Streetwear – Luxury Fashion’s Opportunity of the Century or a Poisoned Chalice
July 29, 2022 |
Julius Lang

Introduction and Health Warning

Intrigued by the laws of supply and demand, I initially started reselling artificially scarce clothing at the age of 14, which eventually led me to develop a deep interest in the economics of the fashion industry. Based on this interest this paper goes into detail how youth culture influences luxury fashion brands and their societal perception. In doing so it aims to evaluate the impact of streetwear on the business model and operations of luxury conglomerates such as Louis Vuitton Moët Hennessy (LVMH). Before we get to the substance of the paper, you should know that I wrote this as a summer intern at Aquamarine Zürich and as a knowledgeable layperson in the streetwear industry. In reaching my conclusions, I have taken at face value and on trust statements that have not necessarily been verified. Thus, none of the conclusions presented here should be considered conclusive or authoritative. Rather, they should be viewed as a jumping-off point for further conversation and discussion. If you have thoughts or reactions, feel free to email me to continue the discussion

For firsthand insights into the streetwear and luxury goods industry I spoke with:

– Dana Kaufeler (Associate at Avenue Fifty Two, previously Marketing at Christian Dior)
– Fabrice Burkhalter (Director at The Edit LDN, previously Team Captain at StockX)
– Fanny Guilhem (Product Manager Assistant at Chanel)

The paper covers the following topics:

1 Streetwear and its influence on the luxury fashion industry

2 Consumer behavior in the luxury fashion space

3 Long term strategic positioning of luxury conglomerates and brands

Streetwear – Luxury Fashion’s Opportunity of the Century or a Poisoned Chalice?

“A Status symbol is an instrument you clash when you want someone to know you are there”. A quote from writer William Sansom which, in its simplicity, captures human nature and the deep longing for recognition and acceptance. The concept of scarcity and the effects on our psyche of owning scarce goods – especially those with high visibility – have long been of interest to me ultimately leading me to start reselling artificially scarce clothing at age 14. The cult-like following, which will be discussed in more detail, and the associated profit opportunities of streetwear drew me towards the space. Since my approach was based on an interest in capitalizing on the hype and using streetwear apparel as an investment vehicle, I always appreciated special collaborations. By sharing collections with other influential brands or public figures, the parties involved were able to generate even more hype, which benefited my cause by driving up prices. A prime example is the long-standing partnership between Supreme, the poster child of streetwear culture, and outdoor apparel brand The North Face. Through the simple addition of a “Supreme” logo on the right sleeve, an always-available jacket from The North Face’s basic collection became a piece that trades for up to ten times its retail price.

Having followed the streetwear ecosystem closely for the past years an interesting trend regarding the mentioned collaborations was to be observed. While streetwear brands primarily targeted partners with similar backgrounds and audiences in earlier collaborations, more exotic collaborations in terms of partner selection have emerged in recent years. One industry being particularly active: Luxury. Realizing the attractive consumer profile of streetwear enthusiasts, characterized by their youth as well as their ability and willingness to spend substantially on clothing, luxury conglomerates such as LVMH have been eager to work together with streetwear brands to diversify their customer base while rejuvenating the brand image.

On first glance any business professor would agree that both expanding one’s customer base and seeking innovation in general positively impacts business. With regard to the complexity and the intricacies of the luxury sector and associated behavioral impact of marketing strategies on existing customers and brand image, this conclusion becomes uncertain. The question must be asked whether such strategic decisions only benefit the short-term and will eventually hollow out luxury brands or in fact provide a long-lasting competitive advantage over players in the industry who chose not to innovate in the same way. This paper sets out to answer this exact question by evaluating the trend of the luxury industry moving towards streetwear and analyzing the long-term implications of the strategic positioning of different luxury brands.

Understanding streetwear

In order to properly assess the impact of streetwear influences on luxury fashion, a discussion and subsequent understanding of the topic of streetwear itself is necessary. The following section will provide insight into the general mechanics of the industry and elaborate on the specifics which set it apart.

