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LVMH Bets on the Future of Luxury with Belmond Acquisition

On December 14 LVMH announced an agreement to acquire Belmond, the luxury travel and hospitality company formerly known as Orient Express Hotels. Belmond owns, partly owns or manages 36 hotels with a new one in the works for London, one stand-alone restaurant (NYC’s 21 Club), seven tourist trains and two river/canal cruise businesses.

In 2017 hotels contributed 86% of Belmond’s $572 million in revenues. LVMH will pay $25.00 per Belmond Class A share in cash which will represent $2.6 billion in equity value based on an enterprise value of $3.2 billion.

Belmond in turn will add revenues just shy of $600 million to LVMH’s Other Activities group which includes three Cheval Blanc hotels, Royal Van Lent custom yachts and a publishing arm Les Echos. The Other Activities group is unique for LVMH as its only money loser, but this is also where it classes the company’s eliminations.

While Belmond revenues will prop up LVMH’s Other Activities group, it will remain a distant sixth business group overall, way behind its number one money maker Fashion and Leather Goods ($17.5 billion in 2017) and number two Selective Retailing ($15.1 billion). Perfumes and Cosmetics ($6.3 billion), Wines and Spirits ($5.8 billion) and Watches and Jewelry ($4.3 billion) round out LMVH’s group portfolio.

LVMH sees the future

In this important strategic acquisition, LVMH is betting on the future of the global luxury market which increasingly is going experiential. Belmond’s holdings are second to none in the competitive world of experiential luxury. Belmond leads against its competitive peers Four Seasons, Rosewood and Mandarin Oriental in net promotor scores and quality assurance ratings, according to Cowen equity research.

Cowen applauds LVMH’s investment in experiential luxury as the “next step in the luxury sector,” adding, “Consumers’ perception of luxury is changing, especially among younger consumers, and the concept is luxury is no longer only about purchasing tangible objects – it is about experiences, travel and instagrammable moments.”

While supporting the Belmond acquisition, Cowen sees challenges ahead as LVMH must adjust to the added complexities of execution in the hospitality sector, which differs markedly from that in its traditional luxury goods’ businesses.

“We believe driving innovation in luxury goods is different expertise from driving innovation and revenue growth in hotels, restaurants and trains,” it writes.

“That being said, LVMH has a rich history of managing, acquiring and fostering heritage brands for the long term and Belmond’s portfolio is difficult to replicate,” Cowen adds in its analysis.

Translating expertise in luxury goods into luxury experience excellence

The question is how well LVMH can adapt its proven success model for luxury goods to Belmond’s hospitality. In a recent analysis by FIT’s Shelley Kohan, with small contribution by yours truly, she broke down the reasons why LVMH has grown year after year. Kohan credits its 3P distribution model – Precise, Preemptive and Perpetual.

“LVMH has perpetually exercised value precision and preemptive behavior,” she writes, stressing it is these 3Ps which have enabled it to deliver “consistent value to the target market for each of the six individual business segments operated by LVMH.”

This 3P model is as perfectly suited to the experiential luxury strategies for Belmond properties as it is for the 70 luxury goods brands in LVMH’s portfolio. In fact, as the experiential aspects of delivering luxurious customer experiences to its luxury goods’ customers becomes more critical to long-term success, Belmond brings unique understanding and executional excellence to its new parent.

While pundits talk endlessly of merging digital and physical retail into an omni-channel or channel-agnostic strategy, in the luxury market a similar merging of luxury goods and experiential luxury services is going to have to take place.

The affluent luxury consumers expect nothing less than that their digital and in-store retailing experiences are delivered with the same emotional intelligence and anticipatory execution that they have come to expect from their favorite luxury hotels or travel providers.

Just like digital and physical retail must merge, so too must the worlds of luxury goods and experiences. In acquiring Belmond, LVMH recognizes this and is preemptively merging the two together. This will become the future model of new luxury retail.

Precise targeting in the new luxury world

Operationally each of LVMH’s 70 brands within its six business segments have assumed dominance in its respective competitive sphere. Each brand, which it calls Houses, precisely targets its customers demographically and psychographically and allows each House to run autonomously in order to be more responsive to new customer needs as they continuously evolve.

In describing its decentralized organizational structure, LVMH maintains, “This allows us to be extremely close to our customers, to ensure that rapid, effective and appropriate decisions can be made.”

This decentralized management approach will work well for the Belmond group, but it will also facilitate synergies across Houses. Belmond’s expertise in hospitality will bring new perspectives to the other Houses, especially those involved with retail where a hospitality approach can greatly enhance the retail-service environment.

In addition Belmond brings the loyalty of its high-spending travel customers on which the future of all the other LVMH Houses depend. Belmond reports its hotels averaged a $510 daily room rate in 2017.

In acquiring Belmond’s hotels and travel providers, LVMH is essentially completing the circle for its Louis Vuitton flagship brand, which got its start selling luggage to such well-heeled luxury travelers.

Perpetual distribution where and when needed

Perpetual distribution in retail is a concept that Robin Lewis described in The New Rules of Retail. Kohan sees it as a key pillar of LVMH’s strength.

“In an oversaturated marketers where customers have unlimited and instantaneous access to hundreds of equally compelling products,” perpetual distribution means “getting to precisely the right customers, when and where and how they want it, and, ahead of the hundreds of equally compelling competitors,” she writes.

Perpetual distribution is just what a luxury experiential company like Belmond must excel in: anticipating and being ready to deliver any experiences the customer wants and needs at a moment’s notice.

Having exceptional properties like Venice’s Hotel Cipriani or Portofino’s Hotel Splendido only gets Belmond on the luxury stage. Perpetual distribution of hospitality service excellence is what makes it shine and brings guests back.

Preemptive strategies to beat the competition

Executing preemptive business strategies is what has enabled LVMH to stay ahead of the competition, writes Kohan, “through unwavering branding and creative innovations across the six business segments.”

“The key differentiator is executing both precision and preemptive behavior consistently over time,” she continues.

And preemptive is the perfect way to describe LVMH’s acquisition of Belmond. It is moving outside the narrow confines of its luxury goods core into the future of the new luxury market which will be experiences.

Well before LVMH sees slowing growth in its luxury goods segments, it is preemptively moving into experiences where new growth will be realized. Unlike its luxury goods competitors, LVMH won’t have to play catchup. It will already be there.

“LVMH’s 3P distribution strategy has been in practice for decades, giving an indisputable, sustainable, competitive advantage,” Kohan writes. The core strength of the company in her view comes from the “diverse nature of its business segments, geographic footprint, distribution model and brands.”

With the addition of Belmond, LVMH is further aligning itself with the new luxury of the future: experiences.

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