Overview
This report aims to achieve two goals: first, to assess strategies of the world’s three largest luxury groups, with a main focus on LVMH; second, to give recommendations based on key findings from the strategy assessment.
The “evolution of the luxury industry during the two last decades” sees “a shift from family-owned business to the constitution of large industry conglomerates like LVMH, PPR and Richemont” (Hoffmann et al., 2012).
LVMH came from a merger of Moët Hennessy and Louis Vuitton in 1987. The group has 70 Houses categorised into five divisions, 35.7 billion euros in revenue, and 120,000 employees (LVMH, 2016).
PPR entered retail in 1990s, and was renamed to Kering in 2013. Kering has 20 brands, reports revenue of 11.6 billion euros, and employs over 38,000 people (Kering 2016).
Richemont was formed in 1988. It owns 19 Maisons™, with “particular strengths in jewellery, luxury watches and writing instruments”, it reports revenue of 10.4 billion euros, and has 31,599 employees (Richemont, 2016).
Strategic assessment
I started by looking at their corporate strategies: LVMH designs its “LVMH Model” with six pillars, Kering focuses on “empowering imagination”, and Richemont sets seven “strategic objectives” (Appendices I – III).
Building portfolios with varied degrees of diversification stood out as a shared core strategy, as Anand (2012) stated: “for a multi-business firm, additional considerations arise since the centre of focus is no longer a single business unit but rather the portfolio of businesses within the firm”.
LVMH, with the largest portfolio and great diversification, has enormous advantages in this perspective, whereas Kering mainly focuses on fashion and watch & jewellery, and Richemont specialises in the later.
I recently raised the question of how to successfully manage its portfolio to Bernard Arnault, Chairman and CEO of LVMH; he responded: “the key is running every House independently… many of these came from families, and some are still working with us”.
This is in line with the argument of Goold et al. (1993): “successful diversification depends on building a portfolio of businesses which fit with the managerial ‘dominant logic’ of top executives and their management style”. They warned that “diversification should be limited to those businesses with synergy… when the performance of a portfolio of businesses adds up to more than the sum of its parts”.
This echoes with the LVMH Model: “sharing of resources on a Group scale creates intelligent synergies while respecting the individual identities and autonomy of our Houses. The combined strength of the LVMH Group is leveraged to benefit each of its Houses” (LVMH, 2016).
Unsurprisingly, globalisation is also emphasised in all three groups’ strategies, because “a luxury brand that cannot go global finishes up disappearing” (Kapferer et al., 2012). LVMH has 3,384 stores in over 50 countries (BoF, 2016), brands under Kering are sold in over 120 countries (Kering, 2016), and Richemont sees good balance in geographical dispersion of revenues (Richemont, 2016).
Studies on corporate strategies were followed by the use of “Porters’ five forces”, because “defending against the competitive forces and shaping them in a company’s favour are crucial to strategy”(Porter 2008).
1. Threat of entry
The level of threat from new entrants “depends on the height of entry barriers that are present and on the reaction entrants can expect from incumbents”, and was analysed based on the seven sources of entry barriers (Porter, 2008):
Sources
Assessment
Height of barrier
Level of threat
Supply-side economies of scale
Although not considered scale-centred, conglomerates benefit from large supplies of accessories and materials
Medium
Medium
Demand-side benefits of scale
Highly applicable: customers are more willing to purchase & pay higher prices for products from these brands, making it hard for new entrants to position themselves appropriately and charge premium prices
High
Low
Customer switching costs
This has two sides: logistically, luxury goods are purchased individually without switching costs; psychologically, most brands owned by LVMH, Kering or Richemont have huge loyal fan bases, to whom switching costs can be high (styles, brand recognition, sense of belonging to social groups/classes)
Medium
Medium
Capital requirements
Luxury conglomerates capitalise experience: entire customer journeys are aligned with their positioning – sufficient capital resources are crucial for success
High
Low
Incumbency advantages independent of size
Significant for all three: gained from their portfolios, market knowledge, staff & connections, and geographical coverage (operations/retail)
High
Low
Unequal access to distribution channels
LVMH, among the three, has unparalleled advantages from its vertical integration that “fosters excellence both upstream and downstream, allowing control over every link in the value chain, from sourcing and production facilities to selective retailing” (LVMH, 2016)
High
Low
Restrictive government policy
Some governments actively promote SMEs & creative industries, and help new entrants start their businesses; strict regulations may also create difficulties for new entrants, especially for fine jewellery and premium alcohols
Medium
Medium
As suggested by Porter (2008), all entry barriers were “assessed relative to the capabilities of potential entrants”, making the threat of new entry faced by these groups considerably low.
