2) The Geographic Position in Sales:
C. LVMH’s Analysis
We need to do first an internal and external analysis of the company to understand what can be done to improve LVMH’s growth profits and sales during the next few years. Then we have to focus on the different sectors. Both analysis will enable us to know what are the success requirements for LVMH.
1) Company SWOT
- Internal analysis comments:
- The most important strength of LVMH is its valuable portfolio of luxury brands. Consumers don’t buy only a product but also:
- The image
- The values promoted by the brand
- LVMH has a long history which is associated with tradition. LVMH means:
- Reliability
- Quality
- Style
- Innovation and authenticity
- In the consumer minds it also represents the image of a mythical France.
Among its portfolio Louis Vuitton symbolizes the jewel of LVMH. Indeed it is the engine of LVMH with 22% of its sales. It provides huge cash flows.
- The major weakness is the variable costs. The cost of goods sold is still high which lead to a less important gross margin compare to the competitors’ one. In fact LVMH gross margin represents 65% of its sales ((gross margin/net sales)*100) while its competitors recorded 66% or 68%. That shows that synergies are not at their optimal level.
- External analysis comments:
- LVMH’s market is global. LVMH have to position itself into the Asian market especially in China and in India.
- In fact China and India are emergent countries which have a very high potential. China shows a growing sophistication in lifestyle need and will play a pivotal role in the future of brands.
- There are 2million of millionaire in Asia and their estimated average annual increase represents 7.4%.
- The counterfeit problem is the major concern of LVMH. The challenge will be to protect its brands.
2) SWOT Per Sector
- The Perfumes and Cosmetics
- The watches and jewelry branch
- Fashion and Leather goods
3) Key Success Factors for LVMH
To compete successfully and keep its leadership position on the luxury market LVMH need:
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To keep a strong corporate image.
The excellent quality of LVMH products contributed to build its strong corporate image. The craftsmanship factor is also important. Products convey symbols, they generate dreams and make the consumer feel that he has a high society status. LVMH must maintain its desirability.
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To keep and improve its distribution network.
It is an important part of the vertical integration. Thanks to this LVMH created an environment in which the image and status of luxury brands were enhanced. It controls where its products are sold and who is selling them. Nevertheless LVMH has to pay attention to keep the scarcity of its products. It is an important value of the luxury products. LVMH must continue to manage the exclusivity of its products even with high volumes.
LVMH has more than 50 luxury brands in its portfolio. That allows LVMH to control the entire channel from production to commercialization. That also allows to profit from synergies and growth opportunities inside the group. Hence it allows reduction in costs and gives a competitive edge to its affiliates.
- An international presence.
LVMH is present in 60 countries at least and needs now to improve its international presence especially in Asia where emerging countries account more and more nouveaux riches. LVMH has to take advantage of commercial relationships already established and its culture knowledge in order to open more stores in those countries.
To keep its leading position, the company has to give priority to innovation
LVMH is a great advertising buyer for fashion magazines and an important client for other outlets. (They spent more than 1billion euros in advertising (11% of sales in 2002). It has a strong bargaining power. LVMH must continue to invest a lot in advertising especially in Asia. Therefore, LVMH has a great capacity to promote brands and communicate product innovations.
4) Competitors
Gucci, Richemont, Bulgari and Hermes are the main competitors of LVMH. All this five powers, controlled approximately 22% of worldwide industry sales. LVMH and Bulgari were leaders in the Asia-Pacific region; Richemont and Hermes controlled the European market and Gucci succeeded in being strongly present in Europe and North America but also Japan.
For a better understanding of LVMH’s strategies, we must know its competitors strengths. This is why, we are going to make a brief presentation of these four groups.
Guccio Gucci, reseller of luggage imported from Germany at origins, started in Florence, Italy in 1923 and 30 years later the company began its global expansion strategy. During a certain period its image was associated with scandals, murder plots and mafia murders but after being bought by Investcorp, the well known designer Tom Ford and the CEO, Domenico De Sole, succeeded in reestablishing the company. Gucci’s ‘product designs were improved and the company initiated buybacks and terminations of licenses and took firmer control of the brand, its products and their distribution. Gucci took the way of the multiband strategy and synergies. In September 2001, following the Settlement Agreement 68% of the company's' shares belonged to Pinault-Printemps-Redoute and 11% to Credit Lyonnais. In January 2003 the Gucci Group had 348 directly operated stores: 173 with Gucci and 48 with Yves Saint Laurent.
