Case Study:
LVMH and Luxury Goods Marketing LVMH Moët Hennessy-Louis Vuitton SA is the world’s largest marketer of luxury products and brands. Chairman Bernard Arnault has assembled a diverse empire of more than 60 brands, sales of which totaled $28 billion (€20.3 billion) in 2010 (see Figure 1). Arnault, whom some refer to as “the pope of high fashion,” recently summed up the luxury business as follows: “We are here to sell dreams. When you see a couture show on TV around the world, you dream. When you enter a Dior boutique and buy your lipstick, you buy something affordable, but it has the dream in it.” Decades ago, the companies that today comprise LVMH were family-run enterprises focused more on prestige than on profit. Fendi, Pucci, and others sold mainly to a niche market comprised of very rich clientele. However, as markets began to globalize, the small luxury players struggled to compete. When Arnault set about acquiring smaller luxury brands, he had three goals in mind. First, he hoped that the portfolio approach would reduce the risk exposure to fashion cycles. According to this logic, if demand for watches or jewelry declined, clothing or accessory sales would offset any losses. Second, he intended to cut costs by eliminating redundancies in sourcing and manufacturing. Third, he hoped that LVMH’s stable of brands would translate into a stronger bargaining position when managers negotiated leases for retail space or bought advertising. Sales of luggage and leather fashion goods, including the 158-yearold Louis Vuitton brand, account for 35 percent of revenues (see Figure 1). The company’s specialty group includes Duty Free Shoppers (DFS) and Sephora. DFS operates stores in international airports around the world; Sephora, which LVMH acquired in 1997, is Europe’s second-largest chain of perfume and cosmetics stores. Driven by such well-known brands as Christian Dior, Givenchy, and Kenzo, perfumes and cosmetics generate nearly 20 percent of LVMH’s revenues. LVMH’s wine and spirits unit includes such prestigious Champagne brands as Dom Perignon, Moët & Chandon, and Veuve Clicquot. Despite the high expenses associated with operating elegant stores and purchasing advertising space in upscale magazines, the premium retail prices that luxury goods command translate into handsome profits. The Louis Vuitton brand alone accounts for about 60 percent of LVMH’s operating profit. Unscrupulous operators have taken note of the high margins associated with Vuitton handbags, gun cases, and luggage displaying the distinctive beige-on-brown latticework LV monogram. Louis Vuitton SA spends $10 million annually battling counterfeiters in Turkey, Thailand, China, Morocco, South Korea, and Italy. Some of the money is spent on lobbyists who represent the company’s interests in meetings with foreign government officials. Yves Carcelle, chairman of Louis Vuitton SA, recently explained, “Almost every month, we get a government somewhere in the world to destroy canvas, or finished products.” Another problem is a flourishing gray market. Givenchy and Christian Dior’s Dune fragrance are just two of the luxury perfume brands that are sometimes diverted from authorized channels for sale at mass-market retail outlets. LVMH and other luxury goods marketers recently found a new way to combat gray market imports into the United States. In March 1995, the U.S. Supreme Court let stand an appeals court ruling prohibiting a discount drugstore chain from selling Givenchy perfume without permission. Parfums Givenchy USA had claimed that its distinctive packaging should be protected under U.S. copyright law. The ruling means that Costco, Walmart, and other discounters cannot sell some imported fragrances without authorization. Opportunities and Challenges in Asia Asia—particularly Japan—is a key region for LVMH and its competitors. The financial turmoil of the late 1990s and the subsequent currency devaluations and weakening of the yen translated into lower demand for luxury goods. Because price perceptions are a critical component of luxury goods’ appeal, LMVH executives made a number of adjustments in response to changing business conditions. For example, Patrick Choel, president of the perfume and cosmetics division, raised wholesale prices in individual Asian markets. The goal was to discourage discount retailers from stocking up on designer products and then selling them to down-market consumers. Also, expenditures on perfume and cosmetics advertising were reduced to maintain profitability in the face of a possible sales decline. Louis Vuitton chairman Yves Carcelle also made adjustments. He canceled plans for a new store in Indonesia, and group managers raised prices to counteract the effect of currency devaluations. Because the DFS chain depends on Japanese tourists in Asia and Hawaii for 75 percent of sales, Louis Vuitton managers also work with tour operators to predict
