MARKENMANAGEMENT

Foto: © TommL/istock.com

Developing Luxury Brands Within Luxury

Groups – Synergies Without Dilution?
The recent acquisition of the famous luxury jeweler Bulgari by the world’s leading luxury conglomerate
LVMH foretells a wave of consolidations. In order to grow, many family-owned luxury brands will join
existing conglomerates or form new groups. This article explores the value created by the corporate
level of luxury groups. Their level of integration is usually moderate, reflecting a balance between the
search for synergies and the preservation of the autonomy of luxury brands that is essential for sustain-
ing their symbolic power.

VINCENT IJAOUANE | JEAN-NOEL KAPFERER

I 
n most industries, concentration has been a long-standing trend,
with major groups leading in each sector. The benefits of size (“big
is beautiful”) are well known. The luxury industry, although
attached to images of independent family brands, is no longer an
exception. LVMH originated in 1987 from the merger of a leather
company with a cognac and champagne house and is now home
to more than 60 brands. More recently, PPR, originally a wood and
retail conglomerate, added a luxury arm with the purchase of the
Gucci Group, with the ambitious goal of making it the world’s
number two luxury group. Richemont (Cartier), the Swatch Group
or Ralph Lauren are other famous groups.
The recent wave of acquisitions has been driven by the desire
of many well-known family companies to give up their autonomy
and by the search for synergies. But some voices have expressed
doubts about the validity of such concentration. Rigby et al.
(2006) argued that “the usual benefits of being big – leverage with
suppliers, shared marketing and administrative expenses, and
high-volume, strategic customers – just do not seem to apply for
most multibrand luxury players”. They added some disturbing
facts. In the luxury industry, single-brand companies actually
grew 60% faster from 1994 to 2004 as compared to brands
owned by multibrand conglomerates, without showing weaker

24 Marketing Review St. Gallen 1 | 2012

 Developing Luxury Brands Within Luxury Groups – Synergies Without Dilution?

profitability (Rigby et al. 2006). Also, it has been speculated that
luxury brands could be in danger when integrated with and
managed by non-luxury groups (e.g., Jaguar and Ford) (Kapferer/
Bastien 2009).
But why should luxury groups be a special case? Because, in con-
trast to FMCG (fast moving consumer goods) brands (Kapferer
2012), the brand equity of luxury brands depends on their high
symbolic power. Whenever a change of ownership takes place,
there is a risk that stakeholders will lose confidence in the sustained
authenticity and inherited culture of the brand.
As luxury groups have transformed into listed companies, they
have come under growing pressure to exhibit growth while simul-
taneously maintaining their high brand equity. However, the feel-
ings of privilege that they create are threatened by the pressure to
increase penetration, diffusion, trading down, and the introduc-
tion of so-called “accessible luxury” options (Kapferer/Bastien
2009). De Sole, former CEO of the Gucci Group (Galbraith 2001),
put it bluntly: “When you are a public company and you want to
continue to create value for your shareholder, you have no choice.
You cannot go downmarket because of the effect on margins and
profitability.”
Theoretical Background: How Groups Create Value
In the luxury business, unlike in other sectors, groups cannot be
based only on cost reduction motives. If they were, how would they
create value? A review of diversification theory reveals that the per-
formance of multi-business firms is related to their capacity to gen-
erate a corporate effect rather than industry or business effects
(Brush et al. 1999; Rumelt 1991). The corporate effect can be
defined as value creation at the corporate level, which corresponds
to both the vertical relationships between the corporate center and

Fig. 1 Typology of Synergies Within Luxury Groups

Currency
hedging Emplacements
Resources
Financing Financial
synergies Fashion magazines
Manufacturing Loan Bargaining
conditions Legal Power
Wholesalers
Sourcing structures
Productive functions Market Power
synergies Space Purchase
Purchasing

R&D Lobbying
Retailing
Logistics Pooling of
resources Luxury expertise Luxury branding
(Economies
Warehousing of scope)
Corporate Brand Tumover
After-Sales service Capabilities
Corporate
effect Management
Human Resources of Talents
IT and ERP Support functions
(Central & Regional) Legal (IP..)
Efficiency
Marketing synergies
(Hard Financial
synergies) Corporate
Media Buying
Assistance Tax
Real Estate Services
Insurance
Back office
Corporate Communication/Media
synergies
Utilization of best Transfer of
Operational
practices to improve synergies Organizational Design
cost efficiency know-how
Corporate Best Practice Sharing
initiatives
Brand Streching
Staffing of key people
International expansion Transfer of
know-how
Corporate Formulation of Strategy
Luxury market trends Growth Control &
synergies Planning
(Soft Control of Performance
Raw material synergies)
Access to
scarce M&A
Corporate
Technology, compo- resources development
nent or product JV

