Louis Vuitton Moët Hennessy: In Search of Synergies in the Global Luxury Industry
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A09-03-0011
Louis Vuitton Moët Hennessy: In Search of
Synergies in the Global Luxury Industry
Mr. Bernard Arnault, variously heralded as the “Emperor of Luxury,” the “Pope of Fashion,” and the
“Lord of Logos,” had settled into the plush executive suite atop the elegant headquarters of Louis
Vuitton Moët Hennessey (LVMH). Situated in the fashionable eighth arrondissement, visitors had to
be checked by his personal bodyguards before the bulletproof glass doors silently retracted to usher
them into the inner sanctum of the global fashion empire that Mr. Arnault had built. Seated in the
midst of sumptuous luxury, Mr. Arnault was perhaps the quintessential ambassador of his company’s
products. He had consistently been voted the Best Dressed CEO many times over by several of the
leading journals in the business press. This was, however, a time for reflection, rethinking, and perhaps
redesigning the strategies that his company would follow as it entered a very challenging period in its
young life. Would LVMH be able to deliver on its promise of doubling its sales and profits over the next
five years?
2001 had been a roller-coaster year for LVMH. Under Mr. Arnault’s leadership, LVMH was
clearly well down the road in executing a strategy that called for a diversified portfolio of luxury brands
and the simultaneous expansion into multiple geographical regions where the firm was underrepresented.
It had hardly been an easy endeavor. Many of the brand acquisitions and line extensions had come at a
high price, and most of these businesses were yet to generate substantial profits. Much of the group’s
profitability was still riding on the shirttails of the established business lines; namely, wines and spirits,
and leather goods. Analysts were therefore questioning the value of building a portfolio of global brands
that spanned diverse product markets from wines and spirits, to leather goods, perfumes, art, and
online retailing. Mr. Arnault took much pride in pointing out that, “We’re the only group that has the
ability to manage different activities that cover the entire range of the luxury business.” He was deeply
convinced that this collection of global brands was the stepping-stone for realizing lucrative synergies in
the fashion business, synergies that would add to the bottom line. It was obvious that these “synergies”
had different meanings for the analysts than for Mr. Arnault.
Was the expansion into multiple brands and businesses justified? Did the umbrella brand LVMH
add any value to the individual brands such as Givenchy, Guerlain, Chateau d’Yquem, and DKNY that
were well established in their own right? Was there any compelling strategic logic in the expansion into
art auction houses, Internet companies, and media ventures? What synergies could be tapped across
these ventures to enhance overall shareholder value? Where should LVMH focus its efforts geographi-
cally to position itself for future growth? These were a few of the critical questions that Mr. Arnault sat
down to contemplate as he looked out at the rush-hour crowds milling around the Arc de Triomphe.
The Luxury Goods Industry
The luxury business encompassed a wide range of products and services. It was reported that the indus-
try generated roughly $80 billion each year (including jewelry, watches, leather goods, wines and cham-
Copyright © 2003 Thunderbird, The American Graduate School of International Management. All rights reserved.
This case was prepared by Professor Kannan Ramaswamy, with research assistance by Mr. Marty Ostermiller, MBA
2002, and Mr. Philip Antoine Kendis, MBA 2002, for the purpose of classroom discussion only, and not to indicate
either effective or ineffective management.pagne, fragrances and apparel). Largely focused on an elite population that had sizable disposable in-
comes, purveyors of luxury and fashion had to deliver cutting-edge, innovative products of exceptional
quality and were constantly looking for ways in which to distinguish their offerings from those of their
competitors.
The Target Market: Bon Chic Bon Genre
The major firms in the industry were quite unified in their pursuit of the target customers, simply
defined as “high net-worth individuals.” A recent survey by Cap Gemini Ernst and Young reported that
in 2000 more than 7.2 million individuals worldwide held over $1 million each in financial assets, a 3%
increase over the previous year. It was believed that 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
for the next five years. In geographical terms, North America was home to roughly a third of these high
net-worth individuals, followed closely by Europe and Asia.
Exhibit I Individuals Who Own Over $1m in Financial Assets
(in millions)
1998 1999 2000
North America 2.06 2.48 2.54
Europe 1.84 2.17 2.31
Asia 1.33 1.71 1.70
Latin America 0.19 0.19 0.19
Middle East 0.22 0.22 0.22
Eastern Bloc 0.20 0.20 0.20
Africa 0.04 0.04 0.04
Worldwide Total 21.6 25.5 27.0
Source: Cap Gemini, Ernst & Young, 2001.
The typical target customers had a keen eye for fashion and trends. They belonged to a rarefied
group that did not flinch at paying $12,000 for a custom-designed Louis Vuitton suitcase, $7,500 for a
bottle of Château d’Yquem premier grand cru, or $500,000 for a Silver Tourbillon wristwatch from
Patek Phillipe. Most of the notable luxury goods companies maintained long waiting lists of customers
who desired to buy a handbag, a wristwatch, or some other exclusive product that was in short supply.
The Wall Street Journal had even reported a run on Louis Vuitton handbags by buyers who had flown
across continents to shop in the company’s stores in France.
