LOUIS VUITTON MOET HENNESSY: IN SEARCH OF SYNERGIES IN THE GLOBAL

LUXURY INDUSTRY
Submitted by: Adreeza Chatterjee, Charu Arora, Chitra Jhawar, Narayani Khanna, Noopur Rathore, Priya Sarkar and
Sucheta Jain, F&LA VII

The Target Market : Bon Chic Bon Genre

The target customers of most of the major firms of the luxury industry was simply defined as “high net-
worth individuals”. “High net-worth individuals” is a classification used by the financial services industry
to denote an individual or a family with high net worth. Although there is no precise definition of how
rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid
assets over a certain figure. The most commonly quoted figure for membership in the high net worth
club is $1 million in liquid financial assets.

A recent survey by Cap Gemini Ernest and Young reported that in 2000 more than 7.2 million individuals
world wide came under the “high net-worth individuals” category, which was an increase of 3% over the
previous year. These individuals accounted for roughly $27 trillion of the world’s wealth. Membership in
this group was expected to increase by an average of 8% annually and north America was home to
roughly a third of these high net worth individuals followed by Europe and Asia.

The target customers of luxury brands have a keen eye for fashion and trends they don’t flinch at paying
$12000, for a custom designed Louis Vuitton suitcase, or $500,000 for a Silver Tourbillon wrist watch
from Patek Phillipe. Most luxury good companies maintain long waiting lists of customers who desired
to by exclusive products that was in short supply.

Japan was a market that was most closely targeted by luxury goods manufactures because Japanese
accounted for roughly 30% of the global market of luxury goods. This made them the most important
buyer segment. Japan was virtually saturated with store despite of the recent economic turmoil, wit no
sign of slowdown in expansion plans.

Luxury Retailing: Country Specific Competitive Advantage

Country specific factors were inextricably linked with brand powers and heritage and, hence, gaining a
foothold in a country known bet for a particular line of product was of paramount importance. Access to
local artisans raw materials and the ability to tap into local knowledge base were all extremely crucial
aspects of building a reputation in this business. Although the costs of labour were often prohibitive
given the low volumes manufactured, it was an essential element of defining brand reputation.

Italy was believed to be the leader in the manufacturing of leather goods. The best manufacture of
leather processing equipment and best leather retailing outlets were in Italy. Over the years, the Italian
customer had developed a very sophisticated awareness of leather fashion products.
Therefore, to compete successfully n this region, companies had to strive hard to attract Italian
customers, who were demanding and knowledgeable. The “Made In Italy” label was considered to be an
important element on luxury leather goods.

France had given birth to the most well reputed design houses and was the hot bed of creativity in the
ready-to-wear- fashion business the leading perfume and cosmetic goods companies traced similar
routes. France also dominated the wine business due to its access to fertile land and wine making
heritage. The support of the French government and careful control of the industry helped the wineries
gain a foothold in world markets.

Switzerland had a global reputation for its jewellery and watches. Many of the leading firms of this
segment traced their heritage to the master craftsmen and jewellers who settled around Geneva to
establish the traditions of swiss craftsmanship. Overtime, quality and precision had become
synonymous with Switzerland.

The Major Players

The major players in the luxury goods industry, LVMH, Gucci, Richemont, Bulgari and Hermes, controlled
approximately 22% of worldwide industry sales.All of these firms completed in multiple product lines
and multiple geographic markets.

Gucci
In 1923, Guccio Gucci opened a small shop selling leather goods in Florence, Italy. After Second World
War, Gucci began to execute its global expansion strategy with a store in New York in 1953, its first
outside Italy. There was intense in-fighting within the controlling Gucci family that resulted in poor
strategy and the unwitting dilution of valuable brand equity. In the late ‘80s, a Middle Easter investment
group, Investcorp, bought 50% of the company. At that time the brand was very week and their good
were sold even in Departmental store. Gucci embarked on a multibrand model more recently. It
acquired Yves Saint Laurent’s fragrance and ready-to-wear apparel lines and added the renowned
shoemaker, Sergio Rossi, to its umbrella of brands. The manufacture of leather goods and shoes sold
under various labels was being centralized. Similar centralization was initiated in the multiple line of
timepieces such as YSL, Boucheron, and Bedat & C that the company offered. The Gucci group reported
consolidated sales of $2.26 billion in 2001.

Richemont
Richemont, the second largest luxury goods company in the world, has headquartered in Zug,
Switzerland. It was controlled by Rembrandt, a South African company which was owned by the Rupert
family. In 1988, some of the tobacco assets were spun off, and Richemont was born. Richemont was
very widely diversified, with interests in companies such as Canal +, a French media company, and
Vivendi, a French water and media conglomerate. Together, sales of watches and jewellery accounted
for nearly 70% of total luxury products sales generated by the company in 2000. Unlike the Gucci or
LVMH models that were built around a family of brands under one umbrella, Richemont emphasized the
stand alone nature of each brand and did not appear to be interested in any synergies across its
portfolio. Richemont operated a network of 720 exclusive stores, 452 of which were company owned.