Marketing Review St. Gallen 1 | 2012 25

 MARKENMANAGEMENT

the businesses and the horizontal relationships between the busi-
nesses (Knoll 2008).
Search for synergies is another goal of groups. Synergy means
that the combined return of two or more units together is greater
than the sum of the returns of each unit individually. Usually the
study of synergies has been limited to efficiency-focused syner-
gies or hard synergies (economies of scope). Following Knoll, we
integrate it into a more global theoretical framework defining
operative synergies, market power synergies, financial synergies
and corporate management synergies, which are derived from
leveraging operative, market power, financial, and corporate
management resources, respectively, across the businesses (see
figure 1).
To answer this question, we conducted a comparative/collective
case study. As mentioned above, three major conglomerates dom-
inate the luxury sector: LVMH, PPR-Gucci and Richemont-
Cartier. All of them are multi-business firms (MBF) in the sense
that they own different brands and offer a very diverse group of
products within the luxury industry – fashion & leather goods,
watches & jewelry, fragrances & cosmetics, pens, wines & spirits,
etc. These MBF were selected because they are representative of
luxury conglomerates.
Fifteen interviewees were selected following a competence and
relevance criterion. We met with at least two interviewees from all
three companies investigated in the collective case study, includ-
ing the Chief Financial Officer of each one. Semi-structured and
open-ended interviews were used.

Research Objectives and Methodology

A brand joining a group has to add value to the group. Recipro-
cally, the group has to add value to the brand. But what is the real-
ity of this parenting advantage with which luxury groups are said
to endow their brands? As Moore and Birtwistle (2005) put it: “Lit-
tle, if any consideration has been given to how luxury brand con-
glomerates secure what Goold et al. (1994, p. 13) described as
‘parenting advantage’ – those strategies, structures and processes
whereby the ‘parent works through its businesses to create value’.”
For them, luxury brand development and sharing of group
resources are the main sources of parenting advantage that luxury
groups can create. Is this really the case?
Findings of the Transversal Analysis
Operative Synergies
The first finding is that in the luxury sector operative synergies are
not as important as they are in other consumer goods industries.
However, we found that efficiencies and growth synergies do exist
and contribute to the corporate effect. We furthermore found that
efficiency synergies, by which value is created through economies
of scope, result from the pooling of common resources. These can
be divided into two distinct forms: resources required for produc-
tion and resources related to support activities.

Fig. 2 How Luxury Groups Create Added Value

Fashion Leather Timepieces Jewelry Fragrances Spirits Overall

Goods & Cosmetics
Pooling of Resources Manufacturing
for Productive Func-
Purchasing
tions
Sourcing
R&D
Pooling of Resources Logistics
for Support Func-
Warehousing
tions
After-Sales Service
Human Resources
IT and ERP
Marketing
Media Buying
Real Estate
Back Office
Transfer of Know-How Best Practices
Efficiency Synergies

