Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Executive SummaryLouis Vuitton Moet Hennessy (LVMH) is with...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Internal AnalysisFinancialsBased upon LVMH’s 2011 Consolida...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 2.0Figure 3.03
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 4.0Figure 5.0Figure 5.1x& 5.2xiprovide a summary of ...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012As indicated by the chart above, LVMH maintains a significa...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 5.2 – Richemont6
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Manufacturing OperationsAs indicated by Figure 6.0xiii, LVM...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 7.08
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 8.09
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012SWOT AnalysisStrengths      Brand recognition for Louis Vui...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012External AnalysisCompetitive AnalysisCompany              R...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012competitors’ stores anytime. This lack of switching costs i...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Economics and DemographicsAs the chart above shows, Asia, e...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Porter’s Five FactorsThreat of EntryAs discussed earlier, w...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012there is some overlap between LVMH, PPR, and Richemont, the...
Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012i LVMH 2011 Annual Report Page 8ii LVMH 2011 Annual Report ...
Louis Vuitton Moet Hennessy Case Study
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Louis Vuitton Moet Hennessy Case Study

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Case study regarding LVMH's financials, corporate strategy, operations and core competencies.

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Louis Vuitton Moet Hennessy Case Study

  1. 1. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Executive SummaryLouis Vuitton Moet Hennessy (LVMH) is without a doubt the industry leader inluxury goods and brands. It maintains a significant advantage over its directcompetitors by providing exceptionally high-quality productswith unparalleledcustomer service in an exceptional environment. Each of its five business groups:1)Wines and Spirits;2)Fashion and Leather Goods;3)Perfumes and Cosmetics;4)Watches and Jewelry;5) Selective Retailing saw an increase in revenue, profit fromrecurring operations and net profit from the previous year. Moreover, LVMHcontinued to foster growth by firmly establishing itself into emerging markets, i.e.,China, and increased its presence with an additional 495 stores worldwide in 2011,an increase of 19.5% from the previous year. Its underlying strengths include itsbrand recognition, brand value and brand loyalty from its diversified portfolio ofbrands and namely its flagship brand, Louis Vuitton. Furthermore, LVMH operateson a global scale with significant presence in Asia (China & Japan), Europe and theUnited States.While some of LVMH’s brands are extremely high profile, a number ofthem are comparatively unknown, leaving a disproportionate share of revenue on afew brands. Furthermore, LVMH is considerably less invested in fine jewelry andwatches, as compared to its two biggest competitors, Pinault-Printemps-Redouteand Richemont. Nevertheless, currently, and in the foreseeable future, thereare no competitors which posses a significant risk to LVMH due its longstandingcommitment to quality and an extremely loyal customer base. Also due to the factthat LVMH products are sold worldwide, any viable threat would have enter themarket with a considerable amount of capital. Consequently, the threat of entry isvery low. LVMH’s strategy is to maintain its commitment to providingtheir loyalcustomers with the highest-quality products with an unparalleled customerexperience and environment. This is no more evident than with their strategicacquisition of Bulgari, a legendary Italian jeweler and watchmaker,in 2011. Asaforementioned, LVMH is currently the market leader within its industry;nevertheless, they must remain vigilant by making strategic acquisitions andcontinued growth by opening new selective stores in emerging markets, namely theBRIC nations. Areas of opportunity for them would be South America, Russia, Indiaand even South Africa. Most importantly, LVMH must remain true to its corecompetencies of providing the highest-grade products because at the endof the daythey are truly selling a lifestyle, which their products embody.1
