Khattab Al Qrarah

11.18.2014

Manas Ussenov

Victoria Rosca

Yousra Zaghdoud Bernichi

LVMH

Business review

Mot Hennessy Louis Vuitton S.A.

is aFrenchmultinationalluxury goods
conglomerate, headquartered inParis.
LVMH was formed by the 1987
merger
of fashion house Louis Vuitton with
Mot Hennessy (from the merger in
1971
betweenthechampagne producer
Mot & Chandon
andHennessy, thecognac
manufacturer.

LVMH

Business review

Business Portfolio

Wine and Spirits

Fashion &Leather Goods
Perfumes & Cosmetics
Watches & Jewelry
Selective Retailing
Media & Other Business

LVMH

Facts

Chairman and CEO: Bernard Arnault

Revenue:

29.1 Billion Euros

Operational Profit: 6,021 Million Euros

Employees: 114,000 in over 70 countries
Distribution Channels : 3,384 Stores
60 Prestigious Brands

LVMH

Revenue over category

LVMH

Main Competitors

Timeline

1743: M&C, established in Champagne Province (France). One of the first Champagne French
brand, with exports accounting for a large percentage of its sales by the 20 th century
1968: Acquisition of Parfums Christian Dior
1971: Merger with Champagne Mercier
1971: Merger with Henessy & Cie (words second largest producer of cognac) ->
Change name for Mot-Hennessy
1987: French government launched an area of privatization Merger with Louis
Vuitton, to avoid takeover from large international companies. Portofolio of uxury
brands Veuve Clicqot, Dom Prignon, Canard Duchne (wine), Christian Dior and
Givenchy perfumes and cosmetics, Gearoges Delbard (grower or roses), Louis
Vuitton, M&C, Hennessy
1987: Join ventures with Guinness PLC distribution British cie
1988: Bernard Arnault Owner of Chrstian Dior, Celine, and Christian Lacroix
purchase share of LVMH and join forces with Vuitton
After a join venture with Guiness, Arnault became the LVMHs largest shareholder, and ask
for changes in the cies management
1988: Arnault acquire Givenchy
1989: Arnault became LVMHs president
1990: Arnault became chairman
1990: Purchase interest on Loewe (Spanish brand) and all assets of Pommery (largest
vineyard in Champagne region), increase of LVMH share in Guinness from 12% to 24% :
LVMH became the worlds largest alcoholic beverage seller
1994: Arnault abandoned his quest to gain a controlling stake in Guinness, agreement to 7a
stock swap

Timeline

Between 1990 and 1994, few small acquisitions

Brought additional fashion and fragrance and diversified by purchasing 2 of Frances leading
financial and business publications Investir, La Tribune Desfosses, LAgefi
Expansion of the number of cie-owned retail stores where its LV, Loewe, Celine, CD,
Givenchy can be found
1996: Arnault strongly believes that the brands should offer high quality
customer service, acquisition of Duty Free Shopper (180 duty-free boutiques in
Asia and various international airports)
1997: Acquisition of Sephora, French cosmetic retailer, and 30% interest in
Douglas International, a German beauty-goods
1997: Acquisition of Chteau dYquem (Champagne)
1997: Purchase of 11% of Grand Metropolitan PLC Britsh Food conglomerate ($1.5 bn wine
and spririts sales)
1998: Retailing operations: La Belle Jardinire, Le Bon March
1998: Laflachre France leading producer of hygiene beauty, and Marie-Jeanne Godard, a
fine fragrance line
1999-2000: Boldest acquisition: TAH Heuer (watches), Ebel (watches), Chaumet
(Jewelry), Zenith (Watches), Bliss, BeneFit, Hard Candy, Make Up For Ever, Fresh,
Urban Decay (all make-up artists) Philips, de Pury & Luxembourg, LEtude Tajan
(all famous auction houses).
Also these years, broadened the companys media operations, thanks to a French radio
network and magazines, New World wine produces in the US and Australia, retail outlets in
the form of an Italian cosmetcs retailing chain,
8
KRUG, producer of some of the wordlt most expensive champagnes

LVMH Indutries

Luxury industry structure

Characteristics of luxury products

10

Global Market Size

Globaly growing market, sensitive to macro-events

11

Growth by geographic
markets

Important expected growth rate of the Asian Market

12

Recent trends
Globalization over 40% of sales is from luxury tourism

13

Recent trends
Globalization plenty of untapped potential in emerging markets

14

Recent trends
Consolidation individual brands are bought up by large luxury groups

15

Recent trends

???