Richemont occupied the second place among the companies of the luxury world. With Cartier, Van Cleef &Arpels and Piaget, it dominated the market of jewellery and watches (70% of total luxury product sales generated in 2000)
Founded in 1837, Hermes began its business with leather harnesses for horses and later on continued with a diversified line of luxury product, from clothing to perfumes and leather accessories, using this single brand. Qualities, fashion leadership, products manufactured in house were their key success. Hermes still largely family-owned 80%), they also succeeded their international expansion. In 2001, 78% of its sales were outside France thanks to its 200 stores in luxury centers. 25% of its sales in 2000 were made in Japan.
It owned 99 stores of which 72 were company-owned and the rest were franchised outlets. The diversity of its products (watches, jewelry, perfumes, fashion accessories, silks, table wear and eyewear) has the "classical chic" image which attracts the traditionalists but also the trendier clients who tended to be mostly first time buyers. This broad appeal constitutes one of their key success.
In 2000, 46% of sales were in watches and 33% in jewelry. Japan and the USA were the leading markets, while Asia-Pacific region accounted for 36% of total sales)
II) LVMH’s Strategic Integration
In the first part we have analyzed the LVMH’s environment. We have seen its strengths, its weaknesses, its key success factors and the force of its competitors, and now there are questions we have to answer. Answering the questions will mean giving recommendations for the future strategic challenges of the Group and this is the reason for which we are here.
A. The Logic of Métiers
In this part we will try to answer a very important question and that is if the Group is prepared for the future, more exactly if it is optimally structured to face the future strategic challenges.
As we know, since the merger of Louis Vuitton and Moët Hennessy in 1987, LVMH has acquired more than 40 brands (There were less than 10 brands at the beginning). The strategy of the conglomerate was to buy luxury brands in different sectors. It was a great success; in 15 years LVMH acquired the most valuable portfolio of luxury brands in the world.
Although, the more LVMH added new brands and activities to its portfolio the more complex they became. The structure was centralized during 10 years and after that it needed to adopt the way of decentralization. This is the path they begin to follow in 1997 in order to be more transparent and to benefit from synergies and values enabled by the size of the conglomerate.
Thereby, LVMH had the idea of combining disparate businesses under the logic of métiers. It consisted in grouping luxury good brands in five different houses (institutionalized structures). We can say that the reorganization of the Group was necessary.
We can see below the different houses and what brands belong to the Group:
Simplified chart not including other activities
We will continue now our analysis with the presentation of the different houses and their structures.
- The Perfume and Cosmetic branch:
This is the first integrated branch and it was created in 1997. In this sector the Group owns prestigious brands like Parfums Christian Dior or Guerlain or Givenchy and it is the third in the world in this sector. These three brands centralized their R and D teams. They also centralized purchases of supplies, production and distribution. Moreover there was a merger between critical services like legal support and finance into the shared service centers. Thanks to this, the starts up acquired in the US can benefit from the support of the shared services centers.
Moët Hennessy is the leader in the champagne and cognac industry and has one of the best distribution networks. There is a partnership between Moët Hennessy and Diaego which is the owner of 34% of Moët Hennessy. With this alliance they have the world’s premier portfolio of high end brands. Together they have a strong bargaining power and they obtain economies in distribution. LVMH owns high end products in this Group. Because of this alliance, strategic integration in this sector is limited only to distribution. Brands are independent.
LVMH is the owner of specialized selective retailing which are Sephora, Le Bon Marché and La Samaritaine, it is also the owner of travel retail Duty Free Shoppers and Miami Cruiseline. The acquisition of selective retailing was made to complete the vertical strategic integration. With this the image and status of luxury goods are enhanced.
We will now focus on the two new sectors added on 2000: The Fashion group and the Watch and Jewelry branch.
This group owns 828 stores around the world. The majority of sales are attributed to Louis Vuitton. There are famous brands in this group like Donna Karan, Fendi, Kenzo, Givenchy couture house. Within the group there are powerful infrastructure and shared resources. The principal advantage of the integration in this group is sourcing which offers a major opportunity for cost reduction. Indeed, the branch acquired leather centrally as well as a ready-to-wear fabric and Rosimoda (fabrication of shoes for Pucci, Berluti and Louis Vuitton). They use their bargaining power to reduce the price of advertisement spaces. They share their technical and industrial knoweldge. The company is well integrated and its identity and strategy are not affected.
