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9B13M022
LOUIS VUITTON
1
Manu Mahbubani wrote this case under the supervision of Professor Mary Crossan solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.
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Copyright © 2013, Richard Ivey School of Business Foundation
Version: 2013-04-04
SYNOPSIS
Moët Hennessy Louis Vuitton (LVMH) enjoyed double digit growth and healthy profitability in 2010 and
2011. A large part of this growth had been driven by its flagship group Louis Vuitton (LV). In 2011,
LVMH announced that long-time LV CEO Yves Carcelle would be replaced at the end of 2012 by Jordi
Constans, an executive from the French food product multinational Danone SA. However, after serving
less than a month, Constans was replaced in December 2012 by Michael Burke, an LVMH insider who
had been with the company for nearly 30 years. While LV had enjoyed rapid growth over the last two
years, the question was whether such a growth rate was sustainable. What were the challenges facing LV,
and how should these challenges be addressed?
HISTORY
Louis Vuitton Malletier was born in 1821 in Anchay, France. At age 16 he moved to Paris and took up a
job as an apprentice trunk maker, over time becoming a respected trunk maker in his own right. In 1854,
he opened his own company and over the next four years went about redesigning the trunk. In those early
days, trunks were oval shaped and therefore not stackable; as such, they were not conducive to the
emerging and rapidly growing forms of travel on steamers and trains. Vuitton came up with a flat-top
trunk with flat hinges that was stackable and suitable for long journeys. A few years later, and in response
to competitors copying his original design, Vuitton invented his famous trunk made of blue and red
striped canvas.
2
The canvas protected the contents of the trunk from rain and dust, and customers loved
the unique design. This innovation in material and design also made it difficult for competitors to copy.
Vuitton’s business thrived. He was able to cement his position among aristocracy in Europe and beyond,
in places such as Egypt and India, when he was appointed the official packer and trunk maker for Eugenie
de Montijo, Napoleon III`s wife and a Spanish countess. As a result, the business strengthened further.
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Louis Vuitton or any of its employees
2
Dana Thomas, Deluxe, How Luxury Lost its Lustre, Penguin, London, 2007.
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Vuitton’s success is said to have been built on three rules: to master his
savoir faire
, to provide excellent
service to his customers and to innovate continuously.
3
The newspaper
Le Figaro
in an article in 1889
wrote of Vuitton’s fame:
The Louis Vuitton firm, whose exclusive models are causing a sensation and must always
be cited first, appears to have solved the problem of irreproachable manufacturing, of a
ruggedness that withstands every test; it offers without a doubt the most beautiful
specimens of French manufacturing.
4
Georges Vuitton, Louis Vuitton’s son, inherited the company after his father’s death in 1892. Georges
continued the company’s focus on innovation. He invented the five number combination lock found on
the trunks even today. He also designed the famous monogram pattern and the more complex pattern used
on the canvas of LV products. Part of the motivation for these latter innovations was to counter the
increased counterfeiting facing the company at that time.
5
Georges is also credited with designing
hundreds of purses and moving the company into the handbag business. It was also during his tenure that
LV started its global expansion. In 1893, LV displayed its products at the Chicago World Fair. In the
years following, stores were opened internationally in New York, London, Alexandria and Buenos Aires.
The Second World War brought an end to this expansion. The period was marked by efforts of the Nazi
occupiers to move the couture houses and luxury businesses from Paris to Berlin. Factories were closed
and LV’s international distribution contracts were terminated. After the war, the luxury business revived,
but LV was not able to recapture its former position. By 1977, its revenues were only US$20 million and
profitability low. It was under these circumstances that Renée Vuitton, the family’s matriarch, brought in
her son-in-law Henri Racamier to lead the business. Racamier had no background in luxury but was an
astute businessman.
Racamier discovered that the majority of profits in the value chain were being retained by merchants. To
bring these profits in-house, he started bypassing the merchants and opening company-owned stores. He
also pushed for rapid global expansion, opening 95 stores by the mid-1980s. The LV brand was pushed
aggressively, products were diversified, manufacturing expanded and new technologies introduced.
Racamier also started acquiring companies that produced high quality products, such as Givenchy and the
champagne house Veuve Clicquot. Revenues grew to nearly US$1 billion by 1987.
6
Racamier also took
LV public and listed it on the French Bourse and the New York Stock Exchange. Going public allowed
him access to capital, which was required to fund ongoing growth.
In 1987, as part of this strategy, Racamier agreed to a merger with Moët Hennessy, a company that was
much larger than LV, to form the Moët Hennessy Louis Vuitton (LVMH) group. The companies had an
agreement that each division would be run independently with its own management and philosophy, with
Racamier maintaining his leadership position at LV. However, relationships between the two divisions
deteriorated rapidly with disputes and legal battles over how to run the company. Finally, in 1987,
Racamier brought in a property developer, Bernard Arnault, to bolster his position against Moët-
Hennessy and try to reverse the merger. It was a move that Racamier would come to regret. Arnault had
different plans, and those plans did not include Racamier.
3
Ibid.
4
Pamela Golbin, Louis Vuitton/ Marc Jacobs,
Rizzoli ; Enfield : Publishers Group UK [distributor], New York, 2012 p. 27.
5
http://voices.yahoo.com/louis-vuitton-history-behind-purse-53285.html, accessed September 11, 2011.
6
http://www.fundinguniverse.com/company-histories/lvmh-mo%C3%ABt-hennessy-louis-vuitton-sa-history/,
accessed
September 11, 2011.
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BERNARD ARNAULT
Bernard Arnault was ranked as the fourth richest man in the world by Forbes
7
in 2011 with much of his
wealth being built on LVMH. Arnault was originally a property developer with no background in the
tradition and heritage of the luxury industry. He entered the industry with the purchase of the then
bankrupt French textile conglomerate Boussac Saint-Frères, for US$80 million; its holdings included the
couture house Dior.
