LVMH: Strategy and Growth of the World's Largest Luxury Brand

The Luxury Goods Market

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 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 — yet there are always consumers who continue to buy these products. As one observer noted, "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 — Beluga caviar, Rolls Royce cars, and luxury yachts among them. 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 prefer to cluster their stores together in order to create a shopping "destination." In the case of luxury goods, these areas are generally found in the oldest and most affluent districts of major world cities.

LVMH: Overview and History

Louis Vuitton Moët Hennessy (LVMH) is the world's largest luxury goods company. It is the parent of around fifty subsidiary companies, each managing a small number of prestigious brands that operate, 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 CAC 40 index.

The group was formed after mergers brought together champagne producer Moët et Chandon and Hennessy, a leading manufacturer of brandy. The oldest of the LVMH brands is wine producer Château d'Yquem, whose origins date back to 1593. In 1987, the group merged with luggage manufacturer Louis Vuitton to form the current conglomerate, which collectively 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 to pursue similar strategies. The Gucci Group (now part of the French conglomerate PPR), Prada, and Compagnie Richemont have all created extended portfolios of luxury brands.

Brand Strategy and Retail Distribution

LVMH operates around 1,500 stores worldwide. Its business plan aims to tightly control the brands it manages in order to maintain and heighten the perception of luxury associated with its products. For example, Louis Vuitton products are sold almost exclusively through Louis Vuitton boutiques in upscale locations in wealthy cities, and through concessions in other luxury goods shops such as Harrods in London. This practice contrasts sharply with less exclusive brands, such as Tommy Hilfiger, which can be purchased in shopping malls around the world.

A distinct advantage of LVMH is its large number of company-owned stores. Following a nearly crippling attempt to widely license the Gucci 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, the company has the opportunity to accelerate this process. Using Vuitton stores to attract customers to its other brands would also reduce the company's reliance on the Vuitton line. As one analysis noted, "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." Bernard Arnault has acknowledged the issue: "Our strategy is to bring this star status [of Vuitton] to other brands. 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 actresses including Scarlett Johansson, Christina Ricci, and Chloë Sevigny. The new boutique was the first in the world to carry clothing, accessories, and a new jewelry line. While other London luxury goods stores were offering discounts, Louis Vuitton's prices remained constant year-round. This pricing discipline is widely cited as a key reason the French conglomerate is considered the most profitable luxury brand on the planet, surpassing rivals Prada, Gucci, and Hermès with $3.8 billion in annual sales.