LVMH Case Study Notes

LVMH: The Rise of Talentism

Introduction

• Klaus Schwab's Prediction: The world is shifting from capitalism to "talentism," where talent is becoming more crucial than capital for competitiveness.
• LVMH's Performance (2007-2012):
  • Stock price increased by 80%.
  • Outperformed S&P 500 Index (-8%) and FTSE 100 Index (-7%).
  • Group revenues rose from €16.5 billion to €23.7 billion (2007-2011).
  • Net profits increased from €2.3 billion to €3.5 billion (2007-2011).
  • Employees surged from 52,000 to approximately 98,000 (2002-2011).
• Bernard Arnault:
  • Chairman and CEO of LVMH.
  • In 2011, he was the fourth richest person in the world and the richest in Europe, with a net worth of US41 billion (€31 billion).
• Chantal Gaemperle:
  • LVMH Group Executive Vice President of Human Resources and Synergies.
  • Invited to speak at the World Economic Forum in Davos about LVMH's talent development practices.
  • Tasked with addressing the "supply of talent" as a major challenge for the Group.

Business Segments (2011)

• Market Value: The personal luxury goods market was worth €191 billion, with a predicted annual growth of 6%-8% until 2014.
• Major Segments:
  • Fashion and Leather Goods: 54% market share.
  • Watches and Jewellery: 22% market share.
  • Perfume and Cosmetics: 21% market share.
• Apparel:
  • Grew by 8%.
  • Fast-fashion and online retailers gained market share in the women’s ready-to-wear segment.
• Leather Goods and Accessories:
  • High growth of 13% in 2011.
  • Considered an entry point to luxury consumption.
  • In China, men represented 45% of the €1 billion market for luxury handbags.
• Luxury Purchases by Gender:
  • Globally, women accounted for 60% of luxury purchases in 2011.
  • In China, men outpaced women’s spending (7:3 ratio).
• "Hard Luxury" (Watches and Jewellery):
  • Strongest growth in 2011 at 18%.
  • Driven by Swiss watch exports, retail outlet conversions in Asia, and growing female consumption of jewellery watches.
  • Jewellery segment had been under-penetrated by luxury brands, representing 5% or €7 billion of the serviceable market.
• Perfume and Cosmetics:
  • Grew by 3%.
  • Growth spurred by emerging markets like China and Brazil.
  • Driven by anti-aging skincare innovations and line extensions.

Customers

• Regional Market Shares (2011):
  • Europe: 36%.
  • US: 30%.
  • Asia-Pacific: 29%.
  • Rest of the world: 5%.
• Mature Markets: Europe and the US were predicted to stagnate.
• Tourism: Recovery of the luxury industry in 2010 was driven by tourism due to a weaker euro.
  • In cities like Paris and Milan, Chinese tourists accounted for up to 50% of total sales.
• US Market: Retained its top ranking as the largest country for luxury goods consumption at €56 billion.
• Asia:
  • Japan: Growth inched up 2%, but the future outlook was timid; four out of five citizens owned at least one Louis Vuitton bag.
  • China: Chinese people accounted for more than 20% of global luxury consumption, fueled by new store openings and organic growth in second and third-tier cities.
• Millionaires:
  • Asia had 3.3 million millionaires (compared to 3.1 in Europe and 3.4 in the US) with a combined wealth of almost €9 trillion.
  • The average mainland Chinese millionaire was 39 years old, male, owned three cars and 4.4 luxury watches.

Future Customers

• Global Middle Class:
  • Projected to more than double from 430 million in 2000 to 1.2 billion in 2030.
  • Growing middle class defined as those with at least US30,000 (€23,000) in personal income.
  • By 2030, 93% of the global middle class would be from developing countries, particularly India and China.

Heritage and Creativity

• Brand Image: Luxury industry is dominated by brands cultivating an image around heritage, savoir-faire, and quality developed over 10-15 years.
  • Examples: Breguet (founded in 1775), Dom Pérignon (traces history to 1670).
• Tensions: Balancing brand heritage with evolving customer tastes and retail methods.
• Fendi's Initiative: "Fatto a Mano for the Future" invited artists to work with craftsmen using raw material scraps to illustrate innovation and tradition.

