Table of Contents
Abstract
LVMH the world’s largest luxury group was found in 1987. Its brand portfolio includes wines, leather and fashion goods, perfumes, cosmetics, watches and jewelry. In the external environment of the LVMH, this case study analyzed the relevant dimensions of the macro environment by using PESTEL framework and analysis of the luxury industry by using porter’s five force model. In this case study author tried to mention strategic management, vision statement and history of the company. SWOT analysis of the LVMH presents the internal environment of the company. Author also mentioned company’s financial data of last 3 years, issues and recommendations for the same.
Case Study
LVMH in 2016: Its Diversification into luxury Goods
Louis Vuitton and Moet Hennessy merged in 1987 by forming the luxury goods LVMH. Its headquarters located in France, Paris. LVMH produces and markets luxury goods under various product categories and brands. The company offers its products under wines, spirits, fashion and leather goods, perfumes, cosmetics, watches and jewelry categories. The major brands of LVMH include Emilo Pucci, Edun, Loewe, Nicolas Kirkwood, Thomas Pink, Make up for ever, Zenith, Louis Vuitton, Guerlain and Celine. LVMH also does retailing business under the DFS, Sephora, Le Bon Marche banners. It also does business online. LVMH operates in Europe, Asia, the Middle East and the US.
Louis Vuitton is a supplier of luggage to the wealthy and powerful customers.
In 1984, Louis Vuitton opened his own business by producing flat topped trunks which were easy for travel and created his reputation as a master luggage maker. Louis’s son George played important role in managing the business by opening the first store in London in 1885. Moet Hennessey which is famous for wines, spirits, cosmetics and perfumes was established in 1927. In June 1987 merger was done between Louis Vuitton and Moet Hennessey which together know as LVMH. This merger allowed Louis Vuitton to expand its investments in the luxury business by saving Moet Hennessey from the threat of takeover. LVMH together focused on growth and expansion during the decade. In 1998 LVMH acquired Sephora and invested in Douglas. In 1999 LVMH spent $1.5 billion to acquire 15 luxury brands. In early years of 21st century, it was difficult for LVMH to be in luxury market. In 2001, company’s sales reduced drastically but gained sales again in 2003. During economic shutdown in 2008, LVMH’s focus on quality, creativity and innovation helped it survive in global shutdown period. Its strategy of diversification among brands and regions proved successful.
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The mission of the LVMH group is to represent the most refined qualities of western “Art de Vivre” around the globe. Its products reflect the cultural values they embody which blend tradition, innovation, dream and fantasy. In view of this mission, five priorities reflect the fundamental values shared by all group stakeholders.
- Be creative and innovative
- Act as entrepreneurs
- Strive to be the best in all we do
- Aim for product excellence
- Bolster the image of our brands with passionate determination and strive to be best
The overall objective is to give people a taste of the qualities of the art of living. LVMH uses specific strategies to be top in the luxury brand market. The company upholds its competitive advantage by relying on the backbone of its points of difference which is its impeccable quality and innovative fashion which put the brand as being desirable, deliverable and differentiable (Kotler & Koller, 2015).
The PESTEL analysis explores the macro environment and identifies the elements likely to affect firms in a luxury Industry (Johnson, 2011). It is an external environment of the luxury industry which gives managers and investors idea about marketing strategies and profitability.
Political factors: political factors are one of the important factors of LVMH which causes great influences on the market environment. Not only economic factors but new policy, business rules and regulation has affected business of LVMH in UK. According to the economic times 2009, the value added tax has increased by 2.5 % which created the threat to luxury market by less consumer spending. In 2010, the household income per capital also increased by 4.1% which give long term effect on consumer spending and behavior.
Economic factors: the economic factors like rate of inflation, GDP and unemployment rate affect the business of LVMH. In 2008 the rate of inflation went down to 0.3% to 4% which leads to more purchase power of money and people desired to purchase goods and expensive goods which ultimately benefits the luxury industry. Economic downturn and unemployment rate can’t affect the rich people to buy luxury products.
Social factors: It consist of demographics of market for LVMH, culture norms and trend of society to buy luxury products. LVMH has targeted the people who have higher income and rich lifestyle and the company has created the images that are in accordance to social identity theory and consumer reckon that consumption of LVMH products increases the social identity, builds the social image and high social reputation.
Technological factors: Technology is put a significant challenge on every aspect of luxury industry from raw material sourcing to strategy development. In the global technological ear, LVMH uses different technology mediums to do marketing campaigns. LVMH also use e-commerce to do online business.
Environmental factors: for protection of the environment, going green in any business is becoming popular to protect environment. LVMH follow this strategy as it is multinational company. Around the globe, LVMH gives best level of environment protection around the world with managing the environmental impacts.
Legal factors: The LVMH is one of the most frequently counterfeited brands in the luxury category. The company has 40 lawyers and 250 investigators and spends approximately $18 million every year on combating counterfeiting. This issue is more common in China where most of the faked products come and protection of the intellectual property is necessary. The Chinese government has shown efforts to take these issues seriously and take legal actions against such incidents.
Porter’s five forces analysis tells how LVMH can maintain a competitive advantage in a luxury industry.
By using porter’s five forces managers can find more profitable opportunities in a luxury industry.