Consolidation large companies experience much higher margins

Brand recognition (esp. emerging markets)
Economies of scale (eg. advertising)
Optimal brand portfolio management

16

Recent trends
Diversification apparel brands branch out to other
luxury product categories, eg. jewelry, cosmetics,
perfume, even restaurants

LVMH
17

5-forces model-Luxury
industry
Threat of new entrants-Moderate to low
Brand image and CRP
programs build high brand
loyalty
Scale economies
Capital requirement: very
high break-even point
Exclusive access to suppliers
& distribution

Suppliers Bargaining Power

Moderarte

Threat of Substitutes - Moderate

Rising popularity of middleprice brands

Consumers tend to trade
down during economic crises
Counterfeit

Olipololy with the big 3

Growing demand
High barrier for entry and
high barrier to stay

Rivalry among Existing

competitors
High

Limited high skilled workers

Key components and
materials are outsources
Highly specialized atelier
dart with a narrow scope of
expertise
Cannot switch easily to
another supplier risk a
lower quality

Buyers Bargaining power - Low

Decreasing
Decreasing buyers
buyers concentration
concentration
Incerasing
Incerasing number
number of
of wealthy
wealthy
househoulds
Top-tier
Top-tier customers
customers are
are usually
usually
early
early adopters
adopters and
and can
can drive
drive
consuption
consuption
No
No one
one single
single buyer
buyer can
can
determine prices
Increasing
Increasing switching
switching costs
costs with
with
loyalty programs

18

Threat of new entrants

Brand image and CRM programs
build high brand loyalty
Decreasing brand loyalty as a results
of different needs in emerging
markets
Traditional markets
Emerging markets
Craftmanship
(artisanat)
Exclusivity
Innovation
Service
CRM
Heritage

Extravagance
Status
Obvious brand logo
-> Easily swith to
other brands of
similar status
19

Scale economies
Consolidation of luxury brands achieve high economies of scale
LVMH, PPR (Gucci), Prada Group, Richemont
Minimize risk through diversification in the company brand portfolio
More financing options e.g. IPO
Operating synergies e.g. advertising
High marketing & management costs
Distribution Fees:
High rent to develop monobrand boutiques in prestigious shopping areas
e.g. South Koreas Apgujeong; HKs Tsim Sha Tsui Canton Road
To develop global presence, 400 stores are needed to cover the world!

High salaries for craftsmen

High investment for promotional activities
e.g. Chanels elaborate runway shows during Paris Fashion Week;
Louis Vuittons microfilm
20

Capital requirement
A very high break-even point
...In the luxury sector, even the smaller brands
have to pretend they are powerful and rich, and by
doing so they end up with a very high break-even.
..For example, every brand must be present
everywhere in the world.
...If the Japanese tourist cannot find his Givenchy
or Aquascutum store when he visits Milan or New
York, he may well conclude that these brands are
weak and he might decide to stop buying them in
Japan. (Abstract from Luxury Brand Management:
A world of Privilege)
21

Exclusive Access to Suppliers &

Distribution

Many brands have acquired suppliers to protect competitive

advantage and insulate against future rising supply costs
E.g. LVMH acquired two watch dial manufacturers Leman Cadran
and ArteCad SA, French artisan shoemaker Delos Bottier & Cie and
haute couture manufacturer Arnys.
Le Bon march and desire to be present in the distribution
More and more distribution access points are available to brands
Contemporary areas like The Bund in Shanghai brings a multisensory experience to luxury

22

Potential retaliation from the

existing companies
Small luxury brands do not have high
barriers of distribution
Pressure from powerful groups to
prevent them from having access to
multi-brand retailers

23

Threat of substitutes
Price of substitues
Quality if substitutes
Switching costs to customers

24

Price of substitutes
Rising popularity of middle price
brands
Consumers tend to trade down
during economic crises
Worldwide shipping of counterfeit
goods from Turkey, China, North
Africa,

