LVMH Past and Current Corporate Diversification Strategy - Case Study Example

LVMH Past and Current Corporate Diversification Strategy Table of Contents 1. LVMH Past and Current Corporate Diversification Strategy 2 LMVH’s past and current diversification strategy2 The ‘star’ brands – and how they contribute to LVMH’s corporate advantage and strategy. 2 LVMH’s key business segments – and the business strategies that LVMH is using in each of these. 3 The common strategic approach used in managing LVMH’s portfolio of businesses and key business synergies 3 2. LVMH’s Portfolio of Businesses 3 Business Segment units 3 Industry Attractiveness 3 Competitiveness 4 3. Impact of Diversification Strategy on LVMH’s ‘Shareholder Value’ 5 The financial characteristics and relative performance of each of LVMH’s six major business segments. 5 Cash cow and cash hog 5 Which businesses should LMVH milk, invest in, divest? Why? 6 How does LMVH’s financial performance overall and by business segment in 1999-2001 compare to 2011 6 Has the diversification strategy increased or destroyed shareholder value? Should shareholders be pleased? 6 4. Recommendations to Improve ‘Shareholder Value’ 7 Segments/businesses that destroyed rather than created shareholder value for LVMH shareholders 7 How might recent/proposed acquisitions (Bulgari, Hermes, etc) …. impact LVMH’s competitive position and shareholder values? Why? 7 What are the ‘Lessons Learned’ from LVMH? 7 5. References 8 Your name Professor’s name Subject Date submitted CASE STUDY: DIVERSIFICATION STRATEGY OF LVMH 1. LVMH’s Past and Current Corporate Diversification Strategy LMVH’s past and current diversification strategy LVMH is a company whose strategy in diversification is to cater to the high end segment of the market. This means the products they sold are expensive that only the rich can afford. Owning any of the LVMH products indicates class, aristocracy, fashion, elite, quality, and luxurious taste, and fulfillment of a dream. LVMH creates a unique brand image during the life cycle of the product that could easily demand attention. The ‘star’ brands – and how they contribute to LVMH’s corporate advantage and strategy. Star brands, according to Arnault, LVMH’S chairman, “are products that speak to the ages’ but feel intensely modern,” these are the products that sell fast and profitably. Star brands are the fast sellers of the company and it does not come cheap because according to LVMH “mastering of star brands is very difficult and rare”. Star brands made Louie Vuittton one of the richest people in the world in 2005, and the brand responsible for $16.47 4 billion sales in 2005. Star brands of LVMH are Dom Perignon, Christian Dior, Donna Karan and Louis Vuitton. A star brand, in the experience of LVMH, takes time to grow. For example, they acquire a product of a company which they think has potential, nurture it until it gets some history. Sometimes, a product takes 10 to 15 years before becoming to be a star brand. (Wetlaufer, Suzy, October 2001) LVMH’s key business segments – and the business strategies that LVMH is using in each of these Business segment Business strategies Wines and spirits Considered a leader in cognac and champagne. Known for luxurious taste. Positioned its products in the high end segment of the industry. Fashion and leather goods Created attention and demand thru a combination of singers, actresses and super models in a media blitz. It also created demand by making a limited edition of every product, and creating a season for its distinctive designs. Perfumes and cosmetics Company is a major player. They represent international brands known for elegance and have international presence. Its make-up-forever brand is favorite of professional make up artists. Watches and jewelry Holds a portfolio of luxury brand with complementary high position in the market. Their brands hold high stature i.e. Tag Huer. Selective retailing Selective Retailing service is offered in Europe, North America, Asia, and the Middle East; it is designed for international travelers, the business of DFS, AND Miami Cruiseline, and selective retailing in the beauty segment of a unique department store in Paris.. Other activities Miscellaneous business ventures Source: Investor Relations, LVMH Financial Report The common strategic approach used in managing LVMH’s portfolio of businesses and key business synergies. The most common strategic approach of LVMH in its strategy is creativity. Strategy starts with radical innovation that seems impossible from the start. Placing it on the high end segment of the market is a radical approach for its product, and then pricing it exorbitantly; making owning its product is like a dream. Its key business synergy is making its products indispensable to the world’s most selective consumers. 