Conclusions And Final Thoughts On 'The Cult Of The Luxury Brand'

For the past two months, I have been writing a series of articles for the investing site Seeking Alpha about The Cult of the Luxury Brand, a book about the luxury industry’s rise in Asia. In those articles, I have used a model from the book, the “Spread of Luxury” model, to estimate the future growth of three of the industry’s largest companies: LVMH group, Compagnie Financière Richemont, and Kering SA. Using those growth estimates, I have projected the annualized returns a long term investor in those companies might be able to look forward to.

However, there is much more to Chadha and Husband’s book than the “Spread of Luxury” model. The book offers many interesting insights about the Asian luxury market, drawing upon fields as diverse as history, philosophy, and psychology to do so. Moreover, though the long term returns I have projected for the major companies in the industry have been fairly uninspiring, I feel the underlying reasons behind those returns provide interesting lessons about how the market views those companies and the industry as a whole. (Read More)

Valuing Kering Through 'The Cult Of The Luxury Brand,' Part 2

In a recent article written for the investing site Seeking Alpha, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry in Asia, could be used to predict the industry’s growth on that continent.

Since then, I have been using a model from that book, the "Spread of Luxury" model, to calculate the future growth of luxury conglomerates such as LVMH group and Compagnie Financière Richemont. LVMH, the owner of such brands as Louis Vuitton, Bulgari, and Marc Jacobs, is the world’s largest luxury goods company. I projected that the company would grow at around 4.6% per year for the next 33 years for a total annualized return of 5.24% taking into account dividends and changes in valuation. Similarly, I calculated that Richemont, the owner of such brands as Cartier, Dunhill, and Piaget, would grow at around 5.13% annually, for a total annual return of 5.76%.

Having calculated the future growth of LVMH and Richemont, I will now do the same with Kering SA. Along with LVMH and Richemont, Kering is the third of the three major luxury conglomerates profiled in Chadha and Husband’s book. Kering is also roughly tied with Richemont for the position of the world’s second largest luxury conglomerate. In my last article, I laid the groundwork for these calculations by estimating Kering's sales to customers from each of its major sales regions. In this one, I calculate how those sales will evolve and contribute to Kering's overall growth over the next several decades. (Read More)

Valuing Kering Through 'The Cult Of The Luxury Brand,' Part 1

In several recent articles, I have described how Paul Husband and Radha Chadha's book The Cult of the Luxury Brand offers us a model for estimating the growth of luxury goods companies in Asia.

That model, the “Spread of Luxury” model, describes how countries advance through several stages of luxury goods consumption. Each stage corresponds to not only a different level of economic development, but also a different level of consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the "Way of Life" stage is the end stage for Asian markets as they become fully developed.

I have applied this model to estimate the future growth of two of the world's largest luxury companies, LVMH group and Compagnie Financiere Richemont. I will now apply that model to Kering, the third of the three major luxury conglomerates profiled in Chadha and Husband's book and the owner of fashion brands such as Gucci and Yves Saint Laurent as well as sports brands such as Puma.

To do this, we first need to calculate where Kering's customers come from. This requires us to apply global trends in personal luxury goods sales to the company's sales around the world. Once we have done so, the next step is to predict the company's growth by forecasting the development of its per capita sales in each region. (Read More)

Valuing Compagnie Financiere Richemont Through 'The Cult Of The Luxury Brand,' Part 2

In a recent article, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry in Asia, could be used to predict the industry’s growth on that continent.

The book’s model of Asian luxury consumption growth, known as the “Spread of Luxury” model, was interesting to me because it reminded me of how Warren Buffett conceived of Coca-Cola as an investment. Even though the company’s stock looked fairly valued by traditional metrics, Buffett knew that per capita Coke consumption abroad was likely to rise until it approached U.S. levels. Because of that, Coca-Cola’s stock was actually undervalued because the company could look forward to decades of growth.