Time

• Local Competition: Emergence of local competition takes time.
• Designers: Successful new designers are often acquired by big brands or private equity firms (e.g., Phoebe Philo, Riccardo Tisci, Tom Ford).
• Creative Directors: Create buzz through fashion shows; designers with experience in at least three countries produce more inspired creations.

Quality

• Exclusivity and Quality: Luxury brands emphasize exclusivity and quality.
• Loro Piana Blazer: A €4,000 blazer uses lotus flower stems, requiring 26,000 stems per blazer; the fabric cools the wearer.
  • The Intha people of Myanmar, who traditionally made robes for monks from lotus stems, found a new patron in Pier Luigi Loro Piana, who guaranteed to purchase all their fabric in advance.

Recognition

• Retail Locations: Established brands secure prime retail locations to maintain exclusivity.
• Barriers to Entry: Lack of established distribution and intense competition for prime locations create barriers to entry.

Production

• Control: Design process intended to allow control over technical expertise, quality standards, and production costs; in-house design teams led by creative directors exert significant influence.
• Communication: Fashion shows, magazine endorsements, and advertising campaigns communicate directly with intermediaries who promote the brand to final customers.
• Specialized Know-How: Employed to produce finished products, with outsourcing to external manufacturers.
• Partnerships: Exclusive contracts and vertical integration with suppliers ensure quality control.
• Raw Material Purchases: Generally not concentrated; top five suppliers should not account for more than 15% of the total volume.

Channels

• Distribution Channels:
  • Directly Operated Stores (DOS).
  • Multi-brand department stores.
  • Franchises.
  • Licenses.
  • E-commerce.
• Directly Operated Stores (DOS):
  • Growth faster than other forms.
  • Economics accretive to sales, margins, returns on capital, and brand image.
  • In China, favorable capital cost and rental structures.
• Brand Image: Brand positioning and continuous refurbishments strategically important to convey desired brand image.
• Sales Personnel: Two-thirds of consumers reported disappointment with salespeople in China; companies like Salvatore Ferragamo deploy specialists to educate customers about the brand's history.
• Multi-brand Department Stores: Offer a comprehensive luxury retail experience (e.g., Harrods, Le Bon Marché).
• Franchising Agreements: Long-term exclusivity arrangements with minimum turnover targets.
• Licenses: Generate quick cash inflows but brands are selectively buying back licenses to control image and maximize margins. Luxottica, the world’s largest eyewear company, represented 2% of Prada’s gross turnover in 2011, generating €24 million in royalties from their eyewear licensing agreement.
• E-commerce:
  • Small but growing; accounted for €5.6 billion (3%) of total sales in 2011.
  • Social media and digital marketing improve customer experience and online sales.
  • Brands investing in e-commerce (e.g., Burberry, Jimmy Choo) sell online at retail prices.
  • Online profit margins are high; the challenge is to steer sales online without damaging brand image.

Competition

• Key Competitors in Fashion and Leather Goods: PPR (Kering since 2013), Prada, and Burberry.
• PPR/Kering: Founded by Franҫois Pinault; entered the luxury sector in 1999 with the purchase of Gucci; owned brands including Gucci, Yves Saint Laurent, and others. In 2011, sales reached €12.2 billion with a net profit of €1.1 billion.
• Prada: Founded in 1913; in 2011, growth was twice the luxury goods sector average with sales of €2.1 billion and EBITDA of €536 million; brands include Prada, Miu Miu, Church's, and Car Shoe.
• Burberry: Smaller than peers with sales of £1.5 billion (€1.8 billion) in 2011; innovative and technologically savvy; known for digital commerce and live-streaming fashion shows.

LVMH

• Foundation: Founded in 1987 after the merger of Louis Vuitton and Moёt Hennessy.
• Growth: Grew from ten brands in 1987 to over 65 by 2012, across five divisions: watches and jewellery, fashion and leather goods, perfume and cosmetics, wine and spirits, and selective retailing.
• Core Values: Be creative and innovate, aim for product excellence, bolster brand image, act as entrepreneurs, strive to be the best.
• Decentralization: Each brand operates autonomously with the brand Presidents assuming discretion over the brand’s strategic direction.
• Star Brand Theory (Bernard Arnault): Brands take time to grow into a "star brand" – timeless, modern, fast-growing, and highly profitable.