This branch provides the highest sales and income from operations at LVMH. In spite of the volatility of the fashion industry it provides huge cash flows (a great part is brought by Louis Vuitton). The different brands have a strong image and deep history which ensure success. This group is important within LVMH.
- The Watches and Jewelry branch:
The group includes brands like TAG Heuer and Zenith which are very famous Swiss brands, Montres Christian Dior, Chaumet and Fred (French reputed jewelers), Omas (famous designer of writing instruments) and DeBeers ( a Louis Vuitton joint venture). LVMH reduced operating costs with consolidating back office activities. It is the latest branch which has been created but brands have been structured as a branch since the beginning. Synergies were realized in fields of product development, sourcing, production and distribution.
However the downturn in 2001 stood in the way of any growth in the sector. The activity took time to yield results. TAG Heuer is the more dynamic brand within the group. We can see that during the first nine months of year 2004 all the brands posted double digit organic sales growth so there is a return to a profitable situation. Luxury watches brands and jewels makers were acquired because they are industries that LVMH understands: luxury products. That is why LVMH made a good investment in this sector.
A branch president is designated for each métier. He has the responsibility to integrate the different brands but he must maintain their independence. This brand independence is very important within LVMH. Thus we see to what extent each division is integrated. We can say that the Fashion group and the Perfumes and Cosmetics group are more integrated than the others while the Wines and Spirits group is the less integrated.
However, we noticed that costs of goods sold are still high at LVMH compared to its competitors. The gross margin is reduced because of it. That implies that synergies did not reach the optimized level. We will see in the second part how to optimize synergies within LVMH.
B. Optimization of synergies:
The diversification strategy had an implicit effect to the Group: the synergy had to be applied at two levels: between the houses and within the house.
As we previously said, the LVMH’s brands want strongly to keep their independence because it is an important element for their creativity. Therefore some synergies have already been made but they can be improved and some others could be achieved in order to reduce costs as follows (cf. exhibit below):
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Synergy in administration: LVMH can merge the financial and accounting activities which operate at the branch level into the one which operates at the corporate level (which was previously centralized).
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Cross brand synergy: LVMH need to increase the collaboration between some brands in different houses like in the case of Christian Dior House which used its well known brand name to produce and sell fragrances and jewelries. Executives too should circulate among different brands in order to share knowledge.
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Synergy in sourcing: it concerns raw materials. Within a house, brands can buy together in order to save up money like they have done in the perfumes and cosmetics house. It has already been done in the fashion house but it can be improved.
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Synergy in logistics and distribution: Within each group, brands have different bargaining power. Those which have a strong power can impose themselves in front of the other brands. They can join their commercial teams and that will reduce costs.
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Synergy in research and development: Like it was done in the Perfume and Cosmetics group, the activities of research and development of brands must be transformed into one group in order to share technical knoweldge. LVMH has to be careful not to “disturb” the development and the identity of each brand.
III) Marketing Program: How to Double Profit within 5 years?
A. General Recommendation on Strategic Sectors
To make sure that LVMH doubles its sales and increases its profits within five years, the group has to focus on its internal growth by investing on its more profitable sectors:
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Fashion Group: between 01 and 04, this group remains the one that is recording the biggest part of the sales and the most important incomes. It's also the sector where the most important investments are realized. These investments have to be more important in a policy of increasing sales. By increasing the investments, we also increase benefits. A particularly attention has to be paid on the brand Louis Vuitton « The Brightest Star » whose sales are the most important of the group: investments will have to be especially targeted on this brand.
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Wines and Spirits: Between 01 and 04, its sales are increasing (despite a small decrease in 03, saved in 2004) and its incomes are important and continuously growing.
More important investments have to be realized in order to always increase more the benefits.
These two sectors are no so ahead of « Selective Retailing » and « Perfumes and Cosmetics » which are recording considerable trades between 2001 and 2004 but whose benefits are still far from reaching the « Fashion Group »and « Wines and Spirits » level.
Our strategy consists in reinvesting earnings generated by the two most profitable sectors on these booming sectors (also invest in « Rising Stars » like de Beers). So as to boost sales and increase incomes in these sectors it is necessary to:
– Innovate in these sectors thanks to efficient investments in R&D,
– extend range of products,
– invest in advertising,
– encourage synergies (production costs, logistics, supply, R&D...)
