Louis Vuitton Moet Hennessy in Search of Synergies in the Global Luxury Industry Term Paper

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Louis Vuitton Moet Hennessy

A luxury good is a product at the highest end of the market in terms of quality and price. Classic luxury goods include haute couture items such as clothing, accessories and luggage. However, many markets have a luxury segment including, for instance, cars, wine and even chocolate. Luxury goods markets are characterized by very high sensitivity to economic upturns and downturns, high profit margins and very tightly controlled brands, but there are always some who continue to buy these products. "Recessions come and recessions go, but luxury never goes completely out of style, even if sales were subdued following the September 11 tragedy. Some individuals with deep pockets and others with high ambitions are always willing to spend prodigiously on common items like handbags and watches, provided they get what they want in return: quality, fashion and the envy of their friends."

In popular culture and the public imagination certain goods have become bywords for luxury. These include Beluga caviar, Rolls Royce cars, luxury yachts and so on. Such items are often regarded as status symbols as they tend to signify that the purchaser has significant wealth.

Like other sectors of the retail market, luxury goods retailers like to cluster their stores closely together in order to create a shopping "destination." In the case of luxury goods, these areas are generally in the old and extremely wealthy areas of major world cities.

Louis Vuitton Moet Hennessy (LVMH) is the world's largest luxury goods company. It is the parent of around fifty subsidiary companies that each manage a small number of prestigious brands, which are run, to a large extent, autonomously. LVMH is based in Paris, and employs 56,000 people. It is publicly traded on Paris's Euronext stock exchange and is part of the CAC40 index. The group was formed after mergers brought together champagne producer Moet et Chandon and Hennessy, a leading manufacturer of brandy. The oldest of the LVMH brands is wine producer Chateau d'Yquem, which dates its origins back to 1593. In 1987, they merged with baggage manufacturer Louis Vuitton to form the current group. Collectively, the company operates around 50 brands.

The company is partly owned by the Christian Dior group, and Bernard Arnault is Chairman and CEO of both companies. His successful integration of various famous brands into LVMH has inspired other luxury companies into doing the same. The Gucci group (now part of the French conglomerate PPR), Prada and Compagnie Richemont have also created extended portfolios of luxury brands.

LVMH operates around 1,500 stores worldwide. Its current business plan aims to tightly control the brands it manages in order to maintain and heighten the perception of luxury relating to their products. For example, for the most part, Louis Vuitton products are sold only through Louis Vuitton boutiques found in upscale locations in wealthy cities and in concessions in other luxury goods shops (such as Harrods in London). This practice contrasts greatly with less exclusive brands, such as Tommy Hilfiger, which can be bought in shopping malls around the world.

As part of LVMH acquisition strategy, Bernard Arnault tried unsuccessfully to take over Gucci in the late 1990s in what was described as the "handbag war." Investment bank Morgan Stanley was an adviser to Gucci and was one of its underwriters when it went public in 1995. The bank was sued by LVMH in November 2002 for alleged unfair research favoring rival retailer Gucci. The $100 million suit alleged Morgan Stanley's research on LVMH was tainted because of the bank's relationship with Gucci. The case was the latest twist in a long-running personal battle between Arnault and the head of Gucci, Domenico De Sole. "These proceedings are an attempt to damage the reputation of Morgan Stanley and to undermine Claire Kent, one of our senior equity research analysts, who has tremendous breadth of industry and company knowledge in the luxury-goods sector and unquestioned credibility with investors,' Stephan Newhouse, chairman of Morgan Stanley International, said in a statement."

In January 2004, a French court ordered Morgan Stanley to pay LVMH at least $38 million for producing a negative research report based on Morgan Stanley's alleged bias against LVMH. The French tribunal found that Morgan Stanley analyst Claire Kent illegally published a research report in order to harm LVMH and benefit Gucci Group, a Morgan Stanley client and LVMH rival. The tribunal cited a number of errors and biased statements in the report to support its finding of a faute lorde (intention to do damage) by Morgan Stanley against LVMH. The tribunal assessed $38 million in damages for the moral harm caused by the report.