Hermes
Thierry Hermes founded the company in 1837, focusing initially on the manufacture and sale of leather
harnesses for horses. Hermes has positioned itself among super premium luxury goods, offering
crocodile skin handbags for $8,800 and cotton poplin shirts for $340. Hermes has built its sterling
reputation by integrating a large proportion of its production and retail operation. Over 75% of the
products it sold were manufactured in-house. The company was even willing to take over key suppliers
of inputs such as fine leather and crocodile skins just to assure superior quality at the input end. It
operated 23 production sites in Europe, of which 21 were in France. In 2000, Herms acquired 31.5% of
Leica Camera A.G., a company that specialized in high end photographic equipment.

Bulgari
Bulgari traced it origins to a small village in Greece named Epirius that was well known for silversmiths:
Mr. Sotirio emigrated from there to Italy and opened his first jewellery shop in Rome. The company was
listed in Milan and London stock exchanges. Bulgari has grown both in geographic reach as well as
product variety through as intense phase of expansion that started in the early 1990s. It operated in
seven luxury segments that included watches, jewellery, perfumes, fashion accessories, silks, tableware,
and eyewear. It was known in the luxury business for its “classical chic” design sensibilities that appealed
both to traditionalists as well as the trendier clientele. The broad appeal was an essential ingredient to
Bulgari’s success story.

Watches and Jewellery Sector

Counted among the most dynamic brands on the market, the Houses in the Watches & Jewelry sector of
LVMH operate in two segments: high-quality watchmaking on the one hand and jewelry and high
jewelry on the other. A quest for excellence, creativity and innovation guide the Houses in this area
every day.

The watchmaking side capitalizes on the complementary positioning of its Houses: TAG Heuer’s
international stature, Hublot’s strong dynamic of innovation, Zenith’s age-old savoir-faire and Dior’s
creativity. In jewelry and high jewelry, the Houses of Bulgari, Chaumet and Fred employ their bold
creativity and perfectly mastered savoir-faire to constantly surprise their customers and offer them the
objects they desire.

In 2000, the sector contributed only 5% of sales. with an operating margin of approximately 10%. They
face a heavy competition among the market because of the presence of other brands like Cartier. Van
Cleef & Arpels.

By that time the brand wasn’t at huge profit in the sector of Watches and Jewellery.
Selective retailing
This division managed LMVH investments in Sephora, DFS Galleria, and Miami cruise lines services

DFS-- Duty Free Shoppers store

On November 7, 1960, Robert Miller and Charles Feeney opened the first Duty Free Shoppers store at
Hong Kong airport. At a time when travel retail was only in its infancy, the pioneering vision of two
American entrepreneurs meant DFS could offer travelers on stopovers high-quality duty-free products.
In 1972, the House built on its success by launching its first DFS Gallerias in downtown Honolulu and
Hong Kong. These outlets, renamed “T Galleria by DFS” in 2013 in honor of the traveler, offer exclusive
services and a unique shopping experience in the heart of the world’s biggest cities. The House
endeavors to convey the founders’ passion for traveling and service, and since day one, has developed
innovative merchandising concepts that have enabled it to forge partnerships with the biggest high-
quality brands. With over 400 points of sale around the world, spread across 15 major airports and 18 T
Gallerias centered in the heart of the most desired destinations, DFS is now the leading luxury travel
retailer in the world.

This sector contributed 28% of the company’s sale in 2000

MCS- Miami Cruiseline Services

It was acquired in January 2000 which is 76% of world’s major criselines. Focusing 90% on the North
American passengers thus counterbalancing the reliance on Japanese tourists that had plagued DFS.

In addition LMVH also acquired La Samaritane, the prestigious Paris department store. LMVH had also
taken minority position in the 200 year old UK fashion.retailer.

The Ascent of Louis Vuitton Moet Hennessy

Loius Vuitton Moet Hennessy was largely a reflection of it’scharismatic CEO. Mr. Arnault devised
strategies that evolved LVMH into a global player through his series of brand acquisitions.

Mr. Arnault attended the Roubaix lycée and the Faidherbe lycée in Lille. He then went on to study at the
Ecole Polytechnique, graduating in 1971.

He began his professional career that year as an engineer with the Ferret-Savinel construction company
and successively was promoted to various executive management positions before becoming Chairman
in 1978.