“Informal clothes of a style worn by young people”. The Oxford Dictionaries attempt to define streetwear – admittedly not the most credible source with regard to the topic. Nevertheless, by mentioning the aspects of informality and the rather young audience it manages to caption the most essential part of streetwear. Regardless of my streetwear background, I still found it difficult to come up with a concise definition and concluded that streetwear, like fashion in general, is better described through feelings and associated lifestyles rather than awkwardly attempting to string specific adjectives into a one-liner. Imagine a young, casually dressed adolescent walking down a busy street, feeling confident because of his or her dissimilar style to older and potentially more serious generations. In a way feeling empowered by the distinctive appearance while fully appreciating the possibilities of self- expression through carefully selecting items of clothing, straying from society’s conventional dress codes. In a simpler way: Not trying to be different but being authentic and therefore ending up being different. In essence true “coolness”.

This definition attempt is supported by a joint report by PwC’s strategy consulting firm Strategy& and Hypebeast, a news website and self-proclaimed “leading online destination for men’s contemporary fashion and streetwear” containing a consumer survey revealing that most respondents (about 70%) are attracted to streetwear because it simply is cool. Other key specifics identified as defining by consumers for being driven towards streetwear are the aspects of community and comfort. The report then further elaborates on the origins of streetwear mentioning graffiti and hip-hop as the countercultures of the 1980’s and 1990’s underscoring the rebellion against conservative structures rooted deeply in streetwear. Inspired by artists like Andy Warhol, Jean-Michel Basquiat and Keith Heiring and their questioning of contemporary art, the streetwear scene experienced rapid growth starting out in New York quickly spreading to California and Japan.

To the displeasure of die-hard streetwear fans, the scene since has come a long way developing from an underground fashion genre with an associated lifestyle to a broadly known almost mainstream phenomenon. Supreme, the aforementioned posterchild of the streetwear industry, being the prime example for this development. James Jebbia, founder of Supreme and now one of the most respected characters within the scene, first opened doors in 1994 on Lafayette Street in New York City. Adoring skate culture Jebbia once stated “It was less commercial – it had more edge and more fuck-you type stuff” intending Supreme to become part of this exact culture capturing the spirit of a generation. Through the recognition of pop culture Supreme became more presentable, slowly but surely losing its connection to its roots in underground skate culture. By unofficially representing the brand style icons such as Kanye West and Madonna helped with, or to be more neutral, drove this development towards a more mainstream appearance of the brand. These influential personas acted as catalysts for the hype to come which took the streetwear scene by storm.

It seemed like an entire generation of teenagers was after Supreme clothing, but contrary to common practice when experiencing higher demand, the brand neither increased supply nor prices, resulting in an astonishing demand surplus. This brought even more attention to the brand and simultaneously set off an upward spiral of demand ultimately leading to people spending nights camping in front of Supreme stores to be among the lucky ones who could buy the clothes at retail prices. By offering products at relatively accessible price points streetwear brands consciously kept barriers to entry kept low and thus managed to create a hybrid of affordability and exclusivity perfectly suiting young consumers with varying financial means.

Luxury’s love for streetwear

To appreciate the rationale behind the strategic decision of luxury players to enter the streetwear sector, it is first necessary to get an overview of the current state of the luxury market. According to a Statista report published in 2020 revenue of the luxury fashion sector is projected to increase to 130.1 billion US$ worldwide achieving a +4,3% CAGR in the years 2012-2025. Comparing that to the broader luxury goods market, a widely accepted benchmark, fashion is prospected to outperform by +0.7% annualized in the same time frame ultimately making up for 46.4% in the revenue split of the luxury goods market in 2025. Relatively unimpressive growth underpins the general assumption of mature market with fierce competition.

In addition, the overall barriers to entry within luxury remain extremely high coming back to both the shier dominance of the major players and general factors that consumers perceive to be decisive during the purchasing decision in the luxury segment. According to Fanny Guilhem, part of Chanel’s Paris office with a background in luxury marketing, the consumer especially values extensive brand history, exclusivity as well as Savoir-Faire, which can be broadly described as expert craftmanship and know- how throughout the entire value chain.

