LVMH – Strategy and future: Diversification
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1.0 Executive Summary
The aim of this paper is to discuss the key strategic issues that LVMH face and establish some future recommendations that can be implemented in order for LVMH to remain successful in the luxury industry. In order to determine the key strategic issues a number of analysis tools were applied to the case study; they include Porter’s 5 forces model, SWOT analysis and PESTEL. It was found that the key strategic issues that LVMH face centred on diversification and vertical integration. A number of strategies have been proposed to offer some recommendations to LVMH, they namely in restructuring their retail sector, considering the concept of moderate diversification and focusing on the human resources side of acquisitions and mergers.
This report is based on the analysis of a case study 27 titled: LVMH’s Diversification Strategy into Luxury Goods. The scope of this report is limited to the data contained in the case and additional supporting evidence that was sourced. In order to analyse this case LVMH’s history and financial data has been discussed in terms of its internal environment, its resources and competitive position.
2.1 Background to Organization
LVMH is an international group of companies that produces and sells luxury goods. It is associated with a number of product lines such as wines, cosmetics, fragrances, fashion, watches, jewellery and retail and with the most prestigious brands in those sectors. Since it conception in 1987, when Louis Vuitton merged with Moet & Chandon champagne and Hennessy cognac, LVMH was conceived to be a star group. It’s business strategy was based on acquiring brands based on the premise that the reputation of such brands “would lead to a long-term corporate advantage” (Thompson, Strickland & Gamble 2005, p. C509). The rapid portfolio diversification took off when Bernard Arnault became president of LVMH in 1989. He expanded the company and acquired a number of specialty retail department stores in Paris.
3.1 Porters 5 Forces (Model of Competition) Given the range of luxury sectors that LVMH has diversified into, the analysis is centred on the LUXURY industry where the game is played by few groups. The appendices illustrate the following: Appendix: 1 Porter’s 5 forces diagram Appendix: 2 LVMH’s sectors and subsequent brands Appendix: 3 Top 10 Competitors Appendix: 4 Industry Map Industry & Competitors The luxury industry operates in a high competitive environment. The need to maintain desirability and uniqueness of each product/brand puts pressure on cost savings and product life cycles, creating a volatile environment where only companies with strong brands, financial resources and the ability to integrate their activities can survive. Advertising, communication and R&D expenses are very high. This is evidenced by LVMH’s expenditure on this to be approximately 11% of sales in 2002 (Antoni 2003).
Training manufacturing employees is another costly element in an industry where the quality is measured by the final consumer in terms of perfection. This last element calls for constant improvement in; however at the same time requires the maintenance of the old manufacturing processes. Key managers that can run each business independently but with a group vision are also part of the equation. Additionally the luxury industry is strongly dependent on tourism which is influenced by economy trends. The 9-11 events and the global economy slowdown have had a great impact on the industry. Finally huge investments were done to win strategic position, having an important impact on revenues. Appendix 5 is an example of the proportion of cost and impact on revenues and the stock performance.
New entrants The risk coming from new entrants is low, except perhaps, for the development of niche brands that can slowly earn a position. The strong financial resources and the “story” of the brand that is needed to succeed are two elements that create a barrier. Bernard Arnault explained that a brand needs a heritage; you can not cross cut and succeed (Thompson, Strickland & Gamble 2005 and Antoni 2003). Furthermore financial resources are very expensive since lenders perceive that the expected margins are difficult to get; thus it is hard for smaller companies to access financial markets (Colonna 2003).
The “entrepreneur / designer” will need to look for a “godfather”the support from one of the big groups. As Muriel Zingraff, Harrods’ director, observed, “We may have more patience with smaller brands if they are owned by a parent company, such as LVMH or the Gucci Group.”(Sherwood 2001, p. 6) Additionally the luxury industry is characterized for the need of becoming global from the very beginning. Brands can not survive relying on domestic markets. A worldwide distribution network is fundamental. The industry has its centre in 3 cities: Paris, Milan and New York, where any luxury business needs to be, making it difficult for start ups to develop their businesses in other parts of the world.