On a global basis, Japan was perhaps the market most closely targeted by luxury goods manufac-
turers. The Japanese were believed to account for roughly 30% of the global market for luxury goods
(including purchases by Japanese tourists overseas, which accounted for about 15%), making them the
most important buyer segment. Attracted by this lucrative market, many of the industry leaders had
virtually saturated Japan with stores despite the recent economic turmoil, and there was no sign of any
slowdown in expansion plans. It was precisely this reliance on the Japanese consumer that threatened
the success of the leading design houses. Exhibit II shows luxury brand sales by geographic region for
the major firms in the industry.
Exhibit II Luxury Brand Sales by Geographic Regions in 2000
Japan Asia Europe N. America Rest of the world
Bulgaria 21.0% 17.0% 37.0% 21.0% 4.0%
Gucci 22.5% 17.9% 30.4% 26.4% 2.8%
Hermès 26.0% 12.0% 42.0% 15.0% 5.0%
LVMH 15.0% 17.0% 34.0% 26.0% 8.0%
Richemont 20.0% 19.0% 40.9% 20.1% N/A
Source: Bear, Stearns & Co. Inc.
2 A09-03-0011Luxury Retailing: Country-Specific Competitive Advantage
Country-specific factors were inextricably linked with brand power and heritage and, hence, gaining a
foothold in the country known best for a particular line of products was of paramount importance.
Access to local artisans, local raw materials, and the ability to tap into the local knowledge base were all
extremely crucial aspects of building a reputation in this business. Although this meant that the costs of
labor were often prohibitive given the low volumes manufactured, it was an essential element of defin-
ing brand reputation. Italy, for example, was widely believed to be the leader in the manufacture of
leather goods. It was home to some of the best leather design houses, the best manufacturers of leather
processing equipment, and some of the best leather retailing outlets. Complemented by the burgeoning
fashion clothing business in Milan, the leather industry in Florence was able to develop synergistic
advantages. Over the years, the Italian customer had developed a very sophisticated awareness of leather
fashion products. Therefore, to compete successfully in this region, companies had to strive hard to
attract Italian customers, who were demanding and knowledgeable. Firms such as Bottega Veneta,
Salvatore Ferragamo, and Tod’s were a few of the Italian companies at the forefront in leather goods.
Thus, the “Made in Italy” label was considered to be an important element that discerning customers
worldwide insisted upon when buying luxury leather goods.
France was widely seen as the hotbed of creativity in the ready-to-wear-fashion business. Tracing
its lineage to the French court at Versailles and the pomp and circumstance that surrounded French
royalty, the country had given birth to some of the most well-reputed design houses. The leading
parfumieres and cosmetic goods companies traced similar roots. The legendary flower fields of the Provence
region provided much of the critical raw materials that these industries required. France also dominated
the wine business that was built on locational advantages, such as access to fertile land, and winemaking
heritage. Winemaking had been part of the culture for a very long period of time and helped put regions
such as Burgundy and the Loire valley on the oenophile’s map. The support of the French government
and the careful control of the industry through the appellation system also helped the wineries gain a
foothold in world markets.
Switzerland had built a global reputation for its jewelry and watches. Many of the leading firms
that competed in these segments traced their heritage to the master craftsmen and jewelers who fled
religious persecution in France and settled around Geneva to establish the traditions of Swiss craftsman-
ship. Over time, quality and precision had become synonymous with Switzerland.
While each of the major design houses had originated through a focus on a distinct set of products
that were rooted in local craftsmanship, they had since branched out through cross-border acquisitions
to build empires spanning wines and champagnes, apparel, watches, and jewelry. The quintessential
global luxury product company was a result of such aggressive expansion.
The Major Players
The major competitors in the luxury goods industry, LVMH, Gucci, Richemont, Bulgari, and Hermès,
controlled approximately 22% of worldwide industry sales. All of these firms competed in multiple
product lines and multiple geographic markets. LVMH and Bulgari dominated the Asia-Pacific region,
while Richemont and Hermès were strong contenders in Europe. Gucci was a well-entrenched player in
both Europe and North America and had been building a strong presence in Japan as well. Exhibit III
provides a summary of major product lines of the key players.
• Gucci
In 1923, Guccio Gucci opened a small shop selling leather goods in Florence, Italy. Originally a
reseller of luggage imported from Germany, Gucci benefited from the economic expansion following
World War I. Since its inception, the company had displayed an innovative streak, improvising with
leather alternatives during the lean years in Italy under Benito Mussolini. After the Second World
A09-03-0011 3Exhibit III Lines of Business of the Major Fashion Houses
Bulgari Gucci Hermés LVMH Richemont
Leather Goods X X X X X
Shoes X X X
Watches X X X X X
Jewelry X X X X X
Ready-to-Wear X X X X
Fragrances/cosmetics X X X X
Silks X X X X X
Tableware X X X X
Writing instruments X X X
Wines and Spirits X
Specialty Retailing X
Auctions X
Source: Bear, Stearns & Co. Inc. and Company reports.
