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Khattab Al Qrarah Manas Ussenov Victoria Rosca Yousra Zaghdoud Bernichi 11.18.20141LVMHBusiness review Mot Hennessy Louis Vuitton S.A. is aFrenchmultinationalluxury goodsconglomerate, headquartered inParis.

LVMH was formed by the 1987 merger of fashion house Louis Vuitton withMot Hennessy (from the merger in 1971betweenthechampagne producer Mot & ChandonandHennessy, thecognac manufacturer.

2LVMHBusiness review

Business PortfolioWine and SpiritsFashion &Leather GoodsPerfumes & CosmeticsWatches & JewelrySelective RetailingMedia & Other Business3LVMHFacts

Chairman and CEO: Bernard Arnault

Revenue: 29.1 Billion Euros

Operational Profit: 6,021 Million Euros Employees: 114,000 in over 70 countries

Distribution Channels : 3,384 Stores

Prestigious Brands

4LVMHRevenue over category

5LVMHMain Competitors

6Timeline1743: M&C, established in Champagne Province (France). One of the first Champagne French brand, with exports accounting for a large percentage of its sales by the 20th century1968: Acquisition of Parfums Christian Dior1971: Merger with Champagne Mercier1971: Merger with Henessy & Cie (words second largest producer of cognac) -> Change name for Mot-Hennessy1987: French government launched an area of privatization Merger with Louis Vuitton, to avoid takeover from large international companies. Portofolio of uxury brands Veuve Clicqot, Dom Prignon, Canard Duchne (wine), Christian Dior and Givenchy perfumes and cosmetics, Gearoges Delbard (grower or roses), Louis Vuitton, M&C, Hennessy1987: Join ventures with Guinness PLC distribution British cie1988: Bernard Arnault Owner of Chrstian Dior, Celine, and Christian Lacroix purchase share of LVMH and join forces with VuittonAfter a join venture with Guiness, Arnault became the LVMHs largest shareholder, and ask for changes in the cies management1988: Arnault acquire Givenchy1989: Arnault became LVMHs president1990: Arnault became chairman1990: Purchase interest on Loewe (Spanish brand) and all assets of Pommery (largest vineyard in Champagne region), increase of LVMH share in Guinness from 12% to 24% : LVMH became the worlds largest alcoholic beverage seller1994: Arnault abandoned his quest to gain a controlling stake in Guinness, agreement to a stock swap7TimelineBetween 1990 and 1994, few small acquisitionsBrought additional fashion and fragrance and diversified by purchasing 2 of Frances leading financial and business publications Investir, La Tribune Desfosses, LAgefiExpansion of the number of cie-owned retail stores where its LV, Loewe, Celine, CD, Givenchy can be found1996: Arnault strongly believes that the brands should offer high quality customer service, acquisition of Duty Free Shopper (180 duty-free boutiques in Asia and various international airports)1997: Acquisition of Sephora, French cosmetic retailer, and 30% interest in Douglas International, a German beauty-goods 1997: Acquisition of Chteau dYquem (Champagne)1997: Purchase of 11% of Grand Metropolitan PLC Britsh Food conglomerate ($1.5 bn wine and spririts sales)1998: Retailing operations: La Belle Jardinire, Le Bon March1998: Laflachre France leading producer of hygiene beauty, and Marie-Jeanne Godard, a fine fragrance line1999-2000: Boldest acquisition: TAH Heuer (watches), Ebel (watches), Chaumet (Jewelry), Zenith (Watches), Bliss, BeneFit, Hard Candy, Make Up For Ever, Fresh, Urban Decay (all make-up artists) Philips, de Pury & Luxembourg, LEtude Tajan (all famous auction houses).Also these years, broadened the companys media operations, thanks to a French radio network and magazines, New World wine produces in the US and Australia, retail outlets in the form of an Italian cosmetcs retailing chain, KRUG, producer of some of the wordlt most expensive champagnesEmilio Pucci, Thomas Pink and Fendi acquisition2001: Dona Karan International and La Samaritaine, the largest departement store in ParisTried to acquire Gucci Group, but lost against the main competitor, PPR (today Kering)8LVMH Indutries

