The global luxury goods’ marketplace in the past decade has experienced nothing short of a complete evolution and transformation. This industry has endured global economic downturns in advanced economies such as the United States requiring them to branch out of their comfort zones and expand into emerging markets specifically the BRIC countries.
These Asian nations possess high GDP rates that are anticipated to increase significantly in the upcoming years. Luxury goods were once a possession of strictly the wealthy, brand conscious consumer with a high disposable income. Within these developing economies reside a “new breed of young entrepreneurs and noveau riche consumers”, offering large potential within the middle class market for luxury brands (Pan). Although these countries offer significant promise, access will come at the cost of fierce competition, potential of counterfeiting and international trade barriers.
Bernard Arnault, the head of the Louis Vuitton Moet Hennessy brands, recognizes that penetration, growth and development in these emerging markets are a critical part of the brand’s long-term global strategy. LVMH is the parent company of around 50 sub-companies that run autonomously and implements the Star Brand formula.
The company is determined to capture the growing Asia market with particular focus on China, Japan, South Korea and India. Although these areas are quite affluent and familiar with Western luxuries, LVMH faces difficult challenges such as raising consumer awareness, counterfeiting, and emphasizing purchase within one’s own nation state.
The recommendations of this case analysis addresses each of the challenges and offers both a short term and a long-term implementation plan. If LVMH executes the suggested recommendations, the organization will be a global powerhouse by both western and eastern standards. LVMH’s Mission, Vision and Core Values
To represent the most refined qualities of Western “Art de Vivre” around the world. LVMH must continue to be synonymous with both elegance and creativity. Their products, and the cultural values they embody, blend tradition and innovation, and kindle dream and fantasy. Five Fundamental
Be creative and innovative
Aim for product excellence
Bolster the image of brands with passionate determination
Act as entrepreneurs
Strive to be the best in all they do
Maintain Status as the Leader in the Luxury Goods Market
Part of LVMH’s mission is to be the leader in the global market for luxury goods. LVMH is the world’s largest and most profitable player in the luxury goods market. They have established this with a product life cycle that emphasized product elegance, quality and uniqueness. The challenge is to stay on top. The vision of the company is to maintain its customer’s loyalty and its strong brand name, while finding new markets worldwide. LVMH is working hard at keeping its star brands in the limelight and constantly reinforcing the value of its brands. Economic Downturns
Threat of New Entrants:
Multiple distributions channels/marketing strategies
Brand loyalty and recognition of larger companies
Large investment cost for initial entrance
Government intervention (import tariffs)
A plethora of distribution channels are available for new entrants into the luxury goods industry. These marketing strategies include but are not limited to franchising, mergers and acquisitions. Many of today’s largest luxury concerns have achieved their success globally through implementation of these approaches.
Although opportunity exists for new entrants, barriers are quite high in regards to qualitative and quantitative measures. Mature and established luxury goods brands such as Louis Vuitton and Gucci, have a strong brand loyalty and recognition amongst consumers, suppliers and retailers (Manning-Schaffel).
Luxury goods raise awareness and sales to the public through marketing tactics, which are quite costly. With any product in the early stages of the product development there is a substantial initial investment required to create brand consciousness. This is most felt by small and or independent brands. A typical global advertising campaign is extremely costly and ultimately drives sales (Wittner).
Lastly, depending on the country a luxury good is looking to penetrate government intervention and import tariffs may act as a barrier, especially in the Asian market. In China alone, import duties have increased from 10% to 30% since 2007 (hktdc.com). Regardless the amount of tariffs imposed and transportation costs make it quite difficult for new entrants into the luxury goods global market place. Bargaining Power of Suppliers:
Various suppliers available
Independent sourcing initiatives
Within the luxury goods industry, a suppliers’ role is to provide materials such as fabric, and raw goods in order to create the end high quality end products. The number of suppliers varies based on geographical location and specific material need. Hence supplier power can vary but in most cases is quite high.
Therefore because some raw materials are limited and/or more costly across the globe many concerns are taking matters into their own hands. The brand Hermes is a perfect example of this. In the past the group had worked with crocodile suppliers in Louisiana, but due to high charged costs this changed (Wheeler). Instead the luxury group now breeds its own crocodiles in Australia independently in order to address global demands for the Birken handbag (Jlieman).
During the current economic times and conditions many suppliers have been forced to file bankruptcy. This has a detrimental effect on many luxury concerns. According to one article, “the company would lose time trying to buy materials directly, resulting in a delay in the construction” (Jieman). The time it takes to switch suppliers is also one that is quite costly to the luxury concern. Bargaining Power of Buyers:
Global economic & security crisis
Brand recognition and perceived value
High concentration of distribution channels
There have been several notable economic and security crises that have occurred globally, which have had significant impact on the luxury goods market place. Therefore buyers (consumers) have a significant possess a tremendous amount of power. The last few years have shown that no country is invincible to recession. This point is evident in the Asian financial crisis, the current United States recession and most recently, the debt
crisis of the European Union. Strict financials are not the only woes causing decrease sales in the luxury goods industry.