War, Gucci began to execute its global expansion strategy with a store in New York in 1953, its first
outside Italy. Unfortunately, the company suffered major setbacks in the 1970s and 1980s after
finding itself the subject of scandals, murder plots, and mafia murders, catapulting it to the front
pages of newspapers for the wrong reasons. 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 Eastern investment group, Investcorp, bought 50% of the company. At that
time, the brand was already very weak, having been plastered on over 22,000 items ranging from
watches to perfumes to shoes sold even in department stores. A patrician brand had become decid-
edly plebian. The revival of Gucci started with the appointment of Mr. Domenico De Sole as the
CEO after Investcorp bought out the other 50% of the company. The new CEO hired Mr. Tom
Ford, a highly acclaimed designer who thoroughly revamped Gucci’s product designs. The company
initiated buybacks and terminations of licenses and took firmer control of the brand, its products,
and their distribution. Investcorp sold its holdings through an IPO in 1996, making a five-fold
return on its original investment.
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 multibrand strategy was expected to deliver important synergies. The manufacture of
leather goods and shoes sold under various labels was being centralized. Similar centralization was
initiated in the multiple lines of timepieces such as YSL, Boucheron, and Bedat & C° that the com-
pany offered. The company relied on a dense network of subcontractors to manufacture most of its
products. Gucci’s retail stores typically carried all its product lines, allowing for some distribution
synergies. The Gucci group reported consolidated sales of $2.26 billion in 2001.
• Richemont
Richemont, the second largest luxury goods company in the world, was headquartered in Zug, Swit-
zerland. It was controlled by Rembrandt, a South African company which was owned by the Rupert
family. The family had originally made its fortune in tobacco. In 1988, some of the tobacco assets
were spun off, and Richemont was born. Richemont still controlled the well-known Rothmans Inter-
national and Dunhill brands. Richemont was very widely diversified, with interests in companies
such as Canal +, a French media company, and Vivendi, a French water and media conglomerate.
Richemont’s forte had always been in jewelry and watches, where it dominated the world scene with
storied brand names such as Cartier, Van Cleef & Arpels, and Piaget. Together, sales of watches and
jewelry accounted for nearly 70% of total luxury product sales generated by the company in 2000. It
also had staked relatively smaller positions in apparel and fashion accessories through brands such as
Dunhill, Sulka, Shanghai Tang, and Chloe.
4 A09-03-0011In geographic terms, the company generated 38% of its sales in the Asia-Pacific market (21% in Japan) and 39% in Europe in the year 2000. The Americas’ market accounted for 21%. 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 brand portfolio. In most cases, the parent company was a behind-the-scenes player and offered full autonomy in brand management with important caveats to protect against brand dilu- tion. Richemont operated a network of 720 exclusive stores, 452 of which were company owned. • Hermés Thierry Hermés founded the company in 1837, focusing initially on the manufacture and sale of leather harnesses for horses. Although still largely family owned (>80%), it commanded a worldwide reputation for quality and fashion leadership. By early 2001, it generated 78% of its sales outside France, mostly through its network of over 200 exclusive stores in important luxury centers of the world. It had relied on a single-brand strategy for its multiple product lines that spanned diverse luxury products ranging from clothing to fragrances and leather accessories. Japan was clearly an important market for the company and accounted for roughly 25% of its sales in the year 2000. Hermés had positioned itself among the super premium purveyors of luxury goods, offering croco- dile-skin handbags for $8,800 and cotton poplin shirts for $340. In terms of its price positioning of leather goods, it hardly faced any competition, even from the other well-known players such as Gucci and LVMH, whose prices were lower in comparison. Only Bulgari and the Richemont brand, Cartier, were probably the closest in terms of comparability of price points. Hermés had built its sterling reputation by integrating a large proportion of its production and retail operations. 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. At the output end, the company blended both directly owned stores with selected franchise operations, often buying back franchises should strategic need dictate such moves. In 2000, Hermés acquired 31.5% of Leica Camera A.G., a company that specialized in high-end photographic equip- ment. • Bulgari Bulgari traced it origins to a small village in Greece named Epirius that was well known for silver- smiths. Mr. Sotirio emigrated from Epirius to Italy and opened his first jewelry shop in Rome. The company was listed on the Milan and London stock exchanges, although the family still held control- ling shares and exercised both strategic and management control over the entire range of operations. Bulgari had grown in terms of both geographic reach as well as product variety through an intense phase of expansion that started in the early 1990s. It operated in seven luxury segments that included watches, jewelry, perfumes, fashion accessories, silks, tableware, and eyewear. In early 2001, it had formed a joint venture partnership with Marriott International. The joint venture was supposed to focus on leveraging the Bulgari brand name in building luxury resorts. It was known in the luxury business for its “classical chic” design sensibilities that appealed both to traditionalists as well as the trendier clientele that tended to be largely comprised of first-time buyers. The broad appeal was an essential ingredient to Bulgari’s success story. Bulgari relied on a network of franchised outlets and company-owned stores to reach its customers. It had a 99-store network, of which 72 stores were company owned. It also distributed its products through other channels such as airport duty-free shops. Although it had interests across a wide spec- trum of luxury products, a substantial part of its revenue was attributed to watches (46% of company sales in 2000) and jewelry (33% of sales in 2000). In geographic terms, Japan and the United States were the leading markets, while the Asia-Pacific region as a whole accounted for 36% of total com- pany sales. Reflecting its Italian location, the company preferred to use a network of contractors for many of its production functions. While it produced its entire range of watches and perfumes in- A09-03-0011 5
house, it contracted out the manufacture of other product lines such as jewelry and fashion accesso-
ries. The company had reported sales of $595 million and EBIT of $101 million in 2000.