9Luxury industry structure

Characteristics of luxury products10Global Market Size

Globaly growing market, sensitive to macro-events11Growth by geographic markets

Important expected growth rate of the Asian Market12Recent trends

Globalization over 40% of sales is from luxury tourism13Recent trends

Globalization plenty of untapped potential in emerging markets14Recent trendsConsolidation individual brands are bought up by large luxury groups

15Recent trendsConsolidation large companies experience much higher margins Brand recognition (esp. emerging markets) Economies of scale (eg. advertising)Optimal brand portfolio management

???16Recent trendsDiversification apparel brands branch out to other luxury product categories, eg. jewelry, cosmetics, perfume, even restaurants

LVMH175-forces model-Luxury industryRising popularity of middle-price brandsConsumers tend to trade down during economic crisesCounterfeitLimited high skilled workersKey components and materials are outsourcesHighly specialized atelier dart with a narrow scope of expertiseCannot switch easily to another supplier risk a lower qualityBrand image and CRP programs build high brand loyaltyScale economiesCapital requirement: very high break-even pointExclusive access to suppliers & distribution

Decreasing buyers concentrationIncerasing number of wealthy househouldsTop-tier customers are usually early adopters and can drive consuptionNo one single buyer can determine pricesIncreasing switching costs with loyalty programsOlipololy with the big 3Growing demandHigh barrier for entry and high barrier to stay

Threat of Substitutes - ModerateThreat of new entrants-Moderate to lowRivalry among Existing competitorsHighBuyers Bargaining power - LowSuppliers Bargaining PowerModerarte

18Threat of new entrantsBrand image and CRM programs build high brand loyaltyDecreasing brand loyalty as a results of different needs in emerging markets

Traditional marketsEmerging marketsCraftmanship (artisanat)ExclusivityInnovationServiceCRMHeritageExtravaganceStatusObvious brand logo-> Easily swith to other brands of similar status19Scale economiesConsolidation of luxury brands achieve high economies of scale LVMH, PPR (Gucci), Prada Group, Richemont Minimize risk through diversification in the company brand portfolio More financing options e.g. IPO Operating synergies e.g. advertising

High marketing & management costs Distribution Fees: High rent to develop monobrand boutiques in prestigious shopping areas e.g. South Koreas Apgujeong; HKs Tsim Sha Tsui Canton Road To develop global presence, 400 stores are needed to cover the world! High salaries for craftsmen High investment for promotional activities e.g. Chanels elaborate runway shows during Paris Fashion Week; Louis Vuittons microfilm

20Capital requirementA very high break-even point ...In the luxury sector, even the smaller brands have to pretend they are powerful and rich, and by doing so they end up with a very high break-even. ..For example, every brand must be present everywhere in the world. ...If the Japanese tourist cannot find his Givenchy or Aquascutum store when he visits Milan or New York, he may well conclude that these brands are weak and he might decide to stop buying them in Japan. (Abstract from Luxury Brand Management: A world of Privilege)

21Exclusive Access to Suppliers & Distribution Many brands have acquired suppliers to protect competitive advantage and insulate against future rising supply costs E.g. LVMH acquired two watch dial manufacturers Leman Cadran and ArteCad SA, French artisan shoemaker Delos Bottier & Cie and haute couture manufacturer Arnys. Le Bon march and desire to be present in the distribution More and more distribution access points are available to brands Contemporary areas like The Bund in Shanghai brings a multi- sensory experience to luxury

22Potential retaliation from the existing companies Small luxury brands do not have high barriers of distribution Pressure from powerful groups to prevent them from having access to multi-brand retailers

23Threat of substitutesPrice of substituesQuality if substitutesSwitching costs to customers 24Price of substitutesRising popularity of middle price brands Consumers tend to trade down during economic crises Worldwide shipping of counterfeit goods from Turkey, China, North Africa,

