The Position of Louis Vuitton Moel Hennessywith Respect to Its Competitors - Case Study Example

Case Study Report – LVMH Table of contents Executive summary Louis Vuitton Louis Vuitton in China………………………………………………….………………….……..2 Louis Vuitton-TOWS Matrix Model. ……………………………………………………….……3 Louis Vuitton-PESTLE Analysis Model…………………………………………………….…..6 Louis Vuitton-SWOT Analysis Model…………………………………………………….……..9 Louis Vuitton-Porter’s Five Forces Model……………………………………………….…….10 Future Performance of Louis Vuitton……………………………………………………….…..12 Conclusion…………………………………………………………………………………………14 Executive Summary The paper focuses on the position of Louis Vuitton Moel Hennessy (LVMH) with respect to its competitors. This is analyzed on the basis of several parameters under different frameworks like the TOWS model, SWOT structure and Porter’s Five Forces frame and PESTLE analysis. Hence, the sales forecast is drawn for the future years. On this basis one can gauge the stand of the firm especially with respect to its brand identity against the backdrop of the retail industry in China. Both the internal and external analysis along with micro and macro environment has been put under the microscope. The detail analysis shows that the firm cannot be beaten despite the tough competition and hence promises a bright future. Thus the report essentially points out the strategic position of the firm and its present and future prospects. Louis Vuitton The world’s largest luxury commodity retail group, Louis Vuitton Moet Hennessy (LVMH) functions on the basis of four parameters viz. its product line, pattern of distribution, style of communicating its product offerings to large number of consumers and its price points. The luxury goods group renders greater impact on the first three activities for which the stress rendered by charging high prices gets mediated. Louis Vuitton had used its distribution and communication styles to lure huge groups of customers to its beautifully ordained stores spread along the region. Furthermore, the company spends a lot on advertising activities to create mass awareness of its products and shops. The price strategy followed by Louis Vuitton helps the company earn a huge margin of around 40 to 45 percent. A comparison drawn on the revenue margins of other luxury brand companies reflects that Louis Vuitton stands far ahead in the race. The world-renowned luxury goods brand states that the maximum number of consumers belongs to the middle level groups while the rich elites constitute only a niche segment. However, Louis Vuitton observes that owing to the event of recession the structure of consumer spending has countered a radical change. The consumers of the luxury goods retail chain who were not price sensitive previously became highly aware of the changing economic situation. This resulted in a huge drop of sales of such luxury commodities, which came to be observed as objects of lesser importance. Owing to the change in the market condition brought about by recession the company felt the need to redesign its products to focus on their basic usage parameters rather than making it gaudy. Thus, the price of the commodities also came down letting the company be in business. Leather goods brand, Louis Vuitton of the luxury group LMVH expanded its business to regions like China and Japan to gain access to a wider market which would help in augmenting the profit position of the company. However, LMVH owing to Louis Vuitton’s expansion activity is shifting its focus on other small brands under its umbrella (The substance of style, 2009). Louis Vuitton in China The market for fashion goods in China has grown at a considerable rate owing to the growth of the economic position of the country. The annual growth rate of the Gross Domestic Product of the country varied along 10 percent, which reflected the rise of the middle level population in the region. Estimates conducted shows that the total spending of the Chinese population on luxury commodities ranged from $4 billion to $5 billion during the period of 2006. Moreover, the pattern of buying luxury commodities got more impetus in the cities composed of middle level income groups than in cities like Beijing and Shanghai composed of rich elites. Henceforth, China is considered to gain a leading position in the global market for luxury commodities. The luxury commodities produced in the Western markets are being increasingly purchased by the Asian economies like China for they reflect a kind of a status symbol. Further, the internal environment of China is proceeding towards a high level of cultural shift in which the younger generation is making a progress to earn a fashion statement. A national