L'Oréal's Surge Against LVMH: A Major Shift in Wealth Between "Lipstick" and "Hermès"
Hello everyone, I'm your financial observer. Today, we're talking about a big story that's made a splash in the French and global fashion circles: L'Oréal has surpassed LVMH in market value, becoming the most valuable company in France.
This might seem a bit counterintuitive. After all, LVMH owns iconic luxury brands like LV, Dior, and Celine, while L'Oréal also has brands like Lancôme and YSL, which are more commonly associated with skincare products and lipstick available in supermarkets.
So, why has the company that sells lipstick suddenly become more valuable than the one that sells Hermès and LV? Behind this is not just a fluctuation in their stock prices; it represents a significant shift in global consumer trends. Today, we'll break down the logic behind this in five easy-to-understand points.
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1. Surface Phenomenon: It's Not L'Oréal That's Soaring, but LVMH That's Falling
First, let's clear up a common misconception: The change in ranking is not because of L'Oréal's sudden explosive growth, but because LVMH's stock price has plummeted.
- L'Oréal's Performance: So far this year, L'Oréal's stock price has only risen by about 5%, which is quite stable.
- LVMH's Performance: LVMH's stock price has dropped by about 35%. Its market value has been halved from its peak of 500 billion euros in 2023 and is now hovering around 200 billion euros.
It's like two students taking an exam: L'Oréal scored 85, and LVMH scored 60. LVMH used to be the top student, scoring 95, but now it has regressed, while L'Oréal has maintained a mid-to-high level. Therefore, this “toppling” reflects a broader decline in the luxury sector, not a surge in the beauty industry.
Key Point: The capital market is reevaluating these companies. It no longer wants to pay high premiums for luxury goods and sees the appeal in affordable beauty products.
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2. Core Logic: The “Lipstick Effect” Returns
Why is the beauty industry more resilient to economic downturns? There's a classic economic concept called the “lipstick effect.”
- What is the Lipstick Effect?
When the economy is poor and people's budgets are tight, they might not be able to afford expensive houses, cars, or luxury handbags. However, they still need a little “pleasure” to comfort themselves. At that point, a lipstick for a few hundred yuan, a bottle of perfume, or a set of skincare products become the most cost-effective way to boost their mood.
- Real-World Reflection:
- Luxury (LVMH): These are “big-ticket” purchases. A LV bag can cost 20,000 to 30,000 yuan, which is non-essential and expensive. Consumers often cut back on such expenses first.
- Beauty (L'Oréal): These are “small, frequent” purchases. A lipstick might cost only 300 to 500 yuan. Even with reduced income, most people still need to maintain their appearance and skincare, making beauty products a necessity.
Simple Explanation:
In the past, when people had more money, they preferred to make bigger purchases like luxury bags and watches. Now, they're more cautious and opt for more affordable alternatives. They might not buy a LV bag, but they still use Lancôme skincare and YSL lipstick. L'Oréal has seized this shift in demand from the luxury sector to the mass market.
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3. Market Pain Point: Luxury Prices Are Too High, Driving the Middle Class Away
Another direct reason for LVMH's decline is that luxury brands have raised prices too much, alienating their core customer base, the middle class.
- The Toll of Rising Prices:
In recent years, the luxury industry has followed the rule that higher prices make products more “exclusive” and help offset inflation. Brands like LV and Dior have been increasing prices drastically.
- Bain Consulting Data:
Research firm Bain indicates that continuous price hikes have led to about 60 million consumers leaving the luxury market.
- Who Left?
These are not super-rich individuals (who don’t care about price increases); rather, they’re “aspirational middle-class” consumers who work hard to save for a luxury bag. When the price of a bag goes from 20,000 to 40,000 yuan, they feel it’s out of reach or no longer worth it, so they stop buying.
Impact on LVMH:
LVMH’s growth relied heavily on these middle-class consumers’ desire for luxury. With this group shrinking, LVMH has lost a significant portion of its customer base. L'Oréal, with its diverse range of brands (from mass-market to high-end brands like Lancôme and Armani), is better positioned to withstand such changes.
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4. The Rich List Changes: Zara’s Owner Surpasses LVMH’s Owner—Efficiency Over Brand
Besides market value, there’s another symbolic indicator: the change in Europe’s richest person.
- New Richest Person: Amancio Ortega, the founder of Zara’s parent company, Inditex.
- Old Richest Person: Bernard Arnault, the former owner of LVMH.
What does this signify?
- Zara’s Model (Efficiency First): Zara focuses on efficiency in its supply chain, quickly bringing new designs to stores worldwide at affordable prices. In tough economic times, consumers prefer this “low-cost, trendy” approach.
- LVMH’s Model (Brand Power): LVMH relies on its brand reputation and heritage. Its growth depended on the wealthy and middle class’s appreciation of its brand value.
Deeper Meaning:
In uncertain economic times, the capital market favors companies that are price-sensitive, responsive, and have a broad audience, such as Zara and L’Oréal, rather than those that rely on high-net-worth individuals and price increases.
This is not just a competition between two individuals but reflects a shift in business cycles, from “showy consumption” to a focus on practicality and emotional value.
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5. Future Outlook: Structural Challenges vs. Cyclical Fluctuations
Let’s look at what investment banks and analysts think. Several top firms (such as Bernstein and Morgan Stanley) have recently lowered their targets for LVMH’s stock price.
- LVMH’s Challenges Are Structural: Analysts believe LVMH’s problems are more than just temporary economic fluctuations; there’s a lack of structural demand.
- China’s Role: China used to be a major driver of luxury growth, but its recovery has fallen short of expectations, and consumption trends are declining.
- European Factors: Inflation, potential tax increases, and job uncertainty are weakening European consumers’ purchasing power.
- Unmet Expectations: Past high valuations of LVMH were based on strong Chinese demand, global tourism recovery, low interest rates, and continuous price increases. Now, all these factors are in doubt.
- L’Oréal’s Strength: Although L’Oréal faces growth pressures, its beauty business is more resilient to economic downturns. Even in tough times, people still need skincare. Additionally, its investments in high-end perfumes and skincare make it well-positioned to capture the demand from the luxury market.
In Summary:
When consumers tighten their budgets, which item is more likely to remain popular? The global market has spoken clearly: Lipstick has stayed, while luxury bags have been put aside.
This doesn’t mean the luxury industry is doomed; brands like LV and Dior still hold great value. However, the era of reckless price increases may be over. The luxury industry will need to rethink how to attract middle-class consumers without resorting to extreme price hikes. L’Oréal, with its diversified portfolio, will likely continue to lead the French market under the influence of the “lipstick effect.”