The Ascent of Louis Vuitton Möet Hennessy
“An unprecedented cocktail of talent, audacity, and thoroughness in the quest for excellence” was the
way in which the company described itself in a recent annual report. Louis Vuitton Möet Hennessy was
largely a reflection of its charismatic CEO, Mr. Arnault, who not only engineered the creation of the
group through a series of acquisitions, but also defined the fundamental strategic direction that the
company would take in its evolution to become a global player. Mr. Arnault graduated from the presti-
gious Polytechnique and went to the United States to run a construction company that had been founded
by his father. Upon his return to France in 1984, he saw an opportunity to enter the branded textiles
and clothing business by buying the bankrupt textile company Boussac for $80 million. The purchase
included Christian Dior, the haute couture house that was in decline at the time. Soon thereafter, Mr.
Arnault dismantled the assets of Boussac (with the exception of Dior), and netted $810 million to
launch his vision of luxury fashion retailing.
In July 1988, in collaboration with British brewer Guinness, he acquired 24% of LVMH, a group
that had already been formed through a merger between Louis Vuitton and Möet Hennessy. At that
time, Louis Vuitton had already established alliances with Veuve Cliquot, Canard Duchêne, and Henriot,
established wine and champagne labels along with Givenchy, a fragrance powerhouse. Mr. Arnault’s
24% stake exceeded the individual holdings of the Louis Vuitton and Möet Chandon families, and by
1990 he became the CEO of the LVMH group. In less than a decade, he had transformed the company
through a spree of acquisitions and opportunistic expansion into overseas markets (Appendix II shows
the ownership structure and key investments of LVMH). By early 2001, the company had been reorga-
nized around five divisions spanning wines and spirits, fashion and leather goods, perfumes and cos-
metics, watches and jewelry, and selective retailing. It reported group sales of $10.7 billion in 2001.
Appendix III shows the major brand names held by key players in the luxury goods industry.
LVMH controlled more than 50 luxury brands across its product lines, spanning prestigious
luxury names such as Louis Vuitton, a brand dating back to 1854, Chateau d’Yquem (1593), Veuve
Clicquot (1772), and Guerlain (1828); sophisticated, upscale brands such as Givenchy and Kenzo; to
the younger edgier names such as Urban Decay and Hard Candy. In an interview published in the
Harvard Business Review, Mr. Arnault observed that a “star brand is timeless, modern, fast growing, and
highly profitable.” By those yardsticks, he had been able to gather quite a few star brands for his com-
pany. It was brand power that had propelled the company to leadership positions in almost every
segment it served. LVMH was ranked number one in champagne and cognac, fashion and leather
goods, and selective retailing. It was ranked number three in watches and jewelry and perfumes and
cosmetics (www.lvmh.com). Appendix IV provides financial and operating statistics for LVMH.
LVMH Businesses
In the interest of transparency, LVMH was organized in a divisional format comprising five divisions,
with each division functioning as an SBU (Strategic Business Unit) with its own General Manager and
top management team. These divisions also managed overseas sales of their respective lines. Exhibit IV
provides a breakdown of revenues by product line and geographic region.
Wines and Spirits
LVMH was clearly the world leader in the wine and spirits business. Through Hennessy, it held 40% of
the cognac market and between 20%-25% of the overall champagne market. In the premium cham-
pagne segment, LVMH had a dominant share of 50% built around exclusive brands such as Möet
Chandon and Veuve Clicquot. It had also ventured outside the traditional wine belts in France and Italy
to acquire high-end wine producers in Napa Valley, California (Newton Vineyards), and Australia (Mount
6 A09-03-0011Exhibit IV Geographic Sales Composition of LVMH Product Lines
% of LVMH Rest of
Line of Business revenues Americas Japan Asia Europe France the world
Wine and Spirits 17.85 38 10 12 26 12 2
Fashion & Leather goods 33.04 24 33 15 16 10 2
Perfumes & Cosmetics 18.40 25 7 8 35 20 5
Other Selective Retail 26.29 37 N/A 23* 9 26 5
Watches & Jewelry 4.35 28 14 12 29 8 9
Other 0.07
Total 100.00 27 15 15 20 17 6
Source: Deutsche Bank, A.G.
Adam). Given the rising prominence of both California and Australia in the wine business, it was
believed that these moves would allow the company to market a truly global selection of wines and
champagnes. The division contributed 20% of group sales and had an operating margin of approxi-
mately 30% in 2000. In 2001, the company witnessed a 4% decline in division sales due to the poor
performance of cognac labels in the traditional stronghold market, Japan. Collectively, the wines and
spirits division reported sales of $1.92 billion in 2001.
Fashion and Leather Goods
LVMH had a very-well-established stable of brands in this segment accounting for 30% (€3.61 billion)
of group sales in 2001. Much of the sales of this flagship division were concentrated in the Asia-Pacific
region, particularly Japan. The company had made important cross-border acquisitions in this area to
fortify its presence and heritage. It had acquired controlling interests in Fendi, the Italian leather de-
signer; Donna Karan, a leading US designer; and had entered into a joint venture with Prada, another
well-known Italian company in leather products and ready-to-wear apparel. Much of the sales in this
segment were directly attributable to the Louis Vuitton brand that specialized in leather goods. This
label had grown by leaps and bounds under the leadership of its legendary designer, Mr. Marc Jacobs.
