LVMH in 2016: Its Diversification into Luxury Goods

I. Case Synopsis
LVMH was formed in 1987 which is a merger between the famous Louis Vuitton
with his sumptuous handbags with champagne maker Moet & Chandon and cognac
Hennessy. CEO Bernard Arnault of LVMH believes that the merger of these two
luxury goods will bring excellent benefits.
LVMH is growing rapidly and growing from about 2.5 billion in 1990 to 35.7
billion by 2015. This rapid growth is slightly disrupted by the misappropriation of
some less glamorous companies, as Arnault selects divestment from business perform
poorly. In addition, some LVMH businesses competed in the glamorous industry, but
failed to make a significant contribution to the company's performance.
The merger between the Moet-Hennessy company and the louis vuitton leather goods
designer is the best strategy. The company has the opportunity to be picked up by
large international companies. To mecegah this then the company made the
acquisition on the company.In addition to fashion, another business from LVMH is
the wine and champagne business through Guiness.

Bernard Arnault believes that LVMH controls the retail channel where its products
are sold is critical to the success of luxury brands. Channel marketing that will be
successful according to Arnault is through the retail jalu which is the spearhead to
imaged a good.
LVMH's corporate strategy under Bernard Arnault incorporates diversification into
the sale of luxury products of various types. The company's wine, champagnes, haute
couture and fashion, cosmetics, fragrances, imitations, and ready-to-wear jewelry are
among the most innovative, prestigious, elegant, and expensive.
Success in the cosmetics, fragrances, and global skin care industries is largely due to
the ability of producers to develop a combination of new chemicals and natural
ingredients to create innovative and unique fragrances and develop cosmetics that
boast the product benefits beyond cleaning and moisturizing for anti aging. , anti
pollution, and tissue regeneration.
LVMH's strategy for this division focuses on heavy advertising and media investment,
couture brand relationships and global brand expansion. LVMH also manages a

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 business unit consisting of media, luxury yacht production, recreational parks, and
luxury hotel chains.
The success of LVMH brand according to Arnault is the result of
artistic creativity, technological innovation, and close attention to every detail of the
production process, Controlling the goods distribution channels and being able to
fulfill what consumers need is the key to their success.

II. Problem identification

Problem identification of LVMH in 2016 are:
Revenue increase but profit is declining
Cost business of fashion and leather goods, Perfumes and cosmetics, Selective
retailing are higher than their revenue
Too much acquisition out of their core competencies make LVMH loose the
company focus.

III. Related theory/frameworks

a. Competitive rivalry with PORTER five forces

Porter's Five Forces Framework is a tool for analyzing competition of a business. It
draws from industrial organization (IO) economics to derive five forces that
determine the competitive intensity and, therefore, the attractiveness (or lack of it) of
an industry in terms of its profitability. An "unattractive" industry is one in which the
effect of these five forces reduces overall profitability. The most unattractive industry
would be one approaching "pure competition", in which available profits for all firms
are driven to normal profit levels. The five-forces perspective is associated with its
originator.

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 Porters 5 Force
LVMH in 2016

LOW
- Brand image established
- High level of knoeledge
needed
- Capital requirement to
MODERATE acquire luxury brands
Rarely for some raw
materials
Low switchi

LOW
No Impact on premium price
HIGH Brand Loyalty
Acquisition war Differentiation between
Domination of big groups products

LOW
Conterfeit Product

b. Value Chain
Value chain analysis is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce
costs or increase differentiation. Value chain represents the internal activities a firm
engages in when transforming inputs into outputs.

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 Value Chain in LVMH 2016

Inbound Logistics : Operations

Focus on Quality raw materials Technical expertise on each business units
High control of quality
High productivity

Marketing & Sales Services

Marketing in the worldwide High level of customer services
Customer relationship management
(pursue cross selling opportunities) to
create loyalty
Advertising the image of brand to increase
desire
Control of retail channels, company-
owned retail locations

Firm infrastructure: Human Resource Management

Common internal communications system Created its training institute, craftsmanship
(LVMH planet) lowed business to share (craftmen training and refined for long
information time)
decentralization Hiring very dedicated people who love the

Technology Development Procurement

LVMH broad collection of business (6 E-procurement of office supplies
business inits)
Online information exchange system
Enterprise resource planning system
Cost savings from sharing technological
knowledge

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IV. Case analysis and solution
a. Case analysis
LVMH segments to multiple target markets. Many people, both men and women
with different values and all walks of life are fans of LVMH. LVMH has multiple
avenues of communicating their brand to different target markets. Through high
fashion print ads, and their Core Values campaign ads, these ads are segmented to
both men and women in the Upper Class, to Upper-Middle, and Middle. LVMH
segments its revenues by its five businesses, which include: Fashion and Leather
Goods, Perfumes and Cosmetics, Watches and Jewelry, Wines and Spirits, and
Selective Retailing. Revenues are also segmented under six geographical segments:
France, Europe (excluding France), the United States, Japan, Asia (excluding Japan)
and Other Markets. By gaining the interest of both the wealthy and middle class, they
have mastered the art of "less is more", maintaining a sense of mystery, yet they
really are an attainable brand.