8
It was this latter holding, which provided him with a base to establish a luxury goods
powerhouse, that Arnault was interested in. He brought his reputation for laser-like focus on profitability
and efficiency to the acquisition. The French press dubbed him “the terminator.” Fired executives would
complain about learning of their dismissal from the press. Over the next few years, Arnault laid off over
8,000 employees and sold off large parts of the conglomerate for US$500 million.
9
He grew Dior into a
profitable business using methods of vertical integration similar to those employed by Racamier.
When Arnault was approached by Racamier to help the latter bolster his position against the Moët and
Hennessy families, rather than backing him Arnault quickly acquired a 45 per cent controlling stake in
LVMH and garnered support from the Moët and Hennessy families. An 18-month legal battle for control
of LVMH commenced between Arnault and Racamier, resulting in a victory for Arnault and the
resignation of Racamier. Arnault became the CEO of the company, and control of LV slipped away from
the Vuitton family. The stealth by which Arnault was able to acquire a controlling stake in LVMH and the
level of bitterness and Machiavellian behaviour for control ultimately contributed to the rewriting of
French laws around takeovers.
10
THE PERSONAL LUXURY GOODS INDUSTRY
LVMH competed in the global personal luxury goods industry. This industry was projected to have
revenues of €212 billion in 2012
11
and included products such as apparel, perfumes, cosmetics, shoes,
leather goods and hard luxury goods. Leather goods included products such as handbags and accessories,
while hard luxury goods included watches and jewellery. The global personal luxury goods industry was a
subset of the larger €1.1 trillion global luxury industry that included a wide range of products and services
from shoes and clothes to yachts and travel experiences.
12
The growth rate for the personal luxury good industry for 2012 was projected to be 10 per cent in euro
terms. However, since most of the major players in the industry were based in Europe, the euro exchange
rate had a significant impact on nominal growth rates. For example, in 2012, the growth rate in constant
exchange rate terms was expected to be 5 per cent. In 2011, the market had grown by 11 per cent in euro
terms and 13 per cent at constant exchange rates, while in 2010, it had grown by 13 per cent in euro terms
and 8 per cent at constant exchange rates. By 2015, the luxury goods market was expected to grow, at
constant exchange rates, to €250 billion with a
compound annual growth rate (
CAGR) of between 4 per
cent and 6 per cent. Of the various product lines, leather goods and shoes were growing the fastest, and by
2011 these formed the largest product segments. They had grown by an average of 15 per cent over the
7
http://www.forbes.com/profile/bernard-arnault/, accessed September 11, 2011.
8
http://www.britannica.com/EBchecked/topic/35681/Bernard-Arnault, accessed September 11, 2011.
9
Thomas, Deluxe.
10
Ibid.
11
http://www.bain.com/about/press/press-releases/bain-projects-global-luxury-goods-market-will-grow-ten-percent-in-
2012.aspx, accessed February 3, 2013.
12
http://www.ft.com/intl/cms/s/0/2cd3653e-ac0e-11e1-a8a0-00144feabdc0.html#axzz2JwtMxJt3, accessed September 17,
2012.
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previous decade, and this growth was expected to continue into 2012. Growth, at constant exchange rates,
was expected to be 16 per cent for leather goods and 13 per cent for shoes.
13
The largest markets for luxury goods were in Europe and the United States, though the highest growth
rate was in China, which had recently overtaken Japan in market size. Exhibit 1 breaks down revenues by
region and shows the 2012 and 2013 growth rates that were projected for each region. Each of the
regions, however, had different growth dynamics.
A fast growing and important region was the Greater China market, which included mainland China,
Hong Kong and Macau, and had a total market size of €23 billion, 65 per cent of which was in mainland
China. In 2011, the sales in mainland China had grown by 30 per cent, in euro and constant exchange rate
terms. For 2012, growth was expected to decelerate to around 20 per cent in euro terms and 8 per cent in
local currency terms.
14
However, these numbers underestimated the size of the Chinese market. By 2011,
one in four worldwide luxury goods customers were Chinese. Wealthy customers from mainland China
tended to travel widely. They therefore not only bought luxury goods at home but also did so during their
travels. Such tourist shopping was fuelled by the differences across regions in prices of luxury goods and
the risk of getting counterfeit products. For example, in 2011, prices in Europe were over 40 per cent
cheaper than in mainland China, and these goods were perceived as less likely to be counterfeit when
purchased in Europe. Indeed, over one-third of sales in Europe were made to Chinese tourists. In 2011, 60
per cent of sales in France were to tourists.
15
LV did make efforts to reduce such price disparity. For
instance, in October 2012, the company increased European prices by 8 per cent.
Growth in Europe on the surface had been steady in 2011. But this masked an underlying weakening in
demand as a result of the financial turmoil and austerity measures put in place by governments in
southern Europe. There had, for example, been a significant drop in consumption of luxury goods in Italy.
However, much of this decline had been offset by increased tourism and increased purchases by these
tourists of luxury items. Growth in Europe, which had been 9 per cent in 2011, was expected to moderate
to 5 per cent in 2012.
16
In the Americas, growth was expected to remain strong as the United States continued its slow but
gradual recovery from the 2008 recession. Growth rates were expected to rise to 13 per cent in 2012
compared to 10 per cent in 2011.
17
In Japan, while growth in euro terms was expected to be 8 per cent due
to the rising yen, in constant exchange rate terms, the market was expected to be stagnant with either very
low or no growth.
Customer Segments
The industry was split between three customer segments: absolute, aspirational and accessible.
18
At the
top of the pyramid was the absolute segment that consisted of individuals of high and ultra-high net
worth. These customers looked for true luxury, which was, in the words of Françoise Montenay, the
president of Chanel Europe:
13
Claudia D’Arpizio, 2012 Luxury Goods Worldwide Market Study 11th Edition, Bain and Company, Milan, October 2012
14
Ibid.
15
Ibid.
16
Ibid.
17
Ibid.
18
http://affaritaliani.libero.it/static/upload/bain/bain.pdf, accessed December 7, 2012.