25Quality of subsitutesIncreased Internet accessibility of top luxury brand designs allow fast fashion brands to respond and copy trends within weeks after fashion shows e.g. Zara, Steve Madden

26Switching cost to customerNo monetary switching costs Loss of prestige if switch to high street or fast fashion brands

27Buyers bargaining power Number of buyers relative to suppliersLevel of dependence on a buyerSwitching costsPossibility of buyers vertical integration28Number of buyers Decreasing buyer concentration Increasing number of buyers relative to suppliers Example: Chinas emerging middle- class buyers Concept of affordable luxuries spreading in second-tier cities & satellite towns Increasing number of wealthy households Of the 1.6 million wealthy households, about 50 percent were not rich four years ago

29Level of dependence on a buyer Luxury industry depends heavily on top-tier customers Average spending by luxury consumers rose by 30% in 2009 MOST driven by small groups of super- affluent top-tier consumers Top-tier customers eg. celebrities are usually early adopters and can drive consumption But not one single buyer can determine prices

30Switching costsBuyers who develop an emotional attachment to the brand may have emotional switching costs Increasing switching costs with the introduction of customer loyalty programs E.g. LVs VIP clients receive free gifts

31Possibility of backward integration Extremely low possibility Customers purchase luxury products for direct consumption No business reason for backward integration Size of luxury companies usually way out of a buyers purchasing power

32Suppliers bargaining powerNumber of suppliers relative to buyersLevel of dependence on a supplierEffective substituesSwitching costs (swith suppliers)Possibility of suppliers vertical integration33Number of suppliersLimited high skilled workers Skills shortage retiring craftsmen, not many youngsters willing to learn Couture-level embroiderers in France: ~10,000 in 1920, dropped to ~200 now

34Level of dependence on a supplier Some key components and materials are outsourced e.g. LV outsources its monogrammed leather Chanel ordered a large bunch of leathers from one supplier at one time in case they wouldnt find a better one

35Effective substitutes Highly specialized atelier darts with a narrow scope of expertise E.g. Feather-maker Maison Lemarie, Costume jewellery and button-maker Desrues Very hard to replace

36Switching costs Cannot easily switch to another suppliers Past cooperating experience is important Risk a lower quality of products after switching to new suppliers

37Possibility of forward integrationExtremely low possibility Luxury companies, especially large groups, are much more powerful and wealthier than their manufacturers

38Rivalry among existing competitors Competitive structureDemand conditionExit barriers

39Market structure Oligopoly A few large luxury groups dominate Large number of small independent brands Big Three LVMH Richemont PPR Gucci

40Top 10 industries players

41Demand conditionDemand will grow at a relatively high rate in the near future

42Exit barriersEmotional Barriers Some brands may not break even but continue operating due to a small number of extremely loyal customers and critical acclaim E.g. Christian Lacroix, never made a profit for the 22 years in operation

Specialized Assets May be difficult to sell the highly specialized supply chain components E.g. Chanel has 6 atelier darts under it Specialized machines no alternative purpose

435-forces model-LVMHMany other products (Prada, Dior)Countefeit issuesRelatively lowLVMH purchase raw-materials suppliers, which reduces loss marking and establishes economies of scalese.g: recently bought Tanneries Roux

High entry barriersLVMH products, quality, serviceCost advantage due to the old presence of the cie on the market

Targeted customers smaller in term of market size2 types of customers : High-net income and middle-market customerNot compatible: the first are quite loyal, and the second type more volatileOlipololy with the big 3Growing demandHigh barrier for entry and high barrier to stayWars of talents

Threat of Substitutes Moderate to highThreat of new entrants-Moderate to lowRivalry among Existing competitorsHighBuyers Bargaining power - LowSuppliers Bargaining PowerLow

44Bargaining Power of BuyersLow.Targeted customers are smaller in term of market size2 types of customers: fortunate (High Net worth individuals, seem not subject to the world economic cycles, and are a growing number (+9% per year) andmiddle-market customers selectively trade-up to higher levels of quality, taste and aspiration)Can potentially expand the market quite dramaticallyGreat opportunity but also a threats (more demanding, more selective, showing less brand loyalty than the most fortunate ones.

