LVMH :Is China still a new market?

IY1 - Introduction to Marketing

Pre-release Case Study

LVMH: Is China Still a New Market?

(Adapted from a Sage case study by Yang Liu & Peter Zámborský, 2018)

Introduction

The firm Moët Hennessy Louis Vuitton SE, typically known as LVMH, is a family-run and

prominent global luxury goods company. Operating globally, it is headquartered in

Paris, France. The LVMH group run 70 houses across six segments: Wines and Spirits;

Fashion and Leather Goods; Perfumes and Cosmetics; Watches and Jewellery; Selective

Retailing; and other activities. In addition to Louis Vuitton and Moët Hennessy, the firm

owns more than 70 brands, such as Bulgari, TAG Heuer, Christian Dior, Fendi, Kenzo,

Givenchy, Guerlain, Marc Jocobs, and Celine.

According to the LVMH2016 Financial Documents (LVHM, 2017), at the end of 2016,

LVMH was operating 1,061 stores in Europe (excluding France), 991 in Asia (excluding

Japan), 703 stores in the USA, 492 stores in France, 387 stores in Japan, and 314 stores

in other markets. LVMH earned revenue of over 37.6 billion Euro in 2016. Fashion and

Leather Goods is the group in which LVMH earns the most (see Table 1).

Fig 1. shows revenue by region while Fig 2. shows how revenue has changed over the

past 10 years in different regions. China had become a key growth market for luxury

goods by 2010, but slower economic growth and anti-corruption legislation to some

extent put a halt on revenue growth around 2015. Will China continue to rise and

become a key market for LVMH? Should LVMH adjust its strategy for this market? What

exactly should its strategy for China be, and how should this be integrated with the

LVMH overall global strategy?

Source: Data from LVMH Financial documents from 2007 to 2016 (translation of the

French financial documents) (LVMH, 2017); figure created by authors.

Role of China in the LVMH group

China is very important for LVMH. Bernard Arnault, Chairman and Chief Executive Officer

(CEO) of LVMH, believes that LVMH has a strong pioneer advantage in China. He said in

a 2007 interview, “It’s an advantage because we became the leaders of the market. In

cosmetics, for example, Dior is the most well-known and strongest cosmetic brand. And

as we invest strongly year after year, we will try to maintain this advantage.” He also

said “The fact that we were first gives us a strong position. It’s the same thing for

Vuitton. We are very, very far ahead of number two” (Socha, 2007, p. 5).

Furthermore, LVMH responded several times to sales declines in China. For example, in

2013, Jean-Jacques Guiony, the LVMH finance director, explained that demand slowdown

in China was due to waning economic growth, the rise of the Chinese currency (RMB)

against the Euro, and a new anti-corruption law, forbidding government officials to

accept expensive gifts (Daneshkhu, 2013).

LVMH reported a quarterly sales decline in 2015, especially for Louis Vuitton, largely due

to the China stock market collapse. According to Reuters (2015), Jean-Jacques Guiony

spoke at an investor conference regarding the third-quarter sales, and reported that

“The Chinese stock market collapse has taken its toll and we expect this to have an

impact only for a few months… We are seeing more Chinese tourists but they are

spending a little bit less, that is … the growth rate is not as high as it was in the first

half.”

China as a new emerging market

Despite the growth of luxury goods markets in recent years, luxury goods companies

faced new challenges from new directions. Namely, emerging markets and new

entrants.

Since 2010, China has had the second highest gross domestic product of any nation,

only behind the United States. Since 2012, China has been the largest luxury goods

market in the world (Bain & Company, 2013). Chinese consumers play a major role in

the growth of luxury spending worldwide. They account for the largest portion of global

purchases (31%), followed by Americans (24%) and Europeans (18%). Furthermore,

China in 2015 represented approximately one-third of the global market, and has

increased dramatically from only 1% in 2000 (D’Arpizio, Levato, Zito, & Montgolfier,

2015).

However, it is still a growing market for luxury companies, even though China opened its

door to international business in 1978. Surprisingly, LVMH has been doing business with

China for more than a century. Many companies operating in China still only have a

vague understanding of the market. This is especially true for luxury goods companies,

who rely on China’s huge waves of economic growth to compensate for this strategic

shortcoming. However, this strategy comes with a huge caveat, the effects of economic

recessions always hit luxury companies first. This effect is further emphasized in China –

in Chinese culture, the meaning of luxury holds a critically different overtone compared

to its original definition in Latin, or in English.

The word luxury translated into Chinese is she chi (奢侈), which is a derogatory term

holding the connotation of wasting money on extravagant (unusual, unnecessary, or

improper) things. Traditional cultural values conflict with the consumer purchasing

behaviours and motivations that those in the Western world are familiar with (Lu, 2008).