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At a minimum, it must be impeccable. Maximum, unique. It’s the way you are spoken to,
the way the product is presented, the way you are treated. Like the tea ceremony in Japan:
the ritual, the respect, the transmission from generation to generation.
19
These customers desired exclusive products backed by brands that were based on heritage and tradition.
They generally bought the highest end of the product line in ready-to-wear products or bought made-to-
measure products. These customers looked for excellent craftsmanship, the use of high-end materials and
an excellent buying experience. They valued their privacy. Vendors set up private fitting areas, which
could be salons or private apartments, for these customers to select their designs and to get measured and
fitted. In some cases, vendors would fly a salesperson along with a collection to a buyer who might, for
example, reside in China. The low-key nature of these purchases extended to the desire for the products
not to carry logos that communicated ostentatious consumption. Price was an important factor, with true
luxury expected to be priced at levels that most could not afford. In the words of a customer at Daslu, a
high-end fashion store in Säu Paulo, Brazil:
Luxury is not how much you can buy. Luxury is the knowledge about how to do it right,
how to take the time to understand and choose well. Luxury is buying the
right thing.
20
(emphasis in the original)
The second segment was the aspirational customer. These included the top 10 per cent of income earners
such as celebrities, professionals and business men and women with high disposable incomes. High
quality, an exclusive buying experience and brands based on tradition, heritage and that communicated
the high quality of their purchases were important attributes for this group.
The final segment was the accessible customer who through the purchase of a luxury product experienced
the feeling of having membership in an elite group. They got a taste of the world of the rich and famous.
While these customers were more price conscious, the product they bought needed to convey a high level
of quality and be backed by a brand that conveyed exclusivity.
In all three segments, customers valued products that were made in France or in other parts of Europe,
more than those made in Asia or even the United States. The highest growth between 2012 and 2014 was
expected to come from the top two segments of the market. By 2011, the absolute luxury segment made
up 21 per cent of the overall market with growth rates expected to be above the market average with
CAGR of 8 to 10 per cent between 2012 and 2014. The aspirational segment was expected to grow close
to overall market rates with CAGR of 6 to 8 per cent during this period, while the accessible segment was
expected to grow below the market rate.
21
The behaviour of customer segments differed across markets. For example, in China as logo brands
became more common, the absolute segment moved away from these brands since they were viewed as
becoming less exclusive. Focus of this segment moved towards absolute luxury, which included high-end
experience and service, and away from logo products. On the other hand, this issue was less prevalent in
Japan where high luxury brands were heavily indulged in by all customer segments without undermining
the attractiveness of the brand in any one segment.
19
Thomas, Deluxe, p. 324.
20
Ibid., p. 345.
21
http://www.altagamma.it/img/sezione3/files/397_975_file.pdf, accessed December 7, 2012.
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Changing demographics and global economic challenges had led to some changes in consumer buying
behaviour. For example, customers, especially at the higher end of the market, had moved towards
placing more value on luxury experiences, such as luxury travel and spas, than luxury purchases.
22
Pricing and Distribution
The major companies in the industry tended to cater to all three segments. For example, PPR offered
products through its Puma brand to the accessible customer segment, through the Gucci brand to the
accessible and aspirational customer segments and through brands such as Bottega Veneta to the
aspirational and absolute customer segments. Smaller competitors tended to focus on specific customer
segments. For example, Hermès focused more on the higher end of the market by offering bespoke,
higher quality and more expensive products. Prices charged by the companies varied according to the
segment at which the product was targeted. Generally, lower prices for products targeted the accessible
customer segment. Prices for a handbag would start at around US$3,000 for the absolute customer
segment and could exceed US$100,000. They would start at around US$1,000 for the aspirational
segment and around $300 for the accessible segment.
23
The highest prices were reserved for limited edition products or bespoke, made-to-measure offerings.
However, especially at the high end of the market, players tended to compete more through product
design, the buying experience and brand image rather than through price. In general, companies had been
able to command a high price for their products. In keeping with these dynamics, companies had tended
to invest heavily in advertising to build their brands and in product design and development to deliver
unique products. Distribution models also varied considerably with some players selling through resellers
while others, such as LV and Hermès, relying on company-owned stores. Many of the more successful
companies controlled most aspects of their production and distribution in order to ensure a level product
quality and experience that justified high prices for their goods. In many cases, companies used multiple
channels, including directly owned stores (DOS), department stores (termed wholesale) and licensing of
their brands to third parties. Growth rates varied between the various channels. For example, in 2011,
DOS sales had increased by 15 per cent in euro terms, and 9 per cent at constant exchange rates versus 10
per cent in euro terms for the wholesale channel. This trend was expected to continue in 2012. Similarly,
sales in outlet stores that sold discounted merchandise had risen by 19 per cent at constant exchange rates
in 2011 and were expected to rise by 20 per cent in 2012.
24
Suppliers
Many of the companies, especially at the higher end of the market, designed and manufactured their
products in-house. As such, they generally sourced only component parts, such as leather, zippers and
clasps, from external suppliers. Companies were selective in their purchasing and had dedicated functions
to ensure the supplies being purchased met the required quality standards. While the industry was
dominated by a few large buyers, there was no such concentration on the side of the suppliers.
22
https://www.bcgperspectives.com/content/articles/consumer_products_automotive_luxe_redux/?chapter=3,
accessed
September 24, 2012.
23
http://www.pwc.com/it/it/publications/assets/docs/marketvision-luxury-2012.pdf, accessed December 7, 2012.
24
Claudia D’Arpizio, 2012 Luxury Goods Worldwide Market Study 11
th
Edition, Bain and Company, Milan, October 2012 .
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Page 7
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THE LVMH GROUP
LVMH, Moët Hennessy Louis Vuitton, operated five businesses: wines and spirits, perfumes and
cosmetics, fashion and leather goods, watches and jewellery and selective retailing. The group owned
over 60 luxury brands.
25
In 2011, sales were €23.6 billion and profits were €3 billion. Exhibit 2 gives the
financial details of LVMH group and three of its competitors for 2009 to 2011. The group had enjoyed
substantial growth in revenue and profitability over this time period.