To generate big margin, it is in the best interest of LVMH to develop its sales network on internet in order to reach consumers who don't have the possibility to buy these goods in stores.
Another strategy consists in targeting consumers of the working class who actually don't consume very much or even not at all, by democratizing some products.
Our last strategy, which we will develop into our last part, consists in geographically expanding and more especially in Asia.
B. The Asian Market
You will wondering now why this and why as final part ! Our goal has been, since the beginning, to double profit within five years. The emergent Asian market is the direction where great investments must be done because there is a large capacity of growth, the market has a great potential of development and the consumers’ behavior has been changing. Why did we choose Asia? Because this market is the answer of our question of how to double profit in five years. Asia is the key element of our strategy. We will prove this by presenting you the threats and opportunities of this market and then the recommendations per sector and geographic dimensions.
1) Challenges and Opportunities
a) The main opportunities are:
-China has a growth rate of 8% and a negative inflation rate and the annual growth rate of premium cosmetic market is 30%.
-South Korea GDP growth rate is about 6,5 % and the inflation rate is 3,1%.
-In India the GDP growth rate is 7% over the previous 10 years.
- The ever-increasing middle-class population.
- High share of lower age groups (15 to 55 year-old)
- The income of the middle class population is growing.
- Some markets are not yet exploited.
- Some markets are not touched by some external crisis, as the South Korean market.
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A growing consumption and attractiveness for luxury products:
- Asia represents 29% of the sales of the Group in 2003.
- In 2003, 20% of the total Christian Dior’s sales were made in Japan
- Well educated young people make a better-than-average living and are interested in fashion designer products.
- The growing interest for international travel leads to an increased awareness of luxury brands.
- Buying a luxury brand means for the emerging middle-class buying a social status.
- The luxury sector is in full expansion.
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The competition advantage:
- LVMH is the first western luxury Group implanted in Asia, in spite of its competitors.
b) The main threats are:
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Setbacks already encountered:
- Opposition by some activist groups against the popularization of the luxury market.
- A special consumption tax on luxury goods.
- Non availability of variety of models, designs and colors.
- The depreciation of the yen against the dollar combined with declining Asian tourism, affected DSF in Japan (-30% in sales).
- In 1998, the Asian crisis.
- In 2003 SARS and the spread of chicken flu diminished largely the number of tourists and the local population didn’t spend much time on shopping being afraid of the disease.
- The multi-brand strategy did not deliver additional profit in some stores.
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Present and future threats:
- The instability of Asian economy.
- Political uncertainties; risk of new tariffs.
- The monetary risk: the Asian currencies are unstable.
- The problem of taxes.
- The high competition level: all luxury brands will establish in the Asian market and have a lot of stores in every strategic place; we mustn’t forget the local competitors.
- The cultural influence of the Asian region on its business (Muslim don’t drink alcohol for example).
- The “gray market”.
- The counterfeit remains a challenge, even if all brands within LVMH had a special group that looked after the Company’s interest in maintaining brand integrity (this group being associated with local professional organisations, local legal institutions and governments in hunting down merchandise sales).
2) Recommendations in the process of expansion in Asia:
Now we can definitely say that Asia is the key for our growth and the expansion on this market must become a priority because of its high potential. Therefore, this market has become more important than the American one with 30% of the total sales of the Group in 2002 and 29% in 2003.
What are the next questions? WHERE and HOW?
So our strategy to expand LVMH’s dominance in Asia and to double profits has two dimensions :
- A geographical dimension: Where will LVMH settle in Asia?
- A sector dimension: How will LVMH conquer this market?
