Big luxury – is the luxury industry becoming the next big tech?

It might seem premature to float the idea of “big luxury”. After all, luxury and technology are two vastly different industries. And why worry about big luxury when we are still in the early days of dealing with big tech? But it is well worth investigating since both industries share one key feature – both are highly concentrated in just a handful of firms.

In tech, we have MAAMA (Alphabet, Amazon, Apple, Meta and Microsoft), a group under scrutiny by governments and antitrust authorities around the world. In the case of luxury, we have LKR – LVMH, Kering and Richemont. Let’s look at the differences and similarities and see how big luxury could become the next big tech.

First, let’s focus on big tech proper. Whether valued by investors or customers, the “big” in big tech is an apt description. Their size is indisputable – “Alphabet, Amazon, Apple and Facebook have a combined market capitalization of $7 trillion.” (New York Times, January 20, 2022). In 2021, total revenues of MAAMA exceeded $1 trillion. In the developed and emerging markets, nearly every consumer uses a MAAMA product or service.

Once hailed as positive forces of innovation, these companies are subject to increasing suspicion in the West because of their size and dominance. Due to their sheer scale and pervasiveness, big tech “act[s] as gatekeepers to digital goods and services” (ibid).

Size and market dominance has enabled Meta, for instance, to establish tremendous control over the flow of information and influence through its leading platforms of Instagram and Facebook. A similar argument is made about Amazon and its outsized influence as the largest e-commerce platform in the US and other markets.

This dominance has led to a loss of privacy, the spread of misinformation and an algorithmic reinforcement of herd-like behaviors (e.g. “hit the like button and subscribe”) and even quasi-addictive ones. No wonder that governments and antitrust authorities are worried about MAAMA’s size, scale, control and influence over consumer behavior, choices and beliefs.

What about big luxury? It consists of the three largest luxury conglomerates – LVMH, Kering and Richemont. These are essentially groups of formerly independent luxury brands purchased in the last 40 years. They operate more or less on a business model initially pioneered by LVMH. Individual brands (and their heritages) remain separate and distinct but are centralized at a group level to maintain financial and operational discipline. LVMH owns around 75 heritage brands or maisons such as Louis Vuitton, Christian Dior and Bulgari. Kering owns more than a dozen including Gucci and Yves-Saint Laurent while Richemont owns about 20 brands such as Cartier, Van Cleef & Arpels and Montblanc.

Let’s first acknowledge the obvious benefits of big luxury.

The primary benefit accrues to equity shareholders and managers who enjoy the financial returns of well-run, profitable brands. In the case of luxury, this can be traced back to Bernard Arnault’s decades-long project (starting with Dior) to create a template for running and scaling up a luxury business. His subsequent acquisitions of Louis Vuitton and Moët Hennessy laid the basis for billions of dollars of new shareholder value and a new business model for the luxury industry.

We should also acknowledge that big luxury has generated socioeconomic and cultural value by supporting and employing craftspeople. LVMH alone employs thousands of craftspeople in France, Europe and North America. Overall, corporate luxury brands employ or support a wide array of crafts including garment production, leather working and specialist skills like embroidery.

If we start comparing big tech and big luxury, they do not appear to be similar, at least at first glance. In terms of financial heft, big luxury currently enjoys a total market capitalization of about $550 billion. This is clearly substantial but MAAMA’s market capitalization is more than 10x larger.

In terms of market size (i.e. total industry sales), the 2021 global personal luxury goods market is estimated to be EUR 283 billion according to Bain’s 2021 Luxury Goods Worldwide Market Study. While significant, this is not even close to big tech. The annual revenues of a single big tech company such as Apple easily exceed the entire personal luxury goods market size.

We can also estimate that big luxury serves perhaps hundreds of thousands of customers every year. This is nowhere near MAAMA’s ubiquity and consumer reach (billions of customers annually).

On these grounds, it is tempting to say that big luxury does not exert the same size, dominance or leverage over consumers as big tech. This is certainly true on one level since very few other industries are truly comparable to big tech. Big tech stands in a league of its own.

However, this ignores the impact of big luxury on its own terms. “Abusive dominant firms typically exhibit high returns on capital, high market shares and face a lack of credible new entrants.” (The Economist, 01/29/2022). These three features appear to describe the dominance of big luxury remarkably well. Whether that dominance becomes “abusive” remains an open question.

Let’s look at the first two features regarding high market share and high return on capital.

For one thing, operating in a globalized economy demands scale. As reported in Deloitte’s “Global Powers of Luxury Goods 2021” report, the top 10 luxury companies earned 51.4 percent of the global sales of the top 100 luxury companies. In other words, just 10 percent of the world’s 100 largest luxury companies generated more than 50 percent of sales of the top 100. This oligopolistic tendency reflects luxury’s need to chase high net worth individuals in a global economy. This feeds growth and profitability.

This incentive to size up is perhaps most easily seen in the luxury watch industry. I would agree with former luxury watch executive Dr. Frank Müller that the “Swiss watch industry will change dramatically over the next two decades, becoming an oligopoly – whether we like it or not.” Watch observers have long known that the industry is dominated by a handful of companies not only in sales but further up the supply chain in terms of critical components like mechanical movements.