Acquisitions
While it had grown over the last two decades both through acquisitions and organically, acquisitions had
played a major role. The majority of acquisitions had been in companies that produced high quality
luxury products. Some of the major acquisitions included Givenchy (1998), Céline fashions (1996), the
winery Château d’Yquem (1996), the retail distributor DFS (1996), the perfume chains Sephora (1997)
and Marie-Jeanne Godard (1998), Miami Cruise Line Service (2000) which owned duty free shops and
the designer clothing company Donna Karen International (2000). It also had stakes in multiple luxury
goods companies including Fendi, numerous wine makers and brands such as Ole Henriksen and Nude
Brands.
26
In 2011, LVMH closed a deal to acquire the jewellery and watch maker Bulgari. Bulgari was a
large player in the industry with 2010 revenues of €1 billion, and its integration into LVMH was expected
to require substantial attention from the LVMH executive team. Other than Bulgari, LVMH made one
other acquisition and invested in two companies in 2011. In general, the rate of acquisitions made by
LVMH had fallen over the last few years with greater emphasis placed on buying partial stakes in
companies.
In 2010, LVMH quietly acquired 17 per cent of the outstanding shares of its competitor Hermès. Arnault
purchased the shares through derivatives to circumvent the French law that requires a company to report
more than a 5 per cent ownership interest. This ensured that he did not have to make his position public
until a larger share had been acquired. Hermès was surprised by the move and did not accept Arnault’s
assurance that LVMH had no intention to acquire Hermès or seek a board seat. By 2011, LVMH’s stake
in Hermès had increased to over 22 per cent. To prevent a possible takeover, members of the Hermès
family formed a holding company that controlled over 50 per cent of the company’s shares. In 2012,
Hermès filed a lawsuit against LVMH, claiming irregularities in the way LVMH had acquired its stake.
FASHION AND LEATHER GOODS GROUP
The Fashion and Leather Group had a number of brands under its umbrella that sold handbags and leather
goods. These brands included Louis Vuitton, Loewe, Fendi, Marc Jacobs, and Donna Karan New York.
These brands had operated in different customer segments. Louis Vuitton had positioned its products in
the absolute and aspirational customer segments. Loewe had been situated at the absolute customer
segments and at the higher end of the aspirational customer segments. Prices for its handbags had started
at $1,500, though most had been priced at between $2,000 and $4,000. Loewe’s high end handbags had
been priced over $5,000 and they had emphasized their made-to-order offering, which had tended to be
more expensive. Fendi and Marc Jacobs had offered products primarily to the aspirational customer
segments. Handbags prices at Fendi had started at $600 though most handbags had been priced between
25
http://www.lvmh.com/the-group/lvmh-group, accessed February 3, 2013.
26
http://www.hoovers.com/company/LVMH_Mo%EBt_Hennessy_Louis_Vuitton_SA/crxfci-1-1njhxk.html,
accessed
September 12, 2012.
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$800 and $2,500. The high-end handbags had been priced around $4,000. At Marc Jacobs prices had
started at $800, most of the handbags had been priced between $1,000 and $2,500, and high-end handbags
had been priced between $10,000 and $25,000, though the selection at this range had been limited. Donna
Karan New York in contrast had served the accessible customer segment and had priced its handbags
between $150 and $500. Details about Louis Vuitton’s products and prices are provided in the next
section.
The Fashion and Leather group’s financials are given in Exhibit 3. Revenues for 2011 had grown in euro
terms by 15 per cent and organic growth, in constant exchange rate, was 16 per cent. Revenues in 2010
had grown by 20 per cent in euro terms and 13 per cent in organic terms.
27
Revenues by region are
provided in Exhibit 4.
Even though the group had multiple brands, the largest brand, the one that drove the financial
performance of the group, had been Louis Vuitton. As such the financial performance of the Fashion and
Leather group had been expected to largely mirror the performance of Louis Vuitton. In addition,
decisions made by Louis Vuitton had a direct and substantial influence on the performance of the group.
LOUIS VUITTON
After taking control of LVMH, Arnault weeded out the old executives from LV and in 1990 brought in
Yves Carcelle as CEO. Under the new leadership and in partnership with Marc Jacobs as head designer,
LV flourished. Arnault and Carcelle brought attention to bear on the profitability and efficiency of the
business. They continued the practice of selling only through company-owned stores, but they also made
other changes. Unlike Racamier, under whose leadership 70 per cent of production was outsourced, the
two brought production in-house, soon expanding the number of factories in France from five to 10. In
2004, they bought out distributors and took direct control of the distribution channel. According to
Arnault “If you control your factories, you control your quality” and “If you control your distribution, you
control your image.”
28
In addition, in partnership with Marc Jacobs, an increased focus was put on new
product designs and innovations that resulted in a slew of creative and successful products.
LV products included a wide range of luxury fashion goods for women and men including handbags,
wallets, luggage, accessories, ready-to-wear clothes, shoes, watches and jewellery, though the company’s
mainstay, and what it was known for, was its collection of leather products. One area in which LV did
not, in 2011, offer products was perfumes. This was an area into which the company was considering
expanding. The perfume market stood at €19 billion in 2011
29
and was expected to grow by 5 per cent in
2012. The absolute and aspirational segment made up about 25 per cent of the market. Of note was that
the parent organization, LVMH, had significant experience in the perfume products in its perfumes and
cosmetics division. This division had industry leading brands such as Christian Dior, Guerlain and
Givenchy under its umbrella.
27
LVMH Annual Report, 2011
28
Thomas, Deluxe, p. 52.
29
Claudia D’Arpizio, 2012 Luxury Goods Worldwide Market Study 11
th
Edition, Bain and Company, Milan, October 2012.