Similarly, based on the “Spread of Luxury” model, the major luxury conglomerates should be able to look forward to decades of growth as per capita consumption in Asia outside of Japan approaches Japanese levels. However, what is important is calculating this growth and quantifying exactly how much luxury companies will benefit from it. 

In a previous post, I made these calculations for LVMH group, the owner of such brands as Louis Vuitton, Bulgari, and Marc Jacobs and the world’s largest luxury goods company. I calculated that the company could look forward to annual growth of about 4.6% for the next 30 years, resulting in a total annual return of about 5.2% taking into account dividends and changes in valuation.

Having done so, we will now make these same calculations for Compagnie Financiere Richemont, the owner of such brands as Cartier, Dunhill, and Piaget and the second of three luxury conglomerates profiled in Chadha and Husband’s book.

In my last post, I laid the groundwork for these calculations by estimating Richemont's sales to customers from each of its major sales regions. In this one, I calculate how those sales will evolve and contribute to Richemont's overall growth over the next several decades. (Read More)

Valuing Compagnie Financiere Richemont Through 'The Cult Of The Luxury Brand,' Part 1

In a previous article, I described how Paul Husband and Radha Chadha's book The Cult of the Luxury Brand offers us a model for estimating the growth of luxury goods companies in Asia.

That model, the “Spread of Luxury” model, describes how countries advance through several stages of luxury goods consumption. Each stage corresponds to not only a different level of economic development, but also a different level of consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the "Way of Life" stage is the end stage for Asian markets as they become fully developed.

In my most recent pair of articles, I used that model to estimate the future growth of luxury goods company LVMH group. Having done so, I will now apply that model to Compagnie Financiere Richemont, another of the world's largest personal luxury goods companies and the owner of such brands as Cartier, Dunhill, and Piaget. 

To do this, we first need to calculate where Richemont's customers come from. This requires us to apply global trends in personal luxury goods sales to the company's sales around the world. Once we have done so, the next step is to predict the company's growth by forecasting the development of its per capita sales in each region. (Read More)

Valuing LVMH Group Through 'The Cult of the Luxury Brand', Pt. 2

In a recent article, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry in Asia, could be used to predict the industry’s growth on that continent.

The book’s model of Asian luxury consumption growth, known as the “Spread of Luxury” model, was interesting to me because it reminded me of how Warren Buffett conceived of Coca-Cola as an investment. Even though the company’s stock looked fairly valued by traditional metrics, Buffett knew that per capita Coke consumption abroad was likely to rise until it approached U.S. levels. Because of that, Coca-Cola’s stock was actually undervalued because the company could look forward to decades of growth.

Similarly, based on the “Spread of Luxury” model, the major luxury conglomerates should be able to look forward to decades of growth as per capita consumption in Asia outside of Japan approaches Japanese levels. However, what is important is calculating this growth and quantifying exactly how much luxury companies will benefit from it. 

The first company I will make such calculations for is LVMH group. LVMH, the owner of such brands as Louis Vuitton, Bulgari, and Marc Jacobs, is the world’s largest luxury goods company. Thus, it is a logical first choice for our valuation method.

In my last article, I laid the groundwork for these calculations by estimating the company's sales in each of its major sales regions. In this one, I calculate how those sales will evolve and contribute to the company's overall growth over the next several decades. (Read More)

Valuing LVMH Group Through 'The Cult of the Luxury Brand', Pt. 1

In my most recent article, I described how The Cult of the Luxury Brand, Radha Chadha and Paul Husband’s book on the luxury industry’s growth in Asia, could be used to predict the industry’s growth on that continent.

Their book contains a model for the development of luxury consumption in Asia, the “Spread of Luxury” model. In that model, countries advance through several stages. Each stage corresponds to not only a different economic development level, but also a different level of luxury goods consumption. Those stages range from “Start of Money,” in which few consumers purchase luxury goods, to “Way of Life,” in which a country’s luxury market is fully saturated. According to Chadha and Husband, the “Way of Life” stage is the end stage for Asian markets as they become fully developed.

