Business Analysis: LVMH Moët Hennessy Louis Vuitton
(Name of Course)
Introduction
LVMH Moët Hennessy Louis Vuitton is the world’s largest luxury products group, with sales of nearly 30 billion Euros in 2013. The company controlled by French billionaire Bernhard Arnault has transformed in the last quarter century from a clothing manufacturer nearing closure into a conglomerate that controls over 60 luxury brands (The Economist, 2012). It is considered the pick of the luxury groups, generating higher returns and better profitability than any of the competing luxury groups worldwide. Building a reputation for craftsmanship and quality matched by few, the company has created an aura of exclusivity that has contributed to its market capitalization of over 62 billion Euros (LVMH, 13).
LVMH currently ranks as the world leader in soft luxury goods – namely leather accessories. Its key brands include its flagship Louis Vuitton and supporting brands such as Fendi, Kenzo and Marc Jacobs. It is also the leader in luxury wines and spirits, with brands like Dom Perignon, Moet & Chandon and Hennessy as part of its product portfolio. It also has significant brands in hard luxury – jewelry and watches. It owns Tag Hueur and Bulgari, considered some of the largest names in performance and jewelry watches respectively. Apart from these, it has significant holdings in perfumes, cosmetics and luxury fashion. The company is presently trying to get control of Hermes, one of its largest rivals in the luxury bags segment. In total, the LVMH Group owns over 60 luxury brands in various categories.
LVMH is a diversified luxury goods company. Its main divisions consist of Fashion and Leather Goods, Wines and Spirits, Perfumes and Cosmetics, Watches and Jewelry, and Selective Retailing. The LVMH business generated 29,149 million Euros in revenue in 2013, and profits of 6,021 million Euros. The break-up among the various business divisions is:
Business Unit Revenues Profits
Wines and Spirits 4,187 1,370
Fashion and Leather Goods 9,882 3,140
Perfumes and Cosmetics 3,717 414
Watches and Jewelry 2,784 375
Selective Retailing 8,938 901
Other Activities (359) (179)
Total 29,149 6,021
(All figures in millions of Euros)
Since the Wines and Spirits and Fashion and Leather Goods segments generate 48 per cent of the revenue but 75 per cent of the profits for LVMH, these two divisions represent the bulk of the company’s business. We will therefore analyze these divisions to understand the company’s business strategy.
Luxury goods as a market has been growing significantly in the last two decades with increasing globalization and demand for top quality brands increasing from the developing markets. Industry analysts estimate that as much as 60 per cent of the demand for luxury goods is coming from aspirational rather than elite wealthy customers. This segment trades essentially on established reputations of brands and a focus on quality, innovation and creativity, and maintaining its premium image consistently.
In this regard, LVMH has been one of the leading luxury makers, unwilling to sacrifice quality and workmanship for a chance to cash in on quick profits offered by developing markets. As a result, the company has shown one of the lowest growth rates in recent years, growing at 5-6 per cent when the industry is growing at close to 10 per cent per annum. One of the key reasons for this has also been the drop in sales in growing market China, where taxes on luxury goods have made LVMH products, mainly its flagship Louis Vuitton bags twice as expensive as Europe. Coupled with the political unrest in Hong Kong, sales have dropped significantly in the Chinese markets.
LVMH focuses on a differentiation strategy that positions its brands as being ultra-luxury, a segment that customers would do anything to acquire as they add to the brand image of the customer, rather than vice versa. It applies this to all the brands within the group, in order to create a consistent image around its entire portfolio of businesses. The key strategy of the LVMH group is to focus on product, distribution and communication. By focusing on these three elements, the company believes it can help customers ignore the pricing and therefore make the purchase irrespective of the price (Economist 2009, 1). For example, Louis Vuitton handbags are ubiquitous in Japan, where the brand has an almost 85 per cent market share, with the country contributing nearly 15 per cent of the total sales of Louis Vuitton every year.
Leather and Fashion
This business unit represents over 37 per cent of the company’s revenues and over 50 per cent of the profits. Effectively, it is a cash cow that the company uses to fund its acquisition and expansion of other businesses. Its broad portfolio includes Louis Vuitton, Fendi, Marc Jacobs, Celine, Donna Karan, Loewe, Kenzo, Givenchy, Thomas Pink, Pucci and Berluti. Louis Vuitton is estimated to be the largest among all these, but no figures are available on individual brand performance in the company’s annual reports.
