Case 11-1

LVMH and luxury Goods Marketing

Do you know anyone who spends $1.700 on a suit plus $600 for a matching
handbag? When it comes to champagne and perfume, do your friends spend $100
or more for a single bottle? Welcome to the rarefied world of luxury goods
marketing. In this world, affluent consumers eagerly seek out luxury brands such as
Armani, Christian Dior, Gucci, Louis Vuitton, Prada and Versace. They are willing and
able to pay high prices for top-quality merchandise from fashion houses whose
names are synonymous with status, good taste, and prestige. In France, haute
couture traditionally meant that one outfit was meticulously crafted for members of
the aristocracy, old money socialites, or celebrities. Today, however, the concept
and meaning of haute couture are being transformed.
Although the couture image of the supermodel strutting dawn the catwalk is
still a mainstay of the fashion world, some of the worlds best-known fashion houses
are redefining the nation of luxury by catering to the needs of a more diverse,
nouveau riche clientele. Whereas in years past, fashion houses produced only
clothing, today numerous licensing deals are generating more cash than the
clothing itself. Countless items bearing the names of venerable couture houses are
now available worldwide. Thanks to the stock market boom of the 1990s and rising
prosperity levels in developing nations, a new class of affluent consumers has
begun to develop a taste for luxury branded products, ranging from Gucci
sunglasses to Dior pantyhose. Apparel goods constitute less than 20 percent of total
sales volume by Hermes. As Lord Thurso, chief executive of a luxury health spa in
Great Britain, noted, The trick is not to sell real luxury to very rich people. Its to
sell a perception of luxury to aspiring people.
One fashion house that is changing with the times is LVMH Moet HennessyLouis Vuitton SA, the largest marketer of luxury products and brands in the world.
Chairman Bernard Arnault presides over a diverse empire of product brands, sales
of which totaled $16.5 bilion (15.3 billion) in 2006 (see figure 1). Arnault, whom
same refer to as the pope of high fashion, We are here to sell dreams. When you
see a couture show on TV around the world, you dream. When you enter a Dior
boutique and buy your lipstick, you buy something affordable, but it has the dream
in it. Sales of luggage and leather fashion goods, including the 100-year-old Louis
Vuitton brand, account for 30 percent of revenues. The companys specialty group
includes Duty Free Shoppers (DFS) and Sephora. DFS operates stores in
international airports around the world; Sephora, which LVMH acquired in 1997,
Icons Europes second-largest chain of perfume and cosmetics stores. Driven by
such well-known brands as Christian Dior, Givenchy, and Kenzo, perfumes and body
products generate nearly 20 percent of LVMHs revenue. LVMHs wine and spirits
unit includes such prestigious such Champagne brands as Dom Perignon, Moet &
Chandon, and Veuve Clicqout.

Despite the high expenses associated with operating elegant stores and
purchasing advertising space in upscale magazines, the premium retail prices that
luxury goods command translate into handsome profits. The Louis Vuitton brand
alone accounts for about 60 percent of LVMHs operating profit. Unscrupulous
operators have taken note of the high margins associated with Vuitton handbags,
gun cases, and luggage displaying the distinctive beige-on-brown latticework LV
monogram. Louis Vuitton SA spends $10 million annually battling counterfeiters in
Turkey, Thailand, China, Morocco, South Korea, and Italy. Some of the money is
spent on lobbyists who represent the companys interest in meeting with foreign
government officials. Yves Carcelle, chairman of Louis Vuitton SA, recently
explained, Almost every month, we get a government somewhere in the world to
destroy canvas, or finished products.
Another problem is a flourishing gray market. Givenchy and Christian Diors
Dune fragrance are just two of the luxury perfume brands that are sometimes
diverted from authorized channels for sale at mass-market retail outlets. LVMH and
other luxury goods marketers recently found a new way to combat gray market
imports into the United States. In March 1995, the U.S. Supreme Court let stand an
appeals court ruling prohibiting a discount drugstore chain from selling Givenchy
perfume without permission. Parfums Givenchy USA had claimed that its distinctive
packaging should be protected under U.S. copyright law. The ruling means that
Costco, Wal-Mart, and other discounters will no longer be able to sell some imported
fragrances without authorization.
Asiaparticularly Japanrepresents important markets for companies such
as LVMH. The financial turmoil that began in July 1997 and the subsequent currency
devaluations and weakening of the yen have translated into lower demand for
luxury goods. Because price perceptions are a critical component of luxury goods
appeal, LVMH executives are making a number of adjustments in response to
changing business conditions. For example, Patrick Choel, president of the perfume
and cosmetics division, has raised wholesale prices in individual Asian markets. The
goal is to discourage discount retailers from stocking up with designer products and
then selling them to down-market consumers. Also, expenditures on perfume and
cosmetics advertising have been reduced to maintain profitability in the face of a
possible sales decline. Louis Vuitton chairman Yves Carcelle is also making
adjustments. He canceled plans for a new store in Indonesia; group managers have
raised prices to counteract the effect of currency devaluations. Because the DFS
chain depends on Japanese tourists in Asia and Hawaii for 75 percent of sales, Louis
Vuitton managers also work with tour operators to predict the flow of Japanese
tourists. When tourism is at a peak, price increases from 10 percent to 22 percent
help maximize profits on merchandise sales.
Arnault was confident that the Asian crisis would not severely affect his
companys performance in the long term. As Arnault explained in the spring of
1998, One has to distinguish between Japan, where most of our business is, and