3. LVMH’s Portfolio of Businesses Business Segment units The company has 6 BSU or business segment units. Typical factors that defines BSU strength are market share, distribution channel access, financial resources, etc. For this report competitive financial ratios to define industry attractiveness and SBU strength are used. Industry attractiveness For Industry attractiveness 9 cell strength matrix is used. BUSINESS UNIT SALES 2011 IN MILLIONS EURO STRENGTH BSU 1 Wines and Spirits 3524 (medium) BSU 2–Fashion and Leather Goods 8712 (high) BSU 3 Perfumes and Cosmetics 3195 (medium) BSU 4 Watches and Jewelry 1949 (medium) BSU 5 Selective Retailing 6436 (HIGH) BSU 6 Other Activities (157) (LOW) LVMH / McKinsey matrix BUSINESS STRENGTH UNIT High medium low HIGH BSU 2 BSU 5 Bsu 1 Bsu 4 MEDIUM Bsu 3 LOW Bsu 6 Competitive strength As to competitive strength, note that LVMH sales are higher than the industry, and net income on 5 years vs. year average is larger than the industry, it has a net profit margin larger than the industry. Although it has a debt ratio higher than the industry, its current ratio is only equal, meaning it has the same ability to pay maturing debts. Return on assets, equity, and capital promises a high ratio than the industry, LVMH is a more attractive investment. Growth ratios LVMH INDUSTRY SALES (YEAR VS. YEAR) 16.4 13 Income (year vs. year) 1.1 8.3 Net income (5 years avg.) 10.28 6.69 Profit margin Gross margin 65.8 56.51 Net Profit margin 14.62 12.34 FINANCIAL CONDITION Debt/equity ratio 0.32 0.5 Current ratio 1.4 1.4 Quick ratio 0.6 0.8 Investment returns Return on Equity 15.46 14.12 Return on Assets 8.2 8.1 Return on Capital 10.6 11.3 Source: Financial Ratios. MSN Money.com All of the SBUS except SBU 6 are business fits. SBU 6 is not a business fit nor right or suitable in the particular business situation because of low sales prevailing in 3 years. 4. Impact of Diversification Strategy on LVMH’s ‘Shareholder Value’ The financial characteristics and relative performance of each of LVMH’s six major business segments. Table 1. Comparative financial performance of SBUs Revenue by business group In eur millions 2011 2010 2009 Wines and spirits 3524 3261 2740 Fashion & Leather Goods 8,712 7,581 6,302 Perfumes and Cosmetics 3,195 3,076 2,741 Watches and Jewelry 1,949 985 764 Selective Retailing 6,436 5,378 4,533 Other activities and eliminations (157) 39 (27) Total 23,659 20,320 17,053 Source: LVMH investor relations Table above is a comparative financial report of revenues by business groups from 2009 to 2011. Fashion and leather goods section have been a consistent leader in earnings for three years. Cash cow and cash hogs Fashion and leather goods are the cash cow of the company. A cash cow represents a division in the company that provides the largest income in the group. It is a product that once acquired and paid off, produces consistent cash flow during its life span. The lowest sector in the group is those Other activities and elimination which produced a low margin and negative contributions to the company for the past 3 years. It could be considered as a cash hog as it has low market share and has no potential to bring in much cash. Cash hogs are businesses which LVMH should divest because it requires significant cash injection to maintain position. Selective retailing is a promising sector as it shows growth potential. Which businesses should LMVH milk, invest in, divest? Why? Company should sell off or divest in SBU 6, Other activities because of low sales performance for the past three years. A thorough study should be done investigating the market growth. Company should continue to invest in other SBUs that are considered their milking cow. These are wines and spirits, fashion and leather, perfumes and cosmetics, watches and jewelry, and