-> Problem for the brand, because the 2 kinds of customers are not quite compatible, and this situation can lead to a difficult trade-off between satisfying a smaller number of loyal customers and a larger number of more volatile customers

45Bargaining Power of SuppliersFor LVMH, relatively low. Because the company often purchase raw materials from suppliers in basis of consignment. With this method, it reduces the loss marking and establishes economies of scale. e.g: LVMH has recently taken over les Tanneries Roux, a leather supplier. With this move to acquire key suppliers, it will reduce the bargaining power of suppliers in terms of leather products. By limiting the capability to plan suppliers contrary to each other. LVMH would be able to save costs on storage space and capable in making sure of the quality of products supplied. 46Threats of new entrantsFew new entrants threats which LVMH can focus on evaluate how much of a threat of new entrants are for LVMHNew entrants made up mainly by new designers of new own brand in the industry, they are normally successful, and would be quickly acquired by the more famous brand of the industry to provide them facilities and needed infrastructure for growth.In return, if the new entrant remained independent, this would represent a threat to the company, by capturing volatile middle market customers. BUT these customers go after the established name and perception, which makes the threat of new entrants less significant.Also, the barriers to entry are high. Customers loyalty for LVMH among time, product service and quality are undeniable whereby a new entrant cannot be compatible for short period of time.LVMH has been functioning in the luxury products market for a century, giving them the complete cost advantage in business key development, which is absolute to new entrants by playing well in engaging their image in the market place to sustain their perception to cater not only customers need and wants but also the customers desires.New entrants find it difficult to survive and would easily be kicked out the market47Threats of substitute produtcs or servicesRelatively high.Many other luxury products such as Prada, Dior, Chanel, Hermes, Armani, Main competitors: PPr (now Kering, having Gucci, Yves Saint Laurent, Boucheron, ) a,d Cie Financire Richemont (Cartier, Montblanc)Counterfeit issues: LVMH has to emphasis on the company core competency, uniqueness of product and service, and to attract and retain capable employees in order to have better value chain and distribution to reach the final usersLouis Vuitton and their Toile Monogramme, substitutes find it hard to earn in the market when the loyal customers are well-knowledge on the differences48Rivalry among existing competitorsRelatively highOligopoly with 2 other main players: PPr (Kering) and Richemont.BUT given the high margins and the customers perception about the price, the competition is not on price, but on quality and image perception, as well as on the ability to attract the right designers with right abilitiesWars of Talent, e.g, LVMH has the star designer Marc Jacobs for Louis VuittonThe barriers to entry are very high. LVMH has built the intangible image and the perception built around the brand.Barriers to stay very hard to: continuous need to feed the image, to maintain the perception but still to respond to customers need and changing expectations.Trade-off between exclusivity, stylishness, extravagance and lasting image makes it difficult to be for a long time in the business.Hardly any barriers to exit given the high barriers to entry and to stay -> the dynamics of the industry are: few big players and only the bestLVMH have to bear copycats as the high level of fakes as an open publicity and competition from other brads, and there is only a limited group of customers who can afford to buy genuine product due to limited brands. 49To sum upThe buyer power is reduces because buyers lack suitable alternatives To mitigate the power of suppliers, the company purchase main raw materials suppliers in order to let the other players competeCreates higher entry barriers due to customer loyalty, to lower the treat of new entrantsEstablishes customer loyalty and hence less threat from substitutes