  2. 2. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Internal AnalysisFinancialsBased upon LVMH’s 2011 Consolidated Balance Sheet, the company had 2.3B EURSin cash and / or cash equivalents (See Figure 1.0).i Moreover, “net cash fromoperations before changes in working capital amounted to 4,441 million EURS, up17% compared to 2010.”ii Furthermore, as demonstrated by Figure 2.0, LVMHincreased its revenue, profit from recurring operations and operating margin thepast three consecutive years. iiiThus, LVMH is enjoying modest growth and isincurring a profit according to its Net Profit indicated by Figure 3.0.ivWith asignificant increase in financial debt from 2.6B EURSin 2010 to 4.6B EURS in 2011totaling to 7.2 billion EURSv coupled with a decrease in free cash flows (See Figure4.0), it might appear that the company could be suffering from mismanagement,however in actuality LVMH made a strategic acquisitions of Bulgari and “Singapore-based Heng Long, which specializes the tanning and finishing of crocodile leather.”viFigure 1.0As of May 8th 2012, LVMH closed at 123.20 EURS with a change of -4.30 EURS,approximately down 3.37%.vii Its Market Capitalization is 61.39 billion EURS.viii Asindicated by Figure 5.0, LVMH has a Price to Earnings of 20.52 compared to theindustry average of 15.95, Earnings Per Share of 6.21, Return On Investment of10.56 compared to the industry average of 2.08 and Return On Equity of 15.46compared to the industry average of 2.37.ix2
  3. 3. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 2.0Figure 3.03
  4. 4. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 4.0Figure 5.0Figure 5.1x& 5.2xiprovide a summary of Pinault-Printemps-Redoute andRichemont’sfinancial health. The following chart will provide insight into LVMH’scompetitive position relative to its direct competitors:xii 2011 Financial Comparison LVMH PPR RichemontMarket Cap 60.99B 15.23 24.77BProfit Margin 12.96% 8.07% 14.69%Operating Margin 22.25% 13.11% 21.31%Revenue 23.66B 12.23B 7.85BRevenue Per Share 48.41 96.92 14.29Total Cash 2.45B 1.29B 3.60BTotal Debt 7.28B 4.68B 999MD/E 30.95 39.82B 13.05OCF 3.91B 1.33B 1.49B*Currency = EURS4
  5. 5. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012As indicated by the chart above, LVMH maintains a significantly larger market sharecompared to its competitors. In addition, stronger and multiple revenue streamsallow for LVMH to consistently have an influx of cash, hence its advantage inOperating Cash Flows. LVMH’s decrease in cash / cash equivalents is attributed toits recent acquisition of Bulgari. Nevertheless, due to its intangible assets, i.e., brandvalue, brand recognition, brand loyalty, etc., and strong cash-flows, LVMH has theability to leverage itself compared to its competitors where as they would run intofinancial distress.Figure 5.1 – Pinault-Printemps-Redoute5
  6. 6. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 5.2 – Richemont6
  7. 7. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Manufacturing OperationsAs indicated by Figure 6.0xiii, LVMH’sMarket Capitalization is significantly greater incomparison to its competitors. Hence, why LMVH maintains the largest marketshare its industry.Figure 6.0Marketing and SalesAs indicated in Figures 7.0 & 8.0xiv, LVMH’s five business groups have allexperienced growth in revenues, profit from recurring operations, sales volume andnumber of stores opened. Revenue 2011 was 23B EURS, an increase of 16%from the 2010.The following is the growth in revenue experienced by eachbusiness group:xv Wines and Spirits’ increased 8% Fashion and Leader Goods posted organic growth of 16% Perfumes and Cosmetics experienced an increase of 9% mostly in United States and China Watches and Jewelry saw an increase of 98%, 72% as a result of the acquisition of Bulgari Selective Retailing increased by 20%The five business groups posted a Gross Margin of 15B Euros, an increase of 19%from the 2010. Their percentage of revenue was 66%, an increase by 1% from the2010.xviThus, LVMH is experiencing modest growth as the economy graduallycontinues to strengthen.7
  8. 8. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 7.08
  9. 9. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Figure 8.09
  10. 10. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012SWOT AnalysisStrengths Brand recognition for Louis Vuitton is unparalleled in the luxury world. Hennessy is the best-selling cognac in the U.S. and in the world.xvii Extremely diversified brand portfolio.xviii Geographically diversified revenue.xix The Louis Vuitton name, as well as the LV logo are recognized all over theworld, and enjoy a reputation and popularity that is not found in any other luxurybrand. Hennessy cognac enjoys a similar popularity, having the distinction for beingthe best-selling cognac both in the United States and the entire world. Its brandportfolio consists of approximately 60 different companies selling diverse productssuch as leather, jewelry, clothing, perfumes, and alcohol. LVMH enjoys ageographically diversified revenue stream with significant portions of revenuecoming from France, greater Europe, Asia, Japan, and the United States.Weaknesses A few of the brands are disproportionately high profile. Less invested in jewelry brands versus competitors.While some of LVMH’s brands are extremely high profile, a number of them arecomparatively unknown, leaving a disproportionate share of revenue on a fewbrands. Furthermore, LVMH is considerably less invested in fine jewelry andwatches, as compared to its two biggest competitors, PPR and Richemont.Opportunities Synergy between brands. Emerging markets with rapidly rising economies / personal income, i.e., BRIC nations and the rising elite of China and IndiaDue to its hugely diversified brand portfolio, LVMH can exercise significantsynergies, such as sharing expertise within different watch brands xx.Threats Economic slowdown can impact bottom line. Brand dilution due to overproduction. Proliferation of counterfeit products lessens value of authentic products.10