Suppliers The power of suppliers could be considered medium. The industry is 100% dependable on a supplier that can assure a supreme quality. However the supplier has limited choices since the market is controlled by few operators.
Buyers Considering the buyer as the final consumer; where the decision to buy is nurtured by the fantasy and desire of style; buyers would only buy if all their expectations are fulfilled. In this context it is considered to be a medium competitive pressure since buyers can easily switch brands. However brand awareness and uniqueness can prevent the easy switching.
In the case of retailers as buyers; the competitive strength is considered medium. Shelf space is a key element for luxury companies. Indeed in the 20th century the expansion of the retail industry to specialty stores, chain stores and retail centres has changed the business. Discounts, cooperative advertising, volumes and exclusivity are some of the elements that put pressure on the industry (Frings 2005).
Moreover there is a possible integration strategy affecting the retailers’ power.
Substitutes Considering the industry as a whole; the analysis should take in account the customers’ cost for each product. With a big range of prices (a perfume costing $100 to a jewel costing up to $ 100.000 or more), the substitutes would also be different for each category of goods e.g.: trips; furniture, cars, real estate. In addition there is the surge of ‘best cost providers’ i.e. brands with a very high quality but with inferior costs, such as Zara, affecting the business when the global economy puts pressures on society.
The above analysis describes an industry with a medium to high competitive pressure. The industry is attractive in terms of profits for players that are already in the field. Well managed companies with sound strategies can earn profits. The strength of a big company plus the flexibility and focus of a small business would be the rule. The ability to vertically/horizontally integrate and find synergies between the different sectors and the ability to maintain the energy and identity of each brand are two fundamental attributes of the future of the fantasy industry.
3.2 PESTEL (External Analysis) Appendix 6 further illustrates how the PESTEL has been applied to the case study.
The outside forces that have been deemed to effect luxury goods industry the most are: Consumers’ perception of luxury goods War and terrorism related to consumer perception.
Global warming and all the hype surrounding this topic.
Use of the internet and amount of people with access to the internet is an issue that luxury goods companies can exploit how ever companies also have to be careful with internet fraud and other legal issues.
The luxury goods industry is affected by global factors to a different extent than other industries. It is clear that the industry is driven mainly by perception. People are willing to pay premium for luxury goods because of the perception of exclusivity. As a result the threat is losing the image of a luxury product. When customers stop perceiving the goods to be unique, the goods may loose its position. One potential way of this happening is if ‘copy’ luxury goods become of high quality and not distinguishable from the original.
3.3 SWOT In balancing the strengths and weaknesses against the opportunities and strengths it can be said that LVMH is in an overall strong position. However this is not to dismiss that it attractive strengths have yet to be developed into competencies. Major competitors also have these strengths that with time and the right management team are easy to copy. The company’s must learn how to successfully run selective retailing and learn from the events of Sept 11 It must addressed the impacts such as a down turn in the economy leading to a reduction of revenues and shareholder value. Several opportunities present further growth and development for LVMH as long as it is able to respond to changes in consumer preferences influenced by societal changes, e.g fads and climax. Overall, LVMH has a strong brand name that represents a powerful strategic asset with competitive advantage. Appendix 7 further analyses LVMH’s strengths, weaknesses, opportunities and threats.
4.0 Key Findings of Analysis/Problem Identification/ Key Strategic Concerns The concerns that will be discussed within the scope of this paper include the following concepts: *Vertical Integration *Diversification *Acquisitions and Mergers 4.1 Vertical Integration The Vertical integration strategy has had limited success for LVMH. One of its advantages is that LVMH believes it has achieved protecting product quality and building barriers to entry. This is true by having its own retail chains as it is able to control the quality of the product sold, the quality of the customer service and also the aesthetics of the stores. However many authors have asked if this is really a necessity. Could the same amount of control be able to be obtained using contracts, agreements and alliances? (Thompson, Strickland & Gamble 2005). The answer is ‘yes’.