25

Quality of subsitutes
Increased Internet accessibility of top
luxury brand designs allow fast
fashion brands to respond and copy
trends within weeks after fashion
shows
e.g. Zara, Steve Madden

26

Switching cost to customer

No monetary switching costs
Loss of prestige if switch to high
street or fast fashion brands

27

Buyers bargaining power

Number of buyers relative to
suppliers
Level of dependence on a buyer
Switching costs
Possibility of buyers vertical
integration

28

Number of buyers
Decreasing buyer concentration
Increasing number of buyers relative to suppliers
Example: Chinas emerging middle- class buyers
Concept of affordable luxuries spreading in second-tier cities
& satellite towns

Increasing number of wealthy households

Of the 1.6 million wealthy households, about 50 percent were
not rich four years ago

29

Level of dependence on a buyer

Luxury industry depends heavily on top-tier
customers
Average spending by luxury consumers rose by
30% in 2009
MOST driven by small groups of super- affluent
top-tier consumers

Top-tier customers eg. celebrities are usually

early adopters and can drive consumption
But not one single buyer can determine
prices
30

Switching costs
Buyers who develop an emotional
attachment to the brand may have
emotional switching costs
Increasing switching costs with the
introduction of customer loyalty
programs
E.g. LVs VIP clients receive free gifts

31

Possibility of backward integration

Extremely low possibility
Customers purchase luxury products
for direct consumption
No business reason for backward
integration

Size of luxury companies usually way

out of a buyers purchasing power

32

Suppliers bargaining power

Number of suppliers relative to
buyers
Level of dependence on a supplier
Effective substitues
Switching costs (swith suppliers)
Possibility of suppliers vertical
integration

33

Number of suppliers
Limited high skilled workers
Skills shortage retiring craftsmen,
not many youngsters willing to learn
Couture-level embroiderers in France:
~10,000 in 1920, dropped to ~200
now

34

Level of dependence on a supplier

Some key components and materials
are outsourced
e.g. LV outsources its monogrammed
leather
Chanel ordered a large bunch of
leathers from one supplier at one time
in case they wouldnt find a better one

35

Effective substitutes
Highly specialized atelier darts with
a narrow scope of expertise
E.g. Feather-maker Maison Lemari,
Costume jewellery and button-maker
Desrues
Very hard to replace

36

Switching costs
Cannot easily switch to another
suppliers
Past cooperating experience is
important
Risk a lower quality of products after
switching to new suppliers

37

Possibility of forward
integration
Extremely low possibility
Luxury companies, especially large
groups, are much more powerful and
wealthier than their manufacturers

38

Rivalry among existing competitors

Competitive structure
Demand condition
Exit barriers

39

Market structure
Oligopoly
A few large luxury groups dominate
Large number of small independent
brands
Big Three
LVMH
Richemont
PPR Gucci
40

Top 10 industries players

41

Demand condition
Demand will grow at a relatively high
rate in the near future

42

Exit barriers
Emotional Barriers
Some brands may not break even but continue
operating due to a small number of extremely loyal
customers and critical acclaim
E.g. Christian Lacroix, never made a profit for the 22
years in operation
Specialized Assets
May be difficult to sell the highly specialized supply
chain components
E.g. Chanel has 6 atelier darts under it
Specialized machines no alternative purpose
43

5-forces model-LVMH
Threat of new entrants-Moderate to low
High entry barriers
LVMH products, quality,
service
Cost advantage due to the
old presence of the cie on
the market

Suppliers Bargaining Power

Low

hreat of Substitutes Moderate to high

Many other products (Prada,

Dior)
Countefeit issues

Olipololy with the big 3

Growing demand
High barrier for entry and
high barrier to stay
Wars of talents

Rivalry among Existing

competitors
High

Relatively low
LVMH purchase rawmaterials suppliers, which
reduces loss marking and
establishes economies of
scales
e.g: recently bought
Tanneries Roux

Buyers Bargaining power - Low

Targeted
Targeted customers
customers smaller
smaller in
in
term of market size
2
2 types
types of
of customers
customers :: High-net
High-net
income
income and
and middle-market
middle-market
customer
customer
Not
Not compatible:
compatible: the
the first
first are
are quite
quite
loyal, and the second type more
volatile
volatile