survey conducted on China shows that around 92 percent of women population residing in the region possesses a fashionable handbag of the Louis Vuitton group. Though there is a huge number of brands operating in China in the field of luxury goods yet the Chinese population earns cultural significance to the leather fashion company Louis Vuitton pertaining to the fashion group Louis Vuitton Moet Hennessy. The relation of China to Louis Vuitton also helped the group to reap further profits in the region through opening up of newer stores in the region. During the period of February 2007 the profits of Louis Vuitton rose by a level of 30 percent, which had been further celebrated through an opening spree, conducted in the Asian region. In a similar manner the price to earnings ratio of Louis Vuitton has also shown considerable growth of around 1.36 times during the mentioned period (Gleeson, 2007). Louis Vuitton-TOWS Matrix Model (appendix A) In making an analysis of the internal and external business environment of Louis Vuitton the TOWS Matrix Model is used. The TOWS Matrix Model makes an analysis of the business environment of a firm depending on four sets divided along the external and internal situational factors. The first matrix in the TOWS Model reflects on ‘Internal Strengths’ and ‘External Opportunities’ which a firm comes to gain operating in a business environment. Louis Vuitton would also be analyzed on the basis of ‘Internal Strengths’ and ‘External Opportunities’. In fact, the analysis would rightly reflect that how the internal strengths of Louis Vuitton are helping to gain huge opportunities in an international market like China. ‘Internal Strengths’ and ‘External Opportunities’ Louis Vuitton the leather fashion arm of Louis Vuitton Moet Hennessy has acquired key internal strengths like possessing a strong global presence and superior brand positioning to tap any foreign market. Louis Vuitton had successfully made a place in the leather fashion industry amidst the other fashion brands like Gucci, Prada and Fendi covering up the retail shelves. Even the brand identity of Louis Vuitton had earned the minds of indigenous designers in such a fashion that even fake looking Louis Vuitton has started sprouting in the fashion market. Wider geographical base of Louis Vuitton becomes a significant truth when one observes that a major portion of the higher Japanese society owns the Louis Vuitton bags for also official purposes. Louis Vuitton has a long legacy of producing fashionable leather bags, which also is one of the potential reasons for its strong brand positioning (Ramachandran & Patvardhan, 2008, pp. 38-46). Another key strength of Louis Vuitton is its relatively large assortment of products on its brand scale. The company through the use of multiple brands across different categories is looking forward to tap the different market segments. The company through the use of around fifty brands in the luxury segment aims to gain a wider space in the retail scenario of the country (Harish, 2008, p. 57). Louis Vuitton has got a potential opportunity in the Chinese market owing to certain reasons. The younger generation of China is found to be potentially brand conscious. Young women tend to save the salary for around two to three months to use it on procuring Louis Vuitton handbags (Wang & Lin, 2009, p. 402). More number of opportunities for luxury products is opening up in China owing to its growth of national income. Observation made in the global market for luxury goods confirms China in the second position below the market for such in United States. Further, the growing incidence of demand for luxury goods at a rate of 20 percent intensifies the effect (Degen, 2009, p. 75). Thus, Louis Vuitton with a strong drive in the international market and with a potential brand position would certainly grow to capture the Chinese market hungry for luxury brands. Louis Vuitton also suffers from significant weakness, which counters a threat in gaining access to high amount of opportunities in the external market. The company thus to gain a potential position in the foreign market must rightly minimize the threat imposed by the weakness. Analysis of the ‘Internal Weakness’ and ‘External Opportunities’ would help to understand the above situation in a clearer manner. ‘Internal Weakness’ and ‘External Opportunities’ Louis Vuitton suffers from a key weakness of falling revenue margins despite actions taken in lowering the operational cost. During, the initial period of 2009 the firm has reported to lose around 1,363 million Euros, which shows a reduction of 12 percent in the revenue earned. In continuance to this event the Louis Vuitton Moet