Decline in travel is also attributed to security issues. These security concerns include the terrorist attack on the United States in 2001, as well the SARS outbreak and chicken flu within Asian in 2003. Each of these events has had a detrimental effect on the luxury goods market (Prince Associates 2008).
Security measures have escalated tremendously and are conducted far more thoroughly therefore increasing travel. The luxury goods market therefore has seen considerable growth (Prince Associates 2008). Many residents within Asia will travel internationally for western goods due to perceived quality and value associated with specific brands, such as Louis Vuitton (Chadha).
There is a high concentration of distribution channels of luxury goods ranging from high-end retail chains to privately owned boutiques. Due to the global recession, buyers within these channels have a substantial amount of bargaining power. It is important to note that this bargaining power varies significantly around brand. For example, Louis Vuitton and Hermes offer no sales or discounts to their products regardless of geographical location. Therefore there is little bargaining power possessed by buyers. It is this lack of negotiation to both consumers and buyers that increased the perceived value of brands (Noor). Threat of Substitutes:
Counterfeit merchandise presence
Increase in discounted designer goods
Purchase of designer goods overseas versus in home country
Although many financial opportunities exist for luxury brands to expand their availability internationally, there is also a presence for threats of counterfeits. These risks are most often associated to Asian markets, in particular China and Hong Kong. According to a USA Today article, it has been calculated that 80% of all confiscated counterfeit luxury goods originate from China (O’Donnell).
This imitation merchandise is available through an array of distribution channels ranging from the street vendors to online store sites. These outlets allow for individuals to purchase these goods at a low cost regardless of geographical residence. Therefore, threat
of substitutes is radically high.
In a time of global recession, many designers have adjusted their products to a cost effective strategy. Products such as Prada and Gucci for example allow for their high-end merchandise to be sold at a discounted price in order to reduce inventory. In addition, designers such as Vera Wang and Dana Buchman have created lines to be sold at retailers such as Target and Kohls to appeal to the middle class (Coffey).
Jimmy Choo who also offers a special line to H&M in certain geographical areas implements this sales strategy (Sibbles & Pidd). Louis Vuitton as mentioned above does not offer sales or discounts on any fashion or leather goods merchandise and therefore runs a high risk of substitution to price sensitive consumers (Noor).
Prices are raised internationally in order to offset the price of import tariffs to certain geographical settings. For example for European luxury brands in order to import goods to the Asian market the price of the good significantly greater than one would pay in a European country. This has caused the threat of substitutions to rise. Competitive Rivalry:
Large concerns economies of scale
Availability of counterfeit merchandise
Shift from “superluxe to simpleluxe” (Wheeler)
Competitive rivalry is exceptionally high globally in the luxury goods market. This occurs because of the existence of many large economies of scale, availability of designer counterfeit merchandise, low cost designer products, and a shift from expensive elaborate brands to more simplistic less expensive ones.
One reason in particular is that there are several large concerns of economies of scale. These concerns include but are not limited to Louis Vuitton Moet Hennessey, Gucci and Cartier. According to hoovers.com, “Large companies have advantages in economies of scale in operations, can more easily raise capital, and have strong name recognition”. It is with this available capital that successful advertising campaigns have been launched, driving market share and consumer brand loyalty.
As mentioned previously, the availability and demand of counterfeit designer goods is on the rise. Availability of this merchandise decreases sales of the legitimate designer products. According to one article by Donald Brown a journalist from the Independent, “Research has found as many as seven out of 10 buyers of luxury goods are willing to “mix and match” designer brands alongside known fakes. And evidence has emerged of a soaring market for “lookalike” goods in which cheaper products are passed off as the real thing, simply without the designer label” (Brown).
The depressed global economy has been named the main culprit in even the rich and wealthy seeking “simpleluxe vs. superluxe” (Wheeler). This transition defined in an article by Karen Wheeler is that many people, “…are looking for now is simple-luxe – smaller, accessibly priced luxuries that improve everyday life rather than flaunting your wealth” (Wheeler). This phenomenon has been seen across continents, as individuals are not willing to spend a month’s salary on a luxury good, therefore impacting the luxury goods industry tremendously, especially on sales of their bigger price tag items.
LVMH should introduce security labels to eliminate counterfeiting and for “gray-market” protection. Pros:
Implement “intelligent security labels”, a unique label that will identify genuine Louis Vuitton products from counterfeited products. Louis Vuitton created the signature monogram Canvas to prevent counterfeiting. The company takes counterfeiting seriously and employs a team of lawyers and special investigation agencies that are actively pursuing offenders through the courts worldwide. LVMH is allocating a significant budget amount to counteract piracy of its goods.
The company closely controls the distribution of its products; Louis Vuitton sells its products strictly through its own retail stores, small boutiques in high-end department stores and online through its website. Cons:
Louis Vuitton is one of the most counterfeited brands in the fashion world due to its image as a status symbol. LVMH faces a ”gray-market” in Asia, where handbags cost 40% more in Japan than they do in France. Arbitrage business of handbags – people fly to France to buy handbags for the purpose of resale through parallel channels in Japan.