44

Bargaining Power of Buyers

Low.
Targeted customers are smaller in term of market size
2 types of customers:
fortunate (High Net worth individuals, seem not subject to the world
economic cycles, and are a growing number (+9% per year) and
middle-market customers
- selectively trade-up to higher levels of quality, taste and aspiration)
- Can potentially expand the market quite dramatically
- Great opportunity but also a threats (more demanding, more selective,
showing less brand loyalty than the most fortunate ones.
-> Problem for the brand, because the 2 kinds of customers are not quite
compatible, and this situation can lead to a difficult trade-off between
satisfying a smaller number of loyal customers and a larger number of
more volatile customers
45

Bargaining Power of
Suppliers

For LVMH, relatively low. Because the company often

purchase raw materials from suppliers in basis of
consignment. With this method, it reduces the loss marking
and establishes economies of scale.
e.g: LVMH has recently taken over les Tanneries Roux, a
leather supplier. With this move to acquire key suppliers, it
will reduce the bargaining power of suppliers in terms of
leather products. By limiting the capability to plan suppliers
contrary to each other. LVMH would be able to save costs
on storage space and capable in making sure of the quality
of products supplied.

46

Threats of new entrants

Few new entrants threats which LVMH can focus on evaluate how much of
a threat of new entrants are for LVMH
New entrants made up mainly by new designers of new own brand in the
industry, they are normally successful, and would be quickly acquired by
the more famous brand of the industry to provide them facilities and
needed infrastructure for growth.
In return, if the new entrant remained independent, this would represent a
threat to the company, by capturing volatile middle market customers. BUT
these customers go after the established name and perception, which
makes the threat of new entrants less significant.
Also, the barriers to entry are high. Customers loyalty for LVMH among
time, product service and quality are undeniable whereby a new entrant
cannot be compatible for short period of time.
LVMH has been functioning in the luxury products market for a century,
giving them the complete cost advantage in business key development,
which is absolute to new entrants by playing well in engaging their image
in the market place to sustain their perception to cater not only customers
need and wants but also the customers desires.
New entrants find it difficult to survive and would easily be kicked out the
47
market

Threats of substitute produtcs or

services
Relatively high.
Many other luxury products such as Prada, Dior, Chanel,
Hermes, Armani,
Main competitors: PPr (now Kering, having Gucci, Yves
Saint Laurent, Boucheron, ) a,d Cie Financire
Richemont (Cartier, Montblanc)
Counterfeit issues: LVMH has to emphasis on the company
core competency, uniqueness of product and service, and
to attract and retain capable employees in order to have
better value chain and distribution to reach the final users
Louis Vuitton and their Toile Monogramme, substitutes
find it hard to earn in the market when the loyal
customers are well-knowledge on the differences
48

Rivalry among existing

competitors
Relatively high
Oligopoly with 2 other main players: PPr (Kering) and Richemont.
BUT given the high margins and the customers perception about the price, the
competition is not on price, but on quality and image perception, as well as on the
ability to attract the right designers with right abilities
Wars of Talent, e.g, LVMH has the star designer Marc Jacobs for Louis Vuitton
The barriers to entry are very high. LVMH has built the intangible image and the
perception built around the brand.
Barriers to stay very hard to: continuous need to feed the image, to maintain the
perception but still to respond to customers need and changing expectations.
Trade-off between exclusivity, stylishness, extravagance and lasting image makes
it difficult to be for a long time in the business.
Hardly any barriers to exit given the high barriers to entry and to stay -> the
dynamics of the industry are: few big players and only the best
LVMH have to bear copycats as the high level of fakes as an open publicity and
competition from other brads, and there is only a limited group of customers who
can afford to buy genuine product due to limited brands.

