You are on page 1of 7

The effect of developments

in EU Industry policy on
Louis Vuitton Moet
Hennessy











Natalie Kong

Student ID: 12618154

The luxury goods sector is of great importance to the European economy. It provides
a very significant contribution to the European economy and has been estimated to
be worth over $440 billion which equates to approximately 3% of European GDP
(Frontier Economics, 2012). The luxury goods sector employs approximately one
million workers directly, and at least a further 500,000 workers indirectly. Louis
Vuitton Moet Hennessy SA (LVMH) is a leading French multinational luxury goods
conglomerate based in Paris. It was founded in 1987 with the merger between the
fashion house Louis Vuitton and Moet Hennessy which produced champagne and
cognac. LVMH holds a portfolio of over 60 top luxury brands in mainly fashion and
leather goods but also the wine and spirits, perfumes and cosmetics, watches and
jewellery sectors. European Industry policy provides a framework by which LVMH
must operate within. The recent economic downturn and other developments have
spurred the European Commission to review its policies in relation to industry to
create a sustainable and competitive environment. These policies have already
affected LVMHs operations within the European Union and future changes in
industry policy if implemented has potential to both positively and negatively affect
LVMH strategy and operations.
LVMHs corporate strategy is diversification into a wide variety of luxury goods. This
is evident from its presence in various markets and also their continuing efforts to
acquire businesses which diversify their portfolio. Their brands are separated into six
groups as identified above. LVMH focusses on creation, innovation and product
excellence. It benefits from a well-developed strong brand which is steeped in
tradition. LVMH has positioned itself in a niche market of high price high quality
goods and targets people who have high disposable incomes. This differentiation
strategy is achieved by the long standing image that LVMH has been able to project
through its marketing and PR as well as the brands that they choose to associate
themselves with through mergers and acquisitions. LVMHs diversification strategy
has allowed them to enter new markets and has helped them to grow to be one of
the biggest conglomerates in the world.
Vice President Antonio Tajani has said that Industry is at the heart of Europe and
indispensable for finding solutions to the challenges of our societyEurope needs
industry and industry needs Europe. Industrial policy encompasses a wide range of
EU policies such as competition, trade, innovation as they all have an impact on the
competitiveness of industry. The EU adopted new industrial policy with the
industrial policy for the globalisation era which was a flagship initiative of Europe
2020. The policys strategy supports a strong, diversified industrial base in Europe
that offers well-paid jobs while generating less CO2 and using resources more
efficiently. The new policy specifically targets competitiveness and sustainability.
This, along with a specific strategy for the high end and fashion industry has already
affected the way in which LVMH will operate.
Competition policy, which is a subset of industry policy, has been under review by
the European Commission. The European Commissions policy on competition
affects LVMHs strategy and operating plans. As discussed above, a key component
of LVMHs strategy is to diversify. They do this by acquiring stakes in other
companies and merging with them. This gives LVMH more of a market share in the
luxury goods market and adds value to their brand. Merger regulation was first
introduced in 1990 and enabled the European Commission to prohibit mergers and
acquisitions that threaten to significantly reduce competition. Under current EU
Merger regulation, the Commission can only review the acquisition of a minority
shareholding where it confers control. Therefore acquisitions of minority
shareholdings which have no power of control are not subject to the merger control
process. The commission can also intervene in minority shareholding cases under
antitrust provisions in Article 101 or 102 of TFEU but the ability to do so is restricted.
The European Commission is considering amending the European Union Merger
Regulation to allow it to examine acquisitions of non-controlling minority
shareholdings in companies. It proposes to either extend the current system of
mandatory notification to minority shareholdings where parties meet the jurisdictional
thresholds so that the transaction could not be completed before it was approved; or
implement a discretionary review model. Here, the Commission would decide
whether to investigate any minority acquisition on the basis of its own market
intelligence and complaints received, or by requiring parties to provide notice where
there would be concerns on the face of the transaction.

The review of competition policy was spurred by the acquisition of Aer Lingus by
Ryan Air which the European Commission was unable to block. This brought up
issues about minority shareholdings in companies and has already affected LVMHs
operations. LVMH announced on October 23 2010 that it had a stake of share capital
in Hermes International a manufacturer of luxury goods. An investigation was
launched against LVMH and they were fined 8 million Euros. The investigation found
that the stake in Hermes had accumulated through several equity swaps through two
of its subsidiaries. While none of these transactions themselves amounted to any
breach, taken together the actions of the swaps breached regulations on disclosure.
It was thought that the swaps were arranged in an unusual way which looked like
LVMH was trying to sidestep disclosure reporting rules (AMF, 2013). Since then,
LVMH has continued acquiring shares in Hermes and has built up a 22.3% stake in
the company which it has disclosed to Autorit des Marches Financiers, the French
market regulator.