Demand for Louis Vuitton products often exceeded supply, requiring customers to go on a waiting list
that often took several months to clear. A case in point was the introduction of the Graffiti line, which
became an instant success, generating a waiting list that took over a year to fulfill.
The company was able to leverage synergies across its fashion brands. For example, its Kenzo
production facility had been transformed into a logistics platform for men’s ready-to-wear products
serving other brands such as Givenchy and Christian Lacroix. Given the historically lower profit mar-
gins in the ready-to-wear market, synergies resulting in cost savings could boost profitability. The Louis
Vuitton label, combined with the strength of the LVMH group, afforded opportunities for expanding
into new brands and products. Using this launching pad, the company engaged in significant brand
expansion efforts to reach a wider audience. These efforts were well supported by the fashion buyers. As
Muriel Zingraff, Harrods’ fashion and beauty director, observed, “What I will say is that we may have
more patience with smaller brands if they are owned by a parent company, such as LVMH or the Gucci
Group.”1
Fragrances and Cosmetics
The fragrances and cosmetics division that generated 18% of company sales in 2000 had a powerful
collection of brands that vied with the leather and fashion goods for the limelight. This division man-
aged the blockbuster brands such as Christian Dior, Guerlain, Kenzo, and Givenchy. The company also
had recently acquired popular U.S. brands such as Bliss, Hard Candy, Urban Decay, and Fresh that
were geared toward a younger audience. Europe was the largest market for fragrances, perhaps due to
1
Sherwood, J. Battling It Out in Style. theage.com, March 2001.
A09-03-0011 7the heritage of the brands that the company offered. The recent acquisitions in the U.S. were an integral
part of the drive to internationalize LVMH’s fragrance and cosmetics offerings. This division had been
able to leverage R&D synergies across brands. Thus, while its R&D expenditure was in line with the
industry norms, LVMH was able to generate twice the average growth rate of the industry. It was
believed that these R&D skills would help boost sales of the acquired companies. As part of a larger
drive to consolidate margins in this division, the company had been integrating R&D, production,
distribution, sourcing, and other back-office operations across brands. These moves were quite benefi-
cial. For example, integrating the purchasing function across brands had resulted in raw materials cost
savings of 20%.2 Analysts believed that the fragrances division was also positioned to reap the spillover
benefits arising from the co-branding strategy under which many of the brands were linked directly to
ready-to-wear apparel brands, a unique avenue of differentiation at LVMH.
Watches and Jewelry
The latest portfolio addition at LVMH, watches and jewelry, contributed only 5% of sales in 2000 and
an operating margin of roughly 10%. In watches, the company owned prestigious brands that included
Tag Heuer, Ebel, and Zenith, and Fred Joallier and Chaumet in jewelry. Unlike its constellation of
brands in other divisions, many thought that the company did not have quite the same star power in
watches and jewelry. Competitors such as Richemont, Hermés, and Bulgari seemed to have more recog-
nizable brands and more upscale products in this category. However, tangible synergies appeared a
distinct possibility because the division could centralize the manufacture of movements and also utilize
Tag Heuer’s expertise in retail distribution across all brands. The jewelry business was also extremely
competitive due to the presence of leading brands such as Cartier and Van Cleef & Arpels. Despite the
Place Vendôme heritage of both Chaumet and Fred Joallier, neither of them was currently profitable.
Selective Retailing
The vertical integration strategy of LVMH came to fruition when the selective retailing arm was estab-
lished. This division managed LVMH investments in Sephora, DFS Galleria, and Miami Cruiseline
Services. While this division contributed 28% of company sales in 2000, it had not made a profit in the
previous three years. DFS Galleria with 150 duty-free and general merchandise stores was the world’s
largest travel retailer. Acquired in 1996, this business was a victim of poor timing, since the Asian
financial crisis hit soon thereafter. LVMH had since instituted several good management practices,
including the execution of a strategy that would reduce DFS’s reliance on Asian airports, selective
closing of underperforming stores and the creation of DFS Galleria stores in large metropolitan areas.
Despite these changes, Japanese travelers were its most important and loyal customers and any macro-
economic development that hurt Japanese travel invariably found its way to DFS’s bottom line.
Miami Cruiseline Services (MCS) was acquired in January 2000. It offered retail services on
board cruise ships and counted 76% of the world’s major cruise lines (over 100 ships) as its customers.
Conceived as an extension of the DFS concept, Miami Cruiseline focused primarily (90%) on North
American passengers, thus counterbalancing the reliance on Japanese tourists that has plagued DFS. It
also managed duty-free operations at the Miami International Airport, the gateway to Latin America,
opening possibilities of strengthening LVMH’s brands in a region of the world where they were
underrepresented.
In addition to these distribution assets, LVMH had recently acquired La Samaritane, the presti-
gious Paris department store. The company had also entered the retailing end of the made-to-order
tailoring business with the acquisition of Thomas Pink, the legendary Mayfair tailoring house that had
a worldwide reputation for excellence in shirts. Thomas Pink had retail outlets in the United States as
well. LVMH had also taken a minority position in the 200-year-old U.K. fashion retailer, Asprey &
Garrard, that had global aspirations of its own.