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Page 9
9B13M022
Pricing and Customer Segments
LV’s product portfolio included offerings for all three segments but had primarily focused on the
Absolute and Aspirational customer segments. Prices for handbags had varied from a low of US$300 for
clutches to a range of mid-priced products priced between US$750 and US $3,500. At the high end,
handbags had been priced anywhere from US$3,500 to US$35,000 with some handbags selling for
US$100,000 or more. The higher end handbags had included custom designed bags that took five months
to deliver. In many of its stores, an area used to be reserved for the best customer to shop in privacy. In
some cities, LV had owned private apartments and yachts, which included amenities such as butler
service, where customers would be given design consultations and could be fitted.
Prices had been tightly controlled. Products were never discounted or sold in value packs. LV, like many
others in the industry, had considerable power to increase prices. While price increases had slowed after
the 2008 recession, they started picking up in the second half of 2010. In 2010, prices in the euro zone
were increased between 2 and 3 per cent. In 2011, prices were increased by 16 per cent in the United
States, 5 per cent in Europe and 11 per cent in China.
30
Some of these price increases were made in
response to currency fluctuations. Between the second quarters of 2011 and 2012, overall prices were
increased by 7 per cent.
31
These price increases made up for the smaller price increases that had followed
the 2008 recession. In the words of a senior executive interviewed for the magazine
The Economist
:
There are four main elements to our business model — product, distribution,
communication and price. Our job is to do such a fantastic job on the first three that
people forget all about the fourth.
32
However, while prices had increased in 2011, customers, especially those in the accessible and
aspirational segments, were becoming value conscious. It was therefore expected that future price rises
would be more moderate.
Distribution
As previously mentioned, LV sold most of its merchandise through its own stores. The number of stores
had increased from 368 at the end of 2006 to 425 at the end of 2008. By the first quarter of 2010, the store
network had increased to 451.
33
Fewer than 10 stores had been inaugurated in 2010, with the retail
network totaling 458
34
stores by the end of the first quarter of 2011. These stores were located at prime
venues in major cities. Stores in many of the cities were anchored by flagship stores; all stores were
designed centrally at LV’s main operations in France to communicate the company’s French tradition and
heritage as well as to provide a unique experience of opulence and luxury. Centralized control of the store
designs allowed for a common brand image across them. Some had areas that were available to members
only. Membership required recommendation by a current member, a one-time initiation fee and an annual
membership fee. Per store, revenues were €12.7 million, more than double the per store revenue figures
for Gucci and Prada.
35
30
Transcript from investor conference call on October 18, 2011.
31
Transcript from investor conference call on July 26, 2012.
32
The Economist, “The Substance of Style.” September 17, 2009.
33
Transcript from investor conference call on July 27, 2010.
34
Transcript from investor conference call on July 26, 2011.
35
http://www.businessweek.com/news/2011-11-16/vuitton-sees-growth-tied-to-invitation-only-luxury-salon-retail.html,
accessed September 24, 2012.
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During the opening of the Bond Street store in London, Jacobs commented: “I think it [Louis Vuitton] is
one of the few companies . . . who have made that leap to create an alternative universe . . . another
universe that co-exists with the classic universe that it is built on.”
36
Products were only sold through LV stores. Brands were not licensed to third parties. Excess stock was
destroyed rather than discounted. Products were not sold through outlet stores or in value packs.
Tight control of distribution also ensured that LV products did not get “lost” during distribution to show
up in the grey market. Another strategy used to counteract grey markets was to ensure that price
differentials between markets were not high enough to encourage the creation of grey markets. For
example, LV entered Japan when it discovered that third parties were bringing products that had been
purchased in stores in Europe into the country and selling them at very high prices. The company set a
formula whereby Japanese prices were set at 1.4 times the prices in France, a price point that was
significantly lower than what third parties were selling at. More recently, despite difficult local economic
conditions, the company increased prices in Europe because Chinese shoppers were buying in Europe
rather than in China to take advantage of the high price differential partly caused by high import duties in
China.
LV had also sold its products online. While it had been difficult to sustain an aura of exclusivity in the
online marketplace, this channel had provided access to a larger customer base. Online products had been
offered in markets such as the US, Europe, and Japan. They had however not been offered in China and
other markets in Asia. Further, many of the higher end products, including the made-to-measure products,
had not been sold through the online channel.
Manufacturing
LV manufactured all its products and did not buy products from third parties for resale. So, when it
expanded its product portfolio to include shoes, it set up a shoe production facility in Italy. It operated 17
factories, of which 12 were located in France, three in Spain and two in the United States. Most of its
production was done in-house, with only parts, such as zippers, being sourced externally. In 2011, it
opened its newest factory in Marsaz, France. The factory expanded production by 70 people.
37
The new
factory, which took over three years to bring into production, helped ease some of the product shortages
that in 2010 had forced the company to reduce store hours in France. New employees at the factory were
trained by experienced workers. Given the size of the company, the new factory could be considered a
small increase in capacity. LV tried its hand at expanding manufacturing internationally. In 2007, it
announced the setting up of a shoe factory in Pondicherry, India. However, in 2011, the plant closed due
to labour trouble.
Improving Efficiency
LV had also focused on improving the efficiency of its production system through the introduction of
manufacturing practices inspired by the lean production techniques used by Toyota Motors. The program,
implementation of which was started in 2005, reduced the level of specialization of an employee and
trained employees in multiple activities, thereby improving productivity. The manufacturing line was
reorganized. Originally goods in production would be put on carts and wheeled to workers, resulting in
36
http://www.youtube.com/watch?v=jyp9QVQvPL4, accessed September 20, 2012.
37
http://online.wsj.com/article/SB10001424052702303627104576409813842858304.html, accessed September 20, 2012.
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goods staying a long time on carts. The new system organized workers in groups of six to 12, with the
complete manufacturing of a product staying within the group. These changes not only increased
production efficiency but also, since the workers were less specialized now, allowed the company to shift
groups to manufacture different products in response to changes in demand. Increased automation, such
as the use of robots, also helped improve efficiency. At its peak, efficiency was increased by 5 per cent
per year, though a more sustainable rate was expected to be 3 per cent per year.