Realizing the maturity of traditional luxury fashion and the associated competition innovation in form of collaboration seems like an attractive method of boosting visibility as well as ultimately sales. Robert Williams, luxury editor at The Business of Fashion and previously a luxury and retail reporter at Bloomberg, explains that younger generations, more specifically Generations Y and Z, are expected to account for nearly half of total luxury spending by 2025, earning them the sobriquet of the market’s “main growth engine.” Still, he believes the critical influence of younger generations is to be traced to the transmission of a particular mindset, as the spread of that mindset changes consumer preferences across generations. A phenomenon often observed within the space of fashion, where older generations try to awaken the youth in them by imitating the style of dress of the younger ones.

As part of this transformation, streetwear has become a significant driver of sales growth in the luxury segment. Streetwear has helped restore the appeal of luxury among men, while demand for formal wear continuously declines. From a business perspective, this is a tremendous opportunity for luxury brands, as traditional luxury clothing relied on laborious tailoring, resulting in low profit margins, while the production of T-shirts, hoodies, and similar casual wear is notoriously efficient and extremely lucrative given the pricing power of the luxury industry. In addition, the aforementioned aspect of community that is deeply rooted in streetwear is among the things that luxury brands desire, and with the continued implementation of streetwear elements, this aspect is likely to spill over into the luxury space and give consumers a deeper sense of belonging, ultimately leading to higher customer loyalty. A direction sought by luxury brands enabling customers to feel belonging through the purchase of clothing, moving beyond traditional luxury which has traditionally served merely as an indicator of affluence. Once again shedding light on the business rationale behind this development, which allows luxury brands to price casual wear similarly to formal wear, thus taking full advantage of the difference in profit margin, directly benefiting the bottom line.

LVMH’s pioneer position

The French luxury conglomerate LVMH has been outpacing its competitors in moving towards the streetwear space by constantly seeking opportunities to expose its portfolio companies to the streetwear consumer. This development has been primarily driven through high frequency of collaborations as well as M&A activity keeping engagement between the young consumer and the conglomerate high. The following section will dissect LVMH’s move towards streetwear in the recent years by diving deep into their collaboration strategy, the conglomerates venture capital investing, and other trends.

Starting off by understanding past collaborations, the most prominent way in which the luxury conglomerate has sought contact with the young fashion scene. LVMH realized the previously outlined potential within collaborations and shocked the entirety of the fashion world in 2017 when releasing a joint collection between its most notable portfolio company Louis Vuitton (LV) and, as you may have anticipated, Supreme. A collection that to this day is unparalleled both in generated hype as well as controversy. It solidified Supremes arrival in mainstream culture while indefinitely confirming LVMH’s direction of seeking rejuvenation through the streetwear world.

The partnership of LV, one of the most famous luxury labels and for many the embodiment of affluence and class, with Supreme, a brand founded on the principles of nurturing counterculture, indeed sparked much debate. Nevertheless, consumers were overjoyed, reflected in the secondary market, where the pieces of the collection are still traded up to 20 times retail price. Due to the tremendous success of the collaboration the LVMH group decided to continue working with streetwear culture to boost its popularity. In December 2016 LVMH completed the acquisition of Rimowa and appointed Alexandre Arnault, Son of LVMH’s Chairman and CEO Bernand Arnault, as the new CEO. Following the buyout, it didn’t take the luggage manufacturer long to partner with, you guessed it, Supreme to release a collection in April 2018. Following the exact same pattern, the luxury conglomerate bought out American luxury jewelry and specialty retailer Tiffany & Co in January 2021 and after Alexandre Arnault was appointed Executive Vice President followed up with another Supreme collaboration in November 2021. Needless to say, LVMH remains keen on working together with the streetwear giant Streetwear and Luxury Julius Lang [email protected] while a definite trend of continuous introduction of portfolio companies to streetwear and ultimately the young consumer is to be observed.