Retail and Marketing

• Employee Focus: 57% of employees in retail function, with training focused on "brand DNA."
• Sales Staff Role: Transmit brand identity, associating the product with the artistic creator; sales staff had to know everything about Louis Vuitton
• Elitism: No markdowns on Louis Vuitton logoed leather handbags, limited-edition releases.
• Expenses: Retail and marketing expenses totalled €8,360 million in 2011, up 18% from the previous year, representing 35% of revenues.
• Journées Particulières: Initiated in Oct 2011 to reveal behind-the-scenes glimpses from selective maisons, highlighting heritage and expertise.

Production and Procurement

• Control (M. Arnault): "If you control your factories, you control your quality; if you control your distribution, you control your image."
• Decentralized: Each brand permitted to act independently; strategy determined by brand Presidents.
• Synergies: Found within divisions, rarely at the Group level, except for media space buying.
• Securing Production: In 2011, LVMH agreed to a joint venture with the Koh family of Singapore to take ownership of Heng Long to strategically complement procurement of high-quality crocodile skins and further control its supply chain.

Talentism

• Bernard Arnault's Leadership Definition: "Find outstanding people and make them accomplish even more outstanding things."
• Chantal Gaemperle's Role: Joined LVMH in 2007 as Group Executive Vice President of Human Resources and Synergies, member of the LVMH Executive Committee.
• HR Strategy: Reinforcing dialogue and collaboration across brands to capitalize on people, targeting two-thirds internal mobility and one-third external recruitment.
• Promise: Perpetuate "the future of tradition" by capitalizing on heritage; lifelong learning and development.
• Mobility: Stimulate creativity and innovation.
• Virtuous Circle of Talent: Focus on recruitment, development, and retention to enhance LVMH’s reputation.
• Brand Focus: Loyalty, continuity, and know-how are key drivers of talent assessment.
• Blending: "Talentism" blended with the prominence of brands.

Mobility

• Attracting Talent: LVMH looks at different industries to recruit those skills that might complement those required by the Group. There is no pre-defined career path, and instead HR works with each hire to mold them into roles where they can excel.
• Costly Exercise: Replacing people with external hires is a costly exercise due to the challenges of integration; LVMH thus creates a plan to build a sustainable pipeline to meet the long-term demands of the business.
• Internal Talent: Focus shifted to internal talent, putting mobility at the centre of the LVMH HR strategy, with a focus on succession plans, retention of the highest potentials, and people caring for those that they want to nurture and develop.
• Mobility Results (2011):
  • 85% of mobility among managers was within the same maison.
  • 15% across maisons.
• Positive Side Effect: Increase in collaboration across brands within the same division.
  • Example: Consolidation of logistics departments for champagne brands, yielding higher efficiencies and better coordination.
• Transfer Focus: The focus shifted to competencies, which made it more palatable to transfer a person across brands and divisions based on their known skills and passions instead of solely experience.

FuturA

• Initiative: Launched in 1999 to recruit and develop “high potential” talents to hold a so called “group key position” within five years.
• Target: Any kind of function and not designed as a rotational programme or a career path.
• Integration: The initiative mostly integrated external candidates in the beginning. It became open to internal talents in 2009.
• Assessment: Strategic and learning agility, engagement and commitment, and ambition.
• Resources: HR professionals provide feedback, coaching, and career counseling to stretch learning agility.
• Size (2012): More than 200 FuturAs; they can lose this qualification if performance and expectations are not met.
• Knowledge: Intriguing feature of the programme was that certain individuals who were deemed to be FuturA did not know about it.
• Events: Presidents of different divisions would take time (2-3 hr) to get to know them at events such as the LVMH Breakfast.

LVMH House

• Setup: Established in 2000 in London, England.
• Aim: Depart from corporate universities and embody a homogenous approach to business.
• Networking: A destination for LVMH people to network and form connections across divisions and brands.
• Forums: Forums created to enable top people to address a particular theme, such as luxury branding, new technologies, e-business, and strategic innovation.

Career Destination

• Mobility: Improves the agility of people. Corporate culture embodied the view that a lateral move was also a stretch and could be as rewarding as being a vertical move.

Conclusion

• Concerns: Implications of the debt crisis and potential economic slowdown in emerging markets like China.
• The Battle for Talent: CEOs assert that the talent demand will threaten growth. CEO's still asserted that the battle for talent was the next major challenge; despite a decrease in spending, there was still concern.
• Chantal's Question: How the Group could benefit from “rise of talentism” and make the most of its decentralized structure and heritage.