In using the “Spread of Luxury” model to estimate luxury goods conglomerates’ future growth, I will start with LVMH group (LVMHF) (LVMHY). LVMH owns brands such as Louis Vuitton, Bulgari, and Marc Jacobs. It is the world’s largest luxury company, with about three times the sales of its biggest rival.

To apply the “Spread of Luxury” model to LVMH’s operations, we first need to see what its sales in Japan and Asia outside Japan are. This is actually a surprisingly difficult question. (Read More)

Examining The Growth Of The Luxury Industry In Asia Through 'The Cult Of The Luxury Brand'

Radhu Chadha and Paul Husband’s book The Cult of the Luxury Brand: Inside Asia’s Love Affair With Luxury describes the rise of the luxury industry in Asia.

In the past 40 years, Asia has become the world’s largest market for personal luxury goods such as clothing and jewelry. According to Bain & Company’s Fall-Winter 2016 Luxury Goods Worldwide Market Study, Asians bought more than half of all luxury goods in 2016.

Chadha and Husband’s book examines the cultural and economic reasons for Western luxury brands’s popularity in Asia. For example, they argue that the conspicuous wearing of luxury clothing has become a way for Asians to define their position in society. This trend, they say, has been influenced by the significant social changes in Asia in the past half-century.

It is beyond the scope of this article to decide if such broad cultural analyses are correct. However, if they are, there are interesting implications for investment analysis. Chadha and Husband’s key model, based on their cultural analysis, is the “Spread of Luxury” model. According to the model, luxury good consumption in Asian nations passes through five stages based on the nations’ levels of development. If this is true, it opens up a way to project the growth of the luxury industry in Asia. (Read More)

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': The Risks Of Growth

There is a running theme in my articles about Beer Blast, Philip Van Munching’s history of the beer industry in the late 20^th Century. That theme is that change is often bad for companies.

In my first article about the book, I described how companies’ introduction of new products often only damaged their brands. In my second, I showed how trying to change a beer brand’s qualities to save money or to make it more modern also damaged their brands. In both of these articles, change was bad for beer companies even when it was desired.

Growth is probably the type of change that companies desire most. Growth, after all, is what drives stock prices up. When a company is growing, it can hire new employees and promote old ones. And, of course, leading a growing company brings benefits for management. Managers, like most people, enjoy seeing their areas of responsibility expand. Such expansion comes with bigger salaries and higher status in their industries. No wonder corporate executives are always trying to grow their companies.

However, Beer Blast shows that even growth, the most desirable form of change, can be more problematic than anyone can imagine. (Read More)

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': Brand Image

In my most recent article, I discussed the beer industry’s quest for new products as seen in Beer Blast, Philip Van Munching’s history of the industry in the late 20^th Century. Van Munching argues that the industry’s constant introduction of new beer varieties has diluted the value of existing brands, hurting beer companies’ brand image.

However, Beer Blast does not only discuss brand image in the context of new products. Van Munching was the advertising director at Van Munching & Co., the former US importer of Heineken (HEINY) (HINKF). As a result, his book goes into great detail about the image strategies of several major American beer brands, offering insights about both their successes and failures.

Though Van Munching’s book was written in 1997, I feel such insights remain valuable for investors. For example, Beer Blast shows that beer companies are similar to luxury goods companies. Customers often use the brand of beer they drink to define their self image and the image they project to others. In this, they treat beer the way they treat luxury goods such as fashion items, which are similarly used to craft one’s personal image.

This may seem obvious, but...(Read More)

Examining The Beer Industry Through Philip Van Munching's 'Beer Blast': The Quest For New Products

BeerBlast: The Inside Story Of The Brewing Industry’s Bizarre Battles For YourMoney is a history of the beer industry in the late twentieth century. Philip van Munching, the book’s author, was once the advertising director at his family’s company, the former US importer of Heineken (HEINY) (HINKF). Though the book was written almost two decades ago, I feel it still offers valuable insights, both for those interested in investing in the alcohol industry, as well as for investors in general. 