There is no reason why with effective controls, LVMH would not be able to achieve the same quality customer service. Another positive thing that being vertically integrated allows is the fact that it allows to make strategic changes to the processes with less bureaucracy, negotiation and contradiction. Perhaps the most important advantage that LVMH would expect to see is cost savings. However there is a concern that vertical integration actually increases costs because of inefficiencies (Thompson, Strickland & Gamble 2005). This can be seen in LVMH’s retail sector as both DFS and Sephora have made $100 million euro loss in 2001.
4.2 Diversification LVMH was in 2001 clearly executing a strategy that called for a diversified portfolio of luxury brands and the expansion into multiple regions. In this context the company described a semi-related diversification strategy, building the business around businesses whose value chains posses some competitively value strategic fits (Thompson, Strickland & Gamble 2005).
LVMH mostly grew through mergers & acquisitions. Appendix 12 illustrates a timeline of its mergers and acquisitions. It has been an option considered to be part of LVMH’s growth strategy however it also a strategy that is used commonly when a company fails to get access to important resources and capabilities. Usually the companies hope to benefit from the mergers & acquisitions through the synergy which enhances cost efficiencies.
However not all mergers are successful as literature indicates that failure rates are as high as fifty to seventy percent Stahl (2004, p.3). Failure is not solely about financial failure but is also about successfully bringing together two companies’ philosophies, styles, values and missions (Nguyen & Kleiner (2003, p.450). Stahl 2004, explained that more importance is often placed on financial and strategic aspects rather than in the human resources side. Swystun, 2001 noted that failure to focus on behaviour can sink a merger or acquisition. One fundamental problem with mergers is that management may neglect the core business while coping with the mergers.
Daimler Benz CEO Schrempp, Jürgen (2003) said that merging a luxury auto maker with a mass-market brand is seen as an unnatural combination that offers limited benefits and requires twice the expertise and effort to manage. As LVMH boasted itself to be leader in the luxury industry with strong brand image merging or acquiring weak brands would affect the company’s brand image. LVMH valued long-term performance and was willing to cultivate investments into new product brands providing brand support before expecting tangible profits.
Although this improved its market share, it did not match the aspirations of the investing public. Many of the brand acquisitions and line extensions had come at a high price, and most of these businesses were yet to generate substantial profits. Much of the group’s profitability was still riding on the established business lines; namely, wines and spirits, and leather goods. Analysts were therefore questioning the value of building a portfolio of global brands with diverse product markets from wines and spirits, to leather goods, perfumes, art, and retailing. LVMH was convinced that the collection of global brands was the stepping-stone for realizing synergies that would add to the bottom line.
In almost all its acquisitions, LVMH had maintained the creative talent as an independent pool without attempting to generate synergies across product lines or brands. However it did create these synergies at a finance, administrative, R& D and service level. Mr. Arnault believed that, “If you think and act like a typical manager around creative people with rules, policies, data on customer preferences… you will quickly kill their talent.”(Arnault & Wetlaufer 2001 p.6). Thus, the company was decentralized by design and had few managers.
The study of each of LVMH’s assets reveals the existence of a diversification strategy into related or semi-related businesses, with a correct fit in some areas of the supply chain. A Nine Cell Industry Attractiveness-Competitive Matrix which considers the attractiveness of the industry and the competitive strength of each if LVMH’s brands/sectors, demonstrates: *That LVMH has most of its business in good shape.
*That the jewellery, the auction and the retailing business need to be fully analysed for a clear understanding of the benefit and fit of these businesses.
LVMH diversification strategy is evaluated in detail in appendices 8,9,10 and 11.