26 Marketing Review St. Gallen 1 | 2012

 Developing Luxury Brands Within Luxury Groups – Synergies Without Dilution?
In the luxury industry, support activities can usually be pooled
without much concern, but pooling production activities is a dif-
ferent matter entirely. As we have shown (Kapferer/Bastien 2009),
this is due to the nature of luxury, and specifically to the impor-
tance of having a distinct brand identity. For a luxury brand, inte-
grating production with that of other brands could potentially
damage its image as well as its integrity in the minds of its custom-
ers. However, we found that, depending on the product category,
numerous domains can generate efficiency synergies, e.g., R&D in
fragrances, purchasing in leather, sourcing and manufacturing in
watches (see figure 2).
The synergies regarding support activities are much more obvi-
ous and generalized across all investigated companies and busi-
nesses. These synergies are simply derived from the possibility to
share costs in functions that are not intrinsic to the luxury prod-
uct. Throughout the luxury industry they are systematically present
at two different levels:
» The performance of multi-business
firms is related to their capacity to
generate a corporate effect rather
than industry or business effects. «
■ Centralized support functions (for operations impacting the
whole brand) operated as shared centralized services.
■ Regional support functions (for operations impacting the brand
in a specific area) operated as support platforms.
The latter represent an opportunity for brands to successfully com-
bine the efficiency of centralization with the need for local respon-
siveness. Efficiencies in regional support functions are primarily
derived from logistics (including cross-docking), warehousing,
human resources, IT, and media buying.
Distribution and delivery are often centralized within timepiece
brands. Similarly, in spirits brands the distribution is fully inte-
grated. The use of common regional warehousing platforms has
been generalized across different product categories. For timepiece
brands, the pooling of after-sales services is a major source of syn-
ergy, as these brands utilize common regional technical centers to
ensure after-sales service.
However, there are a few functions or shared services that gen-
erate synergies that are not always pooled, depending on the level
of integration. Real estate (store development), IT and ERP,
regional marketing (especially for timepieces), media buying,
human resources, and diverse back-office operations are generally
organized on a product category basis.
Within operative synergies, the boundary between efficiency syn-
ergies and growth synergies is vague. This is illustrated by the trans-
fer of know-how, which generates both efficiency synergies and
Marketing Review St. Gallen 1 | 2012
growth synergies. On the one hand, transfer of know-how allows
the brands to share best practices that help reduce various costs (of
manufacturing, contract manufacturing, licensing, processes, etc.).
On the other hand, it also results in other opportunities, such as
allowing brands to extend their existing product offering. A good
example of this are timepieces that are offered by fashion brands
(Tag Heuer and Louis Vuitton, Boucheron and Gucci, Richemont
and Ralph Lauren). Furthermore, transfer of know-how can enable
brands to expand more easily and rapidly in new markets, due to
the existing knowledge and stakeholder relationships in local lux-
ury markets established by those brands in the portfolio that already
operate there (e.g., LVMH’s access to the US fragrances market
thanks to Bliss, Hard Candy, Urban and Decay). Finally, brands can
exchange information about market trends across different busi-
nesses and thus adapt in a better way to current demand or simply
develop an enhanced vision of the luxury market.
Through the present multiple case study we uncovered another
major source of cross-business growth synergies in addition to the
transfer of know-how: access to scarce resources, which can be
divided into access to raw materials, such as precious stones, specific
fabrics or grapes (e.g., through the purchase of wine domains), and
access to specific technology, components or products (taking the
watches industry as an example, e.g., Gucci Group’s stake in the
Sowind Group with the Girard-Perregaux and Jean Richard brands
and their purchase of Sergio Rossi and its manufacturing plant, or
LVMH’s purchase of Roger Dubuis and its manufacturing capacity).
Joint development platforms are relatively insignificant for lux-
ury brands. This kind of synergy is often seen in highly technolog-
ical products, whereas in the luxury industry the dream function
is often superior to the utility function; thus, these products are
more about creativity and affection than about innovation and per-
fection (Kapferer/Bastien 2009). Finally, it should be noted that
typical soft synergy opportunities (e.g., cross-selling, lead-sharing,
cross-business bundling) as well as joint marketing activities (e.g.,
joint image campaigns, joint customer loyalty programs) and
extended umbrella brands are not relevant or highly marginal in
the luxury industry, due to the specific relationship to its custom-
ers and the fact that sales and merchandising teams are kept auton-
omous. However, the pooling of after-sales services is a major
source of synergy in the watches business.
Two important domains in which non-luxury groups usually
realize synergies are not relevant in the luxury industry: creation
and distribution. In luxury, exclusive distribution is the ideal for
selling the singularity of the brand experience. Creation and dis-
tribution are usually not organized to create synergies, because the
risks generated (e.g., value destruction by damaging the brand
equity of each luxury brand) are too high. Only the Poltrona Frau
Group created its own multi-brand flagship stores in the BRIC
countries to break even faster.
There are also a few functions or shared services that generate
synergies that are not always pooled, depending on the level of inte-
gration: real estate (store development), marketing and diverse
back-office operations.
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 MARKENMANAGEMENT
Market Power Synergies
When Knoll (2008) proposed his classification of cross-business
synergies, he acknowledged that, in the face of limited empirical
evidence, market power synergies might be speculative because of
national anti-trust laws that increasingly hinder and jeopardize the
legal realisation of market power synergies. We agree on this word
of caution, as in our specific case market power synergies have
proven not to meaningfully contribute to the corporate effect.
However, we also suggest two additional reasons why their reali-
zation is difficult in the luxury industry:
First, in the luxury industry companies do not compete against
each other in the same manner in which firms compete in other
consumer goods industries.
Second, most conglomerates do not wish to impose their newly
bred brands on their business partners (e.g. wholesalers) and thus