In my opinion, the most important lesson of Beer Blast is how dramatic the beer industry’s history has been. Alcohol companies have been portrayed as safe, “defensive” investments. The common wisdom is that they do well in any environment because demand for their products is persistent. That may be true, but Van Munching’s account demonstrates how even such defensive companies can be surprisingly chaotic. Defensive companies are often driven to innovate, change, and try to grow as much as their more volatile peers.

Beer Blast shows one example of this tendency by depicting the beer industry’s quest for new, disruptive products. When I read the book, I felt this pressure to innovate was stronger than I had expected of a “defensive” industry selling a product with an ancient history like beer. The book also shows how Anheuser-Busch (BUD), the leader in the US beer industry, has used its market position to be successful in this quest for product innovation. (Read More)

Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Part 5 - Final Thoughts

In my article series about Broke,USA, journalist Gary Rivlin’s book on the alternative finance industry, I have written about the competitive advantages of an industry that lends money to those with few alternatives. However, I have also written about the risks of investing in such an industry, such as regulation, corporate misbehavior, and competition.

In doing so, some themes have come up again and again. Such themes have been, in my mind, valuable not only for alternative finance investors, but also for investors in general. They include the importance of pricing power and the threat of competition. They also include the strength of the pawnbroking model as well as the value of analyzing a company through its relationships with its lenders.

That said, one area of the alternative finance business which I have not discussed but which Rivlin goes into in much detail is the subprime mortgage business. I have intentionally not discussed that business, since much has already been written about it and its effects on the global economy in the past few years. That said, Rivlin’s book does have some interesting insights on subprime mortgage lending and how it relates to the broader alternative finance business, insights which I feel are useful for investors. (Read More)

Understanding The Alternative Finance Sector Through Gary Rivlin's 'Broke, USA': Part 4 - Competition And The Price Of Gold

In my two most recent articles reviewing Broke,USA, Gary Rivlin’s book on the alternative finance industry, I have written about what are probably the best known threats to the industry: regulation and corporate misbehavior. I believe that many of those who refuse to invest in the alternative finance industry refuse because of those risks. They fear that government regulation, such as interest rate caps, will end the industry’s high returns. They are unnerved by the industry’s risk of misbehavior. Such misbehavior includes not only obviously illegal activities, such as fraud and illegal collections practices, but also questionable if legal activities, such as lending in ways that encourage borrowers to enter a debt spiral.

However, I believe that it is often not the obvious risks that are the most important to an investor’s returns, but rather the ones that people are unaware of. As I wrote in my article about regulation, alternative finance companies have consistently found ways to work around regulation. Even persistent accusations of misbehavior have not kept companies in the industry from outperforming the overall stock market year after year.

Rather, I believe it is the risk of competition, one that I feel many investors have failed to consider, which may be the most dangerous to the alternative finance industry’s returns. (Read More)

Understanding The Alternative Finance Sector Through Gary Rivlin's 'Broke, USA': Part 3 - Corporate Misbehavior

In my previous article, I described how Broke, USA, Gary Rivlin’s book on the alternative finance industry, shows why regulation is the industry’s most prominent risk. Regulation is the industry’s best known risk because it can totally eliminate parts of the alternative finance business, especially payday lending. Moreover, the book also shows why such regulation is popular, describing many people’s visceral response to an industry that profits largely through high interest lending to the poor and middle class. As a result, support for the restriction or even illegalization of the industry is widespread and bipartisan.

However, in my opinion, Rivlin’s book also shows why regulation is not necessarily the threat to investors in the alternative finance industry that many believe it is. As I described in my previous article, the industry has consistently found ways to work around regulation, with the larger companies in the industry even turning regulation into a competitive advantage. Not only can the largest companies diversify from its riskiest parts, such as payday lending, but they can also gain market share from smaller operators, who are disproportionately affected by regulation related compliance costs. One company that has done this is DFC Global (DLLR), whose strategy was vindicated in June 2014 when it was acquired for $1.3 billion.