2
Hurley, J., & Telsey, D.L. (2001) Luxury Goods: Value in the Magnetism of Brands. Bear Stearns.
8 A09-03-0011Auction Houses Auction houses specializing in art and antiquities were another new line of business for LVMH. In 1999, LVMH spent between $60 and $100 million to acquire Philips, “one of the perennial also-rans of the auction world.”3 It subsequently acquired Geneva-based Gallery de Pury & Luxembourg and the Parisian auction house L’Etude Tajan. It had also recently engineered a merger with Bonham & Brooks, the top automotive auctioneer. The auction business at the upper levels had very poor margins given the competition between the heavyweights, Christie’s and Sotheby’s. The LVMH acquisitions were prima- rily in mid-market auctions and hence considered more economically viable. It was also rumored that Mr. Arnault was taking a closer look at Sotheby’s, and if he succeeded in buying the Sotheby name, he would then be able to package the auction line along with some of the other high-fashion brands to bring in new customers. Forbes noted that, “He could use the champagnes, rare wines, jewelry, and fashion, as well as the cachet of its parties and product launches, to lure new customers. In terms of synergy, it would all fit together nicely.”4 The LVMH Approach to Competitive Strategy Innovation, differentiation, and positioning were the fundamental pillars of the competitive strategy that LVMH followed. It had mastered the art of differentiating itself in every market segment in which it operated. The company valued long-term performance and was willing to plough investments into new product brands and provide brand support for extended periods of time before expecting tangible profits. Unfortunately, although this long-term orientation and reinvestment of profits improved its market share over the long haul, it did not match the aspirations of the investing public, especially in major capital markets such as the United States. Success sometimes did take a long time to percolate to the bottom line. Managing the Business Model Creativity and innovation were synonymous with success in the fashion business. As two analysts re- cently observed, “Luxury brands must foster an appreciation (and tolerance) for creativity that is un- constrained by commercial or production constraints.”5 At LVMH, creative autonomy was a principle that was guarded zealously. In almost all its acquisitions, LVMH had maintained the creative talent as an independent pool without attempting to generate synergies across product lines or brands. When Mr. John Galliano, the design guru at Christian Dior, came up with newspaper dresses, Mr. Arnault did not stop him from showing his creations at the fashion shows. Although the dresses were hardly in- tended to be commercial successes, they created sensational coverage in the fashion media. This expo- sure allowed LVMH to capitalize on the creations in other ways. Mr. Arnault believed that, “If you think and act like a typical manager around creative people—with rules, policies, data on customer preferences, and so forth—you will quickly kill their talent.”6 Thus, the company was decentralized by design and had a very small cadre of managers. New products contributed 15% of LVMH revenues in leather goods and 20% of sales in fragrances and cosmetics in 2000. Integrating Production Customers who were willing to pay substantial premiums for branded luxury products demanded very high levels of quality and craftsmanship. For example, some of the leather accessories such as handbags made under the Louis Vuitton brand went through several hundred steps, carefully engineered by ac- complished craftsmen. The extent of careful attention that the production process entailed was prob- 3 Rohleder, Anna. The Auction Business Waits for the Hammer to Fall. Forbes.com. Nov. 14, 2001. 4 Ibid. 5 Hurley, J., & Telsey, D.L. (2001) Luxury Goods: Value in the Magnetism of Brands. Bear Stearns. 6 Bernard Arnault of LVMH: The Perfect Paradox of Star Brands. Harvard Business Review, October 2001. pp. 116-123. A09-03-0011 9
ably one reason why many of the Louis Vuitton products commanded astronomical price premiums in
the range of 70%, widely speculated to be among the highest in the industry. LVMH believed in vertical
integration, internalizing much of its production across product lines for quality control purposes. One
of the benefits of this internalization approach was the boost it provided to the margins. Some analysts
had estimated that the company saved 19.5% of material costs by centralizing some of the procurement
activities in the fragrances business.7 Coupled with some supply chain initiatives, these analysts believed
that the company was able to boost the operating margin from 6.7% to 8.9%. However, there were
others who expressed the opposite view. Analysts at Deutsche Bank, for example, had observed, “The
gross margin generated by a luxury brand with in-house production does not appear to be higher than
that of a brand that outsources.”8 Their analysis reported that integrated design houses were able to gain
only a slender advantage (1,275). It had recently
premiered a new global store concept. These global concept stores had between 400-1000m2 of retail
space and promoted all the brands under the LVMH umbrella. The company was operating 26 such
stores as of 2000 and had reported a halo effect on sales at smaller LVMH stores that were in close
proximity to a global store. Despite its control over distribution, LVMH faced challenges in pricing.
For example, its Louis Vuitton handbags cost 40% more in Japan than they did in France. This imper-
fection had encouraged an arbitrage business in handbags run by groups from Japan who flew into
France with the sole purpose of buying Louis Vuitton handbags for resale through parallel channels in
Japan.9 The company attempted to control this gray market by maintaining a database, identifying
customers through their passport numbers, and thus making it difficult for the arbitrageurs. Counter-
feit handbags and accessories were another big problem that had persisted for a very long time. In
fashion centers such as Milan, Venice, and Florence, it was not uncommon to see hawkers peddling fake
goods in the very same exclusive market zones where the designers had their boutiques.