In addition to many successful collaborations the LVMH group has made its interest in streetwear clear through other channels as well. Back in 2018 Virgil Abloh, founder of luxury streetwear brand Off- White and considered one of the most influential people within streetwear globally before passing away in 2021, was appointed artistic director of LV’s menswear collection. Putting someone with streetwear background into one of the most sought-after positions within the luxury fashion scene clearly underpinned the broader brand strategy. In 2021 LVMH advanced its relationship with Virgil Abloh by taking up a majority share of 60% Off-White. The fashion label had amassed an impressive following by playing a very specific market: Luxury streetwear. Elegantly combing aspects of both styles enabling the brand to sell casual wear at a luxury price point ultimately gained LVMH’s full attention. After Virgil Ablohs tragic passing in 2021 the succession plan has not officially been revealed but rumour has it that London based-designer Martin Rose, known for blurring the lines between high- fashion and streetwear, could be set in charge for future LV menswear collections.

Next to these strong indicators of LVMH moving further towards streetwear the conglomerates venture capital arm, LVMH Luxury Ventures, has recently been showing interest in the streetwear space as well. In January 2022 the firm dedicated to investing in small creative brands announced the completion of taking a minority share in streetwear brand Aimé Leon Dore. The label was founded in Queens, New York by Teddy Santis, considered to be one of streetwear’s opinion leaders and additionally has been named creative director of New Balance’s collection “Made in USA”. Inspired by 1990’s hip-hop culture the brand delivers an exciting approach incorporating preppy elements into casual wear.

Developments that have turned out to be a tremendous success welcomed by the consumer and ultimately reflected in the income statements of LVMH’s streetwear influenced portfolio companies. Nevertheless, regional differences in terms of openness towards the newly set direction are to be noted. Dana Kaufeler, Associate at Avenue Fifty Two, a strategic advisory firm focused on luxury brand development, tells me about the differences in consumer profile and overall habits. Having been previously engaged with Christian Dior in their marketing division for Ready-To-Wear in Dubai she noted how well the middle eastern customer reacted to streetwear influences which in Dior’s case went hand in hand with the introduction of their oblique pattern to more casual pieces of clothing. Providing comfort and versatility while still offering the luxury image worked incredibly well given the middle eastern customer. An outgoing consumer who greatly appreciates logos and takes the opportunity to show off in public has made the streetwear-influenced approach very successful in the Asian hemisphere.

Comparing approaches

Having taken an in-depth look at LVMH’s efforts to adapt to trends in the fashion scene, the question of long-term viability has still not been answered. The biggest concern of insiders who oppose the conglomerate’s current positioning is the possibility that the luxury image will be diminished, and the brand eroded by extensive collaborations. The same critics often direct attention towards Hermès as a prime example for an exceptional luxury house staying true to its core values. As previously explained LVMH’s portfolio companies, especially LV and Christian Dior, have been specifically seeking contact with the up-and-coming consumer generation while Hermès has been notoriously inactive in that regard. The question arising is whether the conservative approach of Hermès consciously distancing oneself from change and strictly following the principles that have made the brand what it is today will outlive LVMH’s strategy to adapt and follow trends.

To answer this question, one has to recall the developed understanding for demand in the luxury sector. Through purchasing items of luxury brands the consumer not only buys a physical product but also the accompanying image. As long as the brand image is kept desirable consumers are willing to pay a premium to be amongst the ones associated with exactly this image. The question then comes down to whether the image change of LV, to pick a relevant example out of LMVH’s portfolio, would eventually decrease the desirability through for instance more and more representation amongst consumers which are traditionally not associated with luxury fashion. On the other hand, one has to ask whether the desirability of Hermès products can be kept without taking the change in consumer demand for more casual wear into account. What I believe to be a fundamental mistake when choosing to assess the situation this way is the black and white thinking that occurs. Up until now the prospective answer would have seen one approach working while the other one would have failed. The reason why this in fact does not apply lies once again within the complexity of the luxury sector and the subtle differentiation between luxury brands which might not be obvious for the average consumer. Streetwear and Luxury Julius Lang [email protected] LV and Hermés in fact are quite different to each other in terms of what crowd they have been catering to for the past decades and certainly years. While LV, as outlined throughout the paper, has been adapting to demand and changes in consumer demographic Hermés’ approach can be described as the complete opposite being very reluctant to implement change resulting in a brand standing which is widely regarded as impossible to imitate. Through discussions with industry insiders, it became very clear how Hermés acts as the pinnacle of luxury while LV and the majority of the LVMH group has been playing a different market lately and that’s exactly what one has to understand to move closer towards the answer of where the future of LVMH lies. LV deliberately steers away from traditional luxury and finds tremendous commercial success in new markets, taking full advantage of higher profit margins as well a huge new consumer base in Asia. In a way I like to think of LVMH as a profit driven and extremely business-oriented institution happening to produce luxury items while Hermès takes a more honest approach genuinely appreciating the art of fashion and being willing to reduce profits in favor of a pristine image.