Porter Five Forces Analysis:

Threat of New Entrants (Low)
The new entrants are mainly new designers who start their own brand on their own.
Usually, these new entrants, if successful, are quickly acquired by the big names of
the industry, by providing them the needed infrastructure for growth.
Bargaining Power of Buyers (Low)
There are two types of customers: the super-rich and the middle-market
customers. The super-rich customers (or High Net worth Individuals) seem not
subject to the world economic cycles. In addition, they are a growing number. While
the middle-market customers are those that are willing to buy luxury goods, but they
want the trendiest designs which increasingly have to be marketed in creative and
expensive ways. They are considered to be both a great opportunity as they show no
price sensitivity and also a threat because they are more demanding and show less
brand loyalty than the High Net worth Individuals. This leads to a difficult trade-off
between satisfying a smaller number of loyal customers and a larger number of more
volatile customers.

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Bargaining Power of Suppliers (Moderate)
The bargaining power of the suppliers depends on the segment. As some tended to
have increased bargaining power, this leads to the concentration and vertical
integration trend in the industry, one of the reasons for which is to lessen the
bargaining power of the suppliers. However, there is a trend for larger houses to buy
smaller suppliers and to deprive the market from access to those suppliers.
Threat of Substitutes (Moderate)
There are two kinds of substitutes to the luxury goods: counterfeit products from
china or fast fashion brands copying trends within weeks after fashion shows. But
this remains as a non-important threat regarding the fact that consumers are very
sensitive to the loss of prestige when switching to counterfeits or fast fashion brands.
Rivalry between Competitors (High)
The competitiveness in the industry can be qualified as relatively high but given the
high margins and the consumers perception about the price, the competition is not
on price, but rather on quality and image perception, as well as on the ability to
attract the right designers. There are hardly any barriers to exit.

Value Chain
The three most strategic parts that characterize the luxury goods industry are
manufacturing, marketing and advertisement, distribution.
Manufacturing
Manufacturing is crucial in maintaining the quality and brand reputation. Stefania
Saviolo who is a luxury goods industry expert at Milans Bocconi University and
head of its masters in fashion programme explains The only source of luxury is who
makes the product. This is luxury today. The brands where sales are growing are
those perceived by clients to be based on artisanship and manufacturing excellence
such as Herms, Chanel and Cline.
Marketing and Advertising
On average, luxury goods industry spends more than 7% of its sales in advertising as
its one the most important factors in maintaining the brand reputation. Some
mediums of advertisement are television, on-screen campaign, newspapers,
celebrities, fashion shows etc.

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 Distribution
Distribution is one of the key elements in the value chain. As S. de Rosen, a luxury
goods analyst at J.P. Morgan, argues: "If there is one critical word in the luxury
business, it is "execution". People think about the luxury business in the wrong way -
they think about brands. But luxury companies are primarily retailers. In retailing, the
most important thing is execution, and execution is all about management.

b. Solution
The following is a solution to solve LVMH business problems in 2016:
LVMH should expand market share to Asia;maintaining high-priced luxury goods;
improve relationships with retail around the world;create online stores and
knowledge sharing;s elling items in luxury malls; re-evaluate the areas of business
that are experiencing losses.
V. Conclusion and Recomendation

Conclusion
Despite high business competition for luxury goods based on the evaluation results
using PASTEL and Porter's 5 Force LVMH still has a higher competitiveness when
compared to its competitors this is due to superior product quality, build a brand from
scratch, make acquisitions, and producing limited edition items.
Recomendation
Developing market in emerging countries like in Asia and Africa.
Implement marketing skills to conduct market research to find consumer insight in
these countries.
Cooperate with local retailers
Focus on developing product through e-commerce, Have online stores and social
media webpage
hire talent in specialized web designer to create websites

VI. Lessons Learned

Here are some lessons learned from LVMH:
1. LVMH is the most profitable luxury group
2. Some business field of LVMH are lose money
3. You will never find Louis Vuitton "on discount.

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