Case Study LVMH's Diversification Strategy Into Luxury Goods Case Study

Excerpt from Case Study :


Identification Evaluation of the main problems.

Sometimes, the best laid plans of mice and men go awry. The case of Bernard Arnault's involvement in LVMH is one of dazzling brilliance on one hand and intractable egotism on the other.

Arnault's stated strategy seems to make sense: acquire brands epitomizing the combination of classically tasteful luxury with forward-looking modernism. He looks for brands that are traditional in feel, but constantly renewing and reinventing themselves. However, some of his acquisitions for LVMH have seemingly deviated from this otherwise successful strategy. So, first of all, these deviations are problematic for the LVMH cachet.

Secondly, when even seemingly sensible acquisitions have failed to deliver value to the firm and its investors, Arnault has been reticent in divesting them. It is unclear why someone seemingly gifted with such business savvy would fail to unload an unprofitable, burdensome brand. This is an issue which needs explication.

The firm has also had bad luck, along with countless others. The zeitgeist in the United States and abroad undertook at least a temporary detour after the sobering September 11th terrorist attacks, and purveyors of luxury goods instantly found themselves facing growing mountains of inventory. Of course, it would be absurd to imagine there was any way LVMH could have planned for or prevented the attacks, but the company's response to the subsequent economic and cultural reaction could have been different. This was another problem.

Finally, LVMH seems to have stalled in its merger/acquisition mania. It is past time for some new growth.

II. Analysis of the problems

Clearly gifted with foresight, vision, and remarkable business savvy, Bernard Arnault has been LVMH's greatest blessing, but also a major contributor to its woes. Arnault could not have achieved so much in so little time were he not possessed of a strong and resolute character, but the downside of possessing such character (and so much of it) is that Arnault has sometimes proven himself more headstrong than wise concerning LVMH's acquisitions. Acquisitions are what have driven growth for LVMH, but many of the firm's acquisitions are puzzling given Arnault's aforementioned premise in choosing his targets.

The acquisition of Donna Karan is very representative of this kind of exception to the rule. Donna Karan's brand was a solid performer in the 1980s and early 1990s, but long before Arnault acquired it, Karan had moved the brand's image so down-market that it no longer commanded its former prestige. Further, there simply is no way one could compare Donna Karan with Givenchy (Audrey Hepburn wore his haute couture in Sabrina) or Louis Vuitton, especially after Karan's fashions were displayed in bins at discounter TJ Maxx. Arnault's response that it makes sense to acquire Karan's brand because she is so fabulously well-known seems very unsatisfying; McDonald's is also a fabulously well-known brand.

So why would Arnault acquire such a questionable horse for his firm's stable? Given the unlikelihood that he is being truthful in his stated reason, the most reasonable conclusion that suggests itself is "personal reasons." In decision-making, whether personal or business, few people are possessed of the wherewithal to exclude their feelings from the decision-making process. Something about the Donna Karan brand was important to Arnault; similarly for his other puzzling acquisitions, such as DFS. No matter what DFS sells, the name itself suggests something less than luxurious excess; "Duty Free Shops" conveys a sense of luxury approximately equivalent to "Home Shopping Network." These off-center acquisitions seem simply to be favored by Arnault for inexplicable reasons of his own.

However, when even sensible acquisitions fail to deliver value, can there be any serious reason for keeping them? Arnault's purchase of Phillips, de Pury, and Luxembourg, though criticized by some, made at least as much sense as his move into retail, which was not initially criticized. Yet when the auction house ended up costing LVMH several fortunes, he was very hesitant to divest himself of what the BCG would certainly characterize as a dog.

Arnault has been criticized as someone unwilling to admit when he is wrong. Of course, no one can be right 100% of the time, so he must be making mistakes sometimes. When has he admitted making any? Even when he seems to be admitting a mistake, as in the case of Christian Lacroix, (which Arnault did ultimately divest), it is amazing how he manages to avoid conveying any sense of his own culpability in the debacle. Perhaps this is further indication of his stubbornness, if not outright hubris.

Regarding the firm's response to the post-9/11 environment, it seems to have failed to respond at all. The quote from Richermont's chief executive about no one feeling good enough to buy feel-good items is very telling, but the purveyors of good feelings could have mitigated things by a more energetic response. Why not try to make everyone feel good? Isn't that their business? An appropriate, tasteful response to the horrors we all experienced (some more than others) at the time might be something in the tone and mood of, "There is probably no better time to celebrate life's blessings than while reflecting on its vicissitudes." If not those words, then something along those lines could have conveyed the idea, but the opportunity to relieve the world's tension passed, and the company's chance to mitigate its losses passed with it.

III. Issues involved in each option (pros and cons).

One of the universal laws of life is "grow or die." Acquisitions and mergers can be an important part of a firm's growth strategy, ensuring continued life. However, these can also backfire, especially when the market fails to see how the firms involved make sense as a team. When something as delicate as an otherwise much-admired brand image is at stake, executives should engage in mergers and acquisitions very cautiously, if at all.

By the same token, if a firm finds itself burdened with a business unit that is (expensively) gasping for life, an attempt at resuscitation may be warranted. However, this means committing resources to a project that may fail, and these could be used elsewhere. In the case of LVMH, the decision to keep or divest some of its retail venues is a complicated one.

LVMH's response to the economic and social changes that followed "9/11" is actually a fairly tricky issue. Yes, the world was suffering and could have benefited from some joy at the time, but an ad campaign (or some other action) designed to impart that joy from a gigantic corporation could be misconstrued as in bad taste or indelicate by some people, especially by those who criticize large corporations on moral grounds anyway. So yes, there was an opportunity to do some good for itself and the world, but LVMH's apparent silence may have been the safest response Arnault could think of. Why risk making things worse than they are?

Two oft-repeated business statistics are that approximately 70% of all newly commercialized products fail in the market, and approximately 70% of all corporate mergers fail to deliver according to expectations. LVMH under Arnault's lead has achieved a degree of success that seems to defy these odds in both areas. If one is good at something, it stands to reason one should keep at it. Nevertheless, there is also the concern that success is due not so much to spectacular strategy as to spectacular luck. In that case, like the gambler who has thrown the dice and gotten sevens ten times in a row, Arnault can be forgiven for being nervous about the outcome of the next gamble. His winning streak could continue, or it could end in the most conspicuous way possible. Given the hints we have about his personality, Arnault may have lost his nerve; a person who is sufficiently invested in his own self-esteem may choose to do nothing rather than risk a spectacular failure.

IV. Recommended solution based on analysis (future oriented: what the company must do, should do or need to do for smooth and effective management).

Despite criticism, especially from investors, that the inclusion of high-end retail businesses in the LVMH stable was never wise and has hurt the value of the company's portfolio, critics have failed to consider that the performance of some of the firm's brands has definitely benefited from the close handling their being distributed through the company's stores has made possible. If some of the prestige brands had been marketed by a third party, say Bloomingdales, no matter how upscale the venue was it wouldn't have allowed for any two way interaction between customers and LVMH. With such interaction, Arnault's team could tweak marketing variables to solve problems, answer customer questions, and make plans based on customer feedback. Without the exclusivity of selling their own products in their own stores, this would have been difficult of not impossible. So Arnault's strategy here may have hurt the company in one way (by being admittedly very expensive) but helped it in others by stimulating interest in the firm's brands. It may…

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