Louis Vuitton is a flagship group of LVMH, which had double digit growth during 2010 and 2011. Michael Burke, the new CEO of LV group is uncertain about whether the group can grow sustainable. The main issue he current encounter is that how to push LV to grow steadily and protect LV’s values and heritage from being undermined.
Political: The global luxury goods market can separate into America, Europe, Japan, Asia-Pacific, and rest of countries by region. Overall, the major luxury goods consumption countries have relatively stable political environment in recent years. However, in southern Europe, the governments’ financial turmoil and austerity measures indicated an underlying weakening demand of luxury goods for local people. But the gap was filled by travelers from other countries. The import duty policy in different countries is another factor should be considered in the industry. The high import duty will be part reason of high price differences between different countries.
Consequently, the grey market can be formed in the countries which have high price differences. Economic: The major companies in this industry are based in Europe, so the euro exchange rate will be an important factor to the industry. The growth rate will be different by being measured with euro terms and nominal terms. In order to eliminate the exchange rate influence, the constant exchange rate measurement should be used. Currently, the luxury goods market has about 15% constant nominal growth rate. Another important economic impact factor is the world’s economic condition. The world economic encountered a recession phase around 2008, which slowed down the products’ price increase rate. Recently, the world economic condition has been gradually recovered, and the high demand in Asia-Pacific region contributes more revenues to the industry, and the region will have high growth rate in years by estimation.
Sociocultural: In the global luxury goods industry, most of customers regard luxury goods that made in Europe as more valuable products than those made in Asia and US. This behavior brings competitive advantages to the European luxury brands. Moreover, customers in different countries have different purchase behaviors. For instance, some countries’ customers are willing to move away from common recognized brand, because they want to purchase more exclusive products. Furthermore, because of the increasing speed of globalization, people are more likely willing to travel between different countries. These travelers will buy luxury good during their trips. In fact, Chinese tourists contributed over one third of sales in Europe. The luxury goods industry should notice to adjust the actual demand between local people and tourists in Europe region. Technological: As the popularization of online shopping method, most of luxury companies opened their online shop to provide more convenient shopping experiences for customers.
This method can help companies reach more potential customers who live in areas that do not have brands’ physical stores. The technology development also helps the industry manufactories products more efficiently. The introduction of automotive machine partly reduced employees’ level of specialization and increased productivity. However, the improvement of automation also can undermine the appeal of the brands, because the absolute and aspirational customer segments generally want products which are produced by artisans.
Environmental: The global personal luxury goods industry may have negative impact to environmental aspect if the manufactories have poor pollution control abilities. Some companies also destroy instead of discounting their excess product in order to keep the products’ value, which may cause additional waste and recycle pressure, but the case did not provided enough information for the environmental aspect.
Legal: For some companies, acquisition is one of important method to grow companies’ size and profitability, but the acquisition is restricted by law. For example, French law requires that one company should report its purchase action to the other company if it holds more than 5% ownership. If the company uses other ways to circumvent the law, it may face lawsuit issues later on. Conclusion: Overall, the global luxury goods industry still has high potential to growth sustainably in the future. Since the market of this industry is worldwide, companies’ revenues will not largely affected by a single country or region. The important thing is to keep the balance of expansion between different countries. Companies should also be carful about increasing production effectiveness while retain the heritage value of the brands.
Degree of Rivalry: The degree of rivalry is moderate in the global personal luxury goods industry. The industry is very concentrated and occupied by few large players. These companies do not need compete with price; however, they have high overlap of products’ category. Most of companies have several common characteristics. They have long history and start business in Europe areas; they all provide exclusive products and services backed by their brands; and they all served few amount of wealthiest customers over the world. Threat of New Entrants: The threat of new entrants is very low in this industry. Most of the companies have over a hundred year’s history and their brands are based on their heritage and tradition. Even a new company with a large amount of initial capital wants to step in the industry; it is very hard for the company to build a high reputation over the world in a short term period. Many customers in this industry will value products by their brands.
Supplier Power: Since there are a few large luxury companies dominate the industry but the suppliers are relatively decentralized, the supplier power is quite low. Many companies have their own in-house manufactories and only source component parts. In this industry, suppliers have to meet the component parts’ high quality requirement as well as competing with qualified manufactories over the world. The manufactories in different countries have different labor and material costs, which can be a factor that restricts supplier power.
Buyer Power: The buyer power level is low to moderate in the luxury goods industry. This industry has three customer segments which are: absolute, aspirational and accessible. The first two customer segments care more about products’ quality than the products’ price. They have high net worth and seek impeccable products; these consumers are the most price insensitive group, and they even expect high price products which most people cannot afford. On the other side, the accessible customer group is more price conscious; but they also willing to buy high price products with conformable quality.
Therefore, the industry can control the price and retain a high annual growth level. Threat of Substitutions: The luxury goods almost have no direct substitutions. Although the products such as handbags, watches, jewellery, cosmetics and perfumes always have lower price substitutions, the absolute and aspirational customers will not take these substitutions into consideration. The accessible customers may purchase relatively lower price products, but they also have lower contribution to the industry growth than the other two segments. Conclusion: The luxury goods industry is a high profitable industry with low outside threat. There are only few large players in the industry and they server to the most wealthy people in the world. The luxury companies have high power to control the price so they have ability to growth sustainably.
Valuable: The brand of Louis Vuitton is valuable because it has long history and high reputation over the world. Throughout over a hundred years of accumulation, people recognized the brand as a sign of high value products. The company’s tight pricing and distribution strategies help to retain high quality of products and services. The products will not be sold at discount price so they will retain valuable through a long time period. LV’s creative design and innovation help the company stay at the top place and maintain high profitability in the industry. Moreover, LVMH group can be a strong support of LV. The group’s strong profitability and operating ability can benefit LV’s brand image expansion. Rare: There are only few large players in the global personal luxury goods industry.
The long history and Inimitable:
1. Keep the same speed of international expansion, steadily develop Asia-Pacific market, and maintain the same or higher level of product and service quality.
Relatively less risky
Easy to retain LV’s high value image
Maintain sustainable growth potential
Loss of probability to earn higher revenues
May loss market shares if other companies accelerate the development speed Cannot fulfill the increasing global demand of luxury goods
2. Accelerate the speed of international expansion, start to manufacture perfumes, and open more stores in Asia-Pacific market.
Improve opportunity of earn higher revenues
Develop new market and earn more market shares
Fulfill the increasing global demand
Provide a chance to growth faster in the future
Relatively more risky
Increase probability the cannot retain LV’s heritage and tradition during the developing process
3. Slow down the speed of international expansion, reduce the use of automatic machines, and keep on adding value in the company’s heritage and tradition.
Easy to keep LV’s heritage and tradition
Retain the high reputation during the absolute and aspirational customers Prevent the company from growing too fast that may reduce the company’s value
Potential of losing the market shares
Potential of losing the amount of sales
Cannot fulfill the increasing global demand
In order to determine which alternatives is the most appropriate one for Louis Vuitton, several criteria should be satisfied: 1. Sustainable financial growth potential
2. Retain comparative advantages in the market
3. Retain LV’s heritage and tradition
4. Improve brand image and value
5. Adopted by all three segments of customers