  11. 11. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012External AnalysisCompetitive AnalysisCompany Revenue (2010) Profits (2010)LVMH € 20.32B € 3.032BPPR € 14.61 B € 964.5MRichemont € 6.892B € 1.090BxxiLVMH’s two biggest competitors are European holding companies Pinault-Printemps-Redouteand Richemont.PPR’s brand portfolio consists of a number of luxury brands such as Gucci, YvesSaint Laurent, and Brioni, but also young, lifestyle oriented brands such as Pumaand Volcom. xxiiRichemont, on the other hand, has a portfolio consisting mainly of jewelry andwatch companies such as Monblanc, Cartier, and OfficinePanerai. xxiiiComparing revenue streams and profit margins, it is clear that LVMH is the leader inluxury brand holding companies. While PPR has more than 2/3 the revenue, it hasless than 1/3 profit that LVMH has. Similarly, Richemont has approximately 1/3 therevue, and 1/3 of LVMH’s profits.Individually, the Louis Vuitton brand yields profit margins of 40-45%, anunsurpassed figure in the luxury goods world. xxivBarriers to EntryBecause of the small, boutique-oriented nature of luxury goods, there are no realbarriers to entry, other than the sheer size and brand loyalty for LVMH products. Solong as retailers aren’t selling goods derived from toxic materials, manufacturers arefree to design products as they see fit, creating an extremely competitiveenvironment in which to capture customers’ hearts and dollars. The barriers toentry here are natural ones because as a firmly established brand, LVMH productsinspire consumers in such a way few other consumer goods can. Even if competitiveproducts were to enter the marketplace, a competitor would have a difficult timematching the sheer ubiquity of LVMH brands.Switching CostsDue to the fickle nature of fashion, leather goods, and alcohol, switching costs arenonexistent, and customer preferences can change as quickly as the winds shift. Ifcustomers find products they like better, of if they perceive that LVMH products areno longer as exclusive as they would like them to be, they are free to shop at11
  12. 12. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012competitors’ stores anytime. This lack of switching costs is contributing to andextremely competitive market, and a testament to LVMH’s success.Disruptive TechnologiesFashion, as an end product is not a technology-intensive industry. Especially in theluxury sector, manufacturers like to pride themselves on selling products with oldworld craftsmanship, and as such are generally not subject to disruptivetechnologies. In fact, as a testament to LVMH’s commitment to craftsmanship, LouisVuitton luggage is still made by hand, in the same manner since the 19th century.xxvPolitical EnvironmentSimilar to barriers to entry, switching costs, and disruptive technologies, thepolitical environment has little impact on LVMH’s bottom line. So long as thecountries the company operates in allow retail operations, LVMH continues to sellits products.SuppliersLVMH keeps a tight rein on its suppliers. In order to maintain a positive reputationand be kinder to the environment, the company has strict stipulations on the typesof materials suppliers and subcontractors are allowed to work with.xxviIn order toinsure the maximum control over its suppliers, LVMH occasionally goes so far asbuying them outright, as the company did in November 2011 when it acquiredArteCad, one of its main watch suppliers.xxvii To further insure uninterruptedsupplies, LVMH paid € 92M for a 51% stake in a leading supplier of crocodile skin inOctober 2011, and just this month completed the purchase of Les Tanneries Roux, aleather supplier. This commitment, among many others, to keeping its supply chainin perfect operation assures customers and investors alike that shortages areunlikely to occur.12
  13. 13. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Economics and DemographicsAs the chart above shows, Asia, excluding Japan, now accounts for the largest shareof revenue for LVMH. In the last several years, revenue from Japan has tapered off,while revenue in other regions has stayed approximately the same.LVMH products in China are extremely popular with the emerging middle andaffluent classes, and Chinese consumers cannot get enough of these products. Infact, in the first half of 2009, Chinese people throughout the world accounted for18% of LVMH revenue.xxviiiWhereas competitors are stumbling over the economic downturn, LVMH keepsposting record profits, and is using the recession as an opportunity to acquiresubsidiaries at discounted prices xxix.13