Nonetheless, this assessment by no means eliminates the possibility of new entrants gaining competitive advantages, because the “movement toward consolidation is rendering brands more and more uniform, thus creating opportunities for players able to craft offerings for niche luxury clientele” (Hoffmann et al., 2015).
2. The power of suppliers
“Results show that most (supply chain) models do not apply to the luxury context” (Caniato et al., 2009). As mentioned by Arnault, many brands in the three conglomerates’ portfolios’ rose from fine craftsmanship, with suppliers in the value chain. These luxury groups’ control over supplies is examined in the research of Hoffmann et al (2015): “(they) own more than 100 brands and are maintaining a constant pace of acquisitions, relying on vertical integration to secure supplies”.
Hence, the power of suppliers remains low.
3. The power of buyers
While assessing the power of buyers, two major factors were considered: negotiation leverage and price sensitivity (Porter, 2008).
It was argued that “retail luxury is producer rather than consumer oriented” (Dion et al., 2011); this was confirmed by Arnault (2016) when he said that LVMH would not attempt to know what the customer might want, rather it would “create the most innovative product”, then “maximise people’s desire to buy”.
Both statements indicate that the negotiation leverage of buyers is seemingly negligible to luxury groups like LVMH.
Compared to mass consumers, buyers of luxury products are often considered less sensitive to prices – this may be true in their willingness to pay higher prices, but luxury customers show high sensitivity in geographical price gaps.
Emerging markets are playing an important role in global luxury; Jean-Baptiste Voisin, Chief Strategy Officer of LVMH, recently emphasised that China market had great strategic importance to them. However, Chinese customers&rs
quo; increasing purchasing power has not been fully reflected in their regional sales performance, partly because of the surge in overseas travel, and so-called luxury buying agents – both exploiting huge prices gaps, together with tax returns or Euro devaluation, between Europe and Asia.
In an attempt to address this issue, Chanel, followed by Prada and Burberry, implemented a global pricing alignment strategy last year, decreasing prices in China and increasing those in Europe. Responses from conglomerates varied: “Kering has taken a ‘wait and see’ approach, though rumour has it that ailing Gucci may be a potential test case for a similar move. LVMH has categorically stated that consistent pricing across markets is not a strategy the company espouses as it limits flexibility” (Guarino, 2015).
What was the result of not adopting such strategy? Asia contributed to 34% of LVMH’s revenue in 2015, accounting for the biggest regional share. However, 7% came from Japan alone, while 27% came from all other Asian markets, with 5% year-on-year decrease compared – the only area with negative growth (LVMH, 2016).
Consequently, the power of buyers is actually higher than the industry usually acknowledges.
4. The threat of substitutes
Such threat is high when a substitute “offers an attractive price-performance trade-off” and “the buyer’s cost of switching to the substitute is low” (Porter, 2008).
Similar to price sensitivity, price-performance of luxury goods needs to be assessed in context. For example, performance metrics of a handbag are straightforward – capacity, convenience, and durability. Albeit as a luxury handbag, it also needs to carry additional values such as statement of personal styles and unique features.
Therefore, at a similar price level, there are great chances for brands to offer better performance than others’, causing customers to switch.
Buyers’ switching costs are at a medium level, as previously discussed.
As a result, the threat of substitutes can be considerably high in theory; this is where the benefits of portfolios come into play.
LVMH, Kering, and Richemont all have their areas of expertise: within their portfolios, the real threat of substitutes is dramatically reduced, as customers may be “substituting” with another product whose sales revenue will eventually end up in the same line of annual report. Among the three, LVMH faces the lowest threat thanks to its diversification.
5. Rivalry among existing competitors
“A company can outperform rivals only if it can establish a difference that it can preserve” (Porter, 1996), and such difference is particularly difficult to maintain for luxury brands, leading to fierce competition.