49

To sum up
The buyer power is reduces because buyers
lack suitable alternatives
To mitigate the power of suppliers, the
company purchase main raw materials
suppliers in order to let the other players
compete
Creates higher entry barriers due to customer
loyalty, to lower the treat of new entrants
Establishes customer loyalty and hence less
threat from substitutes
50

Competitve strategy of LVMH Differentiation

Unique products and services

Price is not a problem: customers seek for uniqueness, prestige, brand image quality,
and are glad pay a premium
Customer service : importance to have controle on the retail channels for the highest
level of customer service. The desire of Bernard Arnault to aquire retail points, in
order to spread the luxury value not only on final product, but also during the
purchase process and after sales
Main competitors are not competing on prices, we can talk about a high price
parity
Integration of multiple points along the value chain
o Efficient order processing (e-commerce for all brands, LVMH e-commerce
website)
o Very close relation with customers (mail, brochure, invitation for coktails,
fashion shows, privates sales), espacially for main customers (loyalty
programs, gifts)
o Customer service request are seriously taken into account: if a product is not
available in a specific region, it will be ordered immedialty and receive as
soon as possible

51

LVMH Strategy
Strategy-diversification into
luxury goods
CORPORATE STRATEGY: business
diversification, merger&aquisition
BUSINESS STRATEGY: focus on quality,
Innovation, Marketing

52

Life cycle
LMVH
position on
the life cycle
between

53

From 1999 to 2002

A slight decline in 2001, but the

company has quickly caught in 2002
54

From 2009 to 2011

55

Support Activities

Value chain Analysis

Firm
Infrastructure
HR
Management
Technology
Development
Procurement

LVMH
House

Decentralized System various brands operate

independently, with own creativity & brand image
Effective information technology
small nr of managers
Top designers
Special training for craftsmen
Emphasis on retining best talent and employees
Product design, R&D process- carefully planned
with the most modern and complete engineering
technology
Production process - a creative process and
perfect combination of technology &handicraft
A common supply chain management system

Primary Activities
Operatio
ns

Cost Control & Resource

Saving (common R&D
group for variuos business
units + conducting
development work =>
sharing resources and
competences
-most brands manufactured
in country origin, few brands
moved to low cost countries

Logistic
s
Combined
shipping (Sea
route, time
saving)

Marketi
ng&Sale
s
Control over the
distribution and sale
of products among
many business units
-Selective Retailing,
Media
Advertising inside
desing team
-Distribution Channel

Servic
e
Premium
service
After sale
Loyalty
program

56

Sinergies of the Value Chain

Interrelationships inside the firm increase value
& quality by exchanging practices and resources,
knowledge sharing
Technology - exchange of technology via Intranet
Operations - overlap among many businesses due to cost&resource saving
Sales & Marketing, Service- an obvious overlap, different businesses can
lean on each other for accessing the market given that target market is the
same

Relationships of activities within LVMH with

customers and suppliers
- e-procurement
- all businesses are trading in similar markets (high-end of the market,
premium price tag) => common practices in relation with customers

57

Resource-Based View of
LVMH
Competitive advantage => combination of tangible & intangible
& organizational capabilities
Tangible resources:
- Physical Assets: numerous factories in France, Spain, Italy;
sophisticated machinery&equipment
- Large financial capabilities
- Technological resources: artistic creativity & an innovative
production process , trademarks, patents (LVMH Recherche)
- Organizational resources: effective planning (carefully planned
production process, distribution ; effective control on distribution
&sales
- Core assets of acquired brand are assessed and partly preserved

58

Resource-Based View of
LVMH
Intangible resources:
- Well-known designers, high experience & capabilities craftsmen and other
employees, strong managerial skills
- LVMH Recherche: innovation capabilities & scientific expertise
- Reputation: image and brand names
- Creative team and management of acquired firms are preserved
- Knowledge is shared but at the same time the culture of company is maintained

Organizational capabilities:
- Great capability of the management of luxury brands: market analysis, product
development, advertising, promotion, retail management, customer service,
quality assurance.
- capabilities are deployed across Louis Vuitton (accessories and leather goods); Hennessey (cognac);
Moet et Chandon, Dom Perignon, Veuve Clicquot, and Krug (champagne); Celine, Givenchy, Kenzo,
Dior, Guerlain, and Donna Karan (fashion clothing and perfumes); TAG Heuer and Chaumet
(watches); Sephora and La Samaritaine (retailing); and some 25 other branded businesses

59

BCG Matrix for LVMH

Fashion & Leather Goods foundation of LVMH success, timeless

brands, very integrated in the companys strategy of production process
quality&excellence, creativity&innovation
Perfumes&Cosmetics- good outlook for the future, LVMH should
enhance of competitiveness
Wine&Spirits, Selective Retailing- main source of revenue
Media&Other Businesses- media focused only on French market,
60
strategic moove from LVMH to be present in this field

