While America struggles with unemployment and a budget crisis, $1,000 handbags are flying off Chinese shelves.
And the strength of the Chinese consumer was underlined on Monday, with the news that LMVH Moet Hennessy Louis Vuitton bought out Bulgari.
In turn, that points us directly to the best way to profit from China.
Okay, so how is the buyout of an Italian jewelry maker by a French luxury goods firm a play on Chinese profits? I’ll tell you…
Mergers and Man Bags
The story here lies in a new status symbol among Chinese businessmen: Carrying luxury handbags – more commonly known as “purses.”
As the Los Angeles Times reports, “Wang Zhongzhu, a 42-year-old insurance executive, wouldn’t dream of networking without his $1,000 leather Dunhill slung over his shoulder. He said the creamy brown mini-messenger bag sends a message that he appreciates — and can afford — fine accessories.”
And as one of the world’s leading producers of high-end luxury goods, LVMH has actively encouraged this trend. It’s apparent in the company’s modeling campaigns, where it recently signed Jet Li as the major endorser for its Hublot watches. It’s also apparent in its financial statements.
From 2003 to 2010 – LVMH’s recent accelerated growth period – it reported a 200% surge in Asian sales (minus Japan). Growth in the United States and Europe also shot up by 69% and 47%, respectively.
But in its brand-by-brand annual report, LVMH specifically mentions China as the main growth driver for Hennessy, Fendi, Guerlain, TagHeuer and Sephora.
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Tapping into the Massive Chinese Luxury Goods Market
Analysts expect that China will account for more than half of the world luxury goods market by 2020. And with its sights set so firmly on China, you’d better believe that Bulgari fits into LVMH’s vision.
LVMH paid $6.3 billion for Bulgari, putting the deal at 3.77 times sales and 26.44 times the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Those are some hefty growth premiums, but Bulgari has hardly been a growth company. The company is actually losing money.
However, the key here is this: Sales fell last year in every area… except for China and the Middle East.
According to a research report from Bain & Company, Chinese markets are extremely sensitive to brands. The top five brands in each category make up 50% of the total market. That means breaking through as a trendy brand isn’t easy.
For LVMH, while it holds a top place in the handbag market, it lagged in the jewelry market. That will change now, though, because Bulgari holds a top spot in that category.
But with Bulgari’s foothold in the Chinese market, you can expect this deal to pay off quickly for LVMH.
The key takeaway here: If you want to profit from Chinese consumers, the best investments aren’t Chinese companies. Chinese consumers don’t want Chinese luxury, so Chinese stocks are too risky.
I’m no Tim Gunn and don’t profess to have any special fashion forecasting abilities (I never saw Crocs or Chinese man-purses coming), I do know that a diversified luxury company with a 157-year history and tapping into one of the world’s most explosive growth markets is something I can get behind.