However, improved efficiency in manufacturing had some consequences. The LV brand projected its
products as being handmade by artisans. Customers, especially those in the top two segments, expected
their products to be unique and designed and crafted by artisans. Too much reliance on automated
manufacturing processes could undermine the appeal of the brand to these customer segments. For
example, in 2010, two of LV’s ads were banned in the United Kingdom for implying that its bags were
handcrafted while in reality they were machine stitched. As Yves Carcelle said in an interview with the
Wall Street Journal
: “Our paradox is how to grow without diluting our image.”
38
The focus on improving efficiency was also true for all other departments. For example, rather than a
sales person going to the back room to pick up products and leaving the customer alone, an assistant
would bring the products to the sales person. At checkout time, products would be packaged in the
backroom and brought to the customer. Experienced sales persons therefore could concentrate on selling
without interruption.
Product Design and Innovation
LV was known in the industry for having some of the top design and creative talent. Creative design and
innovation in raw material and manufacturing processes were an important component in keeping ahead
of the competition and providing customers with products that were viewed as unique. In an interview,
some of LV’s employees talked about what this involved:
There is a connection between sophistication and expertise; …. For example, with the
basket bag this season, it looks very simple, but actually it wasn’t simple because it was
two layers bonded together — a technique that was embossed and cut out and perforated
at the same time. Before that we’d only done perforations, so we were challenging the
production team to do [multiple techniques] at the same time. So there’s always some
way in which we are pushing new and innovative ways of working. . . .
39
The words they use at the factory are “We’ll try!” . . . It’s very rare. I don’t think there
was anything for the show they couldn’t do. . . . We sit down and we work out how we
can achieve what we need. I think that’s the magic of being here.
40
And specifically on leather goods:
It’s the heart of the business, it’s the image of the business — leather goods are the core
of the company. Working on the fashion leather goods was amazing training and
experience…. How do you convey the message of Marc throughout the store network —
how is that creativity communicated? I’m not just talking about an advert at the end of
38
Ibid.
39
Golbin, Louis Vuitton/Marc Jacobs, p. 143.
40
Ibid.,
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the line. It’s about how to release things, how things are evolving creatively and
implementing that within the business. If the bags are getting more sophisticated how do
you speak about that? How do you treat the bags? So there’s lots going on there.
41
Quality
Part of making top quality products involved sourcing high quality materials. For example, for top-end
products, leather was sourced from northern Europe since leather from cattle there had fewer blemishes
from insect bites. Products were also put through rigorous testing to ensure quality. Some of the
techniques used included a robot that repeatedly dropped a bag containing a three-and-a-half kilogram
weight, a machine that opened and closed a zipper 5,000 times and another that shot ultraviolet rays at the
bag to test for fading.
42
All products had a lifetime repair guarantee.
Competition
LVMH, the parent company of LV, was the largest player in the industry with 2011 sales of over €23
billion. Other large players included the conglomerates PPR and Richemont. PPR, headquartered in
France, marketed a wide range of products from fashions and beauty care to home appliances. It owned
brands such as Gucci and Puma. Sales in 2011 were over €12 billion with Gucci accounting for €3 billion
of those sales. PPR also sold leather handbags and luggage. Its total sales of luxury goods in 2011 were
nearly €5 billion. The other large player, Richemont, was based in Switzerland and also operated a wide
range of businesses including jewellery, luxury watches, leather goods and apparel. Some of its brands
included Cartier, Baume and Mercier, Montblanc and Piaget. Its sales in 2011 were nearly €9 billion.
Many of the companies, especially in Europe, were controlled by founding families who owned either a
majority or a sizable minority position in the firm. This was true of larger players such as PPR, where the
founding family controlled over 40 per cent of the outstanding shares, and of smaller companies such as
Hermès, where the founding family controlled over 50 per cent of the outstanding shares. The companies
were fiercely protective of their brands that in many cases were over 100 years old.
Brands that LV competed against were either owned by conglomerates, such as PPR, or by smaller
companies such as Hermès or Prada. Exhibits 5 and 6 provide an overview of the main competitors and
their sales distribution by region.
Details on each of competitors are provided below.
Hermès
Competition from Hermès came in the absolute and aspirational segments. Hermès prided itself on
producing exclusive high quality goods that were produced by experienced craftsmen using the best
material available. The company promoted itself as innovative and creative with the capability to design
and produce unique products. Some of these products, such as Birkin handbags, had a waiting list that
was months long. Prices for the Birkin bag started around US$5,000 and went up to five and six digits.
41
Ibid., p. 139.
42
http://www.businessweek.com/stories/2004-03-21/the-vuitton-money-machine, accessed September 20, 2012.
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Most of the handbags were priced between US$2,000 and US$10,000, though many were priced higher.
43
The company produced some of the most expensive handbags in the world. In 2012, for example, Hermès
released a handbag priced at US$2 million. In addition to this ready-made line of handbags, Hermès was
also known for designing and manufacturing high-end handbags to customer specifications.
Hermès’s range of products included leather goods, apparel, saddlery, silk products, shoes, accessories
and fragrances, though 47 per cent of its sales came from leather goods.
44
Its products were sold
worldwide through company-owned stores and through select retailers. In all cases, Hermès kept tight
control of distribution and prices. Revenue breakdown by region, including growth rates, are given in
Exhibit 6. Given its rapid growth, Hermès was expected to focus in 2012 on continuing to improve
manufacturing capacity. Most of this manufacturing was located in France and emphasized traditional
manufacturing practices rather than assembly line or mechanistic manufacturing processes.
Gucci
Gucci was part of the PPR group. It designed, manufactured, distributed and sold leather goods, ready-to-
wear apparel, silks, timepieces, jewellery and fragrances. Its mission was to provide excellent products
and experience for its customers based on heritage, craftsmanship, high quality and innovation backed by
a “Made in Italy” label. In 2012, its handbag prices started in the US$850 range with most priced between
US$1,000 and US$3,000. Some bags were priced as high as US$4,700.
