrace sustainable practices if it is to maintain its dominance.
From Burning Bags to Getting Burned
The fashion industry is notoriously wasteful, responsible for 20 to 35 percent of oceanic microplastic flows, and more carbon emissions than international flights and shopping combined. Luxury fashion brands in particular are known for maintaining high standards in production and distribution that often result in unsustainable practices. Despite this, at least 10 percent of the industry has not pursued any responsible sustainability practices. Consumers have taken a stand against these wasteful behaviours, with environmental protests cropping up at fashion week events globally.
Demand for high-end luxury stems from scarcity; to this end, LV products are exorbitantly expensive, limited in quantity and only sold in specific locations. When luxury brands are left with unsold inventory, they often opt to destroy the merchandise rather than discount or donate, since this would have negative impacts on their brand’s perceived value. To tackle these wasteful practices, the French national government introduced a ban on the destruction of unsold fashion goods, to be implemented by 2023. This move will force retailers like LV to either greatly limit supply or start recycling materials. It is the first national-level environmental policy for the fashion industry and highlights the regulatory risk which LV faces.
Beyond complying to public policy, fashion retailers have an innate financial incentive to shift towards more sustainable practices. Public market investors are changing their investment behaviours to consider the social impacts of business beyond its responsibility to turn a profit. Recent developments include the sustainable loan Prada received from Crédit Agricole Group, with lower interest rates contingent on meeting environmental standards. Moreover, institutional investors and asset managers are also changing investment preferences in accordance with environmental, social, and governance (ESG) strategies. In the next five years, one-in-five institutional investors say they would allocate 21 to 50 percent of their funds to ESG funds. Thus, companies that pursue sustainable initiatives are able to obtain a more favourable cost of capital, potentially offsetting certain costs associated with sustainability and change.
The New Face Of Haute Couture
In the coming years, Generation Z, born between 1997 and 2012, and Millennials, born between 1981 and 1996, will reshape the luxury fashion market. Generation Z consumers currently make up four percent of industry revenues and are projected to represent 40 percent of luxury purchases by 2035. Not only do these younger consumers have shifting product preferences, they also expect their favourite brands to be socially engaged. To that end, consumers are voting for sustainability with their wallets: 31 percent of Generation Z consumers are willing to spend more money on sustainable products and 66 percent of Millennials said they were willing to boycott a fashion brand if it was not sustainable. Consequently, a refusal to embrace sustainability could alienate two of luxury fashions’ most important consumers.
While LV has undertaken a number of measures in an attempt to be more sustainable, it has not been successful. In 2016, LVMH launched The LVMH Initiatives For The Environment (LIFE) Program, with the goal of improving the environmental performance of all products. Policies were established to improve source traceability, diminish firm-wide carbon footprint, and increase energy efficiency. LV set targets to reduce energy consumption and waste production by 10 percent in 2020. However, despite these commitments, energy consumption and waste production increased by 6.5 percent and 8.7 percent from 2013 to 2019, respectively. With unsustainable practices such as destroying unsold merchandise and using hazardous chemicals in production, LV is unlikely to meet consumer expectations on its current trajectory.
Despite this, given LV’s resources and position as a leading luxury fashion company, it is well-positioned for a course correction. Being vertically integrated, LV is able to effectively manage its supply chain, particularly on materials and waste. Furthermore, it can directly control sourcing and incorporate newer eco-friendly raw materials. Through its positioning and key partnerships, LV has an opportunity to redesign its supply chain to be sustainable.
Making a Material Impact
To improve sustainability, LV should focus on the root of the issue: raw materials. LV’s most commonly used materials are cotton and synthetics. Cotton cultivation is an intensive process that requires significant volumes of water and toxic materials. Similarly, synthetics are usually produced from oil, resulting in substantial environmental pollution and contributing to the global plastic pandemic. In accordance with the Ellen Macarthur Foundation’s report on a new textiles economy, LV should develop new materials that prevent the release of plastic microfibres.
Firstly, cellulose, an important input to textile production, can be replaced by partnering with sustainable cellulose manufacturer Tencel. Tencel’s Lyocell fibres are naturally white, sustainably sourced, have supply chain transparency, and subscribe to the circular economy. This production process involves significantly less dye, energy and water than cotton, in addition to being biodegradable. Utilizing LV’s vertically integrated factories further, LV can gather excess cotton scraps to be used as inputs in the production of Lyocell.
Moreover, LV can adopt more sustainable alternatives to nylon, a synthetic. LV should source products from Econyl, a producer of regenerative nylon that is produced entirely from waste. For every 10,000 tons of Econyl raw material, 70,000 barrels of crude oil and 65,100 tonnes of CO2-equivalent emissions are saved.
Introducing: The Earth Collection
When first implementing raw material changes, LV should purchase limited quantities of Lyocell and Econyl to produce a limited-edition fashion line, The Earth Collection. The brand should partner with Virgil Abloh and make use of drop marketing strategies to promote the collection among Generation Z and Millennials. Reflecting on the pilot, LV should consider reviews of the product drop from fashion critics to implement improvements in successive collections. To ensure it does not alienate its current target market, the new materials should be introduced incrementally to other product lines.
Off the Rack
By utilizing its scale and expertise, LV can establish partnerships across the supply chain to produce more sustainable products. A partnership with Tencel will enable LV to produce luxury products from high-quality sustainable materials. Increased focus on sustainability will allow LV to capture significant market share within the growing Generation Z and Millennial demographics and position the brand advantageously for long-term growth. LV is currently one of the most highly sought-after luxury brands; to preserve this reputation, it will need to adapt to changing consumer preferences and policy pressures. Ultimately, to remain a leader in the luxury apparel industry, it is not enough for Louis Vuitton to stick to its traditional roots. Instead, it must adapt and innovate to remain a defining brand for a new generation.