5.0 Possible solutions & Strategies.
The possible solutions for the integration problems include: Firstly LVMH could sell its retail sector. Cut their losses and run. The advantage of this is that they will stop making losses and be able just concentrate on their profitable businesses. Vertical integration theory would suggest that LVMH should gain efficiencies as they would be forced to deal with other organizations and negotiate to sell their product and therefore forcing LVMH to be more efficient (Thompson, Strickland & Gamble 2005). The disadvantage is that it may not be the right moment to sell the retail sector. The events of September 11 have definitely affected the retail market. Given the limited information we have in the case study a major risk of selling the retail sector is that LVMH could be selling it at a low price. Indeed the losses LVMH are making could be considered more as a result of the market than vertical integration.
A second solution could be to that LVMH run its retail business as a separate agency. It could consider a possible restructure to make the retail sector even more independent from the rest of LVMH’s businesses. The advantage of this is that running the retail sector as an independent entity could improve efficiency both on the retail and production side. Also given that the market conditions are not great at the moment, when they improve, LVMH would be in a position to reap the rewards. The risk for following this strategy is that LVMH will still be making losses. Therefore they would be delaying the inevitable (selling retail sector) and making losses for another few years.
The problems that LVMH faces with merges and acquisitions could be overcome by: communicating the strategic intent; ensuring that it is maintained; and enhancement relationships with three key constituencies: employees, customers, and the investment community.. LVMH needs to adopt a strategy that incorporates sound leadership practices to facilitate the integration process to ensure it brings together the various companies structure, vision and mission.
The future of LVMH depends on the options it takes in terms of diversification and in terms of the correct decision regarding expanding (contracting) further and the allocation of resources. The result could be a mix of the following strategies (Thompson, Strickland & Gamble 2005): 1.Broaden the Diversification Base. Acquire more businesses (related / un-related).
2.Divest some Businesses. Sell the weak and focus the resources in a small selection.
3.Restructure the Company’s Portfolio. Sell the weak, finance new acquisitions.
4.Multinational diversification. Entering other markets.
The vulnerability and elasticity of the luxury industry in terms of potential negative impact due to economic instability and social concern, is a high risk that LVMH has to address perhaps by considering other businesses. Restructuring their portfolio; taking into consideration the performance of particular brands in each sector; plus the decision of divesting in an entire sector (jewellery, auction or retailing) should also be part of the future strategy.
In adopting a related diversification strategy LVMH must acknowledge that any downturn in consumer spending will hit the luxury goods industry hard. If the economy faces a recession, consumer spending decreases and often the non-essential items are compromised. Performance may have more to do with the health of the global economy. This is further evidenced by the events of 9/11 and the slowed sales growth in late 2001 and early 2002. LVMH’s weak financial performance in 2002 is perhaps indicative of a sign of weakness in their strategy or a weakness of big group (see appendix 5. Stock performance).
The only evidence of an unrelated diversification strategy was when LVMH purchased 3 of Frances’s leading financial and business publications as well as media production, magazines and radio.
Entering new markets or strengthening presences in promising ones such in Asia were the GDP is growing and more people are ready to spend, is another ingredient of the strategy that LVMH should follow in the future.
7.0 Conclusion LVMH is a company that has enjoyed a strong brand name growth by its numerous mergers and acquisitions. It has battled the negative effects of a downturn in the economy. Its strategy has been largely based on a semi-related diversification strategy within the same luxury industry. However it must also be considered that the related diversification strategy is not a track that should be applied at every stage of the company’s life (Harper, Neil & Patrick 2002). In order to reduce the risk of underperformance of the luxury industry in times of changing societal tastes, new fads and a downturn in economic spending it must consider an appropriate balance in it diversification strategy.”[managers] must direct a process of continuous balancing between tightening a company’s focus and branching out through business building, acquisitions, and other forms of related diversification” (Harper & Viguerie 2002, p.30).
8.0 Appendices Appendix 1: Porters 5 Forces Appendix 2: LVMH Sectors and Brands (Simplified for the analysis of Luxury Sector) Media and Other Businesses excluded.