You can think of watch movements as analogous to lithium batteries in electric vehicles (EVs). There are only a handful of lithium battery makers in the world. If you want to make EVs at scale, you have to source your batteries from CATL, LG, Panasonic, Samsung or SKI (or invest considerably to make your own inhouse). The same idea applies to watch movements though arguably movements are even more concentrated than lithium batteries.

In addition to business scale, the other ground truth of corporate luxury brands is that brand management always ends up being more important than artisanality. This means a corporate luxury brand will never put artisanality and craftsmanship above the financial value of the brand. It will, however, always put the intangible value of tradition, heritage or craftsmanship in the service of the brand as a profit/rent-seeking enterprise (i.e. high returns on capital).

Put another way, heritage and craft are necessary but never sufficient ingredients for operating and financially managing a corporate luxury brand. (I go in more depth on why craftsmanship and luxury are at odds in my article on craftsmanship in the 21st century). As a result, cultural capital (tradition, heritage, craft) is always subordinate to the profit/rent-seeking logic and requirements of financial capital.

Of course, this is never explicitly stated as such by big luxury. Instead, brand owners and managers will always pay careful homage to craftsmanship by sponsoring and supporting events, publications and craft education (see LVMH’s Les Journées Particulières, Institut des Métiers d’Excellence, or the recent coffee table book on craftmanship, Louis Vuitton Manufactures). In the end, what is essential is that the image and perception of artisanality serve and support the business model of luxury.

But you may be asking yourself, how do we know that big luxury truly prioritizes the brand and its growth over artisanality? Here is a simple question you can ask about any of the big three luxury groups. How many artisans or craftspeople do they employ? And how do they compare to its overall headcount and compensation?

As noted in their 2020 annual report, LVMH has more executives and managers than production workers who actually design and make products – 32,713 v. 24,132. It also has more than three times as many sales and administrative staff (79,059) as it does production workers. This should tell you something about the relative value of managing and growing LVMH’s portfolio of brands over preserving and enhancing craftsmanship per se.

Hence, artisanality in a corporate luxury brand is a double-edged sword. On the one hand, it employs thousands of craftspeople. However, it comes at the expense of crowding out independent, smaller artisans who simply cannot match the accessibility, aura and convenience of corporate brands. This is the third feature of so-called “abusive dominant firms”, i.e. crowding out competitors, especially independent artisans who face their own unique challenges.

We should also not confuse the artisanality of small workshops headed by independent masters of trades and crafts with the artisanality in a factory setting. They are two different types. When you shop with big luxury, you are in effect rewarding clever managers and shareholders for capturing and harnessing craftsmanship as a means of financial value creation.

On the other hand, if you value cultural capital over financial capital, you really should support artisans as directly as possible. This is what I call a direct-to-artisan model. Think of Etsy for example or going directly to the artisan that best fits what you are looking for.

The basic idea is to rethink your relationship to artisans and find a way to directly engage and support forms of “intangible cultural heritage” such as those recognized by UNESCO. This vast global heritage includes Panama straw hats, Congolese rumba, Croatian lacemaking, Byzantine chant, Arabic calligraphy, Japanese paper making (washi) and much more.

But many, perhaps most, luxury consumers do not view luxury as informed engagement of cultural heritage. They view luxury as a lifestyle that they want to buy into and mimic. Why is that? One key reason is what sociologist Thorsten Veblen famously called “conspicuous consumption” as a means of signalling one’s social status. More colloquially, this is known as showing off.

If there is an unsettling similarity between big tech and big luxury, it is their ability to condition us to consume more readily and think less critically. Both big tech and big luxury tend to encourage and monetize herd behaviors among consumers whether it is mindlessly scrolling through an Instagram feed or TikTok videos, or buying iconic products of luxury brands to signal one’s status.

Caught in this mind-numbing feedback loop, we forget to ask fundamental questions. What is the social and cultural value, if any, of such conditioned behaviors? What are the harms? What are the heritages and traditions behind the products? Do we value them appropriately? Is the heritage being authentically expressed or is it being harnessed to pursue something else? How can we engage artisans more sustainably and value craftsmanship as a cultural good on its own terms?

Perhaps the most lasting business innovation of big luxury has been the harnessing of heritage brands to investors’ expectations and modern managerial goals and techniques. Luxury brands are incentivized to strap a financial performance harness onto artisanality, transforming sleepy heritage brands into shiny luxury brands. In effect, craft becomes the everyday workhorse while managers and shareholders become the jockey and the owner. In such an arrangement, the key question becomes cui bono (who benefits)?

If the apparent answer to this question concerns you, viable remedies come to mind. An obvious one is reducing the big in big luxury. I’m thinking of smaller, independent luxury brands with a more holistic, humanistic approach to luxury (i.e. Brunello Cucinelli). Another is building an alternative, more sustainable idea of luxury by directly supporting independent artisans such as tailors, shoemakers, watchmakers, etc.

I end with this quote by big tech critic Tim Wu:

“If we desire a future that avoids … the narcosis of the consumer and celebrity culture, we must first acknowledge the preciousness of our attention and resolve not to part with it as cheaply or unthinkingly as we so often have.”

Tim Wu, The Attention Merchants (2016)