selective retailing. How does LMVH’s financial performance overall and by business segment in 1999-2001 compare to 2011? Table l. Financial Performance LVMH revenues Year Net income (in millions) EUR 1996 4,748 1997 7,323 1998 6,936 1999 8,547 2000 11,851 2009 17,053 2010 20,320 2011 23,659 Source: LVMH Annual Report As shown in Table l, the company showed a steady growth in revenues. The stream of revenues showed it is not affected by economic crisis. Has the diversification strategy increased or destroyed shareholder value? Should shareholders be pleased? The company has 6 BSU or business segment units. Typical factors that defines SBU strength are market share, distribution channel access, financial resources, etc. For this report competitive financial ratios to define industry attractiveness and SBU strength are used. Growth ratios 10 YR SUMMARY LVMH INDUSTRY SALES (YEAR VS. YEAR) 16.4 13 Income (year vs. year) 1.1 8.3 Net income (5 years avg.) 10.28 6.69 Profit margin Gross margin 65.8 56.51 Net Profit margin 14.62 12.34 FINANCIAL CONDITION Debt/equity ratio 0.32 0.5 Current ratio 1.4 1.4 Quick ratio 0.6 0.8 Investment returns Return on Equity 15.46 14.12 Return on Assets 8.2 8.1 Return on Capital 10.6 11.3 I think shareholders are pleased with the diversification strategy because the company has provided them regular dividends. It has increased the value of the company. 5. Recommendations to Improve ‘Shareholder Value’ Segments/businesses that destroyed rather than created shareholder value for LVMH shareholders Business segment 6 or other activities reduced shareholders value because of its low growth performance, and inappropriateness or business fit. The shape of the products in this segment is not rightly proportioned in the umbrella of LVMH. This section has a net contribution margin that pulls down overall profitability, How might recent/proposed acquisitions (Bulgari, Hermes, etc) …. impact LVMH’s competitive position and shareholder values? Why? Watches and jewelry is the lowest performing group in LVMHs group of business sector. However its growth is promising since it exhibited rising sales from 2009 to 2011. LVMH considered its alliance with Bulgari in 2011 vital for growth because Bulgari label is known for authentic craftsmanship and quality. LVMH benefits from the new synergies of acquisition; it has strengthened its capabilities, increased its market share, and ability to finance growth projects. What are the ‘Lessons Learned’ from LVMH? Lessons learned from LVMH are the importance of positioning, diversification, segmentation, and becoming market leaders. Positioning creates a niche in the market so much so that loyalty in the brand is developed among customers. Diversification allowed the company to invest in several investments ranging from the conservative commodities to the riskier ones. In due time, it reduces risks and in the end, captures market gains. A market leader, enjoys : premium price; shorter sales cycle because of market awareness; longer product life cycle and customer loyalty, more publicity due to leadership status, easy access to decision makers of target customers, get to be included in customers’ future plans, more favorable distribution terms due to more channel demands, and easier recruitment of talented personnel (IPO Group) As a market leader, all of these factors are reaped by the company using business synergy and diversification strategies. References Chairman’s Message. 18 July, 2012. Investor’s Relation. Retrieved 19 July 2012 from http://www.lvmh.com/investor-relations/lvmh-at-a-glance/chairman-s-message Investor Relations. 18 July 2012. Key Figures. Retrieved 19 July 2012 from http://www.lvmh.com/investor-relations 2011 Annual Report Documentation. Investor Relations, LVMH. Retrieved 17 July, 2012 from http://www.lvmh.com/investor-relations IPO Group. Advantages of the Market Leadership. Retrived 19 July 2012 from http://www.ipo- group.com/Insights/Advantages_of_the_Market_Leade/advantages_of_the_market_leade.html Msn.money.com Financial Ratios, LVMH Retrieved 19 July 2012 from http://investing.money.msn.com/investments/key-ratios?symbol=FR%3AMC Wetlaufer, Suzy, October 2001 The Perfect Paradox of Star Brands.: An Interview with Bernard Arnault of LVMH. Harvard Business Review. The Magazine Read More