Nevertheless, Mr. Arnault has continued to be confident about the Chinese economy for

many years. In a 2007 interview, several hours before the Fendi (a LVMH brand) spring–

summer collection was displayed on the Great Wall of China, he said of China, “It’s still

technically a socialist country, but it operates with a free market economy that is many

times more liberal and efficient than a number of European countries……If the economy

continues at the same rate, 25 years from now China will be the greatest global

economic power, which means we will have a potential comparable to the United States

today.” He confirmed “If things continue at this rhythm, (China) will be the most

important country on the economic agenda for a business like ours.”

Throughout 2016 LVMH recorded revenue growth in China, focusing on two business

groups: Wines & Spirits; and Watches & Jewellery. (LVMH, 2017).

Strategy and Business Model of LVMH

Mr. Arnault describes the business strategy of LVMH: “Our business model is anchored in

a long-term vision that builds on the heritage of our Houses and stimulates creativity

and excellence. This model drives the success of our Group and ensures its promising

future.”

This unique operating model is anchored by six pillars (descriptions adapted from LVMH

annual reports and website):

 Decentralized organization. The group ensures that its Houses are both autonomous

and responsive. This allows LVMH to be close to its customers and facilitate rapid,

effective, and appropriate decisions. This approach also improves the motivation and

entrepreneurial spirit of employees, according to LVMH.

 Organic growth. The LVMH group prioritizes organic growth and commits significant

resources to develop its Houses. It also encourages creativity of its employees and

supports their career growth.

 Vertical integration. The group places an emphasis on vertical integration to foster

excellence both upstream and downstream. This allows control over every link in the

value chain, from sourcing and production to retail, according to LVMH.

 Creating synergies. Sharing of resources on a Group scale creates synergies while

respecting the individual identities and autonomy of the Houses, according to LVMH.

The combined strength of the LVMH Group is leveraged to benefit each of its Houses.

 Sustaining savoir-faire (the ability to act or speak appropriately in social situations).

LVMH and its Houses pursue a long-term vision rooted in history and craftmanship.

To preserve their distinctive identities and excellence, LVMH and its Houses have

developed initiatives to transmit savoir-faire and ensure that craftsmanship and

creative métiers are valued by younger generations.

 Balance across business segments and a geographic distribution: LVMH has the

resources to sustain regular growth thanks to the balance across its business

activities and a well-distributed geographic footprint. They believe that this balance

positioned them well to withstand the impact of shifting economic factors.

Challenges of Growing in China

Compared to mature markets, where the environment is more stable, luxury companies

are operating in volatile environments when in emerging markets, such as in China. In

2015, Bain & Company reported closures of 58 luxury retail stores in China (Prada, Louis

Vuitton, Hugo Boss, Chanel, Giorgio Armani, Hermes, Versace, Tiffany, and others).

Simultaneously, 78 new stores were opened by the same brands in the same country

(Bain & Company, 2016).

Chinese customers, as new entrants to the global luxury goods market, are different

from mature Western customers. The Chinese customers are young and eager for luxury

brands. However, Chinese customers exhibit several purchasing behaviours distinctive

from their Western counterparts who largely grew up in a mature luxury goods market.

A key difference is saving to purchase a luxury good. Some young customers will save

money for several months (Chadha & Husband, 2007; Yu, 2014). In terms of income

level, tariffs, quotas, and price distortion, luxury goods are comparatively expensive for

Chinese consumers. Luxury fever (a phenomenon that people act as though they have

an illness preventing them from pursuing luxury goods) emerges in this environment.

Moreover, Chinese consumers purchase more low-priced luxury goods. Bain & Company

(2016) reported that in 2015, the accessories consumption accounts for most of the

personal luxury goods expenditure, which is 30% of the global market, followed by

apparel (24% of the global market), then hard luxury (22% of the global market). On

the other hand, Chinese consumers spend the most on cosmetics, perfume, and personal

care categories (more than 30%), followed by watches (around 20%), then suitcases

and handbags (around 13%). Comparatively, the accessories consumption is the lowest

at around 7%.

All in all, the purchasing power of the Chinese population is strong. China’s fast-growing

economic development will support market expansion. This is especially true for the

luxury companies since the Chinese are still new to this market and they display a huge

passion for luxury goods. However, neither research institutions nor luxury companies

show a deep enough understanding of Chinese luxury consumers, who are different from

Western customers in many respects. It is also important to understand that the

differences between marketing luxury products in China and selling non-luxury fast

moving consumer goods are often subtle. The availability of affordable luxury branded

accessories has reduced the distance between luxury and mass market offerings. For

example, BCG (2012) found that a typical price difference between a luxury product and

a mass market product for categories such as fragrances and makeup could be quite

small.

Conclusion

Foreign multinationals in China need to be sensitive to the distinct characteristics of this

market. Without doing this they cannot hope to be successful in this potentially lucrative

growth market.