Business Strategy
Knowing that the biggest portion of its revenues and profits comes from a single brand, the company has taken the profits from that brand and invested it in acquiring other struggling or new luxury brands, adding them to its portfolio. A study by the Boston Consulting Group found that retail brands that continue growing save significant costs in commercial activity when they double in size (Economist 2012, 1). By acquiring new labels, LVMH will continue to reduce its overhead costs thereby hopefully increasing its profits over time (Thomson, 1). LVMH has established a track record of taking struggling luxury brands and making them profitable.
Driving Force for the Business
Until the recession hit in 2009, LVMH had been spending heavily on its merchandising and stores. However, with the recession, customer buying patterns saw significant changes. Customers became more cautious about buying into luxury goods and started looking for more value from their purchases. Recognizing this changing trend, LVMH began revamping its stores and adding product lines that offered variety without compromising on the brand (Dishman, 1). Even today, the company destroys its out-of-season products rather than offer them at discounted sales, in order to ensure the brand equity is kept intact. The company also refuses to license its brands out to other companies for merchandising. Instead, for all brands that it acquires, LVMH has a history of buying back licensing rights to ensure the purity of the brand image is retained.
Its manufacturing strategy has been to adopt best practices from other industries with a continuous focus on efficiency and productivity. This consolidation and focus on excellence in manufacturing as well as the retail experience has seen the company perform steadily if not exceptionally well even in times of recession. Thanks to the diversification of the portfolio as well as geographical distribution, the company has continued to deliver growth even in the period from 2009 to 2012, which saw several luxury retailers decline.
LVMH’s approach towards consolidation and leveraging volumes extends to the merchandising end as well, with the company owning all of its stores, instead of opting for franchisees. This allows it to control inventory and manage its costs better than most other retailers in a similar position. Since LVMH values the experience of buying a luxury item and gives it prime importance, the company has never opted for the e-commerce route, although it has started working towards a digital and e-commerce strategy with some of the newer and smaller brands like Sephora in segments like cosmetics (Sherman, 1).
Evaluation of the Business Strategy
In the case of Fashion and Leather Goods, the manufacturing strategy makes perfect sense, giving the company the advantage of economies of scale across the various brands and product lines. It has a great basket of brands that have widespread recognition among luxury buyers, with the flagship Louis Vuitton brand, followed by Fendi, Donna Karan and others. Since LVMH relies on its differentiation strategy of being exclusive and representing high-end luxury, focusing on its own stores to control the retail experience is also useful. The diverse geographical expansion also works towards reducing the risk of the business as has been the case in the last five years, with growth in Asia helping to cover for the marginal decline in business across US and Europe due to the recession.
The company has chosen to focus exclusively on the luxury segment of the market. Therefore, during an economic downturn, the company is likely to suffer more than a competitor with a diversified portfolio of brands across all consumer segments. At the same time, the use of its own stores also means that in newer growing markets, the company has more of its capital at risk, if the opportunity in those countries does not build up to support business investments. At the same time, the company has not worked out a comprehensive strategy to build its e-commerce and digital marketing efforts. The company has also bought out brands which are struggling and the time required to make them profitable during a slow economy is longer. Therefore, the company will have to wait years before the other brands can scale up, but is committed to investing millions in these brands until they do so. All these are perceptible weaknesses in the LVMH strategy.
Recommendations
LVMH needs to ramp up in a few areas to generate better returns for its product lines. In addition, it needs to take steps to diversify some of its risk, mainly at the retail end, in order to ensure better returns and reduce the chances of failure.
The recommendations include:
- Focus on developing an exclusive e-commerce channel for its entire range of products. Due to the diversity of its products across the luxury segment, this will give the company the opportunity to cross-sell many of its products, thereby increasing the revenue per customer that it can generate.
- Look at franchise or licensing operations in smaller countries with growing opportunities. Places like India, Indonesia, West Africa and South America where the demand for luxury goods is increasing should be run through licensing or franchisee operations to mitigate the risk of entering these new markets.
- Build a digital marketing strategy that reaches out to luxury segment customers. With technology goods like smartphones becoming standard, customers in the luxury segment will all own high end smartphones and tablets through which reaching them online will be made much easier. Ignoring this channel could be disastrous in the long run for LVMH.