This brings us a lot closer to answering whether there is long-term viability in LVMH’s strategy. From an investors view focusing primarily on the business side LV has displayed outstanding abilities in regard to being profitable while satisfying the customers ever changing needs – qualities reflected in the company’s financials as well as stock price. This leads to the conclusion that LV and the LVMH group has an immense edge on Hermés short- and medium-term regarding business performance. Still the long term remains uncertain since its virtually impossible to predict the consumer reaction to LV’s adaptive strategy possibly losing credibility and desirability along the way. What in my mind is not uncertain is the stable long-term success of Hermès, which, while not breaking profitability records, is assured by its excellence in catering to a very specific type of consumer. In conclusion it very much comes down to being able to differentiate between luxury brands and appreciate that different playing fields suggest that there can be simultaneous winners. As is so often the case it is about playing your field to the best of your ability and it seems both LV(MH) and Hermés have been managing to do quite well in that regard.

Concluding with practical advice

As investors, we are on a never-ending quest for value. Therefore, the following paragraph is intended to capture the value I believe this paper contains, while reminding you of my belief that the greatest value for you will come from not blindly adopting ideas, but carefully examining them one by one. I suggest that you consider all the ideas presented as building blocks that you individually test for robustness and then select those that you wish to incorporate into the construction plan of your “house of knowledge” about the luxury industry. In this regard, I recommend that you pay particular attention to the very shiny blocks that we usually tend to promptly embrace. In my experience these often turn out to be the faulty almost hollow ones. Fooled by fancy wording and other distractions the acceptance of these blocks can later be made responsible for a collapse traceable to a simple lack of attention due to their impressive exterior. Should you after reading the paper have concern about the stability of the house I am currently working on, I would be happy to be contacted to discuss other recommended building materials.

What I believe the most valuable idea provided in this paper to be is realizing the utter importance of understanding the future consumer. This surely is mentioned in every introductory business course in some form and still I believe it to be a concept fully understood by very few. Allocating resources towards something that is not tangible or reflected in annual reports is hard to justify from a management perspective, but I still believe it to be one of the key qualities that separate great managers from exceptional ones. A thorough understanding of this concept provides a significant competitive advantage by anticipating change in consumer habits which ultimately is the most crucial factor for long-term success. Many businesses have fallen victim to being content with the status quo failing to realize that an ever-changing environment requires adaption requiring companies to critically challenging itself and their ways of operating. Once again taking the investors perspective the task lies in identifying businesses with management teams who have proven to constantly seek understanding of the prospective developments on the demand side and base strategic decision accordingly. After thoroughly considering all my findings, I believe the LVMH group and current management to be among the selected few fully grasping the presented concept of sustained excellence. Tirelessly looking for ways to tackle new consumer groups while displaying exceptional ability of being profitable in their operating fields. Following Benjamin Grahams principle this conclusion should enable LVMH shareholders to enjoy the stock without feeling the need to check the share price on a daily basis.

Sources and Resources:

You can access the White Paper here.

I’m a Zurich based investor. Since 1997, I’ve managed a privately offered investment fund known as the Aquamarine Fund.

I am also the author of a book titled The Education of a Value Investor, which was published in 2014.

As I wrote in my book, we are all a work in progress. This site documents my ongoing quest for “wealth, wisdom and enlightenment”.

I have created a /now page – inspired by Derek Sivers

I’m a Zurich based investor. Since 1997, I’ve managed a privately offered investment fund known as the Aquamarine Fund.

I am also the author of a book titled The Education of a Value Investor, which was published in 2014.

As I wrote in my book, we are all a work in progress. This site documents my ongoing quest for “wealth, wisdom and enlightenment”.

I have created a /now page – inspired by Derek Sivers

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