LVMH and Luxury Goods Marketing

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.

“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.

5. Is there any evidence or possibility to implement brand extension strategies by

way of adjusting pricing of specific LVMH lines by way of increase or decreases? If
so are what are the advantages and disadvantages for the LVMH brand?
“Brand extension or brand stretching is a marketing strategy in which a firm
marketing a product with a well-developed image uses the same brand name in a
different product category.” (Brand)

An evidence of brand extension by LVMH is creating the first Louis Vuitton ready
to wear line by American designer Marc Jacobs. There is no price decrease
because any stocks that remain at the end of the season will be destroyed. as
always, there are advantages and disadvantages pertaining to this strategy for
LVMH.

Advantages of this strategy are:

- Consumer knowledge: The association with the LV brand is already done and the
main task is just communicating the specific benefits of the new product.
- Consumer trust: LV brand represents a promise of quality, luxury etc to the
consumers thus the new line will benefit from this fame.
- Lower cost: Because the new product uses the name of LV, the advertisement
budget will be considerably low.
- It enhances the visibility of LV because the brand has appeared in a new field.

Disadvantage is:
- Because the extension is using the most important asset of the company that is
its brand name there is a risk that the new product may generate implications
that damage the image of the core/original brand

(END)

Works Cited

“Advantages and Disadvantages of Brand Extention” Managementsutdyguide.

Management Study Guide Inc., 2011. Web. 22 Mar 2011

“Brand Extension” Wikipedia. Wikimedia Foundation Inc., 2 Mar 2011. Web.

22 Mar 2011
“ Corporate Synergy” Wikipedia. Wikimedia Foundation Inc., 8 Mar 2011. Web.

22 Mar 2011

Forum for International Trade Training Inc. International Marketing.

5th Ed. Ottawa: FITT, 2009. Print

Forum for International Trade Training Inc. Global Business Environment.

5th Ed. Ottawa: FITT, 2009. Print

Knowel, James. Retail-Jeweller. Retail Jeweller, 14 Mar 2011. Web. 23 Mar 2011

“Luxury Good” Wikipedia. Wikimedia Foundation Inc., 2 Mar 2011. Web. 23 Mar
2011

“Synergy” Wikipedia. Wikimedia Foundation Inc., 8 Mar 2011. Web. 22 Mar 2011