The luxury sector is having a magnificent run, capped off last month by LVMH ascending to become the first European company to surpass a market value of $500 billion. So, what’s behind these stellar earnings and will it last?
Certainly, the sector has proven to be remarkably resilient. Despite the pandemic, war in Ukraine, and soaring inflation which has squeezed consumers’ spending power, high-end brands LVMH and Hermès reported strong increases in sales and profit for 2022, as they benefited from buoyant demand in China.
According to a Bain study, the world’s wealthiest – or top 2% – account for around 40% of luxury sales. In recent years, brands have tapped into aspirational mass-market customers, with the growing ranks of the upper middle classes aspiring to own luxury products. Even teenagers are now saving up to buy luxury items. At the same time, brands have diversified into hospitality and interior design, while investors seeking higher returns have funnelled their money into watches and wine.
Against this backdrop, there is a risk that brands grow complacent. There are some clouds on the horizon, such as a slowing, or even reversal in globalization, potentially denting demand. As sales have soared, so have greenhouse gas emissions, complicating pledges to get to net zero. Moreover, there is a risk that the luxury sector could be perceived as the business of inequality as the yawning gap between rich and poor becomes more visible.
These challenges mean that luxury brands will be forced to embrace new business models that decouple revenue growth from sales volumes. We may well see the return of made-to-order and a move away from stock. The key question is whether these business models will be as profitable.
I think you have to accept, in a number of areas…not to have all the answers- Philippe Blondiaux, Global CFO of CHANEL and an Executive in Residence at IMD
Innovation will be crucial, and brands will use data and innovation to reinvent the supply chain. There will be more and more cross-collaboration, both with external partners and in-house businesses, and the sector will have to invest in continuous learning for its talent to stay ahead.
So, what challenges will this present for the finance function? CHANEL’S Global CFO Philippe Blondiaux recently gave us answers during a webinar organized by the IMD Luxury Forum 2050.
When Blondiaux first became a CFO, at the age of 24, the job was much simpler. Even the world, divided at the time into an Eastern and Western bloc, was easier to understand.
Over the past 5-10 years, the role has become broader, and CFOs have had to get to grips with complex questions, data and data models being one, the growing importance of environmental, social, and governance (ESG) reporting norms, being another, he said. While a decade ago, Blondiaux believes he had the knowledge and skills to step in for any of his direct reports if they were off sick, today this is not the case. “I think you have to accept, in a number of areas…not to have all the answers,” he said.
Companies have typically measured their performance in the past in terms of operating profit. But this is now changing. “In the future, it’s kind of obvious to me that the CFO will have to be the guardian of the company performance, but company performance defined in a much broader way and including the particular impact companies have on society,” he said.
A particular challenge for high-end luxury brands will be reducing emissions. CHANEL has pledged to halve absolute carbon emissions from its own operations by 2030 and cut those in its supply chain, known as Scope 3 emissions, where the majority of its environmental footprint lies. Yet rising sales, and a current lack of eco-friendly alternatives to critical raw materials for the industry, such as leather, mean this is no easy task.
Blondiaux pointed out that while all the big players in the industry had recently reported fantastic financial results, their emissions were up in the same proportion. “Frankly, in terms of emissions, in spite of all the efforts the industry is and has been doing, the transformation efforts ahead of us are tentacular,” he said.
The CFO has a critical role to play in moving luxury brands onto a more sustainable track, said Blondiaux. He identified four ways in which the finance function can support this sustainable shift: by measuring progress or the absence of progress; by putting this at the forefront of financial and non-financial communication; by building information systems which enable the company to capture this data; and by making sure that ESG questions are at the heart of what each and every person working in finance at the company does.
“I fundamentally believe that all of the 800 people working for CHANEL in finance understand that they have a role to play,” said Blondiaux. “The responsibility of the transformation does not rest only on a team of sustainability experts. It’s all of us. And that’s what I’ve tried to do as a leader of this function.”
Because CHANEL continues to make sure that every decision contributes to long-term brand equity, the brand now views every investment decision through an ESG lens. For example, when they are considering a capex proposal, such as a new boutique, the company looks at whether the building materials are recyclable and makes sure the store is accessible for people with disabilities. Its internal audit teams have also changed the scope of their activities to assess the impact of the supply chain. “When our indirect procurement teams choose between different suppliers, it’s not only about cost (…) it’s about the carbon-footprint impact,” he said.
The beauty of being a CFO, said Blondiaux, is that you are always sitting at the decision-making table. “We can use our role to extend our scope in terms of allocation of resources, to have a faster payback in terms of impact on society.”
Blondiaux names curiosity and adaptability as two of his attributes that helped him become a successful CFO at a young age. Throughout his career, where he previously held CFO positions at consumer goods giant Nestlé in Ivory Coast, Pakistan, Switzerland, and Russia, he constantly had to adjust to new environments, cultures, and expectations. “At times it was really exhausting as a leader to have to reinvent yourself so often, but that has been the beauty of my career.”
The responsibility of the transformation does not rest only on a team of sustainability experts. It’s all of us.- Philippe Blondiaux, Global CFO of CHANEL and an Executive in Residence at IMD
Blondiaux strongly believes in not only tracking revenue, costs, and emissions, but also the satisfaction of his team through employee surveys. CHANEL has purposefully moved people without a finance background into the finance team to broaden their career opportunities. Following an employee survey, he realized that these people were feeling less included than those with a finance background.
“For me this was a trauma,” he said. “But it’s important to measure continuously what you do and how you are perceived as a leader, because how you feel is irrelevant. Regular measurement and taking the pulse of the team is very important, even if it’s sometimes a very humbling experience.”
Citing one of his favorite books, The Myth of Sisyphus by Albert Camus, Blondiaux said that being a leader in today’s environment can at times feel like being in the shoes of Sisyphus, a figure from Greek mythology who was forced to repeat the task of pushing a boulder up a hill, only to see it roll back down again. “That’s a little bit how I would define leadership today,” he joked. “But one of the important quotes from this book is that you have to imagine Sisyphus happy, and that’s what I am trying to do every day.”
This webinar was organized by the IMD Luxury Forum 2050, a community that joins forces to share experiences, learning, and views of the future of luxury in a trusted environment, and address the challenges and transformations of luxury brands. You can learn more about the forum here.
27 November 2023 • by Michael Skapinker in Finance
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