50Competitve strategy of LVMH - DifferentiationUnique products and servicesPrice is not a problem: customers seek for uniqueness, prestige, brand image quality, and are glad pay a premiumCustomer service : importance to have controle on the retail channels for the highest level of customer service. The desire of Bernard Arnault to aquire retail points, in order to spread the luxury value not only on final product, but also during the purchase process and after salesMain competitors are not competing on prices, we can talk about a high price parityIntegration of multiple points along the value chainEfficient order processing (e-commerce for all brands, LVMH e-commerce website)Very close relation with customers (mail, brochure, invitation for coktails, fashion shows, privates sales), espacially for main customers (loyalty programs, gifts) Customer service request are seriously taken into account: if a product is not available in a specific region, it will be ordered immedialty and receive as soon as possible

51LVMH StrategyStrategy-diversification into luxury goodsCORPORATE STRATEGY: business diversification, merger&aquisitionBUSINESS STRATEGY: focus on quality, Innovation, Marketing 52Life cycle

LMVH position on the life cycle between53From 1999 to 2002

A slight decline in 2001, but the company has quickly caught in 200254From 2009 to 2011

55Value chain AnalysisFirm InfrastructureHR ManagementTechnology DevelopmentProcurementPrimary ActivitiesOperationsLogisticsMarketing&SalesServiceCombined shipping (Sea route, time saving) Decentralized System various brands operate independently, with own creativity & brand imageEffective information technology small nr of managers

Support ActivitiesProduct design, R&D process- carefully planned with the most modern and complete engineering technologyProduction process - a creative process and perfect combination of technology &handicraft

Control over the distribution and sale of products among many business units-Selective Retailing, MediaAdvertising inside desing team-Distribution Channel 100% exclusive

LVMH HousePremium serviceAfter saleLoyalty program Cost Control & Resource Saving (common R&D group for variuos business units + conducting development work => sharing resources and competences-most brands manufactured in country origin, few brands moved to low cost countries-strict control on quality

Top designersSpecial training for craftsmenEmphasis on retining best talent and employeesA common supply chain management system 5656Sinergies of the Value ChainInterrelationships inside the firm increase value & quality by exchanging practices and resources, knowledge sharingTechnology - exchange of technology via IntranetOperations - overlap among many businesses due to cost&resource savingSales & Marketing, Service- an obvious overlap, different businesses can lean on each other for accessing the market given that target market is the same

Relationships of activities within LVMH with customers and suppliers - e-procurement- all businesses are trading in similar markets (high-end of the market, premium price tag) => common practices in relation with customers57Resource-Based View of LVMHCompetitive advantage => combination of tangible & intangible & organizational capabilities

Tangible resources: - Physical Assets: numerous factories in France, Spain, Italy; sophisticated machinery&equipmentLarge financial capabilitiesTechnological resources: artistic creativity & an innovative production process , trademarks, patents (LVMH Recherche)Organizational resources: effective planning (carefully planned production process, distribution ; effective control on distribution &salesCore assets of acquired brand are assessed and partly preserved

58Resource-Based View of LVMHIntangible resources:Well-known designers, high experience & capabilities craftsmen and other employees, strong managerial skillsLVMH Recherche: innovation capabilities & scientific expertiseReputation: image and brand namesCreative team and management of acquired firms are preservedKnowledge is shared but at the same time the culture of company is maintained

Organizational capabilities:Great capability of the management of luxury brands: market analysis, product development, advertising, promotion, retail management, customer service, quality assurance.capabilities are deployed across Louis Vuitton (accessories and leather goods); Hennessey (cognac); Moet et Chandon, Dom Perignon, Veuve Clicquot, and Krug (champagne); Celine, Givenchy, Kenzo, Dior, Guerlain, and Donna Karan (fashion clothing and perfumes); TAG Heuer and Chaumet (watches); Sephora and La Samaritaine (retailing); and some 25 other branded businesses

59BCG Matrix for LVMHFashion & Leather Goods foundation of LVMH success, timeless brands, very integrated in the companys strategy of production process quality&excellence, creativity&innovationPerfumes&Cosmetics- good outlook for the future, LVMH should enhance of competitivenessWine&Spirits, Selective Retailing- main source of revenueMedia&Other Businesses- media focused only on French market, strategic moove from LVMH to be present in this field

