1. Bernard Arnault has built LVMH into a luxury goods empire by making numerous acquisitions. Describe the strategy is being used here? Discuss why you agree or disagree with this type of strategy. If you disagree, what alternative tactics would you use?
Actually Mr. Bernard Arnault, one of the richest men in the world who took control of LVMH in 1990, has been snapping up luxury brands during past two decades one after another. He has build LVMH into a luxury good empire by conducting a selective acquisition strategy with which I agree. Now LVMH has more than 60 brands under control and is still pursuing some others including the old famous family business; Hermes.
LVMH structure is made up of Wines and Spirits, Fashion and Leather goods, Watches and Jewelry, Perfumes and Cosmetics and Selective Retailing. Although some may argue that there are issues such as lack of concentration on core business thereby exclusivity and rarity which are main characteristics of luxury brands can be faded, I firmly believe that not only has Mr. Arnault saved these special features of the business and is still focused on prestige, he has improved the profitability of each division by creating synergy between subsidiaries in terms of cost, corporate and management synergy.
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“Synergy, in general may be defined as two or more agents working together to produce a result not obtainable by any of the agent independently. Corporate synergy occurs when corporations interact congruently. A corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation” (Synergy).
As result of corporate synergy and this partnership, LVMH now has a bigger market share, wider range of products and less competition because the competitors are now members of the group and are all working together in a coordinated way. On top of that, they can take advantage of the existing selective retailing outlets to differentiate their products by adding value in their offering and demonstrate them as distinctive. Also, prestige, luxury and quality associated with the brand ‘LVMH’ influences every item being presented in these shops.
“A cost synergy refers to the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating costs that are viewed as duplicate within the merged entity.” (Synergy) This means reducing; promotional and advertising costs, sales cost, shipping cost, travel cost and also some managerial cost such as certain executives, human resources and head quarters office cost which finally influences companies bottom-line.
“Synergy in terms of management and in relation to team working refers to the combined effort of individuals as participants of the team. The condition that exists when the organization's parts interact to produce a joint effect that is greater than the sum of the parts acting alone” (Synergy) As stated in the text of this case study,” Arnault implemented a corporate restructuring that groups the company’s subsidiaries into divisions. Previously, the heads of individual subsidiaries reported directly to Arnault; now, division heads meet with him to discuss strategy. Notes Arnault, “It’s much more efficient, because it allows us to put into practice all the synergies between the different brands in a coordinated way.”
Francesco Trapani, CEO of the Bulgari Gruop, the luxury brand recently acquired by LVMH, said: “The 2010 financial results show how the Company was able to brilliantly overcome the economic slump, reaping the benefits of the efficiency and cost containment strategy and therefore becoming more solid. At the same time, the intense creative and product development activity generated an even more competitive product offer, which enjoyed great success in all product categories.” (Knowel) He added: “At this positive moment of strong top-line growth, our alliance with the LVMH Group has created new synergies that will enable Bulgari to strengthen even more and pursue its long-term, worldwide growth.” (Knowel)
In conclusion, I believe that Mr. Bernard Arnault has made LVMH into the word biggest luxury brand by adopting acquisition strategy and creating cost, corporate and management synergy between divisions of the group.
2. How do LVMH executives adjust prices in response to changing economic conditions, and why?
In response to changing economic conditions, LVMH executives adjusted prices in sepcific ways in each market. In Asian markets, Patrick Choel, president of the perfume and cosmetics division has increased wholesale prices in order to discourage discount retailers from selling the products to consumers at low price. Instead, he has reduced the advertising budget to offset profitability in case the company faces a decline in sales. In countries where LVMH faced currency devaluation, managers raised the price to counteract the effect of currency depreciation. In Indonesia, the chairman of Vuitton, Mr. Yves Carcell canceled the plan for opening a new store.
Since Japan market is sluggish and there has not been a sign of soon economic recovery, Japanese consumers are reluctant to invest in stock market. Mr. Arnault figured out the difference between Japan where most of his business is, and the rest of Asia. He noted: “Japan is in a growth slump, but it isn’t going to have the same difficulties as Korea or Indonesia”. Japanese had not many other spending option and executives decided to raise prices at Louis Vuittons Japanese store.
Also Louis Vuiton manageres has worked closely with tour operators to predict the number of Japanese tourists traveling in Asia and to Hawaii whom 75% of sales depends on. At peak of tourism, they increase the price by 10 to 22 percent to maximize profit.
Furthermore LVMH took advantage of crisis by renegotiating store leases in Asian cities. In some cases, the company extended lease terms longer than before and reduced the rate by as much as one-third which resulted saving for the company.
The overall result has been an increase in price and the rationale behind this decision is the fact that price perception is a critical component of luxury goods’ appeal. In fact, executives know that sales volume would decline sharply due to the effect of crisis and they have lost a big number of their customers. It is not a good time for expansion and opening new stores, so they decided to stay focused on the narrow market segment of their loyal customers. Those who still had notable disposable income shaped a niche market which was still large enough to be profitable. On the other hand, LVMH helped profitability by reducing the cost and cutting expenditures on advertisements. This was the adjustment executives made as opposed to the other alternative; reducing the price and presenting products to a bigger number of consumers.
3. Explain why some customer might think the high retail prices charged for luxury goods are worth paying?
As peoples income increases, they are more willing to buy luxury goods because the demand of luxury items increase as people get wealthier. According to wikipedia.com once the consumption of luxury was limited to the elite classes which meant whatever the poor cannot have and the elite can was identified as luxury.
Consumers are willing to pay high prices for luxury goods because the brand is associated with quality, durability, scarcity and beauty. In fact, consumers pay for these values that they obtain by purchasing a luxury item.
“Several researchers focus on exclusivity dimension and argue that luxury evokes a sense of belonging to a certain elite group. Prof. Jean-Noel Kapferer, takes an experiential approach and defines luxury as items which provide extra pleasure by flattering all senses at once” (Luxury). Using luxury goods is a lifestyle and shows the wealth of consumer. These can also be reasons behind why some pay high retail prices charged for such items.
4. How were luxury goods marketers affected by the slowdown in tourism that followed especially after the attacks of September 11, 2001?
If we take a look at marketing mix, we can see what has been affected by slowdown in tourism is place, where a good or service is presented. Luxury goods are mainly presented in duty free shops at airports, in hotels and attractive places as tourist destinations. With the slowdown in tourism, as people are less willing to travel, airports hotels and attractive places are not that busy compared to the days before September 11 terrorist attack. Even those who still travel might care less about luxury because their main concern is security during the flight and at destination. I think this is how luxury goods marketers were affected by slowdown in tourism.
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