Diversification into luxury goods
Case Study – ...........
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006

Agenda
‣ Luxury goods ‣ Portfolio of LVMH ‣ Overall evaluation
industry
Strategic fit LVMH’s lineup
9-cell matrix Resource fit Recommendations
Priorities
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 2

Luxury goods
industry
Industry attractiveness
Competitive strengths of LVMH
9-cell matrix
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 3

Luxury goods industry
9-cell matrix 1/4 # Business CS IA %*
high priority 1 Champagne 4.25 6.40 11
medium priority
2 Wines 6.75 5.55 6
7
low priority
high
3 3 Fashion 7.95 6.62 15
8
4 Leather goods 7.70 6.32 15
5
4
Industry Attractiveness
5 Fragrances 5.40 6.78 14
1 6 Cosmetics 8.40 4.12 4
2
medium 7 Watches 8.30 8.40 2
8 Jewelry 8.30 7.50 2
6 12
9 Selective
9 4.95 3.20 28
Retail
10
10 Media 6.55 2.85 1
low
11 11 Art auctions 6.65 1.55 1
12 e-Commerce 6.35 3.62 1
strong average weak
Competitive Strength/ Market Position * percentage of total revenues of LVMH
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 4

Luxury goods industry
9-cell matrix 2/4 – High priority
Fashion, Leather Goods, Watches and Jewelry
‣ Fashion and Leather Goods are the ‣ All of them contain timeless brands
flagship and provide an outlet for that have been the foundation of
creative expression and company LVMH’s success (“creating
innovation heirlooms”)
‣ All these businesses have high
propensity to satisfy the company’s
strategy of production process
quality excellence
The traditional core businesses of LVMH have the highest fit of
competitive strength and industry attractiveness
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 5

Luxury goods industry
9-cell matrix 3/4 – Medium priority
Champagnes, Wines, Fragrances and Cosmetics
‣ Concentration on production and ‣ The main focus in these businesses
marketing in the Champagne is brand image
business
‣ Fragrances is an innovative business
‣ Their cognac is already number one and an essential part of their
in the world market image, this business should
therefore maintained on a high level
‣ They should abandon the idea of
becoming number one distributor
of alcoholic beverages in the world
The mentioned businesses have a good outlook for the future –
LVMH should use this to maintain/ enhance its competitiveness
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 6

Luxury goods industry
9-cell matrix 4/4 – Low priority
Selective Retailing, Media, Art Auctions and e-Commerce
‣ e-Commerce is becoming a ‣ Media is only focussed on the
more
important channel, however it lacks French market and does not fit the
service excellence global strategy of LVMH
‣ LVMH should divest the Art
Auctions and Media businesses
‣ Selective Retailing should
concentrate on own stores, where
service excellence and product
priorities are guaranteed
Some of these businesses should be divested – they are not
contributing to LVMH’s success and only take ressources
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 7

Portfolio of LVMH
Strategic fit
Resource fit
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 8

Portfolio of LVMH
Strategic fit 1/2 – Value chain match-up
Purchases
Sales and
from Technology Operations Distribution Service
marketing
suppliers
Wines &
Spirits
Fashion &
Leather Goods
Perfumes &
Cosmetics
Watches &
Jewelry
Selective
Retailing
Media & Other
Businesses
no synergies
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 9

Portfolio of LVMH
Strategic fit 2/2 – Synergies
Which synergies can be identified from the value chain analysis of
LVMH?
‣ Technology • All businesses are trading in similar
markets (luxury products, likely to be
• Overlap across all businesses in selling to same customers, premium
exchange of technology via Intranet, e- price tag, etc.)
procurement in Moët & Chandon
‣ Sales & Marketing, Distribution and
• Opportunity to roll out technology
Service/CRM
developments across the businesses
•
‣ Most obvious area of overlap as the
Operations
different businesses can lean on each
• Overlap for all businesses except the other for route to market given that
wines and spirits the target market is the same, high
price tag, etc.
The corporate value chain shows potential for the use of
synergies between the different businesses
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 10

Portfolio of LVMH
Resource fit 1/2 – BCG Matrix
100% Star Question mark
Fashion
& Leather Goods Perfumes
& Cosmetics
Industry growth rate
Watches
& Jewelry
10%
Media &
Wine & Spirits Other
Businesses
Bubble sizes represent
Selective Retailing
percentage of total
Cash cow Poor dog revenues of LVMH
0%
10 1 0
relative market share
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 11