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Innovation in two types of innovation:Product innovationProcess innovation61Product innovation in LVMHLVMH Recherche, founded in 1981 as a G.I.E. (Groupement dIntrt Economique). Members: Parfums Christian Dior, Guerlain and Parfums Givenchy.Approximately 250 researchers (in Saint Jean de Braye). Areas of research: biologists, chemists, pharmacists, medical doctors, ethno botanists, physicistsMission: develop innovative cosmetic approaches based on the latest scientific discoveries.Collaborative studies with researchers in the major universities and research centers (Ex. Cooperation with University of Orleon).The expertise and the know-how of its researchers in the fields of skin biology, of formulation, as well as its discoveries of active ingredients and evaluation methods of cosmetic products (skin care, make-up, perfumes)

62Process Innovation in LVMHThe main core of the innovation creativity of the designers.Giving complete freedom to designers by decentralization of the department. Each brand very much runs itself, headed by its own artistic director Inventing product to see the creations on the street on their costumers.Picking up right designers and ateliers , training them for and maintaining them for a long timeSpecific testing of products comparing with competitors products

Hand made Louis Vitton shoes63Strengths: powerful and prestigious brand known worldwide strong quality control share operational resources across the brands and divisions exclusivity by multiple brands decentralized management superior R&D in perfume and cosmetics ads with celebritiesWeakness:high prizes for some brandstoo much focus on Star brandshigher number of brandsover focus on specific consumer target- lack of attention and neglecting smaller brandsOpportunities:market expansion to new regions low cost materialsincreasing margins due to price policyto source creative talent globally invest more on R&D transfer skills and strengths interests (cooperation) with competitors (Guci)Treatments: Low cost imitators (China) price deflationIncreasing of the price for row materials loss of talented and experienced talents global and regional economical and political conditions other luxury brand competitors SWOT analysis64PESTEL analysisPolitical:Establishing of Anti-Counterfeiting Trade Agreement(ACTA)Political Issues for cheap labor in AsiaGood International relations for tradeExisting commerce infrastructureBeing part of EU, allowing to make easy trade with same currency within the EuropeTrade sanctions (Sanction against Iran)Reluctance to trade with specific regions (Middle east)Economic:- One the leader economiesLVMHs impact on globalizationExchange rates: USA, EU, AsiaGlobal economy: out of recessionInflation rate: lowInterest rate: low large presence of workforce: more people-lower wage, less people- reduced productionSocial:-Workforce age: increase in workforce population (baby boom echo)Market age: baby boomers are affluent religion: taboo for alcohol and materialism trends: fashion and innovationPerception of prestigious itemsTechnological:- High percentage of R&D expenditure in FranceGood presence of online marketing service Strong base Machinery and chemical formulas Presence of social media

Legal:embargos: can lead for loss market labor low: inflexible but secure truth in advertising: EU bans misleading ads. counterfeiting: reduces prestigeEnvironmental:Climate change: change in arable lands (vineyards)Energy waste: effects on distribution costsCarbon footprint: huge amount of CO2 in wine productionQuality of WaterReserve the natural resources

65ConclusionLVMH is the one of the main actor of luxury goods retailing and luxury marketingThrough numerous acquisitions, this company takes the biggest share in a notoriously fickle market.With an increasing revenue despite a global recession, and the fact that most LVMH products are high-priced and never go on sale is a testament to both tremendous quality and masterful marketing.Planning for the future, LVMH must be cognizant of the emerging BRICS nations, in addition, to the rising elite of China and Indie simply due to their population size.LVMH must also invest wisely in the emerging markets and attept to acquire PPE at low costs in order to help maintain a profitable bottom line.Paramount to all, LVMH must stay true to its core competency selling the worlds premier luxury lifestyle66