Hennessy as a total group countered a heavy loss of 687 million Euros or a decline in 23 percent in revenues (Moodie, 2009). Louis Vuitton needs to potentially address its key weakness in order to efficiently tap the foreign market. It is because gaining access in foreign markets involves a lot of expenditure in advertising and distribution, which would not be possible in the event of such low revenues. The firms operating in a wider market are amenable to larger business threats. To counter such threats the firms need to be operationally strong. Internal strengths derived by the firm would help in countering the ill effects of the external environment. Hence, an analysis of ‘Internal Strengths’ of the business firm in the context of ‘External Threats’ would help in rendering a clear understanding of the above condition. ‘Internal Strengths’ and ‘External Threats’ The key external threats affecting the business of Louis Vuitton in context of China are an increasing market for counterfeit products and completion from other leading brands like Gucci. Louis Vuitton produces a lot of products like handbags for ladies, which are replicated by a host of indigenous manufacturers and sold in the market. Manufacturing bases in Thailand are found to replicate the models for handbags for Louis Vuitton, which is sold to international markets (Han, Nunes & Dreze, 2010, pp. 20-21). Huge amount of counterfeit practices create an effect of brand dilution. Thus, the firms like Louis Vuitton needs to possess internal strengths like strong brand identity among its competitors along with a potential to create market expansion in foreign regions to help counter such imminent threats. The TOWS Matrix Model finally throws light on the area of combining weaknesses of the firm with the amount of external threats faced by such. The main objective behind such combination is to render an understanding about the manner the firm can reduce its internal weakness to be able to generate a potential obstacle to the external threats. Hence, the last corner of the matrix relates to the event of ‘Internal Weakness’ and ‘External Threats’. ‘Internal Weakness’ and ‘External Threats’ The study made on internal weakness of Louis Vuitton reflects that the firm had been countering a reduction in its revenue margins despite a stand taken to reduce the operational costs. Thus, pricing and distribution strategies must be revised to generate maximum revenue through reducing operational costs. This would help the firm in countering the huge volume of external threats coming from potential competitors like Gucci and in minimizing the effects of brand dilution imposed by the counterfeit market (Moodie, 2009; Han, Nunes & Dreze, 2010, pp. 20-21). Louis Vuitton-PESTLE Analysis Model (appendix B) The performance of the leather fashion firm Louis Vuitton in a foreign market like China can also be studied through the analysis of several factors pertaining to Political, Economic, Social, Technological, Legal and Environmental effects. Such an analysis would help in generating a holistic understanding of the firm’s external environment. The several factors which would be used for analyzing Louis Vuitton external environment in China viz. Political, Economic, Social, Technological, Legal and Environmental constitute the macro environment of the firm. Macro Environmental Conditions Political Factors Louis Vuitton gained an initial political obstacle in China for the country during the period of 1992 did not get ascension to the World Trade Organization. Henceforth, the ascension of the company in the Chinese soil was not smooth and faced considerable restrictions in conducting the distribution operations. However, after the period of 2004 the foreign firms can easily carry on its trade activities with other indigenous Chinese firms in the same sector (Chevalier, Lu & Toledano, 2009, p.126). Economic Factors The economic factors in the context of China, which tempted fashion firms like Louis Vuitton to enter its marketing sphere, constitute the growth in the fashion industry of the region. The sales of fashionable products in the context of China are growing in leaps and bounds ranging from 20 to 30 percent. Moreover, the market for luxury goods in the region being devoid of indigenous competition helped the foreign firms like Louis Vuitton to gain easy access by producing trendy models. The huge market composed of both middle and high-level consumers helped the firm to create a better impact (Peloso, Gregory, Noble & Macarthur, 2008, p. 535). Social Factors The modern Chinese society has come out from the clutches of the Maoist dominion and is steadily marching towards a modern environment. Thus