Three Reasons why LVMH’s Acquisition of Belmond is a Smart Move
By Florent Girardin, Assistant Professor of Marketing at Ecole hôtelière de Lausanne
LVMH, the world's largest luxury group by revenue (42.6 billion euros in 2017), hit the headlines recently on the news of its acquisition of Belmond, which operates luxury hotels and train services in two dozen countries, for 3.2 billion dollars, including debt.
In my view, the acquisition makes sense for three main reasons:
First, the hospitality luxury sector grew by four percent and luxury cruises by 14 percent in 2017 (D'Arpizio, Levato, Kamel, & Mongolfier, 2017) and luxury travel is expected to grow further, thanks to generations X and Y, with an increasing number of high-net-worth individuals within these segments willing to spend more on their travel experiences. Therefore, LVMH will be able to capture market share from these fast-growing sectors of the overall luxury industry.
Second, there is a clear trend in the luxury industry towards more experiential rather than pure material purchases. Luxury consumers are demanding more than physical luxury goods, as they want to be immersed in an overall luxury experience. This evolution is observed in many industries and has been referred to as the experience economy (Gilmore & Pine, 2007) but it is even more present in the luxury industry today.
The third reason, based logically on the above trend to seek out the experiential, relates to an increasing desire for authenticity in consumption. From the research literature, the perception of authenticity can emerge from three sources: objective, constructive and existential authenticity (Morhart, Malär, Guèvremont, Girardin, & Grohmann, 2015) but it is the latter source that is particularly relevant for consumption experiences. Existential authenticity refers to feeling true to one's self when living a specific experience. If this phenomenon happens thanks to a brand, the brand will be perceived as more authentic by consumers.
The LVMH group is currently facing some challenges with the authenticity perceptions of its luxury goods brands.
As more and more consumers buy and wear luxury products from a particular brand, that brand is in danger of losing its exclusive image, which is at the heart of the definition of luxury (Kapferer & Bastien, 2012). Moreover, some LVMH-owned brands - such as Louis Vuitton - are being criticized for outsourcing production to countries with low-labor costs while, at the same time, increasing prices for their products. For a fraction of their targeted consumers, these practices tend to decrease their perceived brand authenticity and, as a result, their loyalty towards those brands.
LVMH's acquisition of Belmond represents an opportunity to offer transformative experiences to their customers and increase their authenticity perceptions of - and, in turn, their loyalty towards - other brands in LVMH's portfolio through a positive halo effect.
Accordingly, it would not be surprising to see some of Belmond's activities, such as the Venice Simplon-Orient-Express,renamed or co-branded with a luxury goods brand from the LVMH portfolio. Indeed, Louis Vuitton and its "Spirit of Travel" brand positioning would be a perfect fit for an association with the Venice Simplon-Orient-Express.
As brand equity is one of the main assets of a luxury company, increasing brand loyalty is key, particularly among younger consumers as their potential customer-lifetime value is greater than for older generations.
In summary, it should not come as a surprise to see LVMH paying more than three billion dollars to acquire Belmond, as it will help the LVMH group capture a greater share of the potential growth in the hospitality luxury sector, while increasing the perceived authenticity of its brands by offering authentic experiences to younger customers.
- D'Arpizio, C., Levato, F., Kamel, M.-A., & Mongolfier, J. d. (2017). Luxury Goods Worldwide Market Study, Fall-Winter 2017. Retrieved from bain.com: https://www.bain.com/insights/luxury-goods-worldwide-market-study-fall-winter-2017/
- Gilmore, J. H., & Pine, B. J. (2007). Authenticity: what consumers really want. Boston: Harvard Business School Press.
- Kapferer, J. N., & Bastien, V. (2012). The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands: Kogan Page.
- Morhart, F., Malär, L., Guèvremont, A., Girardin, F., & Grohmann, B. (2015). Brand authenticity: An integrative framework and measurement scale. Journal of Consumer Psychology, 25(2), 200-218. doi:https://doi.org/10.1016/j.jcps.2014.11.006