do not leverage their existing “market share”. This is due to the fact
that the long-term risks of damaging the star brands are quite high,
both in terms of image and in terms of the conglomerate’s power,
which is directly harmed if the brands pushed forward do not per-
form.
However, we also identified two distinctive opportunities for
value creation. First, luxury malls are multiplying throughout the
BRIC countries. No luxury mall can be established without LVMH.
With their portfolio of 60 brands, LVMH alone can start a luxury
mall and make it grow. Second, these conglomerates have one or
several leading brands within their portfolio which give them
bargaining power vis-à-vis their different stakeholders, such as
wholesalers, department store or mall managers (for the choice of
the best location), journalists (fashion or luxury magazines), and
regarding media space purchase.
Financial Synergies
This point is often ignored yet matters substantially. Our study
shows that all luxury conglomerates have implemented a pooling
of financing resources. This means that the brands no longer have
to negotiate their credit lines on their own, but rather receive funds
according to a budget approved by both the brand and the corpo-
rate level. This gives the brand easier access to credit, which can be
very important considering that brands in ramp-up often find it
difficult to acquire the financial resources that they need to expand
and reach their very high break-even point. Moreover, brands in
conglomerates are granted much better conditions for loans, as the
parent often has a better risk profile, since it is more diversified and
larger. Finally, some conglomerates are cash rich and often only
need to use debt to raise their leverage and the return to their share-
holders.
We also identified the possibility for brands in conglomerates to
DOI: 10.1007/s11621-012-0107-8
protect themselves from currency fluctuations by pooling currency
hedging at the corporate level. Doing so allows the brands to fully
concentrate on their operational management and remain confi-
dent that their performance will not be greatly endangered by cur-
rency fluctuations.
28
Eventually, thanks to a legal integration of local affiliates into the
legal entities of the parent company and other sophisticated legal
schemes, the brands can optimize their legal structure.
Corporate Management Synergies
Corporate management synergies are often neglected in synergy
studies, but our study shows that they are of prime importance, at
least in the luxury industry. Corporate synergies are derived from
corporate capabilities, corporate initiatives, corporate planning
and control, and corporate development.
In the luxury industry, corporate parents create value for brands
by bringing specific expertise in distribution (e.g., shop experience,
selective distribution, internet distribution), licensing and market
intelligence. Conglomerates often have particular knowledge and
proficiency in luxury branding (i.e., in helping brands to position
themselves as true luxury brands). Every so often they also have dem-
onstrated a significant ability to turn ailing brands around by change
management. Last but not least, the management of talents seems to
be a significant lever of value creation among multibrand companies.
Groups have been leveraging the potential of their talents across
brands by offering them attractive career paths. Luxury groups offer
many more talent development opportunities than do most single
brand companies. Indirectly, these HR strategies help attract, moti-
vate and retain the best talents in the luxury groups. This is a major
difference between conglomerates and family-owned companies.
We found that corporate centers can, in addition, generate value
in HR executive management by first allowing operational top
management to share high-level best practices and ideas through
internal universities (e.g., LVMH House in London) and by
employing them strategically at key positions across the different
brands. These key managers represent a very scarce resource, as
they need three complementary skills or competences that are
fairly exceptional: a thorough understanding of the product, excel-
lent commercial and financial skills, and the ability to manage the
creative leader(s) of the brand.
Implications for Growing Luxury Brands Within Groups
Synergies in luxury groups are not so much about costs. Given the
industry’s high margins, cost reduction logic is not needed and
cannot be achieved at any price. Every search for synergy must be
conducted carefully so as not to harm the brand. Usually, synergy
is a word that is badly connoted from the employees’ point of view,
but in the luxury industry it is the managers who have to be careful
with regard to the realization of synergies, always remaining aware
of the potential drawbacks of such synergies.
All activities in contact with the end customer have limited syn-
ergy potential and this is confirmed by the fact that all brands are
expanding their directly operated network. Production, however,
seems to follow a different logic. While production used to be fully
autonomous, this might change and become dependent on cus-
tomer perceptions.
Marketing Review St. Gallen 1 | 2012
 Developing Luxury Brands Within Luxury Groups – Synergies Without Dilution?
Foto: © Nikada/istock.com
Regarding the governance debate between autonomy and cen-
tralization, we believe that with respect to the identity, culture and
strategy of each brand, an organization by business branches can
provide a powerful infrastructure and deliver shared resources to
the brands of the division, especially the weakest or smallest. Each
entity (also called Maison) acts as a virtual company with its own
CEO and its own head creative designer, both having a real “brand
custodianship”. The difficulty comes in finding the right balance
between the search for synergies and the autonomy of the brands.
We would like to warn corporate managers that cross-business syn-
ergies should be implemented carefully and that “the more syner-
gies the better” is a very dangerous point of view. Luxury brands’
symbolic capital is fragile. It is essential for them to maintain their
roots and their freedom within a framework.
If too many synergies are realized, brands tend to underperform,
as sharing resources can reduce their sense of accountability. How-
ever, entrusting full profit and loss responsibility to brands driven
by corporate objectives jeopardizes coordination and collaboration
mechanisms.
Finally, we would like to draw corporate managers’ attention to
human capital and knowledge management (including the shar-
ing of best practices), two undisputable strengths that groups
should cultivate so as to outperform their peers on a long-term
basis.
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The Authors
Vincent Ijaouane
Investment Manager at Agora Fund LP in Geneva,
Switzerland
E-Mail: vincent.ijaouane@gmail.com
Jean-Noel Kapferer, MBA, PhD
Professor at HEC Paris and Pernod-Ricard Chair on the
Management of Prestige Brands in Paris, France
E-Mail: kapferer@hec.fr
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