the flow of Japanese tourists. When tourism is at a peak, price increases from 10 to 22 percent help maximize profits on merchandise sales. Arnault was confident that the Asian crisis would not severely affect his company’s performance in the long term. As Arnault explained in the spring of 1998, “One has to distinguish between Japan, where most of our business is, and the rest of Asia. Japan is in a growth slump, but it isn’t going to have the same difficulties as Korea or Indonesia. And our business in Japan is doing very well.” Because the Louis Vuitton unit controls its own distribution, management has even been able to take advantage of the crisis by renegotiating store leases in key Asian cities. In some instances, the company has secured longer lease terms plus reductions in rates by as much as one-third. Arnault’s optimism was well founded; with interest rates at record lows and a gloomy outlook for the stock market, Japanese consumers had few other spending options. In 2001, executives actually raised prices at Louis Vuitton’s Japanese stores. “One friend of mine has 10 Louis Vuitton bags. In Japan, it’s a status symbol. It’s very important to have European luxury goods.” A 39-year-old flight attendant based in Tokyo Strategic Decisions at LVMH Over the past decade, Arnault has leveraged his multibrand strategy by broadening the company’s consumer base. In the late 1990s, Arnault sensed that cosmetics-buying habits were changing in key markets. He opened Sephora stores in New York, Chicago, and San Francisco in conjunction with a new Web site, Sephora.com. Today, there are more than 270 Sephora stores in the United States and Canada; the chain also has a presence in more than a dozen other countries, including China and Russia. Customers who visit Sephora USA stores are encouraged to wander freely and sample products on an open floor without waiting for sales clerks to assist them. In 2001, Arnault paid more than $600 million for Donna Karan International Inc. and its trademarks. Arnault had tried without success to acquire Giorgio Armani; Donna Karan is LVMH’s first American designer label. As Arnault noted, “What appealed to us is the fact that it is one of the best-known brand names in the world.” In January 2008, executives at Louis Vuitton announced a new corporate branding campaign using a 90-second ad that would appear on cable and satellite television and in cinemas. This was something new in the luxury goods sector; generally, advertising budgets are limited and television is viewed as too expensive. In addition, some in the industry believe that TV’s status as a mass-marketing medium can undercut a luxury brand’s aura of exclusivity. However, Louis Vuitton executives hoped audiences would connect with the brand’s travel heritage. To achieve that, the company’s ad agency proposed buying time on news channels that business travelers watch such as CNN. As Louis Vuitton marketing chief Pietro Beccari noted, “It is supposed to touch our clientele and viewers in ways that perhaps other media will not touch. This is a way to say Louis Vuitton is different. It is something éphémère, but also something that stays.” Arnault has also turned his attention to emerging markets. Louis Vuitton entered India in 2002 with a boutique at a luxury hotel; now, Fendi, Tag Heuer, and Dior are open for business as well. LVMH has a lock on prime locations at Emporio, an upscale shopping mall that opened recently in New Delhi. Because LVMH has a group presence in the mall, it can negotiate favorable lease rates for retail space. Arnault’s expansion coincided with the September 2007 launch of Vogue India. Once again, thanks to LVMH’s diverse brand portfolio, the company is able to buy large blocks of advertising space from Condé Nast India at discounted prices. The global economic crisis that gained traction in 2008 affected many retail sectors, and the luxury goods business was no exception. Overall purchases of luxury goods fell in the key U.S. market; sales slowed in Russia and other emerging markets as well. Although total sales in the luxury segment were expected to reach a record €175 billion ($218 billion) in 2008, industry observers expected that they would drop significantly in 2009. For European-based luxury companies, there was some good news: the dollar was strengthening against the euro. As the 2008 holiday shopping season approached, many luxury goods makers reduced prices in the United States. At Chanel, the cuts ranged from 7 to 10 percent; as John Galantic, president of Chanel’s U.S. unit, noted, “The dollar’s recent strength has allowed us to pass on greater value to our customers.” Louis Vuitton was a notable exception; in fact, during 2008, the company raised prices twice, resulting in an average increase of 10 percent. The price increases did not dampen sales; in fact, sales continued to increase. Visit the Web site www.lvmh.com A complete PowerPoint presentation of the current year’s financial results is available on the LVMH Web site. www.sephora.com
Q1. Bernard Arnault has built LVMH into a luxury goods empire by making numerous acquisitions. What strategy is evident here?
Q2. What are the possible risks of Louis Vuitton’s first-ever television advertising campaign?
Q3. In March 2008, the euro/dollar exchange rate was €1 = $1.50. By November, the dollar had strengthened to €1 = $1.25. Assume that a European luxury goods marketer cuts the price of an $8,000 tweed suit by 10 percent to maintain holiday sales in December. How will revenues be affected when dollar prices are converted to euros?
Q4. Louis Vuitton executives raised prices in 2008, and sales continued to increase. What does this say about the demand curve of the typical Louis Vuitton customer?
Q5. Compare and contrast LVMH’s pricing strategy with that of Coach.
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.