the rest of Asia. Japan is in a growth slump, but it isnt going to have the same
difficulties as Korea or Indonesia. And our business in Japan is doing very well,
Because the Louis Vuitton unit controls its own distribution, management has even
been able to take advantage of the crisis by renegotiating stores leases in key Asian
cities. In some instances, the company has secured longer lease terms plus
reductions in rates by as much as one-hird. Arnaults optimism was well founded;
with interest rates at record lows and a gloomy outlook for the stock market,
Japanese consumers had few other spending options. In 2001, executives actually
raised prices at Louis Vuittons 45 Japanese stores.
The United States is also a key market for LVMH. One particular marketing
program focused on increasing awareness of Hennessy cognac. Thanks to a revival
of cocktail culture in the United States, sales of hard spirits are up. To promote
awareness and consumption among a younger demographic, in the mid-1990s
Hennessy marketing managers recruited twenty something to got to upscale bars in
major metropolitan markets and order drinks such as the Hennessy martini and
Hennessy sidecar made with cognac. Although traditionalists consider the nation
of mixing cognac heresy, it was essential to broadening the brands appeal. If a
bartender didnt know how to create a particular drink, the Hennessy agent
helpfully explained the recipe while attracting the attention of other patrons.
Hennessy also picked up the tab when their secret agents would buy rounds of
cognac-based drinks for everyone at the bar. The promotion was designed to
increase awareness among young adults and to communicate that cognac can be
enjoyed by people other than old fogies. The effort paid off in some unexpected
ways: Urban hip-hop culture has embraced cognac, and cognac exports to the
United States tripled over the past decade. LVMHs Hennessey is the brand of choice
for many rap stars; the brand name has even popped up in more than 100 songs.
Such marketing tactics are a world away from the old days, when the
companies that today make up LVMH were family-run enterprise focused more on
prestige than on profit. They sold mainly to a small, very rich clientele. Even as he
broadens the companys consumer base, Arnoult has taken a number of steps to
raise the level of professionalism of LVMHs management team. In 1997, Arnault
implemented a corporate restructuring that groups the companys subsidiaries into
divisions. Previously, the heads of individual subsidiaries reported directly to
Arnoult; Now, division heads meet with him to discuss strategy. Notes Arnault, Its
much more efficient, because it allows us to put into practice all the synergies
between the different brands in a coordinated way.
Arnaults choice of American designers Marc Jacobs to create the first-ever
Louis Vuitton ready-to-wear line shows that times are changing. The line is priced
quite high, and to preserve its exclusivity, it is currently available only through Louis
Vuitton boutiques. There will be no markdowns on unsold merchandise. Any stocks
that remain at the end of the season will be destroyed. Jacobs first collection
included a plain white cotton poplin raincoat that prompted one observer to ask, Is

this luxury? Ironically, the signature LV is hard to spot on many pieces in the
collections, such as a white-on-white patent leather bag.
In the late 1990s, Arnault sensed that cosmetics buying habits were changing
in key markets. He opened Sephora stores in New York, Chicago, and San Fransisco
in conjunctions with a new Web Sites, Sephora.com. today, there are more than 70
Sephora stores in the United States; plans call for expanding into Japan and Latin
America as well. Customers who visit Sephora USA stores are encouraged to wonder
freely and sample products on an open floor without waiting for sales clerks to
assist them. However, high start-up and promotion costs have reduced the financial
contribution that Sephora makes to LVMH, and some analysts have asked when
Sephora will be profitable.
Profitability is also an issue with another of Arnaults acquisitions, Donna
Karan International Inc. in 2001, Arnault, paid more than $600 million for the
company and its trademarks. Arnault has tried without success to acquire Giorgio
Armani; Donna Karan is LVMHs first American designer label. As Arnault noted,
What appealed to us is the fact that it is one of the best-known brand names in the
world. After the deal was completed, however, company executives were surprised
to learn that some items from the DKNY line could be found in discount stores such
as T.J.Maxx. Arnault appointed Giuseppe Brusone, a former managing director of
Armani, as Donna Karans chief executive and instructed him to reshape the
company. Brusone intends to improve quality, close company-owned outlet stores,
and reduce shipments to department stores to keep the clothes from being marked
down. He also intends to shift manufacturing out of New York; the move will both
cut costs and lend the line the added prestige associated with garments that are
made in Italy.
All of these actions are designed to keep LVMHand Arnault himselfat the
forefront of the luxury goods business and one step ahead of an ever-changing
business environment. Arnault, is widely admired for his business instincts and
acumen. However, some in the industry view his bold moves as emblematic of all
that is wrong with luxury in the new millennium. An executive at a competitor noted
disapprovingly, They run this thing like Procter & Gamble.