  14. 14. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012Porter’s Five FactorsThreat of EntryAs discussed earlier, while any designer can choose to create similar products withfew legal barriers, LVMH has a longstanding commitment to quality and anextremely loyal customer base. Also due to the fact that LVMH products are soldworld wide, any viable threat would have to be backed by a major investment.Consequently, the threat of entry is very low.The Power of SuppliersAs mentioned earlier, LVMH enjoys a reputation of being kind to the environmentand is quite strict in the suppliers it chooses to work with. In order to ensureuninterrupted supply, the company makes frequent acquisitions, often at great cost,and as recently as this month. Because there is only one LVMH, but there are manysuppliers, and because of low switching costs, the power of suppliers is low.The Power of BuyersTheoretically, buyers should have most of the power. After all, one $1,500 bagshould be as good as another, and no one needs to drink expensive cognac. Inpractice however, top LVMH brands enjoy considerable power over buyers, andcommand brand loyalty like few other brands can. For example, Louis Vuitton neverputs its products on sale, an anomaly in the leather industry, instead preferring todestroy outdated products, rather than marking them down.xxxThis is one of thestrongest testaments of a lack of buyer power in the retail world.Threat of SubstituteCommon wisdom would hold that luxury products are easily substituted, as canhigh-end fashion, or expensive alcohol. In the case of LVMH products, however,common wisdom would be wrong. Despite the fact that these are all retail productswith absolutely no switching costs, the primary LVMH brands have done such atremendous job differentiating themselves that when one wants to purchase one ofthese products, no substitute, no matter how luxurious, will do. The threat of asubstitute is low.Rivalry Among CompetitorsBecause of the nature of luxury marketing, competitors are not poised to badmouthone another. This means that advertising stays positive, inspiring the consumer,rather than attempt to dissuade him or her away from the competition. Also, while14
  15. 15. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012there is some overlap between LVMH, PPR, and Richemont, there are alsoconsiderable differences between each of these holding companies, so none of thesefully competes against one another. Each luxury brand attempts to entice theconsumer, assuring him or her that their products will bring them closer to Nirvana,but in the end, LVMH’s profits speak the loudest. Rivalry among competitors ismoderate at best.Analysis of the Five FactorsConsidering these factors all fall squarely in LVMH’s favor, it is no surprise to findout that profit margins hover around 40-45%, not only the highest in the luxurygoods market, but as high as any industry.xxxiConclusionLouis Vuitton Moet Hennessy is the epitome of luxury goods retailing and luxurymarketing. Through numerous acquisitions, this company takes the lion’s share in anotoriously fickle market, and commands brand loyalty matched perhaps only byApple Inc. The fact that revenue keeps increasing despite a global recession, and thefact that most LVMH products are egregiously priced and never go on sale is atestament to both tremendous quality and masterful marketing. Planning for thefuture, LVMH must be cognizant of the emerging BRIC nations, in addition, to therising elite of China and India simply due to their population size. LVMH must alsoinvest wisely in theseemerging markets and attempt to acquire PPE at low costs inorder to help maintain a profitable bottom line. Paramount to all, LVMH must staytrue to its core competency – selling the world’s premier luxury lifestyle.15
  16. 16. Alfred DangMBA 6114 – Strategy & Competitive Advantage5/10/2012i LVMH 2011 Annual Report Page 8ii LVMH 2011 Annual Report Page 17iii LVMH 2011 Annual Report Page 4iv LVMH 2011 Annual Report Page 4vhttp://finance.yahoo.com/q/ks?s=MC.PAvi LVMH 2011 Annual Report Page 17viiviihttp://www.reuters.com/finance/stocks/overview?symbol=LVMH.PAviiihttp://www.reuters.com/finance/stocks/overview?symbol=LVMH.PAixhttp://www.reuters.com/finance/stocks/overview?symbol=LVMH.PAxhttp://uk.finance.yahoo.com/q/ks?s=PP.PAxihttp://uk.finance.yahoo.com/q/ks?s=RITB.DExiihttp://uk.finance.yahoo.com/xiiihttp://uk.finance.yahoo.com/q/in?s=MC.PAxiv LVMH 2011 Annual Report Pages 6 & 7xv LVMH 2011 Annual Report Page 14xvi LVMH 2011 Annual Report Page 14xviihttp://education.mhusa.com/section.asp?i=1254949138406xviiihttp://www.lvmh.com/the-group/lvmh-companies-and-brandsxix LVMH 2011 Annual Report Page 9xxhttp://us.fashionmag.com/news-158993-Bulgari-lifts-dividend-as-LVMH-synergies-loomxxi Wikipediaxxiihttp://www.ppr.com/en/groupxxiiihttp://www.richemont.com/our-businesses.htmlxxivhttp://www.economist.com/node/14447276xxvMartin, Richard (1995). Contemporary fashion. London: St. James Press. p. 750.xxvihttp://www.lvmh.com/the-group/lvmh-and-the-environment/design/involving-suppliersxxviihttp://www.lvmh.com/press/614xxviiihttp://www.economist.com/node/14447276xxixhttp://www.economist.com/node/14447276xxxhttp://www.economist.com/node/14447276xxxihttp://www.economist.com/node/1444727616

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