Perishability is also a huge concern, because it “creates a strong temptation to cut prices and sell a product while it still has value” (Porter, 2008). As soon as a collection becomes “out of season”, it goes on sale. In recent years, sale calendars have created major conflicts among rivals, causing a vicious cycle: when brands start to sell on discounts, it would be harder for other products to stay attractive on full price; therefore, many brands try to go on sale before their rivals. This creates a dilemma between optimising profit margins by maximising full price sell-through, and beating rivals by bringing forward discount offers.
Such unsustainable models demonstrate very strong competitive force among rivals.
To summarise, “power of buyers” and “rivalry among existing competitors” are the two strongest forces that “determine the profitability”, and are therefore “the most important to strategy formulation”(Porter 2008) for luxury conglomerates like LVMH.
Recommendations & implementation
Seeing strategy as “the creation of a unique and valuable position, involving a different set of activities” (Porter, 1996), I have three recommendations for LVMH.
1. Portfolio, diversification, and competition
Compared to Kering and Richemont, LVMH has significant advantages in its portfolio structure and diversification, and “advantage is the most critical aspect of a strategy statement” (Collis et al., 2008).
To maintain such advantageous diversification, LVMH could add a new division, Hi-tech Accessories, to its current portfolio. This might have been on its radar already: LVMH reportedly revealed plans to “launch a rival product to Apple Watch costing 1,400 euros” (Reuters, 2015).
It should not stop there; moving forward, LVMH could leverage its vertical integration to further expand in other areas such as technology-enabled consumer goods, luxury hospitality, and members-only all-inclusive international travel.
2. Globalisation
Globalisation strategy often pays off well: “between 2007 and 2012, the Chinese luxury goods market grew by a compound annual growth rate of 27%… even today… Chinese consumers still account for 31% of global luxury sales” (Pike, 2016). However, benefits of globalisation come with strings attached, and “the major risk is that (company) forgets its roots” (Kapferer et al., 2012).
Hence, LVMH’s resistance to unified pricing might have harmed its short-term revenue, but such decision could prove rewarding in the long run. Preserving authenticity of brands should be of uttermost importance for LVMH, as a luxury product is expected to “carry a whole world with it” (Kapferer et al., 2012).
Against this backdrop, I would recommend that LVMH puts authenticity, heritage, and origin at the forefront of strategic positioning across all five divisions:
Divisions
Implementation suggestions
Wines & Spirits
Educational tours about the regions, varietals, viticulture & vinification, vintage, style, and heritage of the Houses
Fashion & Leather Goods
Art projects featuring “behind-the-scenes” stories of new collections and inspirations
Perfumes & Cosmetics
Initiatives on sustainability in beauty industry: using natural & precious ingredients developed through environment-friendly process
Watches & Jewellery
Technology-enabled virtual gallery: legacy of fine craftsmanship, precision & perfection, and responsible sourcing
Selective retailing
Exclusive in-store events with universal themes, bringing the best of LVMH to every location where it operates
LVMH should not worry about the trade-offs that it would have to make, as “trade-offs are essential to strategy” and “create the need for choices and purposefully limit what a company offers”(Porter, 1996). Furthermore, “the trade-offs companies make are what distinguish them strategically from other firms” (Collis et al., 2008).
3. Power of buyers
LVMH’s leadership position in global luxury is particularly powerful in neutralising the power of buyers. As pointed out by Joy et al. (2014), “how consumers perceive and experience Louis Vuitton flagship stores shows that luxury stores are becoming hybrid institutions, embodying elements of both art galleries and museums, within a context of exclusivity emblematic of luxury”.
Enhancing collaboration among its Houses can help LVMH create such context, and communicate its unique culture. For example, its fine jewellery brand Chaumet and champagne house Moët & Chandon are both famous for serving Napoleon in history; a limited edition Moët & Chandon vintage champagne can be created with Chaumet’s iconic design of Josephine’s crown on the label, complemented by champagne flutes embellished with precious stones. Not designated for mass production or consumption, such creations can accelerate customers’ loyalty and aspire their desire for involvement.
To conclude, my
recommendations for LVMH addressed strategic concerns on the three dimensions that make up “a firm’s scope: customer or offering, geographic location, and vertical integration” (Collis et al., 2008).
“Never satisfied”, as Arnault (2016) said, LVMH “should stay positive, but prepare as the worst is coming”.