45
Most of its products were
manufactured in Italy and were largely sold through 376 DOS and some through department stores. The
brand was making significant efforts to reduce distribution through resellers and also making efforts to
limit merchandise offered at discount prices.
In 2011, Gucci achieved revenues of €3.14 billion and a recurring operating profit of €946 million.
Revenues had grown by 18 per cent in euro terms and 19 per cent in constant exchange rate terms from
the previous year.
46
Bottega Veneta
Bottega Veneta was also part of the PPR group. Its revenues in 2011 were €683 million and recurring
operating income was €205 million, up 33 per cent from the previous year in both euro and constant
exchange rate terms. The majority of its products were leather goods, though it also sold shoes, ready-to-
wear apparel and fragrances. Its brand was based on exclusivity, craftsmanship, the highest quality and
innovation, also backed by a “Made in Italy” label. Products were sold through 170 DOS and through
other retail channels such as select department stores and franchises. For 2011, sales from DOS had
increased by 32 per cent and through the wholesale channel by 41 per cent.
47
Prices for handbags started at US$1,400, with the upper end of the ready-to-wear collection priced at over
US$28,000.
48
43
http://www.hermes.com/index-ca-en.html, accessed December 3, 2012.
44
Hermes annual report, 2011.
45
http://www.gucci.com/ca-en/home, accessed February 3, 2013.
46
PPR Annual Report, 2011
47
PPR Annual Report, 2011
48
http://www.bottegaveneta.com/, accessed February 3, 2013.
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Prada
The Prada Group was headquartered in Italy though its shares were listed on the Hong Kong Stock
Exchange. In all, 19 per cent of Prada Group shares were publicly traded. The group owned a number of
well-known brands anchored by its famous Prada and Miu Miu brands that covered mainly leather goods
and shoes but also included accessories, jewellery and fragrances. The company’s brands were based on
heritage and craftsmanship, high quality and innovation. DOS accounted for 78 per cent of its sales while
the rest came from wholesale channels that sold to select department stores across the world. Its goods
were manufactured in-house with factories located in Italy and the United Kingdom.
Revenues in 2011 were €2.6 billion and net income was €436 million. Revenues had grown by 25 per
cent over the previous year in euro terms and by 26 per cent in terms of constant exchange rates. Sales in
the retail channel had increased by 37 per cent in 2011, while sales through the wholesale channel had
declined approximately 5 per cent.
49
Prada priced its bags starting at US$1,000, with most bags priced between US$1,500 and US$4,000. Bags
at the high end went for between US$6,000 and US$10,000.
Chanel
Chanel S.A., established in the early 1900s, was a privately held fashion house headquartered in France.
The company’s products were wide-ranging including sunglasses, perfumes, skin-care products, ready-to-
wear collections, handbags, shoes and accessories. It sold its products through company-owned stores and
select department stores. In 2012, its accessories, including handbags and other leather products and
apparel, were not sold online.
Since it was a privately held company, financial information was not publicly available. However,
industry sources pegged Chanel’s 2012 revenues at around €3 billion.
50
Other indicators provided a clue
to Chanel’s position in the marketplace
vis-à-vis
LV. An analysis of web searches indicated that the four
most searched handbag brands online were LV, Chanel, Gucci and Hermès accounting for 30 per cent, 23
per cent, 13 per cent and 10 per cent respectively.
51
Chanel was also ranked higher than its competitors in
terms of brand quality, customer experiences and social status by high income earners.
52
Chanel priced its handbags starting at US$1,650, with most handbags priced between US$2,500 and
US$5,000. High-end handbags were priced between US$6,000 and US$10,000.
Coach
53
Coach was firmly entrenched in the accessible customer segment. Most of its handbags were priced
between US$200 and US$600, with the most expensive ones priced around US$1,000. While Coach was
not a direct competitor, it was an example of a company whose product price range overlapped with that
49
Prada Annual Report, 2011.
50
http://www.businessoffashion.com/2012/10/ceo-talk-bruno-pavlovsky-president-of-fashion-chanel.html, accessed January
14, 2013.
51
http://blogs.ft.com/material-world/2012/11/20/handbags-at-the-ready/?, accessed January 14, 2013.
52
http://luxuryinstitute.com/blog/?tag=chanel, accessed January 14, 2013.
53
Coach Annual Report, 2011
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of LV. It was the type of company with which LV would have to compete if it decided to enter the
accessible customer segment.
Coach’s products were sold directly through company-owned stores, which included factory outlets, and
indirectly through the wholesale channel via department stores. In North America, for example, Coach’s
products were sold through 354 company-owned retail stores, 180 factory stores and 990 third-party
department stores. However, 81 per cent of its revenue came from the direct channel.
Coach outsourced its manufacturing with sourcing and product development offices located in Hong
Kong, China, Vietnam, South Korea and India. Its manufacturing was sourced out of China, Philippines,
Taiwan, Vietnam, Thailand, India, Peru, Italy and the United States. There was significant emphasis on
product development with 71 per cent of 2011 revenue generated from products that did not exist a year
earlier.
For the 12 months ending June 30, 2012, Coach had annual net sales of US$4.8 billion, with net income
of US$1.04 billion. Revenues over the last 12 months had increased by 14 per cent and net income by 18
per cent.
THE DILEMMA
Reviewing the history of LV and its current performance, a number of concerns came to mind. While it
was obvious that the company’s performance in 2010 and 2011 had been good, were there early signs of
trouble? Could the recent performance be sustained? What were the options available to Michael Burke?
Michael Burke was a veteran of LVMH who had been working with Bernard Arnault since 1986.
54
He
had been widely credited for the turnaround of Fendi from a money-losing family business to a highly
profitable brand.
55
In December 2011 he had been appointed as the CEO of Bulgari, a large and important
acquisition made by LVMH. A year later, as he took over the helm of Louis Vuitton, some of the issues
facing him were how should he balance the values and the heritage of Louis Vuitton, the seeds of which
had been laid over 150 years ago by its founder, with the pressures to grow the business. How far could
he push the Louis Vuitton machine without undermining those values?