Mr. Arnault remained there until 1984, when he undertook the reorganization of the Financière Agache
holding company. He returned the group to profitability as he embarked upon a strategy of developing
the world’s leading luxury products company. In the process, he reinvigorated Christian Dior as the
cornerstone of the new organization.
In 1989, Mr. Arnault accomplished his objective of creating the world’s leading luxury products group
when he assumed control of LVMH Moët Hennessy - Louis Vuitton, vowing to assure French luxury
goods brand leadership worldwide.

By early 2001, the company had been reorganized around five divisions i.e wines & spirits, fashion and
leather goods, perfumes and cosmetics, watches & jewellery and selective retailing. It reported group
sales of $10.7 billion approx.. in 2001.

LVMH controlled more than 50 luxury brands across it’s product lines. It was brand power that was the
core catalyst that lead the company to leadership positions. Lmvh ranked No. 1 in champagne & cognac,
fashion & leather goods, and selective retailing while it ranked No. 3 in jewellery & cosmetics.

LVMH Businesses
LVMH comprises of five divisions, each division functioning as a SBU(Strategic Business Unit) with it’s
own management team.

Wines and spirits

LVMH is the world leader in this sector. Through Hennessy, it held 40% of cognac market and 20 – 25%
of the overall champagne market. It has also ventured to acquire high end wine producers in Napa
Valley, California and Australia.

Auction Houses

LVMH has acquired two major Genevian & Parisan aution houses. It faces compettion from
auctioneering heavyweights such as Christie’s & Sotheby’s, and Mr. Arnault has been rumored at taking
interest in buying Sotheby’s. If the LVMH raid succeeds, Arnault will be one of the most powerful figures
in the art world. He bought the Phillip's auction house last year for £70m.

The LVMH Approach to Competitive Strategy

LVMH differentiated itself in every market segment. The company was ready invest into new product
brands and supported them before huge expecting profits. This reinvestement did improve the market
share but it didn’t match the aspirations

Managing the Business Model

Creativity and innovation are synonyms to success in this fashion world. Creative autonomy is one of the
most important principles at LVMH. For, example the launch of the paper dresses by John Galliano.
Although, the dresses weren’t supposed to be a commercial success still they created sensational
coverage in the fashion media. Mr. Arnolt believed that thinking with rules, policies and data on
customer preferences will kill the creativity of a designer.
Integrating Production
Customers who were willing to pay premium prices demanded high level of quality and craftsmanship.

Therefore, products like Louis Vuitton hand bags were carefully engineered by accomplished
craftsmen.LMVH believed tin vertical integration across product lines for quality control.

Distribution And Positioning

LVMH played monopoly in the market with availability of the stores all over the global market.Then they
launched the idea of a global store which will carry all the brands parented by LVMH. These concept
stores were around 400-1000m2 in retail space and by the year 2000, almost 26 in number were
working functionally. Gradually the halo effect spread to the other smaller LVMH retails stores too.

Despite of ruling the market,LVMH had issues in maintaining their standards as in that of pricing where
LVMH had loyal customers both in Japan and France yet the prices of the handbags were 40% higher in
Japan than that of France, which was untolerable and so the Japanese fetched the bags from France so
that they could attain it cheaper.After a lot of strict database informative service they could bring this
act into control. However what they couldnot control was the market of duplicated goods even in places
like Milan , Forence etc which were the fashion capitals supposedly.

However retail ventures of Sephora and DFS Galleria were highly useful to the LVMH , for market and
clientele reseach and also to know about their choices and also the competitors in the market. Under
the parenthood of LVMH , Sephora had also expanded their market to a lot of countries like UK,Japan,
Italy and the US although they were running in loss.

Only production of the products was not important but to inform to the clientele was also a task. Hence
the magazines , fashion shows and fashion journals were also important.Some of the journalists were
particularly influential in the market and were a key to the success of the big design houses.

The premiere of the Graffiti line of LVMH led to a lot of customers coming in There waas no now a
better way to let the people know about their pieces. It increased the footfall in the stores be it even the
smalllest of retail stores.

The Future
The French luxury products group LVMH Moet Hennessy Louis Vuitton has sold its controlling stake in
the art auction house Phillips, de Pury & Luxembourg. Previously LVHM had forged with De Beers along
with several other brands, which increased the brand name for both of the companies and also had a
positive impact on brand loyal customers.

LVMH's stake was acquired in equal shares by Phillips's chairman, Simon de Pury, a former chairman of
Sotheby's Europe, and Daniella Luxembourg, president of the auction house. LVMH retained a 27.5
percent minority stake in the company. The markets were hopeful that this move to sell off auction
business would help boost earnings, specially since it had been a drag on earnings for quite sometime.
LVHM shares rose to 3% on the announcement. But questions arose such as has Mr. Arnault made the
right move for the company’s growth. Will other buyers get more profit which he did not get. Etc. It was
a thrilling ride for the company.