The European Commissions reforms to this area of policy will greatly affect LVMH
as it will mean that any acquisition they make, even if they are in minor
shareholdings, will have to be approved and examined first. This could hold up
agreements which may benefit both companies which may decrease profitability.
The company will also have to be more careful in choosing which companies they
wish to acquire or merge with because if the Commission denies their application,
then they would waste time and resources on ventures that cannot even go ahead.
Subsequent mergers between LVMH and other companies such as Bulgari (2011),
and Loro Piana (2013) have been submitted to the European Commission under
merger regulations and have been approved. In those cases the Commission
decided that if the companies did merge, they would not achieve more than two
thirds of their aggregate EU turnover within one member state so the merger would
not provide issues in market competition. The difference between these subsequent
mergers in which there was no issue or objection, and the Hermes acquisition was
that the Bulgari and Loro Piana mergers involved LVMH taking sole control whereas
the Hermes acquisition was seen to be a stealth takeover beginning with a build-up
of a minority shares not requiring notification.

Another part of competition policy which affects LVMHs operations is EU policy on
selective distribution. Article 101(1) of the Treaty on the Functioning of the European
Union prohibits agreements that may affect trade between EU countries which
prevent, restrict or distort competition. However agreements which have benefits that
outweigh negative effects are exempt. In 2010, the European Commission revised its
Vertical Restraints Block Exemption regulation. In its changes, the Commission
recognised changes in technology and discussed fully the role of online sales and
internet and how it should affect distribution agreements. The new guidelines allows
suppliers to require its distributers to have one or more brick and mortar ships or
showrooms as a condition for becoming a member of its distribution system, to
impose restrictions on online sales that are overall similar to those for sales in brick
and mortar shops. The new block exemption arguably gives more power to the
manufacturer to decide who can distribute their goods and how. However the
manufacturer cannot have more than a 30% market share for the Block exemption
regulation to apply. Selective distribution is essential to the way LVMH operates as
achieving excellence in the distribution and the sale environment of luxury goods is
essential to the success of the luxury goods industry. (Gode, 2009). If LVMH were
to have more than 30% market share in the future which means that the Block
exemption would not apply, then they would potentially lose the ability to control how
authorised distributers sell their product. This could lead to a decline in quality of
service which in turn impacts on their reputation. The block exemption regulation
also contains hardcore restrictions. The first of these restrictions is the most
relevant for LVMH. It states that suppliers are not allowed to fix the price at which
distributors can resell their products. This means that a distributor can sell a product
that is cheaper than what a customer would get from a brick and mortar store from
one of LVMHs brands. This could mean that consumers could choose a product in
the physical shop but then buy it online from the cheaper distributor. This would have
a negative effect on LVMH as the physical stores which cost a lot of maintain would
make less profits and their existence could be threatened if people cease to
purchase from physical stores.