Source: Company reports. Thompson, Strickland and Gamble 2005. Antoni 2003 Appendix 3: Luxury Goods Group & Brands Top Ten Competitors GROUPSECTORBRANDS LVMH RICHEMONTWatches Jewellery Fashion Leather GoodsCartier Van Cleef & Arples Vacheron Jaeger-LeCountre IWC Alfred DunhillConstantin Mont Blanc Montegrapa Old England Shangai Tang LancelPiaget Baumet et Mercier A.Lange & Sohne Officne Panerai Chloé SWATCHWatches JewelleryBreguet Blancpain Glasshutte Original Jacquet-Droz Omega SwatchCK Watches Certina Mido Halmilton Pierre Balmain EnduraLongines Rado Tissot Flik Flak GUCCIFashion Leather Goods Perfume/CosmeticGucci Yve Saint Laurent Alexander McQueenBottega Veneta Boucheron Roger & GalletStella McCartney Sergio Rossi Bedat & Co CHANELFashion Leather Goods Jewellery Perfume/CosmeticsChanel TIFFANYJewellery Watches HomeTiffany PRADAFashionPrada ChurcuJil SanderHelmut Lang HERMESFashion Leather Goods Perfume/Cosmetics Jewellery HomeHermers John Lobb Gautier Lica Camera BurberryFashionBurberry BulgariJewellery Watches AccessoriesBulgari Source: Company reports. Antoni 2003 Appendix 4: Industry Map*.
*Size of bubbles represents revenues for each company. Relation between sectors and brands.
Source: Company reports. Antoni 2003.
Appendix 5: Financial Performance Source: Thompson One Banker.
Stock Performance LVMH RALPH LAURENRICHEMONTHUGO BOSS Appendix 6: PESTLE Analysis FACTORCOMMENTS PoliticalWar / Terrorism -do people want to buy luxury good in times of uncertainty and sadness EconomicThe world economy – Income distribution The divide between richer and poorer widening Exchange rates.
SocialGlobal market but different cultures Perception – Peoples perception of luxury goods (ties in with political) – Brand Reputation TechnologicalCopies of the original luxury goods may be made to a high standard for much cheaper. May be hard to justify the premium paid for luxury goods.
Internet – Don’t want to fall behind the e-commerce world. A lot of opportunity but also opens up the market for other people ie. fake web sites, fraud.
EnvironmentalGoing green – is it a new fad? Can it replace luxury goods to some extent.
Global warming LegalCopyright – China etc Global economy – Different competition laws import / export laws in different countries.
Appendix 7: SWOT Analysis STRENGTHSWEAKNESS *Very Powerful and Prestigious Brand Image.
*Strong business portfolio *Growth through acquisition *Strong Distribution Capabilities *Strengthened Management Team *Combining activities and best practices between Business Units *Largest and most broadly spread company in the luxury goods sector *Many product lines *Portfolio Management Skills *Poor Performance in selective retailing *Poor performance in specific areas *ERP systems only partially deployed *Failure in Art auction industry *Poor operating performance *Expansion in emerging countries/geographic markets *New product / Brand Launches *Rationalization of brands to generate value *Inorganic expansion of brand portfolio *Counterfeit Goods *9/11 having overall negative impact *Time factor for non star brands *Changes in demographic factors *Downturn in economy *Rising labour costs *High interest rates in the US OPPORTUNITIESTHREATS Strengths LVMH’s prestige brand focus is the key foundation for its group’s strategy. It has built and acquired nearly 50 brands and has one of the strongest brand portfolios. The strategy of organic growth through star brands is illustrated in appendix 2.
One of LVMH’s major strength lies in its global distribution network which has over 1500 stores worldwide. This has nearly doubled since 1998.. LVMH is the largest company in the luxury goods sector. The success and reputation of LVMH reflects the work of their management team. A turnover in1989 of 2.5 billion to a turnover in 2001 of 12.2 billion, LVMH is also the most broadly spread across different categories of luxury segments.