- Threats of new entrants (Low): Brand recognition and loyalty are among the main factors that drive middle to high income earners towards luxury brand like LVMH. A newcomer in the luxury industry would find it difficult to achieve this position without making significant investments.
- Threats of substitutes (Low): middle to high income group people are consumers for LVMH. As these consumers like to wear high end luxury brands to display affluence, the demand for brands like LVMH will continue. However counterfeit products represent a great threat for the company, especially in emerging markets such as china. As the quality of counterfeit products has been improving over the past few years, this problem is important for the company’s brand value. This is the area of concern for the company.
- Bargaining power of buyers (Low): LVMH has positioned itself as an exclusive brand and enjoys strong brand recognition due to its high-quality products. The bargaining power of buyers will remain low in the future as LVMH’s efforts to reinvigorate its brand appeal will be offset by rising competition in luxury market.
- Bargaining power of suppliers (Low): LVMH does not manufacture its own products, instead it relies on manufacturers located in various countries like China, Vietnam, India and Itlay. LVMH has recently taken over Les Tanneries Roux which is a roman based leather supplier. With this move to acquire key suppliers will reduce the bargaining power of suppliers in terms of leather products.
- Rivalry between existing competitors (High): LVMH has gained many rivals in the luxury brand industry like Gucci, Prada, Burberry, Chanel and Hermes. Rising competition in handbags and accessories market is overriding concern for LVMH. So, rivalry is high between competitors.
Diversification strategy is the integral part of the company’s success. CEO Bernard Arnault takes pride on LVMH’s ability to manage different activities that cover the entire range of the luxury business which includes a portfolio of wines and spirits. With its integration and economies of scope, LVMH uses its expertise to leverage in R&D, production and marketing.
The company LVMH has control over strengths and weaknesses from SWOT analysis but no control over opportunities and threats.
Strengths:
- Strong brand portfolio
- Diversifies business in terms of business segments and geographic presence
- High inventory turnover ratio
Weaknesses:
- Decline in liquidity position
Opportunities:
- Positive outlook for global luxury goods market
- Growth in global spirits market
- Positive outlook for global fragrance market
Threats:
- Intense competition
- Cybersecurity risks
- Increase in organized retail crime (MarketLine, 2019)
The company reported revenues of (Euro) EUR 46,826 million for the fiscal year ended December 2018 (FY2018), an increase of 9.8% over FY2017. In FY2018, the company’s operating margin was 21.1%, compared to an operating margin of 19% in FY2017. In FY2018, the company recorded a net margin of 13.6% compared to a net margin of 12.6% in FY2017. Geographically Americas accounted for 33% of the total value of global luxury market, followed by Europe with 32.5%, Asia-Pacific with 28.3% and rest of the world with 6.2%. In FY2016, the company’s revenue was 5.15% more than FY2015, 11.81% more in FY2017 compared to FY2016 and 8.97% more in FY 2018 compared to FY 2017. Company’s gross profit was 5.91% more in FY2016 compared to FY2015, 11.83% more in FY2017 compared to FY2016 and 10.76% more in FY2018 compared to FY2017.
There are several issues and challenges LVMH is facing through internal and external
Analysis of the Company
Key issues and challenges are as follows:
- Aging population pose a threat to the company means target customer of female aged between 35 to 60 will decrease and it will affect business of the company. However, it also presents opportunities to the company to design and develop new products targeting the elderly generation. The men’s changing taste in fashion industry also give opportunities to the company in developing more luxury menswear and accessories in high end market.
- China’s economic growth is slowing down and spending in some costly cities are reducing for the company. This will force LVMH to slow down its expansion in china.
- Competition among rivalries are high. The key competitors of LVMH are Hermes, Gucci, Chanel which are from same market segment.
- Rapid rise of e-commerce business and greater use of social media has exerted pressure on LVMH to revise its marketing and business strategies to get more profit.
Recommendations
LVMH should continue to invest in various business ventures that allows the company innovation and differentiation. LVMH should understand its competitor’s advantage in various market and determine the strategic and economic possibility of being successful if they have to enter in that. LVMH should gain strongholds in other regions. It was predicted that the “target market of high net worth individuals were expected to increase by an average of 8% for the next 5 years. LVMH should build a long-term expansion plan to reach out its target market in high potential regions to reduce dependency on the Japanese market. Advertising is essential, as luxury industry is highly competitive. Instead of magazines, LVMH should promote their products through celebrity endorsement using social media.
The success of LVMH is in its heritage, tradition of fine art and quality products. Its sustainable competitive advantage are innovation, diversification and superior craftsmanship, vertical integration of the value chain and quick response to demand change from their customers. To get more growth and development of the company, LVMH should use new strategies.
References
- Business Insights Essential. (2010). LVMH International directory of company histories vol 113. Detroit MI: James Press
- Johnson, G. (2011). Strategies of LVMH. Paris: Pearson Education France
- Kotler, P. & Keller, K.L. (2015) Marketing management, 15th edition
- MarketLine (2019). LVMH SWOT analysis. Retrieved on November 26, 2019 from EBSCO Host.
- Yahoo Finance (2019). Financial Data of LVMH. Yahoo finance. Retrieved on November 26, 2019, from https://finance.yahoo.com/quote/MC.PA/financials?p=MC.PA