- Geographic recommendations
The thing we want to explain in this table is that we make a strong distinction among the Asian countries where LVMH has already established its stores. The geographic sector which represents the key of our future growth is of course the dynamic market. These will be the countries where LVMH will focus its main demarches to strengthen its position by:
- Multiplying its shops and acquisitions,
- Making investments in advertising in order to make the brands’ names known better,
- Strengthening the brands,
- Continuing the control of the “gray market” (maintaining the database and identifying the customers through their passport numbers),
- Fighting the counterfeit. (The Group had already taken measures against this issue and they also have been helped by local authorities and Governments and focused on hunting down counterfeit merchandise sales. Yet the counterfeit network continues to live and evolve. This is why we think that the fight must be strengthened directly on the field. The investigations and the information must be more dynamic in order to allow the Group to take measures as faster as possible. Having their proper network of outside investigators in collaboration with the legal service will enable the Group to discover quickly the counterfeit networks. And when we say counterfeit network we say: the producer, the transporter, but especially the seller and his landlord if there is one in his case. So the focus must be made on the end of this chain, this means to take action against them and to convince sellers and landlords to refuse the commercialisation of counterfeited products. In case of refusal or non collaboration the measures against them will involve requiring monetary damages and interests too.)
We will not forget of course the other markets of the Asian continent. In South Korea and India we will develop our networks in the cities where we have already established our stores. The rest of Asia, the not yet exploited market, will be the next step after the consolidation of the Group in the less dynamic market.
- Recommendations per sector
We must have a view per sector too when analysing a market and creating strategies because each sector is different and has its own demands, and in this case we have to take into account the difference between the western and the Asian culture too. And this is why we will detail the recommendations.
We know that the consumption of wine and spirits on the Asian continent is lower than the Occidental one (in 2003 the percentages of sales are: 37% N&S America, 37% in Europe, 22% in Asia, 3% in other markets), but there is a real increase in this sector and we mustn’t forget that the behaviour of the Asian consumer has been changing. If they have been adopting the western look, they have been adopting the western behaviour too. So the wine and spirits sector represents a great potential for the Group. The market of wine and spirits in Asia has evolved over the past few years. We have to take into account the fact that position of women in the present society has been changing too, so they are a new target in certain Asian countries, because more women are drinking wine today.
Thus this new market promises future growth opportunities. To achieve this goal, the Group must:
- increase volumes,
- develop especially the brands which have a special French resonance : Hennesey, Moet&Chandon, Dom Perignon, Veuve Cliquot, Canard Duchene,
- launch many advertising campaigns to reinforce the brand image of the Group (a key success factor),
- maintain the top quality products and the high prices policy,
- innovate (a key success factor)
- Fashion and Leather Goods
Fashion and Leather Goods is one of the sectors that make the most important profits in the Group. The star brand is Louis Vouitton which is very appreciated by the Asian women. So we have to bet on the “new” Asian woman who has become independent and more and more interested by her image. Another great advantage is that we have a young market.
Thus the recommendations are:
- to win this young market by being close to consumers,
- launching many advertising campaigns to reinforce the brand image of Louis Vouitton and especially of the other brands of the Group (example: fashion parades to present new collections)
- develop especially the brands which have a special French resonance: Louis Vouitton, Marc Jacobs, Givenchy, but also Brands like Fendi, Donna Karan,
- to focus its investments on the products that interest the most the Asian consumer, the flagship products
- to continue to launch new products and lines
- to make alliances with Asian creators so that they should understand better the local demand
This sector needs strong innovation and adaptation to the local demand. So the strategy will be in this direction. The “new” Asian woman is a great opportunity because, as we have already said, she pays more attention to her image. Yet the Asian woman is different than the western one. The beauty is understood differently; for example they like the flashy make-up and the white skin.
So the main investment must be done in the R&D and in this way they will adapt the product to the local demand. Investments must be done of course in advertising campaigns too.
Christian Dior has already won the market, so they must develop especially the brands which have a special French resonance like Parfums Givenchy, Guerlain and Parfums Kenzo.
The TAG Heuer brand must continue the strategy used till now but also to develop its network stores. The “improvement” must be the motivation word. The Group must bet and be more creative in the brand of Christian Dior, and to introduce the new ones: Fred Paris, Chaumet, Fred, Oman and DeBeers LV jewellery. So, the creativity is compulsory in this sector and it must be more dynamic. It is important not to stop launching new products and the commercial part must be strengthened.
The retailing division had no profit for the last three years. Yet we mustn’t give up to this sector because until 2001 they brought profit; so we have to bring them at the same rhythm of growth they had before 2000 when the division contributed with 28% of the company’s sales.
In this perspective our recommendation will target two directions:
- development of the network especially for Sephora, Le Bon Marché and La Samaritaine
- investments in the employees’ training part , to create in this way a new customer approach and new services included in the sale process (for example the seller should know how to give make-up advice to the Asian customer).
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