LVMH Louis Vuitton : Moët HennessyPeeyush Agarwal, Michelle Berson, Michael Grant, Melissa Meruelo, Dontae Rayford, Mark Watson,Block 3

LVMH: Louis Vuitton • Moët Hennessy

Chaired by Bernard Arnault, the LVMH empire was created in 1987 via the merger of storied brands Louis Vuitton and Moët Hennessy.

LVMH targets customers with high-quality luxury goods. They capture customers in both the high-end and aspirational segments via its 5 lines of business:

LVMH searches for growth by optimizing and scaling selective, premiere luxury brands. LVMH’s corporate strategy guides its tactical moves. LVMH operates its multiple business lines globally with a strong emphasis on driving growth. This growth is driven internally via production/manufacturing efficiencies, bulk advertising capabilities, and strategic market creation in new locales. This emphasis on internal growth is reinforced by what Mr. Arnault describes as "as selective acquisition strategy." Horizontal integration is centered around brands carrying a specific level of prestige, while vertical integration seeks increased economies of scale and increased control over quality of inputs and outputs.

Wine and Spirits Fashion and Leather Goods

Perfumes and Cosmetics

Watches and Jewelry

Selective Retailing

The LVMH Corporate Strategy

An LVMH executive sums up their corporate strategy by saying, "There are four main elements to our business model—product, distribution, communication and price.” He goes on to explain, “Our job is to do such a fantastic job on the first three that people forget all about the fourth.”

Towards this end, LVMH built a diverse portfolio that targets luxury industry and customer segments on a globally distributed platform, therefore creating a lifestyle brand: Diverse in the wide array of industries in which they are invested, decreasing the company's overall risk Also diverse on a micro level-LVMH owns a range of mega to niche brands within each industry Fun fact pointing to how globally distributed they actually are :) (reference revenue/profit chart per geographic

distribution, we should include that graph in our PP)

LVMH creates value by offering high quality products that: Leverage premium inputs by exploiting vertical integration opportunities to control supply chain management

LVMH seeks internal growth via acquisitions of new products in new geographic markets. The company: Grew its customer segment of Asian women with the Louis Vuitton product Acquires firms then strategically "deploy[s] corporate resources" in order to reduce costs and spur growth Opted to internally develop products when no attractive target companies were available

LVMH emphasizes distribution control and messages brands independently. For example: Strength derived from both LVMH parent brand and the individual brands in group portfolio Operates more than 1,300 select retailing locations and, owns nearly 2,500 outlets, allowing direct interaction with its consumers Centralizes control over and creates value via upstream inputs (ie, tannery, R&D lab, watch face maker)

LVMH’s management tactics preserve brand autonomy and recognize the values of designer innovation as the core competitiveness of the fashion industry. Yet, they improve subsidiary margins by leveraging LVMH's resources.

Value Creation: Individual Business UnitsBeverages: Investing in areas of growth and providing a portfolio of strong premium wine and spirits brands. In addition, by investing in a distribution network, Moet Hennessy (MH) guarantees stronger control of its brands and increases efficiencies in its operations.

Selective Retailing: LVMH's Selective Retailing unit differs from other units in that it is not a collection of products, but rather a collection of retail outlets, including high-end beauty supply store Sephora, high-end airport retailer DFS Gallerias ("duty free shops"), high-end cruiseline retailer Miami Cruiseline Services, and high-end, legacy-minded department stores in Paris. Selective Retailing does not exclusively sell LVMH products, opting to focus more broadly on luxury products and a luxury experience in-store. In focusing on the luxury experience within its stores, Selective Retailing clearly aims to increase the willingness to pay and price for its products. By offering non-LVMH products in its stores, which clearly target upscale consumer segments, Selective Retailing can decrease costs as non-LVMH brands compete for shelf space.

Perfumes and Cosmetics: The group's pooled R&D approach allows the breakthroughs of the over 300 scientists at "LVMH Recherece" -- LVMH's reserach arm -- to be applied across all relevant perfume and cosmetic brands (driving down costs), while some savings can be directed towards highlighted the luxury of the goods via elaborate packaging, design, and advertising (driving up willingness to pay).