bureaucracy has lost its control-giving rise to the middle level society to reap and enjoy the fruits of society. Henceforth, large number of consumer products pertaining to fashion commodities is increasingly purchased by the cities filled with middle level population in comparison to richer cities like Beijing and Shanghai. Further, the purchase of these fashion accessories mostly branded like the Louis Vuitton handbags is considered to act as a symbol of status of such people. Hence, Louis Vuitton gains easy acceptance in the modern Chinese society (Zhang & Stening, 2009, pp. 93-94). Technological Factors Louis Vuitton has impacted the technological front of China in an impressive manner through the creation of a ‘digital product’ known as ‘Soundwalk’. The technology used by Louis Vuitton has deepened its effect on the minds of Chinese consumers. The ‘digital product’ uses sound and voice effects to narrate the location where the person using it is located. The technology is also used on an entertainment front to create a virtual audio environment for its users (Okonkwo, 2009, p. 295). Legal Factors Louis Vuitton faces stringent legal actions from the Chinese government owing to the committing of certain criminal activities. During the period of 1993 the company faced stringent legal action for activities that related to money laundering operations. Louis Vuitton through agents based in Paris was transferring huge amount of fraudulent capital to the hands of tourists visiting Japan and China on their purchase of Louis Vuitton handbags and other luggage. Such capital transferred to the hands of the tourists gave them an access to fraudulent money, which was later converted into the currency of the host countries. Further, the Chinese government also curbed the level of counterfeit activities replicating the fashionable handbags of Louis Vuitton with strong hands through the arrests of fraudulent manufacturers (Association d’economie financiere, 1995, p. 48). Environmental Factors The environmental factors in effect in China rightly indicate that foreign companies like Louis Vuitton must use quality raw materials to produce the products like shoes and leather handbags. Moreover, the scraps and other wastages must be rightly dumped in zones away from locality to help in reducing the effects of pollution. Moreover, firms must also consider lowering the effects of harmful emissions to save the environment from being infected by harmful gases. Thus, rapid commercialization and industrialization must go hand in hand with safe practices to save the country’s environment (Gupta & Wang, 2009, p. 58). Louis Vuitton-SWOT Analysis Model (appendix C) The SWOT Analysis Model is another form of the TOWS Matrix Model. Like the TOWS Matrix Model the SWOT Analysis Model also deals with the Internal Strengths and Weaknesses of the Company in the light of Opportunities and Threats emanating from the external environment. This model helps in analyzing the potential of the company in the modern competitive world. Strengths Louis Vuitton survives in the competitive market owing to certain key strengths, which can be identified as follows. Firstly, in respect to brand positioning Louis Vuitton has made a mark amidst its various competitors like Gucci and Prada in the fashion segment. Louis Vuitton operates on the basis of fifty international brands operating under it to cover the fashion world. Secondly, Louis Vuitton has a huge assortment of products leather commodities to perfumes and jewelry. The product portfolio of Louis Vuitton has a further extension in covering segments like breweries and watches. Finally, Louis Vuitton has not restricted its operation in Europe only. Rather it endeavors to operate on a worldwide base along United Kingdom and other Asian countries like Japan and China. (Ramachandran & Patvardhan, 2008, pp. 38-46; The substance of style, 2009) Weakness The potential weakness, which affects the expansion drives and other operations of Louis Vuitton, is the event of decline in the revenue margins of the company. The company countered a heavy loss during the period of 2009 where it reflected a fall of 12 percent in the revenue potential. Numerically it stands at around 1,363 million Euros. This heavy loss countered by the company spell a disaster for the entire Louis Vuitton Moet Hennessy group leading it to suffer a loss of 687 million Euros. Louis Vuitton despite its strong efforts to reduce the operational cost could not help in reducing the effect of reducing margins (Moodie, 2009). Opportunities The Chinese society is countering a huge transformation. Middle level consumers are looking forward to occupy a significant position in the procurement of fashion commodities ousting the rich buyers located in only niche cities like Beijing and Shanghai. Owing to the huge demand by the large numbers of middle class consumers the sales of such commodities are increasing at the rate of 20 to 30 percent. Thus, China is opening up with ample number of opportunities for world-class brands like Louis Vuitton, Gucci and Prada to thrive in. (Zhang & Stening, 2009. 