The European Commission has recognised the importance of the fashion industry
and states that European fashion industries are at the crossroads where
manufacturing meets creativity (European Commission, 2012). It recognises the
importance of increasing competitiveness in the European fashion industry and how
this can give the EU fashion industry the opportunity to strengthen its position as a
key player in the global market. The Commission recognised that the European
fashion industry is negatively affected by various factors which a lot of European
industry sectors face such as skills shortages and intellectual property rights
infringements. The luxury goods sector provides innovative and high-added value
products which operates in niche markets. This requires a more qualified workforce
to deal with new technologies, stimulate innovation, ensure quality management
and develop international strategies and marketing. Unemployment and the ageing
workforce has become an issue in the European Union affecting all sectors. For the
fashion industry, the Commission identified four main policy fields to focus on which
the chose to focus on to ensure that the fashion and high end industries remain
important drivers of growth and employment in Europe. The Commission plans to
invest in knowledge, skills, creativity and innovation; protect the creative effort of
companies while fostering the digital market; ensure a level playing field in
international trade; assuring the framework conditions necessary for sustainable
growth in the fashion industries.
The structure of the workforce in the European fashion industry has changed
significantly and faces a problem which the European Union as a whole faces.
Europe has an ageing workforce which is particularly evident in the fashion industry
where the share of people employed in the 50+ age group is increasing and there is
no interest from young people to fill the available jobs. The Commission claims that
the lack of interest from young people to join the industry is linked to the structural
decline of the manufacturing industries in Europe. The commission aims on
concentrating on safeguarding and developing the essential knowledge and skills for
the industry, promoting modern skills and competencies as well as entrepreneurship.
This involves forging alliances to promote cooperation between the industry and
education and training providers, and launching the Sector Skills Alliances which will
address skills shortages by ensuring that vocational and educational training better
responds to labour market needs. The shortage in the workforce has the potential to
have a large effect on LVMH and its companies. A lot of its companies involve goods
which are traditionally manufactured by hand and these talents need to be
developed. Currently, the company already has various initiatives for young people
in France and already offers internships however these are normally aimed at those
studying in higher levels of education. The Commissions concentration on the
manufacturing side of skills will benefit LVMH greatly as the manufacture of high
quality goods is at the heart of their business.
According to the World Customs Organisation, counterfeiting has cost the industry at
least 5 billion in revenue over the last 20 years. As a part of industrial policy, the
European Commission has identified intellectual property rights as an important area
to focus on to help protect the industry and to foster growth in the sector. Intellectual
property rights include patents, trademarks, design rights and copyrights. Trade
marks and design rights are especially relevant to LVMHs operations. The European
Commissions focuses is to prevent counterfeit goods, particularly through the
European Union. This involved a campaign to raise awareness about the dangers of
fake goods and promoted closer cooperation between the European Commission,
national authorities, industry and even consumers and focuses on enhanced
enforcement. The Louis Vuitton brand which is owned by LVHM is one of the worlds
most valuable brands. It is also one of the most counterfeited brands due to its
image as a status symbol. Therefore counterfeit policies are especially relevant to
LVMH as the luxury industry, especially those involved in fashion, are particularly
hard hit by the counterfeiting of goods. Anti-counterfeiting measures have been
organised by LVMH for each brand that they own. This involves LVMH employing
around sixty people who work at preventing counterfeiting. The new intellectual
property policy which the European commission adopted has helped for more
coordination between various interested groups including LVMH in monitoring and
preventing counterfeits. The collaboration between the European Commission,
authority and industry has made it easier for LVMH to detect any unlawful selling and
prevent it. While this extra surveillance and any possible action taken will cost
LVMH, it will also preserve the high quality image that they have and protect their
intellectual property rights.

As Europe recovers from the economic crisis, industry is becoming more important
to aid Europe in its recovery. The European Commission aims to boost growth and
jobs by maintaining and supporting a strong and diversified competitive industrial
base in Europe. To do this policies have been developed and put into place as a
framework to promote its aims. Industrial policy has focused on increasing the
competitiveness and sustainability of European industry. The high end and creative
industries have been recognised by the European Commission as ones to which are
important to the growth of the Europe. In turn, policy has focused on skill and
innovation as well as competition regulation. Policies regarding increasing the
amount of people in the skilled workforce will benefit LVMH in the future as the
workforce ages. Competition policy which includes merger regulation and vertical
agreements which aim to maintain competitiveness, consumer protection and
prevent anti trust agreements, may hinder LVMH strategy by slowing down the
growth of the company.





















References:
AMF. (2013). AMF Enforcement Committee sanctions LVMH. Retrieved from
http://www.amf-france.org/en_US/Actualites/Communiques-de-
presse/Comission-des-
sanctions.html?docId=workspace%3A%2F%2FSpacesStore%2Fb4a9196b-
015f-45dd-b93f-bebca6acaeb8
Commission Regulation 330/2010 (2010) on the application of Article 101(3) of the
Treaty on the Functioning of the European Union to categories of vertical
agreements and concerted practices.
European Commission. (2010). An integrated industrial policy for the Globalisation
Era Putting competitiveness and sustainability at centre stage. Brussels.
European Commission. (2010). Antitrust: Commission adopts revised competition
rules for distribution of goods and services. Brussels.
European Commission. (2011). Case No COMP/<. 6212 LVMH/ Bulgari. Retrieved
from
http://ec.europa.eu/competition/mergers/cases/decisions/m6212_20110629_2
0310_2068410_EN.pdf
European Commission. (2012). Competitiveness of the European High End
industries. Brussels.
European Commission. (2012). Policy options for the competitiveness of the
European fashion industries Where manufacturing meets creativity.
Brussels.
European Commission. (2013). Action plan for Fashion and High end industries.
Retrieved from
http://ec.europa.eu/DocsRoom/documents/4154/attachments/1/translations/en
/renditions/native
European Commission. (2013). Case No COMP/M.7020 LVMH/Loro Piana.
Retrieved from
http://ec.europa.eu/competition/mergers/cases/decisions/m7020_20131115_2
0310_3404863_EN.pdf
Frontier Economics. (2012). The value of the cultural and creative industries to the
European economy. Retrieved from
http://www.comitecolbert.com/assets/files/paragraphes/fichiers/20/Thevalueoft
heculturalandcreative
Gode, Pierre. (2009). LVMH Submission: Concerning the review of the Community
competition rules applicable to vertical restraints.
www.lvmh.com