Instead of regulation, I believe that one of the most serious risks to investors in the alternative finance industry is actually corporate misbehavior. (Read More)

Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Pt. 2: Regulation

In my previous article, “Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Pt. 1: Competitive Advantages,” I described how one can learn about the alternative finance business by reading Broke,USA, Gary Rivlin’s book on the industry. In that article, I noted that the book shows how the strengths of such companies as payday lenders, pawn shops, and rent-to-own stores include high returns on investment, pricing power, and growth opportunities.

That said, it would be wrong to focus on only the industry’s competitive advantages. This is an industry that, after all, focuses on making high interest loans to lower and middle class people. As a result, an investor in this industry faces many risks, the most prominent of which is regulation.

Regulation is the best known risk to the alternative finance industry because it can totally eliminate some parts of the industry, especially payday lending. As Billy Webster, the founder of America’s largest payday lending chain, Advance America Cash Advance, says in Broke, USA, “it’s hard to invest in the future earnings of a company if you don’t know if it’s going to have a future.”

And yet, Broke, USA also shows how regulation is not necessarily the threat to the alternative finance industry that some would believe.  (Read More)

Understanding The Alternative Finance Sector Through Gary Rivlin's Broke, USA, Pt. 1: Competitive Advantages

Broke, USA by Gary Rivlin is a book about the alternative financing industry. This industry, which focuses on lending money to lower and middle income individuals, includes payday lenders, tax preparation companies, and pawn shops.

It is easy to tar this industry, which Rivlin calls "Poverty, Inc," with the same stigma as the subprime lending industry that got the US into so much trouble during the 2000s. Both industries serve many of the same customers, and both appear in the book.

That said, from an investing perspective what is interesting is the difference in performance between the two industries. Unlike most subprime mortgage lenders, companies such as payday lenders and pawn shops passed the 2008 financial crisis with flying colors. In turn, though, such companies face unique risks that their mortgage lending brethren do not. Broke, USA shows us both the competitive advantages and risks of this sector.

Before we begin, though, it is worth noting that Broke, USA was written to criticize the alternative financing industry. Its heroes are those who campaign against payday loan operators and tax refund lenders. Thus, there is a certain irony in mining such a book for investment ideas in the industry it criticizes-an irony which some may not be comfortable with.

That said, it is because of the very success of this industry that a book such as Broke, USA exists. Without the various characteristics that have made payday lenders, rent to own stores, and pawn shops so profitable, (Read More)

Book Review Of Distant Force: A Memoir Of The Teledyne Corporation And The Man Who Created It

I first read about Distant Force, the biography of Teledyne and its founder Henry Singleton, in an article by Geoff Gannon titled "What Would Value Investing 101 Look Like?" Teledyne Corporation was a conglomerate founded in 1960 as an electronics company by Singleton and George Kozmetsky. The company would eventually diversify into such areas as aeronautics, steel, and insurance before breaking itself up into such successor companies as Allegheny Technologies (ATI), insurance company Kemper (KMPR), and of course, Teledyne Technologies (TDY) through a series of spinoffs in the 1990s and early 2000s. During that time, the company’s stock gave investors 17.9% annual returns for 25 years, causing Warren Buffett to describe Singleton as having "the best operating and capital deployment record in American business." The reasons for that record are in this book.

That said, Distant Force isn't one of those investing books that neatly gives each concept its own chapter before wrapping up with a nice summary at the end. The author began his career as a metallurgist, and the book focuses heavily on technology rather than finance.

Thus, it is necessary to read between descriptions of rocket nozzles and rolled steel, of managers and mechanics, to understand the basis of Teledyne's extraordinary performance. Once you do so, though, you discover that there were five key factors to this performance—(Read More)