93-94; Degen, 2009, p. 75). Threats While operating in China the fashion retailer Louis Vuitton faces some potential threats from the practices of some fake manufacturers. These fake manufacturers are endeavoring to replicate the fashionable handbags designed by Louis Vuitton and sale in the local market. Such practices affect the brand image of the company. Moreover, Louis Vuitton also faces significant completion from other international players like Gucci operating in the same segment in the Chinese market (Han, Nunes & Dreze, 2010, pp. 20-21). Louis Vuitton-Porter’s Five Forces Model (appendix D) To understand the industrial environment of Louis Vuitton in terms of the bargaining strengths of buyers, suppliers, the prevalence of substitute products and competition from new and existing firms the Porter’s Five Forces Model is used. This model helps to get a holistic view of the external market conditions of Louis Vuitton. The several factors used in Porter’s Five Forces Model constituting of buyers, suppliers, and existing and new competitors mainly reflect the microenvironment of the firm. Micro Environmental Factors Bargaining Power of Buyers The Chinese market is filled with consumers eager to get possession of the world’s best brands in the field of consumer goods and fashion commodities. However, the bargaining power of buyers in terms of price fails to make a stand for increased import duties on foreign products. Still the buying population in China makes a bargain to get access to the best product for the existence of many brands operating in the same segment (Gershman, 2008, p. 241). Bargaining Power of Suppliers Louis Vuitton has maintained a strong network of supplier bases to combat against the fake practices of certain manufacturers. The supplier base of Louis Vuitton is coordinated in connection with the administrative authorities of New York Police Department, which looks after the trademark practices and governmental units in China. This practice has helped in the identification of counterfeit practices of some supplying bases in Shanghai leading to its closure (Okonkwo, 2007, p. 173). Existence of Substitutes Louis Vuitton suffers from the threat of existence of substitutes in the Chinese market in the form of fake products. Some designer pieces of the leading fashion brand Louis Vuitton are imitated by local manufacturers and sold at the same price to get hold of potential consumers. Both the rich and middle class consumers get lured by such and accept them to be real (Chadha & Husband, 2006, p. 60). Competition from Existing fashion retailers in China The Chinese market has become a hub of many international and local fashion retailers all competing on a common ground to get public attention to their products and designs. The most significant brand in China, which had internationalized its operations, is Baleno. Like Louis Vuitton, Baleno has also successfully expanded its base to international markets like Central America and Middle East. In China, Baleno through its price and widespread distribution strategies has earned a reputable market. (Bruce, Moore & Birtwistle, 2004, p. 216) Competition from New Entrants The fashion market of Hong Kong in China is gradually becoming the target center for many international brands that are entering the Chinese territory to gain newer markets. Brands like Prada, Tommy Hilfiger, Guess and many others are fighting for space in China. Some other brands like Esprit are endeavoring to expand their base through franchisee operations. Thus, Louis Vuitton is facing a tough time in China competing with the potential entrants (Bruce, Moore & Birtwistle, 2004, p. 216). Future Performance of Louis Vuitton The French luxury goods and fashion company Louis Vuitton is expecting a promising future owing to the increment in its sales and profit parameters. Estimates made by the company reflect that the total worldwide sales of the company have grown by 16 percent in the 2010 period compared to the revenue incurred during the 2009 period. Louis Vuitton feels that in the coming future the Asian markets would prove to be a very promising region for marketing of luxury commodities like toilet products including cosmetics and perfumes and other leather goods. The company views that