Wines and Spirits
The wines and spirits business division represents 14 per cent of the total revenues and nearly 23 per cent of the profits of the parent company and is therefore one of the most significant groups within the business (LVMH, 20). Though smaller than selective retail, it has a profit contribution that is second only to Leather and Fashion division, and this makes it strategically important for the company. The wines and spirits business comprises of world renowned brands like Dom Perignon, Moet & Chandon, Mercier, Veuve Clicquot, Ruinart, Krug, Chateau D’Yquem, Cheval Blanc, Hennessy, Glenmorangie, Ardbeg, Belvedere and Wenjun (China).
Business Strategy
As in the case of the Fashion vertical, the company concentrates on having luxury brands with high recall in its portfolio. Brands like Dom Perignon, Krug and Moet & Chandon (champagne) Hennessy (Cognac) and Glenmorangie (Single malt Whisky) are all brands easily recognized among the luxury segment. Therefore, the company does not have a problem commanding significant price premium for these products. Using these flagship brands, the company has grown business for its other acquired brands as well, but these investments will take time to mature. For example, in order to establish its entry into the Chinese market, LVMH bought Wenjun, a maker of Chinese white spirit (Baijiu) which is the Chinese equivalent of champagne. The company subsequently re-launched it as the country’s first premium brand in that category. The company also has vineyards in some of the most well-known locations such as France, California’s Napa Valley, Australia and New Zealand. Similarly, premium vodka brand Belvedere is made in Poland.
Driving Force for the Business
The driving force for the wine and spirit business is the recognition and brand name, and LVMH works hard to maintain this. Its focus is on getting recognition for its brands every year at the various wine and spirit competitions across the world. The awards that its vintages (products of each year) receive are the key to its successful differentiation.
Evaluation of the Business Strategy
The wine and spirit business, unlike fashion and leather, cannot be consolidated for manufacturing as the lineage of the product is the key differentiator. Therefore, the company focuses on brand recognition and awards as its main tool for creating premium pricing and positioning. The business strategy can be evaluated as follows:
Advantages:
- The company has a diversified portfolio of products across geographies, enabling it to weather any adverse economic condition.
- The geographical distribution of the company ensures that it continues to generate revenues from multiple markets including the new developing economies in Asia.
- It has a portfolio of brands that have universal recognition – Dom Perignon, Hennessy, Krug, etc. are all high recall brands among luxury consumers and aspirational class buyers.
Disadvantages:
- In spite of being a large group, all the brands are in the luxury segment.
- Apart from the flagship brands, the other brands are still not large enough to generate profits to match the scale of the leading 5-6 brands.
- The company has invested heavily in acquiring more luxury brands, diversifying its holdings geographically. This makes management structure fragmented.
Recommendations
Since wines and spirits is a business that is heavily dependent on the economic conditions, it is critical that the company diversify its products across various segments and geographies. However, in the wines and spirits business, this means a fragmented business structure, which needs close management. It is recommended that the company consolidate its holdings in the key 5-10 markets where it has the maximum revenues, so that supply chain and management structures are maintained. Since liquor cannot be retailed online, the company should focus on creating an experiential aura around its brands to build and maintain market position.
Conclusions
LVMH as a group has grown significantly in the last 30 years since its acquisition of Christian Dior. However, it grew in an age of materialism, and needs to ramp up its strategy to keep pace with the new generation of millennial luxury buyers as well as to better tap into growing markets without increasing its costs significantly. This is possible if the company focuses on the media and tools of the new generation – e-commerce and digital marketing. By using licensing to enter new markets, the company can keep its costs and risks down to acceptable levels, thereby improving its return on investment in the long run.
References
Dishman, L. “Why LVMH Will Weather the European Economic Storm in High Style”, Forbes, Web. (2012)
Economist, The. “The Substance of Style”, Economist, Web. (2009)
Economist, The. “LVMH is Slowly Taking over the Entire Luxury Market”, Economist, (2012).
LVMH “Annual Report”, Web, (2013).
Sherman, L “Inside Sephora’s Branded Beauty Strategy”, Business of Fashion, web, (2013).
Thomson, A “LVMH shakes up watches and jewellery product-mix and strategy”, Financial Times, Web, (2014).