In the customer-facing front-end operations, the selective retail ventures such as Sephora and DFS
Galleria were thought to play a crucial role. These retail stores helped LVMH gather vital competitive
intelligence and an enhanced understanding of the luxury goods customer. For example, their DFS
Galleria stores carried an assortment of products from LVMH as well as its competitors, thus offering
an ideal environment for understanding current customer needs and how the competition was faring in
meeting those needs. The acquisition of Sephora, an upscale fragrances and cosmetics retailer, opened
vertical integration pathways for LVMH. Sephora had expanded to key markets in the U.K., Japan,
Italy, and more recently in the U.S. Although the company felt that this retailing arm was crucial,
Sephora had been losing money.
While designing and producing cutting-edge products was one side of the picture, getting the
message across to potential buyers and organizing the distribution outlets was a completely different
proposition. Fashion shows and fashion journals were important gatekeepers in the business, and their
opinions were particularly influential in determining the success of product suites. Despite the appear-
ance of objectivity, some fashion editors and, consequently, writers were constrained by the power of
large design houses that were key to the success of the fashion magazines. As one former editor observed,
“I have been coerced into featuring products. If the advertising spend of a company is massive, it will
demand editorial mentions commensurate with the money it’s pouring into the magazine.”10 A typical
ad in a leading fashion magazine cost upwards of $50,000, and hence commanded the attention of
7
Mills, E. LVMH. Credit Suisse First Boston, 9 March 2001.
8
Deutsche Bank, A.G. Luxury Goods Sector: Traversing the Twilight Zone, October 9, 2001.
9
Economist. July 14, 2001.
10
Sherwood, J. Battling It Out in Style, theage.com, March 2001.
10 A09-03-0011editors. When Louis Vuitton advertised the premiere of its Graffiti line, its stores generated long waiting
lists because of the demand spike that was created as a consequence of the advertising. The size of
operations commanded by a designer appeared to have important benefits. The influence spread to
buyers who acquired collections on behalf of the department store chains as well. These buyers did not
need to be courted. They automatically migrated toward the design house that had the most clout, a
beneficial fallout of the size of the design house. These buyers were more willing to take a chance on
even the small brands that a design house might promote because such support had its rewards, such as
preferential allotment of scarce inventory.
The Future
Mr. Arnault strode over to the window to peer at the serpentine queue outside the Louis Vuitton store.
He was thrilled to see the throngs of loyal customers. It bode well for the partnership that LVMH had
forged with DeBeers to market brand-name diamonds—a market that was estimated to exceed $25
billion. It was expected that De Beers would share its knowledge and supply sources for diamonds,
while LVMH would bring brand name and luxury management expertise.
A few days earlier, LVMH had announced that it would sell 70% of its holdings in the auction
business Phillips de Pury and Luxembourg, bringing its ownership stake to 27.5%. The analysts had
interpreted this as an inglorious retreat for Mr. Arnault, who had vowed to compete successfully against
Christie’s, the auction house owned by Mr. Pinault, who wrested away a significant piece of Gucci when
LVMH mounted a hostile bid on that company. The markets were quite hopeful that this move to sell
off the auction business would help boost earnings, especially since it had been a drag on earnings for
quite some time. LVMH shares rose over 3% on the announcement. Was this a portent of more divest-
ments to come? Had Mr. Arnault had a change of heart over the synergistic growth of LVMH as a
fashion empire spanning multiple lines? Now that LVMH had retreated from auctions, would the
specialty retailing ventures that were consistent loss-makers be spun off? Perhaps the most critical ques-
tion was whether massive divestments that would refocus the group around Louis Vuitton would make
strategic and economic sense in the industry environment where the company found itself. It had
indeed been a thrilling ride, and there was much to reflect upon as Mr. Arnault thumbed through the
press clippings on the sale of Phillips de Pury and Luxembourg.
A09-03-0011 1112
Appendix I Stock Market Reactions to LVMH Acquisitions and Divestiture
LVMH Stock Performance (% change) CAC 40 Index Performance (% change)
3 days Day 3 days Total 3 days Day 3 days Total change
Event prior1 announced [A] after1 [B] change [A+B] prior announced after after
10/29/96 Buy DFS -0.87 -1.59 +6.25 +4.66 -0.56 -1.15 +0.77 -0.38
4/19/96 Buy Chateau d’Yquem -6.58 +10.00 -3.59 +6.41 - 1.82 -1.97
7/21/99 Buy Sephora -2.16 -0.90 -1.09 -1.99 -2.35 -1.03 -1.35 -2.38
9/13/99 Buy Tag Heuer -0.79 -1.43 -0.25 -1.68 +0.50 -0.60 -1.16 -1.76
11/21/00 Buy La Samaritane -2.88 +2.30 -3.50 -1.20 -4.20 0.98 -0.40 +0.58
12/17/00 Buy Phillips -9.49 +4.87 -5.62 -0.75 -3.48 +0.82 -2.00 -1.18
11/24/01 Buy Fendi -1.85 +2.20 -8.30 -6.10 -0.41 -0.21 -2.61 -2.82
11/27/01 Buy DKNY +0.73 -2.80 -5.50 -8.30 -0.76 -1.72 -0.89 -2.61
2/19/02 Sell Phillips stake -1.65 -3.54 +6.21 +2.67 -1.28 -2.09 -0.41 -2.50
1
Time period may be less than 3 days in case of intervening holidays
Source: Stock market prices from Bloomberg and Big Charts.
