January 31, 2017

An Inside View of How LVMH Makes Luxury More Sustainable

(Note: It can feel odd right now to talk about nearly anything except what's going on in the U.S. An increasing percentage of my time is spent on activism. But the realm of my core work -- sustainable business -- is perhaps more critical than ever.

A few months before the election I did some research and interviews with executives at the large luxury company LVMH. I was doing something I hadn't done in a while -- focusing on what a single company was doing to improve its environmental and social impacts. It took me months to carve out time to write it up. I posted this at HBR.org a few weeks ago.

I received some pushback and commentary from a few people who felt the company is not doing enough. That's always true. I may be a touch rosy in this piece, but I've never felt that highlighting what a company is doing right confers a blanket endorsement...or indicates that the organization has conquered sustainability. If I only wrote about fully sustainable companies, I wouldn't have much to write about. That said, I'm more interested in the macro question for a company like LVMH -- can it ever be "sustainable"? See what you think...)


The LVMH Sustainability Story

The companies that are most vocal about environmental and social issues tend to be big, mass-market brands — well-known retailers, consumer products giants, and tech firms that are telling a new story to consumers who increasingly care about sustainability. It might seem that luxury goods companies would not feel the same pressure, but the high-end brands face important questions about the way their businesses impact the world. These companies can’t ignore sustainability.

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One luxury leader, LVMH, provides a great example of how to build a robust sustainability program. The company is a €36 billion decentralized collection of valuable brands — which they call houses (or maisons) — covering fashion, wine and spirits, cosmetics, and jewelry. To understand its sustainability journey better, I spoke with the company’s head of environment, Sylvie Benard, and the CEOs of two of its wine and spirits brands.

The center of the corporate program is a framework it calls LIFE (LVMH Initiatives for the Environment), a “strategic backbone” for programs that address nine environmental challenges. LIFE focuses attention on the full life cycle of products, from supply chain to production excellence to designing longer-lasting and repairable products. Each brand’s strategic business plans now include a LIFE plan, with actions and targets laid out for the next five years.

Looking at LVMH’s efforts, I’ll highlight three areas where I see great impact and innovation: managing carbon and energy, building a connection with customers around brand purpose, and working closely with suppliers. I’ll then discuss some of LVMH’s challenges.

Managing Carbon and Energy

Since 2001 LVMH has studied its life cycle carbon footprint, focusing on both the obvious energy hogs — its stores and distribution — and brand-specific issues, such as packaging in spirits and personal care. The company has aggressively reduced its own energy demand and ramped up the use of clean energy. By the end of this year, 100% of the electricity for LVMH facilities in France will be renewable.

Belvedere Vodka, a brand with sales in 120 countries, has pursued many large-scale projects to reduce its CO2 footprint. Belvedere’s distillery in Poland shifted from oil to gas for energy generation and added heat recovery systems to capture wasted energy. Charles Gibb, Belvedere’s CEO, says it made a strategic choice to invest in this project, even though it had a longer payback period than normal. It was part of a larger overhaul that included automating some distillery operations, which gave it better data and helped slash energy and water use. As a result, Belvedere’s greenhouse gas emissions have dropped by 40%.

The most innovative part of LVMH’s carbon strategy is the use of an internal carbon fund. Dozens of the world’s largest companies use “shadow prices” to model how a carbon tax would affect their investment decisions. But only a few big companies actually collect real money from their divisions or brands (Disney and Microsoft were early leaders). LVMH’s approach is somewhat unique. Where others have collected funds internally to create a central pool of money for carbon-reducing projects, LVMH instead requires every maison to spend €15 for every ton of carbon emissions (either on-site or from grid-based electricity) on efficiency and energy reduction, clean energy, or research to understand that brand’s greenhouse gas emissions better. Like its carbon-taxing peers, LVMH has created a powerful virtuous circle of emissions reductions. In total, LVMH has invested about €6 million in the first year of the program.

Brand-Building and Customer Connection

The LVMH leaders I spoke with believe strongly that Millennials, more so than previous generations, care about sustainability. As Gibb puts it, “Until recently, marketing would focus mainly on product and brand image. But now people look for whether you’re both socially and environmentally responsible. People look at brands and ask what they do for the world. If you don’t do this stuff, you’re not a modern brand.”

One of the ways the company is telling a more sustainable story to customers is through the use of the “Butterfly Mark,” a symbol — a first in the luxury industry — that “at a glance helps people identify brands committed to social and environmental sustainability.” (Disclosure: I’m an unpaid advisor to Positive Luxury, the company behind the mark.) The Butterfly Mark will soon appear on Krug’s Champagne. Krug also uses a fun, innovative tracking system to share information with consumers. Every bottle has a unique six-digit number, which you can input on its website to get that bottle’s story.

Supply Chain Partnerships

Maggie Henriquez, CEO of Krug Champagne, says that its focus on environmental and social impacts, and the story the company tells about it, stems from looking inward at its own history. Like many luxury brands, Krug was struggling after the 2008 financial crisis. Henriquez says there was a deeper problem than just economic conditions: It had lost its connection to the founder’s 19th-century ideals about craftsmanship, humility, and quality.

A critical part of going back to its roots, Henriquez says, required connecting in a deeper way to growers. The quality of the crops, and the care of the growers, are key to the success of the business. Henriquez started a program to work with growers on sustainability and quality, going plot by plot to review harvest times and implement modern best practices. Together they reduce waste and agricultural inputs (such as fertilizer and water) to get better yields, which reduces the overall footprint. Some of LVMH’s other businesses, such as jewelry brand Bulgari, have also implemented supply chain tracing programs for critical inputs with potentially troubled histories (like some metals and diamonds).

In one sense, none of this is surprising or cutting edge. Most large companies with agricultural supply chains, like Kellogg and General Mills, have developed elaborate, robust supplier programs to improve yields and cut water use and greenhouse gas emissions. And on the jewelry side, companies like Tiffany employ extensive tracking programs to avoid conflict minerals and blood diamonds.

But LVMH does some unusual things. Henriquez decided that growers were so important to the Krug story that she wanted them engaged in a deeper way. Henriquez, growers, and the winemaking team enjoy product tastings together, allowing growers to enjoy the end results of their work and their crops. It sounds so simple, but Henriquez says, “It’s not normal in our business, and it’s such a moment of connection.”

The Challenges

The sustainability and operating execs at LVMH talk openly about some of the challenges they face. As usual, short-term pressures on financial performance are a concern, and change takes time. Environmental exec Sylvie Benard comments that changing behavior can take a few years, and you have to keep hammering home the message and “find the right moment” to act.

However, it’s a bit easier for the brand CEOs to stay focused on the long term when some of the maisons are three centuries old. They have to plant trees today, for example, to have the right wood for casks 150 years from now. As Gibb puts it, “If you’re not thinking about the brand over a 10-year period, you’re not doing your job.”

Perhaps the biggest hurdle is more existential: Can luxury goods ever be sustainable? On one level, probably not, since these products almost by definition are not an inherent human need. But while it would be easy for sustainability people to assert that “none of these products should exist,” that’s more than just unrealistic — it’s probably counterproductive. Everyone has different definitions of what makes for a thriving life; for many, it can easily include some wants, or things that provide fun and beauty.

The challenge, then, is to make sure sustainability and beauty are inseparable. LVMH is on the right track, talking about sustainability as core to excellence, quality, and brand image — and central to how the company operates. As Sylvie Benard says, when “the marketing director, financial director, logistics director, and so on take the environment into account when making a decision, then life will be beautiful.”

(This post first appeared at Harvard Business Review online.)

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(Andrew's book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot.



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