54
http://blogs.ft.com/material-world/2012/12/18/michael-burke-at-vuitton-old-hand-new-house-big-surprise/, accessed
February 3, 2013.
55
http://www.ft.com/intl/cms/s/0/699106c0-24eb-11e1-bfb3-00144feabdc0.html#axzz2JnN4m5oM, accessed February 3,
2013.
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Exhibit 1
WORLD LUXURY GOODS MARKET
Source: Claudia D’Arpizio, 2012 Luxury Goods Worldwide Market Study 11th Edition, Bain and Company, Milan, October
2012.
Exhibit 2
FINANCIALS FOR LVMH, PPR AND RICHEMONT
2010
2011
2010
2012
2010
2011
Revenues
20,320
23,659
11,008
12,227
6,892
8,867
Gross Profit
13,136
15,567
5,369
6,224
4,394
5,651
Operating Profit
4,169
5,154
1,229
1,544
1,355
2,040
Net Profit
3,032
3,065
709
999
1,090
1,540
Shares Outstanding (mm)
478
492
126
126
566
560
Current Assets
11,199
13,267
6,940
5,277
7,024
8,595
Non Current Assets
25,965
33,802
17,754
17,508
2,659
3,158
Current Liabilities
7,060
9,594
6,495
5,472
2,213
2,722
Non Current Liabilities
11,900
13,963
6,549
6,133
488
413
Total Debt
5,266
7,266
5,219
4,678
222
88
Shareholder Equity
18,204
23,512
10,599
10,925
6,992
8,618
LVMH
PPR
Richemont
Source: LVMH Annual Reports. 2006 to 2011.
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Exhibit 3
LVMH REVENUE AND RECURRING OPERATING PROFIT BY BUSINESS GROUP
2009
2010
2011
Wines and Spirit
2,740
3,261
3,524
Fashion and Leather Goods
6,302
7,581
8,715
Perfumes and Cosmetics
2,741
3,076
3,195
Watches and Jewellery
764
985
1,949
Selective Retailing
4,533
5,378
6,436
Other activities/eliminations
‐27
39
‐27
17,053
20,320
23,792
LVMH Revenue by Business Group
2009
2010
2011
Wines and Spirit
760
930
1,101
Fashion and Leather Goods
1,986
2,555
3,075
Perfumes and Cosmetics
291
332
348
Watches and Jewellery
63
128
265
Selective Retailing
388
536
716
Other activities/eliminations
‐136
‐160
‐242
3,352
4,321
5,263
Profit from Recurring Operations by Business Group
Source: LVMH Annual Reports. 2009 to 2011.
Exhibit 4
FASHION AND LEATHER GOODS REVENUE BY REGION
Source: LVMH Annual Reports. 2006 to 2011.
EUR Million
2006
2007
2008
2009
2010
2011
Revenue
5222
5628
6010
6302
7581
8712
Asia
20%
23%
25%
28%
30%
32%
France
9%
9%
8%
8%
8%
8%
Europe
19%
20%
21%
21%
21%
20%
US
21%
20%
19%
18%
18%
18%
Japan
26%
22%
20%
18%
16%
14%
Rest of the World (ROW)
5%
6%
7%
7%
7%
8%
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Exhibit 5
LOUIS VUITTON COMPETITOR OVERVIEW
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
2010
2011
Ownership status
Customer Segment Served
Distribution Channels
EUR Millions
Revenues
2666
3148
511
683
2047
2556
2401
2841
NA
3000
3127
3581
7581
8712
Recurring Operating Income
757
946
130
205
418
629
668
885
NA
NA
981
1137
2555
3075
Stores
317
376
148
170
309
388
317
328
NA
NA
451
458
Prada revenues excludes royalties of 32m
NA = Not Available
Coach financials converted from US$ to euro at €1 = US$1.33
Direct owned
stores
Online
Direct Owned Stores
Select Retailers
Direct Owned Stores
Franchises
Outlet Stores
Select Retail Stores
Licensing
Online
Direct owned stores
Online
Direct Owned Stores
Franchises
Select Retail Stores
Online
Direct Owned Stores
Franchises (33 in
2010, 26 in 2011)
Select Retail Stores
Online
Direct Owned Stores
(193 in 2010, 205 in
2011)
Select Retailers (124
in 2010, 123 in 2011)
Online
Part of LVMH
LVMH: Publicily
Traded with
over 40% owned
by Arnault Family
Aspirational
Accessible
Absolute
Aspirational
Aspirational
Accessible
Absolute
Aspirational
Absolute
Aspirational
Accessible
Absolute
Aspirational
Accessible
Part of PPR
PPR: Publicly Traded
with
40% controlled by
insiders
Part of PPR
PPR: Publicly Traded
with
40% controlled by
insiders
Publicly Traded
80% controlled by
insiders
Publicly traded.
Hermes family
controlled 50.2%
Privately Held
Publicily Traded
Gucci
Botegga Veneta
Prada
Hermes
Chanel S.A.
1
Coach
LV
Source: PPR, Prada, Hermes, Coach Annual Reports. 2010 to 2011.
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Exhibit 6
COMPETITOR SALES BY REGION – 2011
Revenue
Growth
Revenue
Growth
Revenue
Growth
Revenue
Growth
Revenue
Growth
Europe
881
13%
184
42%
986
17%
1055
17%
Asia‐Pacific (incl China)
1165
23%
239
46%
873
42%
808
17%
China
708
29%
155
75%
525
40%
NA
NA
Japan
378
4%
137
4%
257
16%
472
‐1%
635
12%
Americas
567
19%
96
28%
393
20%
464
26%
2439
12%
ROW
157
NA
27
NA
15
29%
43
36%
NA
NA
Prada revenues excludes royalties of 32m
Coach financials converted from US$ to euro at 1 = US$1.33
NA = Not Available
508
34%
Coach
Gucci
Botegga Veneta
Prada
Hermes
Source: PPR, Prada, Hermes, Coach Annual Reports, 2011.
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