Weakness The operating performance of LVMH is poor compared to the previous years. According to Thomson One Banker the net income for 2001 is -98.47% while for the previous year is 14.27%. In addition to this the net cash flow from operating activities has suffered from 45% in 2000 to a steep fall of -3.02% in 2001. The selective retailing division has witnessed a loss in their operating profit of 2 Million in 2000 to 194 Million in 2001. External factors such as September 11 attacks played a major part in its suffering.
Opportunities Moet Hennessy acquired a 40% stake in Millennium in 2002. This gave LVMH access to two new brands: Belvedere & Chopin where millennium has the distribution rights for Chopin brand. Both has created high-end vodka category in the US, this gave opportunity for Moet Hennessy to market them worldwide except in US.
Due to poor performance in 2001 LVMH started to divest its assets. The disposal of Pommery Champagne, Phillips, de Pury, & Luxembourg are to be noted. A further rationalization of the brand portfolio will prove to be beneficial for the share price performance.
The company has introduced new brands/products. A few examples are: Louis Vuitton bags created by Marc Jacobs and Takashi Murakami, new watch by Zenith, new perfumes by Michael Kors, Givenchy and Kenzo, new beauty care products by Dior. These are expected to add depth to a focused line of brands/ products the company plans to focus on, in the long term.
LVMH should increasingly emphasize on international expansion. They should focus on emerging markets such as Brazil, Russia, India and China. Opportunities for Sephora are welcomed both in Poland and Romania markets. With buoyant economic growth and increased disposable incomes, presence in ‘first mover’ advantage, LVMH could benefit immensely from these growing markets.
Threats The sales of any branded accessory are adversely affected by the proliferation of counterfeit goods and accessories. The Global Congress survey shows that 9% of world’s goods are a fake. Counterfeiting is more prevalent in fashion accessories such as watches, shoes, and hand bags and these goods are increasingly finding place in various retail shops. As imitation trade increases, the group stands to lose its brand equity. Furthermore it may also result in customer dissatisfaction, which will also be detrimental.
The company was impacted by the effects of the September 11 Terrorist attacks. This represents the largest risk to the sales forecast for LVMH (and luxury goods companies in general) as US and Europe account for majority of the sales. It takes time for a non-star brand to get well established and become a star. These brands in the portfolio are the future star brands; and will increase LVMH’s performance in the future.
Appendix 8: Evaluating industry Attractiveness and Competitive strength Adapted from Thompson, Strickland & Gamble 2005.
Appendix 9: A Nine Cell Industry Attractiveness-Competitive Matrix Adapted from Thompson, Strickland & Gamble 2005.
*High Priority for resource allocation.
*Medium Priority for resource allocation.
*Low Priority for resource allocation.
Appendix 10: Cross Business Strategic Fits Adapted from Thompson, Strickland & Gamble 2005.
*Opportunities to share market research, consumer behaviour.
*Collaboration to reduce expenses.
*Opportunities for cross activities.
*Opportunities for logistic savings.
*Collaboration to create a strong customer services in the stores.
Appendix 11: Evaluating the Strategy of a Diversified Company Source: Thompson, Strickland and Gamble 2005.
Wines and Spirits LVMH was the world leader. It held 40% of the cognac market and between 20%-25% of the overall champagne market. In the premium champagne segment, LVMH had a dominant share of 50% built around exclusive brands such as Möet Chandon and Veuve Clicquot. It acquired high-end wine producers. Given the rising prominence of the wine business, it was believed that these moves would allow the company to market a truly global selection of wines and Champagnes. The division contributed 20% of group sales and had an operating margin of approximately 30% in 2000. In 2001, the company witnessed a 4% decline in division sales due to the poor performance of cognac labels in Japan, the traditional stronghold market; and the world economy.
Fashion and Leather Goods LVMH had very-well-established brands in this segment, accounting for 30% of group sales in 2001. Much of the sales of this division were concentrated in the Asia-Pacific region, particularly Japan. The company had made important acquisitions in this area to fortify its presence and heritage. Much of the sales in this segment were directly attributable to the Louis Vuitton brand that specialized in leather goods.