Portfolio of LVMH
Resource fit 2/2 – Implications
What are the implications of the resource fit analysis?
‣ LVMH has a nice, balanced portfolio ‣ The portfolio of stars within the
of businesses company is reasonably diversified
and well positioned to capitalize on
‣ Within the poor dogs, certain potential industry growth
products have the chance to move
‣ The cash cows are unlikely to
up, while others should be divested
(which the company did after 2002) become poor dogs, because of the
timelessness of LVMH’s products
LVMH’s current portfolio is well balanced and looking at the
nature of the business it can be expected to stay so
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 12

Overall Evaluation
LVMH’s lineup
Recommendations
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 13

Overall evaluation
LVMH’s lineup
Evaluation of LVMH’s current business lineup
‣ LVMH’s newly acquired businesses ‣ The downturn in the 2001
have contributed significantly to the financials can be mainly attributed
company’s revenues over the last to social and political influences,
years resulting in few international
travelers (9/11, SARS causing
‣ The declining profit margins can be economic recession)
described through general trends in
‣ LVMH’s shareholders have
the industry, as more players are
entering the market benefitted greatly from Arnault’s
diversification strategy
LVMH has a balanced lineup that makes the company able to set
synergies free – only very few businesses do not fit
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 14

Overall evaluation
Recommendations
What recommendations can be made in order to improve LVMH’s
position?
‣ LVMH should entrench it’s current ‣ Nurture creative spirit
acquisition strategy (independence of artists)
‣ Non-core luxury businesses should ‣ Leverage production excellence
be divested (Mass-retailing, Media,
‣ Make more use of company-wide
Auctions)
synergies
‣ LVMH should not be overhasty in
it’s decisions concerning
acquisitions or divesting (“timeless
brands are not build over night”)
Main focus should small clean-ups in the portfolio and making
use of the potential for synergies
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 15

FT 06 Group 1
Jacques Burger Lynn Haupt Eugénie MacDonald
Lars Schmidl Keval Shah Tony Simpson
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006

Back-up
Case Study – ...........
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006

Back-up – Luxury goods industry
Industry attractiveness 1/4
Champagnes Wines Fashion
Industry attractiveness measure Rating Score Rating Score Rating Score
Weight
Market size and growth rate 0.175 4 0,70 5 0,88 5 0,88
Industry profitability 0.125 8 1,00 6 0,75 7 0,88
Intensity of competition 0.150 4 0,60 6 0,90 6 0,90
Strategic fits with other industries in
0.150 7 1,05 4 0,60 7 1,05
LVMH lineup
Resource requirements 0.100 6 0,60 5 0,50 5 0,50
Potential for production quality
0.075 7 0,52 6 0,45 7 0,52
excellence
Artistic flair/ Creative expression 0.100 8 0,80 6 0,60 9 0,90
Potential for timeless appeal 0.125 9 1,12 7 0,88 8 1,00
Total 1,00 53 6,40 45 5,55 54 6,62
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 18

Back-up – Luxury goods industry
Industry attractiveness 2/4
Leather Goods Fragrances Cosmetics
Industry attractiveness measure Rating Score Rating Score Rating Score
Weight
Market size and growth rate 0.175 4 0,70 5 0,88 4 0,70
Industry profitability 0.125 7 0,88 9 1,12 6 0,75
Intensity of competition 0.150 5 0,75 5 0,75 4 0,60
Strategic fits with other industries in
0.150 6 0,90 7 1,05 3 0,45
LVMH lineup
Resource requirements 0.100 7 0,70 6 0,60 4 0,40
Potential for production quality
0.075 8 0,60 6 0,45 6 0,45
excellence
Artistic flair/ Creative expression 0.100 8 0,80 8 0,80 4 0,40
Potential for timeless appeal 0.125 8 1,00 9 1,12 3 0,38
Total 1,00 53 6,32 55 6,78 34 4,12
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 19

Back-up – Luxury goods industry
Industry attractiveness 3/4
Watches Jewelry Selective Retailing
Industry attractiveness measure Rating Score Rating Score Rating Score
Weight
Market size and growth rate 0.175 7 1,22 6 1,05 5 0,88
Industry profitability 0.125 9 1,12 8 1,00 3 0,38
Intensity of competition 0.150 7 1,05 6 0,90 2 0,30
Strategic fits with other industries in
0.150 8 1,20 7 1,05 5 0,75
LVMH lineup
Resource requirements 0.100 9 0,90 7 0,70 3 0,30
Potential for production quality
0.075 10 0,75 10 0,75 2 0,15
excellence
Artistic flair/ Creative expression 0.100 9 0,90 8 0,80 2 0,20
Potential for timeless appeal 0.125 10 1,25 10 1,25 2 0,25
Total 1,00 69 8,40 62 7,50 24 3,20
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 20