Innovation in

two types of innovation:

1. Product innovation
2. Process innovation
61

Product innovation in LVMH

LVMH Recherche, founded in 1981 as a G.I.E. (Groupement dIntrt

Economique).
Members: Parfums Christian Dior, Guerlain and Parfums Givenchy.
Approximately 250 researchers (in Saint Jean de Braye).
Areas of research: biologists, chemists, pharmacists, medical doctors,
ethno botanists, physicists
Mission: develop innovative cosmetic approaches based on the latest
scientific discoveries.
Collaborative studies with researchers in the major universities and
research centers (Ex. Cooperation with University of Orleon).
The expertise and the know-how of its researchers in the fields of skin
biology, of formulation, as well as its discoveries of active ingredients
and evaluation methods of cosmetic products (skin care, make-up,
perfumes)

62

Process Innovation in LVMH

The main core of the innovation creativity of the

designers.
Giving complete freedom to designers by
decentralization of the department. Each brand
very much runs itself, headed by its own artistic
director
Inventing product to see the creations on the
street on their costumers.
Picking up right designers and ateliers , training
them for and maintaining them for a long time
Specific testing of products comparing with
competitors products
Hand made Louis Vitton shoes
63

SWOT analysis
Strengths:
- powerful and prestigious brand
- known worldwide
- strong quality control
- share operational resources across
the brands and divisions
- exclusivity by multiple brands
- decentralized management
- superior R&D in perfume and
cosmetics
- ads with celebrities

Weakness:
-high prizes for some brands
-too much focus on Star brands
-higher number of brands
-over focus on specific consumer
target
- lack of attention and neglecting
smaller brands

Opportunities:
-market expansion to new regions
- low cost materials
-increasing margins due to price policy
-to source creative talent globally
- invest more on R&D
- transfer skills and strengths
- interests (cooperation) with competitors
(Guci)

Treatments:
-Low cost imitators (China)
- price deflation
-Increasing of the price for row materials
- loss of talented and experienced talents
- global and regional economical and
political conditions
- other luxury brand competitors

64

PESTEL analysis
Political:
-Establishing of Anti-Counterfeiting
Trade Agreement (ACTA)
-Political Issues for cheap labor in
Asia
-Good International relations for
trade
-Existing commerce infrastructure
-Being part of EU, allowing to make
easy trade with same currency within
the Europe
-Trade sanctions (Sanction against
Iran)
-Reluctance to trade with specific
regions (Middle east)

Economic:
- One the leader economies
LVMHs impact on globalization
-Exchange rates: USA, EU, Asia
-Global economy: out of recession
-Inflation rate: low
-Interest rate: low
- large presence of workforce: more
people-lower wage, less peoplereduced production

Social:
-Workforce age: increase in
workforce population (baby boom
echo)
-Market age: baby boomers are
affluent
- religion: taboo for alcohol and
materialism
- trends: fashion and innovation
-Perception of prestigious items

Technological:
- High percentage of R&D
expenditure in France
-Good presence of online marketing
service
-Strong base Machinery and chemical
formulas
-Presence of social media

Legal:
-embargos: can lead for loss market
- labor low: inflexible but secure
- truth in advertising: EU bans
misleading ads.
- counterfeiting: reduces prestige

Environmental:
-Climate change: change in arable
lands (vineyards)
-Energy waste: effects on distribution
costs
-Carbon footprint: huge amount of
CO2 in wine production
-Quality of Water
-Reserve the natural resources

65

Conclusion
LVMH is the one of the main actor of luxury goods retailing and
luxury marketing
Through numerous acquisitions, this company takes the biggest
share in a notoriously fickle market.
With an increasing revenue despite a global recession, and the fact
that most LVMH products are high-priced and never go on sale is a
testament to both tremendous quality and masterful marketing.
Planning for the future, LVMH must be cognizant of the emerging
BRICS nations, in addition, to the rising elite of China and Indie
simply due to their population size.
LVMH must also invest wisely in the emerging markets and attept to
acquire PPE at low costs in order to help maintain a profitable
bottom line.
Paramount to all, LVMH must stay true to its core competency
selling the worlds premier luxury lifestyle
66