The company was able to leverage synergies across its fashion brands. For example, its Kenzo production facility had been transformed into a logistics platform for men’s ready-to-wear products serving other brands such as Givenchy and Christian Lacroix. Given the historically lower profit margins in the ready-to-wear market, synergies resulting in cost savings could boost profitability. Since then the company engaged in significant brand expansion efforts to reach a wider audience.
Fragrances and Cosmetics The fragrances and cosmetics division, 8% of company sales in 2000, had a powerful collection of brands that “competed” with the leather and fashion goods for the public eye. Europe was the largest market for fragrances, due to the heritage of the brands. The acquisitions in the U.S. were an integral part of the drive to internationalize LVMH’s fragrance and cosmetics. This division was quite effective in leveraging R&D synergies across brands: while its R&D expenditure was in line with the industry, LVMH was able to generate twice the average growth rate. These R&D skills were the corner-stone to boost sales of the acquired companies.
The company had been integrating R&D, production, distribution, sourcing, and other back-office operations across brands. These moves were fairly beneficial. For example, integrating the purchasing function across brands had resulted in raw materials cost savings of 20% (Hurley & Telsey 2001). Analysts believed that the fragrances division was also positioned to harvest the benefits arising from the co-branding strategy under which many of the brands were linked directly to ready-to-wear apparel brandsan area where LVMH was a success.
Watches and Jewellery Watches and jewellery, contributed only 5% of sales in 2000 and an operating margin of roughly 10%. Unlike its group of brands in other divisions, many thought that the company did not have quite the same star power in watches and jewellery. Competitors such as Richemont, Hermés, and Bulgari seemed to have more recognizable brands and more glamorous products in this category. However, tangible synergies appeared as a distinct possibility because the division could centralize the manufacture of movements and also utilize Tag Heuer’s expertise in retail distribution across all brands. Moreover the joint venture with De Beers Jewellerylargest diamond produceris a promising business.
Selective Retailing This division managed LVMH investments in Sephora, DFS Galleria, and Miami Cruiseline Services. While this division contributed 28% of company sales in 2000, it had not made a profit in the previous three years. DFS Galleria was the world’s largest travel retailer. This business was a victim of the Asian financial crisis. LVMH had since instituted several management practices, including a strategy that would reduce DFS’s reliance on Asian airports, selective closing of underperforming stores and the creation of DFS Galleria stores in large metropolitan areas. Japanese travellers were its most important and loyal customers.
Miami Cruiseline Services (MCS) was acquired in January 2000. It offered retail services on board cruise ships and counted 76% of the world’s major cruise lines. Conceived as an extension of the DFS concept, Miami Cruiseline focused primarily (90%) on North American passengers, thus counterbalancing the reliance on Japanese tourists. It also managed duty-free operations at the Miami International Airport, the entrance to Latin America, a place where LVMH was underrepresented. In addition, LVMH had acquired La Samaritane, the prestigious Paris department store. The company had also entered the retailing end of the made-to-order tailoring business with the acquisition of Thomas Pink. LVMH had also taken a minority position in the 200-year-old U.K. fashion retailer, Asprey & Garrard, which had global aspirations of its own.
Auction Houses In 1999, LVMH spent between $60 and $100 million to acquire Philips, it subsequently acquired Geneva-based Gallery de Pury & Luxembourg and the Parisian auction house L’Etude Tajan. It had also recently engineered a merger with Bonham & Brooks, the top automotive auctioneer. The auction business at the upper levels had very poor margins given the competition between the heavyweights, Christie’s and Sotheby’s. The LVMH acquisitions were primarily in mid-market auctions and hence considered more economically viable. It was also rumoured that Mr. Arnault was taking a closer look at Sotheby’s.
He would then be able to package the auction line along with some of the other high-fashion brands to bring in new customers. “He could use the champagnes, rare wines, jewellery, and fashion, as well as the cachet of its parties and product launches, to lure new customers. In terms of synergy, it would all fit together nicely.”
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