Back-up – Luxury goods industry
Industry attractiveness 4/4
Media Art Auctions e-Commerce
Industry attractiveness measure Rating Score Rating Score Rating Score
Weight
Market size and growth rate 0.175 5 0,88 1 0,18 7 1,22
Industry profitability 0.125 3 0,38 2 0,25 6 0,75
Intensity of competition 0.150 3 0,45 2 0,30 2 0,30
Strategic fits with other industries in
0.150 1 0,15 1 0,15 3 0,45
LVMH lineup
Resource requirements 0.100 2 0,20 2 0,20 2 0,20
Potential for production quality
0.075 2 0,15 2 0,15 5 0,38
excellence
Artistic flair/ Creative expression 0.100 4 0,40 2 0,20 2 0,20
Potential for timeless appeal 0.125 2 0,25 1 0,12 1 0,12
Total 1,00 22 2,85 13 1,55 28 3,62
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 21

Back-up – Luxury goods industry
Competitive strengths of LVMH 1/4
Champagnes Wines Fashion
Competitive strength measure Rating Score Rating Score Rating Score
Weight
Relative market share 0.20 7 1,40 6 1,20 8 1,60
Marketing and promotion 0.15 6 0,90 6 0,90 8 1,20
Product innovation capabilities 0.10 4 0,40 4 0,40 9 0,90
Distribution capabilities 0.20 6 1,20 6 1,20 6 1,20
Match of business and resources of
0.05 7 0,35 7 0,35 7 0,35
LVMH to industry KSFs
Brand name recognition/ image 0.30 9 2,70 9 2,70 9 2,70
Total 1,00 39 6,95 38 6,75 47 7,95
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 22

Back-up – Luxury goods industry
Competitive strengths of LVMH 2/4
Leather Goods Fragrances Cosmetics
Competitive strength measure Rating Score Rating Score Rating Score
Weight
Relative market share 0.20 8 1,60 8 1,60 8 1,60
Marketing and promotion 0.15 7 1,05 7 1,05 7 1,05
Product innovation capabilities 0.10 8 0,80 8 0,80 8 0,80
Distribution capabilities 0.20 6 1,20 8 1,60 8 1,60
Match of business and resources of
0.05 7 0,35 7 0,35 7 0,35
LVMH to industry KSFs
Brand name recognition/ image 0.30 9 2,70 10 3,00 10 3,00
Total 1,00 45 7,70 48 8,40 48 8,40
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 23

Back-up – Luxury goods industry
Competitive strengths of LVMH 3/4
Watches Jewelry Selective Retailing
Competitive strength measure Rating Score Rating Score Rating Score
Weight
Relative market share 0.20 8 1,60 8 1,60 7 1,40
Marketing and promotion 0.15 7 1,05 7 1,05 7 1,05
Product innovation capabilities 0.10 8 0,80 8 0,80 6 0,60
Distribution capabilities 0.20 9 1,80 9 1,80 8 1,60
Match of business and resources of
0.05 7 0,35 7 0,35 6 0,30
LVMH to industry KSFs
Brand name recognition/ image 0.30 9 2,70 9 2,70 7 2,10
Total 1,00 48 8,30 48 8,30 41 7,05
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 24

Back-up – Luxury goods industry
Competitive strengths of LVMH 4/4
Media Art Auctions e-Commerce
Competitive strength measure Rating Score Rating Score Rating Score
Weight
Relative market share 0.20 7 1,40 7 1,40 6 1,20
Marketing and promotion 0.15 6 0,90 6 0,90 6 0,90
Product innovation capabilities 0.10 7 0,70 6 0,60 7 0,70
Distribution capabilities 0.20 6 1,20 7 1,40 6 1,20
Match of business and resources of
0.05 5 0,25 5 0,25 5 0,25
LVMH to industry KSFs
Brand name recognition/ image 0.30 7 2,10 7 2,10 7 2,10
Total 1,00 38 6,55 38 6,65 37 6,35
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006 25

Diversification into luxury goods
Case Study – ...........
Diversification into luxury goods – Case study – FT 06 Group 1 – 25 October 2006