the different foreign brands are gradually gaining potential recognition in the Asian markets. A global outlook conducted foresees that in western markets like those pertaining to the regions of Europe and United States the demand for luxury commodities which became stagnated previously would start growing which is thereby a positive signal for the brands to flourish in such areas. Louis Vuitton speaks in a confident fashion for future performance in the global luxury market. The management team at Louis Vuitton expects that through systematic programs aimed at targeting key geographic areas with spontaneous innovation would help the company to reach far-reaching heights. Moreover, the company is looking at promoting effective cost control measures to help in the growth of profit margins. (Bird, 2010). With an annual average growth rate of 4.03 percent the revenue incurred by Louis Vuitton would increase from 20 billion in 2010 to around 22 billion during 2011. (LVMH Moet Hennessy Louis Vuitton SA, 2011). The increasing market for the brands in both the Asian and Western markets further suggest that the forecasted figure of annual revenue of Louis Vuitton would turn around to 30 billion for the 2013 period and 32 billion Euros during 2014.. In the graph Y1 signifies the 2011 period, Y2 to 2012, Y3 to 2013 and Y4 to 2014. The average annual growth rate for the 2012 period is taken as 4.08 percent. For the period 2013 the average annual growth rate is forecasted to be around 5 percent while for the 2014 period it is expected that the growth rate would reach to 5.07 percent due to the continual growth in market demand for luxury products. Conclusion Louis Vuitton the French luxury goods manufacturer has not only restricted its operations in the European market. Rather it has spread its wings to encompass the huge potential of the Asian markets. Together with its strategy of continuous innovation and wide scale distribution it is gradually moving to take further strides in Asian markets like China. However, many obstacles like growth of a counterfeit market and fall in the revenue margins counter its huge potential of product innovation and market penetration. Louis Vuitton aims to penetrate the foreign markets through strategic techniques like reduced price points and maintaining strong tie-ups with the local retailers. Louis Vuitton through the opening up of local manufacturing centers and use of regional knowhow happens to reduce the price of raw materials and other resources. This helps them charge less on the products. The Chinese market for luxury goods is also growing for the increased dominance of the middle level consumers. Thus, more number of foreign brands like Gucci, Prada, Tommy Hilfiger and others are coming to build stores in the region posing competition to Louis Vuitton. Local brands of China are also eyeing up to internationalize their operations. Thus, Louis Vuitton in order to sustain its strong brand position must continue building up its strong brand identity of innovative designs marketed at low prices and augmenting its revenue margins. References 1. “The substance of style”, (2009). economist.com. Retrieved on December 29, 2010 from: http://www.economist.com/node/14447276?story_id=14447276 2. Gleeson, E. (2007). How China fell in love with Louis Vuitton. Retrieved on December 29, 2010 from: http://www.moneyweek.com/investment-advice/how-china-fell-in-love-with-louis-vuitton.aspx 3. Ramachandran, J. & S. Patvardhan. (2008). International by Design. IIMB Management Review. Vol. 38, no. 9 pp. 38-46.   4. Harish, R. (2008). The Concept and Origin of Brand Architecture: A Comprehensive Literature Survey. ICFAI Journal of Brand Management. Volume 51, no. 12. pp. 51-62. 5. Wang, C. & X. Lin. (2009). 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Retrieved on January 7, 2011 from: http://www.cosmeticsdesign.com/Financial/LVMH-performance-up-on-strong-brands-and-market-recovery 20. ‘LVMH Moet Hennessy Louis Vuitton SA’,markets.ft.com. (2011). Retrieved on January 7, 2011 from: http://markets.ft.com/tearsheets/analysis.asp?s=LVMH Appendices (A) TOWS Matrix Model ‘External Opportunities’ ‘External Threats’ ‘Internal Strengths’ ‘Internal Strengths’ and ‘External Opportunities’ ‘Internal Strengths’ and ‘External Threats’ ‘Internal Weakness’ ‘Internal Weakness’ and ‘External Opportunities’ ‘Internal Weakness’ and ‘External Threats’ (B) PESTLE Analysis Model Political (C) SWOT Analysis Model Helpful to Business in Achieving Objectives Internal Factors Strengths Internal Factors Weakness Harmful to Business in Achieving Objectives External Factors Opportunities External Factors Threats (D) Porter’s Five Forces Model Read More