In February 2003, LVMH confirmed it had acquired the stake in Italian luxury shoemaker Rossimoda SpA it did not already own. Rossimoda was founded in 1942 and specializes in the production of women's shoes for the high-end market. Apart from its own brand, the company produces under license for companies such as Calvin Klein, Emilio Pucci and Marc Jacobs. In March 2002, Rossimoda signed a deal for the production of a footwear collection for U.S. fashion house Donna Karan. "In 2002, shortly after buying the business, LVMH restricted its men's wear distribution to freestanding Donna Karan stores in an effort to bolster perceptions of exclusivity in the brand. Last year LVMH continued its reworking by closing unprofitable Donna Karan stores, which reduced sales for the line by 30% ... It also reduced its merchandising licenses and focused more on high-end retail outlets."

A distinct advantage of LVMH is the large number of company-owned stores. Following a nearly crippling attempt to widely license their brand in the early 1990s, for example, the Gucci brand is now largely sold in directly owned stores. These stores can be used to cross sell different products. While currently only a small percentage of these stores take this umbrella approach, they should accelerate this process. They should also use the Vuitton stores to attract customers to its other brands, which would reduce the company's reliance on the Vuitton line. "Vuitton brings in 25% of LVMH's $13.5 billion in revenues and a whopping 60% of its $2.47 billion in operating profits. That's a dangerous level of reliance on one brand for a company that owns more than 50 others...'Our strategy is to bring this star status [of Vuitton] to other brands,' says Arnault. 'We have to build for the future.'"

Louis Vuitton opened a new store in London in 2003 and launched a new advertising campaign featuring Hollywood's elite actresses, including Scarlett Johansson, Christina Ricci and Chloe Sevigny. The new boutique is the first in the world to carry clothing, accessories and the new jewelry line. While the rest of London's luxury goods stores are drowning in a sea of discounts, Louis Vuitton's prices remain as expensive as they always are, 365 days a year. Perhaps that is why the French conglomerate is the most profitable luxury brand on the planet, trouncing its nearest rivals Prada, Gucci and Hermes with $3.8 billion in annual sales.

In line with the company's policy of concentrating on its "star brands," LVMH announced in January 2003 that it is finalizing the sale of two of its California-based cosmetics companies, Hard Candy and Urban Decay to the Falic Group that is based in Florida. A spokesman for LVMH said the companies were profitable, but that margin prospects at both weren't in line with LVMH's "demanding targets." Founded in the mid-1990s, the two cosmetic businesses are targeted at younger consumers and are seen as more adventurous than other LVMH cosmetics operations such as Dior and Guerlain. The family-controlled Falic Group is best known for its Duty Free Americas chain of stores.

LVMH reported sales growth of 11% in the first quarter of 2005, which comes on top of a 10% increase in sales for the same period in 2004. Consolidated sales were 3,082 million Euros for the first quarter 2005. The sales growth momentum since the beginning of the year is impressive with almost all business groups recording double-digit sales growth. Perignon, Krug and Veuve Clicquot champagne brands performed very well. Moet & Chandon had a good start to the year in Europe. Hennessy enjoyed an impressive start as well, with strong sales growth in the U.S. And Asia. China confirmed its growing potential as an important market for its brands.

In Fashion & Leather Goods, Louis Vuitton continued to achieve double-digit sales growth in the first quarter 2005. Growth for the brand continues in the U.S. after an excellent 2004 and it has also enjoyed a good start to the year in Europe. A return to growth has been achieved in Japan and the Asian markets are progressing strongly, driven by growing tourism, notably from China. Among the other fashion brands, Celine, Marc Jacobs, Pucci and Berluti all enjoyed a good start to the year and Fendi achieved double-digit sales growth in its stores.

In Perfumes & Cosmetics, Parfums Christian Dior continued to grow well in the quarter, driven by the…

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