Watches and Jewelery: As in Perfumes and Cosmetics, LVMH has a pooled R&D approach for this luxury segment. Besides, LVMH drives the WTP by using strong brand ambassadors for their watches and marketing watches such as '5 million Hublot.' They add further value by their perfect retail stores.

Fashion and leather goods: There are 3 key “quality” values: “original know-how” (no outsourcing as means of cost cutting), “craftsmanship” (lean, handmade production of small units), and “icons” (differentiation through shapes and colors). LV brand never offers discounts, opting to instead destroys stock. Derives value from aspirational customers, to whom company offers lower absolute entry pricing. Company also boasts a diversified product mix (complementary mix of mega and niche brands) that helps with targeting emerging markets customers with the "need to belong” and sophisticated luxury consumers with a "need to differentiate.” Lastly, no franchising allowed! LVMH maintains control of international store operations, regardless of high management costs.

wtp costs

Acquisitions: Motivation, Philosophy, and Strategy

M&A Motivation: Diversify from over-reliance on LV brand, which accounts for 37% of sales and the majority of profits. Gain control over the entire luxury retail industry. LVMH already controls soft luxury (leather accessories), along with champagne and

cognac. Bernard Arnault now wants control over hard luxury (jewelry and watches), as demonstrated through an overpayment for the Bulgari brand.

M&A Philosophy: LVMH is driven by its pursuit of growth and maintaining its family of premiere, luxury brands so all acquired companies must meet a

selective brand criteria. Prefers M&A to developing internally since LVMH can leverage its history and tradition to create synergy, which can create

opportunities for co-branding strategies. LVMH recognizes that the reason a company is strong in the first place is because of its original brand and employees. When the much

larger LVMH brings a new brand into the portfolio, it preserves the brand’s freedom and independence, which ensures continuing innovation and successful integration.

M&A Strategy: Some acquisition tactics reveal acquisitions triggered by over capacity, in which an "eat or be eaten" philosophy shows them

swallowing direct competitors (like the acquisition of Givenchi, or the M&A with Fendi). However, they prioritize "internal growth,” buying subsidiaries they can grow. Insert examples Product or Market Extension M&A (e.g acquisition of Zenith and Hublot after Tag Heuer to gain enormous market share in luxury

watches and use retail strength of Tag Heuer; Moet Hennessy wanted to enter the single malt scotch category: Glenmorangie acquisition in early 2005 with subsequent takeover of worldwide distribution (company’s leading shareholders wanted to sell stake in the firm and were shopping for buyers; LVMH acquired Glenmorangie and Belvedere. Strategy was to diversify brand portfolio and be in multiple drinks categories, concentrating on growth opportunities in super-premium spirits. Acquisition of Glenmorangie meant the first Scotch whiskey brand for LVMH, bringing them closer to competitors’ business model of building “strong brands in most segments of the alcoholic drinks market."

Geographic M&A (insert examples)

Scope Changes: When to use what strategy?

LVMH’s dominant strategy is acquisition of strong, autonomous brands with high growth potential. The decision to acquire reinforces the firm’s desire to control the entire brand experience, which is essential in the luxury goods space. This is especially true if the acquiree would have benefited more than LVMH if another arrangement was explored instead of acquisition.

In the Glenmorangie acquisition, Glenmorangie would have received world-class marketing and access to markets outside of the UK using MH’s distribution network, yet MH would have little say about the production and quality control. Production was very specific to the distillery, so acquisition was necessary to gain control of these hard assets and processes engrained in the product identity. Furthermore, Glenmorangie’s distributor at the time of acquisition, Bacardi, was also making a bid for ownership. LVMH’s acquisition positioned the company to leverage its own distribution channels. LVMH also bought Belvedere so that it could also control the distribution of the product to new markets. By owning and having complete control of the brand, LVMH was able to successfully launch Belvedere to the US, and effectively pioneered the luxury vodka market.

However, it does leverage different approaches at times. Examples of scope changes: Alliances (to increase capacity & purchasing power). For example, Prada-MH entered into strategic partnerships to remain competitive in the marketplace. In October, LVMH partnered with Italian fashion company Prada, usually a competitor, to acquire a majority stake in fashion design house Fendi, an Italian company operated by five sisters.”