LVMH should increase the number of Duty free shops and airport stores presence around the world. Pros:
Over 100 million of Chinese travel annually and Duty-free shops are important shopping locations for Chinese travelers. On average Chinese travelers spend $928 on shopping in duty-free shops and airport shopping during their outbound trip. Shopping is considered a “must-do” by most Chinese travelers when traveling overseas.
Chinese outbound travelers tend to be young (20-39 years old), well educated and with higher income, working professionals, tech-savvy and fashionable (interested in cutting-edge gadgets and latest fashions). Confectionery, fashion, fashion accessories and cosmetics are the most popular or international branded items purchased by Chinese travelers during their foreign overseas trips. India has been ranked as one of the fastest growing travel and tourism economies in the world both for inbound and outbound travel. India has an increasingly affluent middle class with growing disposable income willing to spend on luxury items.
The product categories mostly purchased by the Indian outbound travelers on their trip abroad are confectionery, fragrances/perfumes, fashion and accessories, leather goods and cosmetics. Duty-free shops and stores at overseas airports are the most frequented purchasing places for Indian travelers. Shopping at Duty-free shops and airport stores is more impulse driven than pre-planned for Indian travelers which they expect to see various offers available such as exclusive fine gifts or exclusive fashion collections.
There is not much else to do at most airports other than walk around window-shopping and occasionally making purchases. Cons:
Price difference can be quite large from one duty-free to another, depending on its location, sometimes for the same size, brand and product purchased. Even though Duty-free shops do no apply local or national taxes and duties, shoppers may still have to pay duties in their home country on items purchased from a duty-free shop. LVMH should reach out to the middle-class customers who are willing to purchase luxury items. Pros:
Sales of luxury products are on the rise in Asia-Pacific area. Growing middle class in India and China is increasingly buying designer goods. In India, shoppers mainly comprise of “status seekers” and “technology savvy”. Cons:
In order to make their products more affordable for middle-class consumers, LVMH might have to compromise on quality, by lowering labor costs or moving production offshore. Using less skilled workers and the ability to provide more merchandise lines to their stores, could make the brand less exclusive in the long run because of increase in popularity and mass appeal. Open manufacturing plant for handbags in India
Reduce/Eliminate tariffs and transportation costs.
India has an English-speaking population.
Improved social and political stability in India.
India has cheap labor force and will cost the company less to manufacture the handbags. Growing middle-class with disposable income willing to spend on luxury items. Cons:
“Made in France” was an important selling point at LVMH, although 2 of 14 factories were in Spain and one in California. Customers expect western quality. Buyers in India are concerned with being offered the latest products and designs. The myth of the brand is linked to where the product is manufactured. Compromise on quality by slashing labor costs and making the products in India. Conditions in operations in India are not promising.
Create new markets and advantages by introducing LVMH brands to children/teenagers Pros:
Introduce LVMH brands to kids – they become lifetime customers. Create new markets by offering merchandise specifically to children/teenagers. These offerings will allow for womb to tomb mentality and increase customer lifetime value as well as brand loyalty. Cons:
Investment and research is costly.
Small market segment.
Diversification of product lines and innovation is essential for LVMH to stay ahead in the luxury goods market. One-way LVMH to achieve this is to extend their customer base to include children and teenagers. “Many reports indicate luxury buying is supported more from Baby Boomer grandparents and relatives who are eager to spare no expense. Some experts even theorize that the lavish spending and pampering is due to an opposite psycho-economic creation to a person’s own strict upbringing,” (Mesa).
Parents are also experiencing higher incomes and tend to save on certain items the families consume but are “trading up on products for loved ones – specifically children and pets,” (Mesa). Children also have more say in regards what products they prefer. Children and teenagers are experiencing higher allowances than we’ve seen in the past (Mesa).
Louis Vuitton would not be the only luxury goods brand when launching children’s and teenage product line. Luxury goods producers such as Dolce & Gabbana and Versace embraced this opportunity and broadened their product lines by launching clothing lines. Dolce & Gabbana launched the ready-to-wear line D&G Junior and “offers a unique 2004/2005 collection aimed at newborns and pre-teens,” (Mesa). Versace rolled out a clothing line that target kids ages 4 to 14 (Mesa).
This strategy may prove to be risky and LVMH will have place investments towards research and development and eventual marketing and advertising costs upon launch. The children’s market, although potentially lucrative for a business, is a small segment. However, Louis Vuitton, among other luxury brands, has already entered in the baby market through products like baby bags. This will provide LVMH with leverage in that particular product segment.
“Since baby bags are more about a fashion accessory with functional benefits for parents to carry, it is not surprising that luxury handbag makers have jumped on the baby bandwagon,” (Mesa). Many products such as mini-handbags, jewellery, and shoes can be diversified and included in the children’s product line.
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