A09-03-0011Appendix II Ownership Structure of LVMH and Its Holdings
Family & holding
company
99.7%
Groupe Arnault
5.10% 29.6%
Grand Vision Free
Free float
float
60%
Bouygues 10.4%
10.4% 100% Christian Dior
Guerlain family Christian Dior
Couture
100%
Europ@web 100%
20% Icollector.com
17.5% Petopio .com Financière
12% Datek.com J. Goujon
8% Planetex.com
5% MP3.com 48.9% 3.70% Moët Chandon
Free
Free float
float
4% 1-800 Hennesy family
Flowers.com
2% Webvan.com 42.4%
8% Boo.com
10.5% Qxl.com
44% Aucland .com 6.8% 5.0%
Diageo LVMH Treasury stock
44% LybertySurf /
Nomade .fr 34%
Moët Hennesy 58.67% 61.2% DFS
Spirits & Selective 100% Sephora
99% Hennesy Cognac Retailing 100% Bon Marché
100% Thomas Hine 100% Franck & Fils
100% Moët Chandon
100% Mercier
100% Ruinart 100% Fred
7.33% 100% Veuve Clicquot Watches 100% Tag Heuer
Ponsardin & Jewelry 100% Chaumet
100% Canard Duchêne 100% Ebel
99.8% Pommery 100% Zenith
99.8% Krug
98.88% Desfossés Int’l
64% Château Yquem Other
98% La Tribune
100% 100% Investir
Louis Vuitton 100% Radio Classique
Fashion 20% Video network
100% Louis Vuitton Malletier & leather 99% Victoire multimedia
100% Cêline goods
100% Loewe 100%
100% Berluti LV Capital
100% Kenzo Mode LV Capital
100% Givency Couture 20% Interparfum Inc.
100% Christian Lacrois 60% Thomas Pink
25% Fendi 36.4% Régina Rubens
100% Philips
100% La Brosse Dupont
100% Parfum Christian Dior 100% 24% apache
100% Parfum Guertain Fragrance 34% Gant
100% Parfum Kenzo & Cosmetics 10% Prost
100% Parfum Givenchy
>50% Hard Candy
>50% Bliss
>50% Benefit cosmetics
>50% Make up for ever
Source: BNP Equities
A09-03-0011 13Appendix III Leading Multibrand Luxury Goods Companies1
Gucci LVMH2 Richemont Bulgari
Alexander McQueen Art & Auction A. Lange & Sohne Bulgari
Bedat & C° Benefit Alfred Dunhill Logomania
Bottega Venetta Bliss Baume et Mercier Lucea
Boucheron Canard Duchene Cartier Rosenthal
Gucci Celine Chloe
Sergio Rossi Chandon Estates Hackett
Stella McCartney Chateau d’Yquem IWC
YSL Beaute Chaumet Jaeger-LeCoultre
Yves St. Laurent Christian Lacroix Lancel
DFS Group Montblanc
Dom Perignon Montegrappa
Donna Karan Officine Panerai
Ebel Old England
eLuxury.com Piaget
Etude Tajan Purdey
Fendi Seeger
Fred Joaillier Shanghai Tang
Givenchy Sulka
Guerlain Vacheron Constantin
Hard Candy Van Cleef & Arpels
Hennessy
Hine
Kenzo
Krug
La Samaritane
La Tribune
Le Bon marche
Loewe
Louis Vuitton
Marc Jacobs
Mercier
Miami Cruiseline Services
Moët & Chandon
Parfums Christian Dior
Phillips de Pury & Luxembourg
Pucci
Sephora
Solistice
Tag Heuer
Thomas Pink
Tod’s
Veuve Cliquot
Zenith
1
Hermés sells under a single brand name, “Hermés”
2
Partial list of brands for LVMH
14 A09-03-0011Appendix IV Operating and Financial Statistics for LVMH
METRIC Wines & Spirits Fashion & Leather Perfumes & Cosmetics Watches & Jewelry Selective Retailing
A09-03-0011
($ million) 1999 2000 2001 2002 1999 2000 2001 2002 1999 2000 2001 2002 1999 2000 2001 2002 1999 2000 2001 2002
Net Sales 1972 2057 1965 1994 2021 2819 3180 3691 1499 1824 1964 2056 119 541 483 486 1904 2894 3060 2937
Operating Income 577 630 595 660 727 1029 1122 1141 128 162 131 142 4 52 24 (11) (2) (2) (171) 18
Operating Margin 29% 31% 30% 33% 36% 37% 35% 31% 9% 9% 7% 7% 3% 10% 5% -2% -0.1% -0.1% -6% 1%
Note: Selective Retailing figures for 2000 and 2001 are restated in 2002 annual report taking into account the reclassification made in 2002.
LVMH partially hedges its foreign exchange exposure. In 2001, 2002, 2003, the hedge coverage was 0.92, 0.89, and 0.86 USD/Euro. Variations, if any, are due to rounding off.
Sources: LVMH Annual Report for 2000 and 2002, http://www.lvmh.com, company financials at http://www.mergentonline.com
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