Alliances (to leverage the know-how of another brand). When LVMH does not feel it has expertise in an area – and that it could potentially damage its premium brand equity – they will choose to partner instead. For instance, LVMH's joint venture with DeBeers in the diamonds market created an independently managed company, for while DeBeers fits LVMH’s portfolio of luxury products, LVMH did not have expertise (i.e., operations & extraction).

Internal Development: If there is not a strong brand that meets the LVMH selection criteria, it may choose to seek alternative strategies to enter a new category. For example, MH launched 10 Cane, its first internally developed brand, which is an artisinal rum. In the search for value creation, LVMH must have decided that there was no suitable rum brand on the market that it could buy and consider to be luxury. Because MH has the marketing and distribution expertise in luxury wine and spirits, an internal brand launch was a viable alternative. Under the direction of the LVMH master distiller, 10 Cane was created under strict control of the LVMH standard. Outsourcing: LVMH also avoids outsourcing or franchising its core fashion and leather goods business in order to maintain control and brand integrity. This is even at the expense of possible cost savings or new geographical advantages within the fashion and leather goods line. In fact, the LVMH fashion and leather goods line is operating its international stores by themselves, despite high management costs.

Boundaries: LVMH draws boundaries when expertise is involved. If LVMH feels they have expertise, they may choose to internally develop. Finally, LVMH draws its boundaries in order to preserve brand autonomy.

Strategy Reasoning Example(s)

Acquire companies upstream in the value chain (raw materials suppliers, manufacturing plants).

Means to create sequential synergies, and increase control over cost structures, especially when inflation begins to pressure margins.

(a.) Bought majority stake in a crocodile tannery in Singapore in 2011 in order to control leather costs to the Louis Vuitton business(b.) Bought Christian Dior perfume/cosmetics facility to centralize R&D across brands and promote sequential synergy(c.) Bought Artecad watch face manufacturer to control input costs to components of its watch production

Acquire companies downstream in the value chain (distributors, retail).

Means to increase control over product placement and pricing.

(a.) Rather than subscribing to the traditionally fragmented US liquor distribution network, LVMH created their own (Moet Hennessey USA) with a large sales force focused on developing the Moet Hennessey brand image(b.) Manages own retail network of LV stores, giving them control over levels of stock, presentation, and pricing, while also shielding the brand from discounting by larger department stores

Vertical Integration: Upstream and Downstream Strategies

Horizontal Integration: Building Brand and Product Portfolios

Strategy Reasoning Example(s)

Acquire direct competitors within a product category in which they already play

Better serve current consumers through increased segmentation and brand building

(a.) Acquired Krug champagne to add to portfolio of current champagne brands, diversifying their customer segmentation between premium and super-premium(b.) Bought Fendi in 1999 primarily for their handbag and watch businesses, believing they could position the brands better than parent company Prada had, while also being able to reach a younger, growing customer demographic

Expand into new/adjacent product categories through acquisition

Grow the business by leveraging brand expertise in different products within the same industry

(a.) Alcohol: acquired Glenmorangie, their first scotch whisky product, and developed 10 Cane, their first rum, in order to match competitive offering(b.) Acquired Donna Karen International in 2001 in order to diversify away from luxury hard goods and build a stronger portfolio of luxury fashion designers

Dimensions of Integration

Key Takeaways (Mike)

LVMH uses horizontal integration for empire building and vertical integration for control of its products- Brand autonomy, and emphasis on growth (internationally), subordinate brands are improved by joining LVMH. Reference:

3 tests, criteria for ally vs acquisition. A)types of synergy b. Nature of resources c)market uncertainty d)extent of redundancies)

- Success in acquisitions by starting off with minority stake; test the waters before full out purchase- How does this complement the business? -example that passes all 3 testsàoutline how (strategic rationale)

References

1. http://www.beveragedaily.com/Financial/LVMH-victorious-in-battle-for-Glenmorangie2. http://www.economist.com/node/21556270 3. Collis, David. "Managing the Multibusiness Corporation."19974. "Commission clears venture between De Beers and LVMH but warns De Beers on Supplier of Choice Agreements"

Brussels, 25 July 2001 IP/01/1069