CASE 22 TEACHING NOTE 1

LVMH in 2016: Its Diversification

into Luxury Goods*

Overview

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ouis Vuitton Moët Hennessy (LVMH ) is the world’s largest luxury products conglomerate with a business

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portfolio that includes some of the most prestigious brand names in wines, spirits, and champagnes, fashion,

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watches and jewelry, and perfumes and cosmetics. The company began as Moët & Chandon, a French
champagne producer, in 1743. As of 2016, the French conglomerate’s business portfolio also includes a luxury

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yacht producer, a 19th-century-styled French amusement park, two prestigious Parisian department stores, duty-
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free stores, a retail cosmetics chain, high-end luxury hotels, and a variety of French media properties.
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By making strategic acquisitions of iconic luxury brands, LVMH had grown from approximately €2.5 billion
in 1990 to €35.7 billion in 2015. The company had set revenue and operating profit records in 2015, with both
growing by 16 percent since 2014. LVMH’s revenues, operating profits, and free cash flows had produced
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attractive returns for shareholders and had made its CEO, Bernard Arnault, the world’s 14th wealthiest person.
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Arnault placed an emphasis on internal growth by exploiting common strategies and capturing synergies
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across the portfolio in four key areas: product quality, innovation, image, and craftsmanship in the production
process.

During the last half of 2016, LVMH’s performance had slowed from 2015, as revenue and operating profit
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achieved 3 and 4 percent year-over-year increases, respectively. Revenues of LVMH’s fashion and leather goods
products declined by 1 percent during the first half of 2016, as terrorism across Europe greatly affected tourism
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in that region. The company’s overall performance was negatively impacted by acquisitions of brands that were
once thought to be its “rising stars,” but that did not materialize. Some questioned the impact of LVMH’s
“Other” businesses outside its core on shareholder value. Investors and analysts had called for the divestiture of
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nonperforming LVMH brands almost since the early 2000s, but with the exception of the divestiture of Omas
pens, the sale of the company’s art auctioning houses, and a planned sale of the DKNY brand in 2017, Arnault
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had not been sympathetic to divesting underperforming brands.

Suggestions for Using the Case

The case pairs particularly well with the coverage of strategies for: (1) strengthening a company’s competitive
position in Chapter 6, (2) competing in international markets in Chapter 7, and (3) diversification in Chapter 8.

*This teaching note reflects the thinking and analysis of Professor Armand Gilinsky, Sonoma State University. We are most grateful
for his insight, analysis and contributions to how the case can be taught successfully.

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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 2

There’s ample detail in the case for students to evaluate:

n LVMH’s international and diversification strategies

n How sustainable LVMH’s position is as leader in the branded luxury goods industry, in light of
environmental forces, competitive dynamics, and its current situation

n The company’s financial performance.

The assignment questions and teaching outline presented below reflect our thinking and suggestions about
how to conduct the class discussion and what aspects to emphasize.

To guide students in thinking about which analytical tools can be used to prepare the LVMH in 2016: Its
Diversification into Luxury Goods case for class discussion, we strongly recommend (1) providing class
members with a set of study questions and (2) insisting that they prepare good notes/answers to these questions.

To facilitate your use of study questions and to make them available to students, we have posted a file of the
assignment questions contained in this teaching note for the LVMH case in the instructor resources section

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of the Connect Library.

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You may also find it beneficial to have your class read the Guide to Case Analysis that follows Case 31 and is

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also posted in the instructor resources section of the Connect Library. Students will find the content of this Guide
particularly helpful if this is their first experience with cases and they are unsure about the mechanics of how to

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prepare a case for class discussion, oral presentation, or written analysis.
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The Connect-based Exercise for the LVMH in 2016 Case. A Connect case exercise has been developed
for all cases included in the 21st Edition. Each case exercise follows the assignment questions listed in the
teaching note for the case and require students to work through the entire analysis presented in the Teaching
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Outline and Analysis section of the teaching note. The purposes of the case exercises is to help get students off
on the right track in understanding the demands of case analysis and what it takes to come to class fully prepared
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for discussion of an assigned case (or to develop a substantive written analysis or oral team presentation).
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All assignment questions are auto-graded with the exception of strategic recommendations, which is left as an
open-ended question for students to complete. You may find the Connect case exercise suitable for use with
written case assignments with the analysis component of the assignment auto-graded, leaving only the students’
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recommendations left to be graded by the instructor.

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This case is suitable for both written and oral presentations. Our recommended assignment questions are as
follows:

1. As part of your internship requirements with LVMH, Inc., you have been asked to prepare an analysis of
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LVMH’s competitive position in the luxury goods marketplace. Your report should contain 2-3 pages of
recommendations for continuing the company’s success in assembling a diversified portfolio of brands,
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improving its financial position, and a recommendation about potential new areas for diversification or
divestment. Write an executive summary of recommendations of no more than 2–3 pages, accompanied
by supporting exhibits. These exhibits may include an overview of LVMH’s strategy, a competitive
strength assessment, and a financial analysis.

2. LVMH’s CEO Bernard Arnault has learned of your considerable skills in strategic analysis and has
hired you to develop a strategic plan that will enable LVMH to improve its position in the branded
luxury goods industry, continue to build a stronger financial position, and make a decision about
future diversification or retrenchment from its existing lineup of businesses. In developing your
recommendations, you should assess the luxury goods industry. You should also assess LVMH’s
portfolio of diversified businesses and analyze its recent financial performance. Finally, the plan should
offer specific, actionable recommendations that will allow LVMH to further improve its position. Your
recommendations should be well supported with arguments and justifications for each recommendation.
Your report should include 4-6 pages of recommendations and whatever supporting charts, tables or
exhibits you deem useful.
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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 3

Assignment Questions
1. What are the major elements of LVMH’s competitive strategy in the branded luxury products industry? How
well do the pieces fit together? Is the strategy evolving?

2. How have LVMH’s corporate strategy choices strengthened or weakened its competitive position in the
branded luxury products industry?

3. Is LVMH’s international strategy best characterized as a multi-domestic strategy, global strategy, or

transnational strategy?

4. Does it make good strategic sense for LVMH to compete in all of its current segments? Which of its
product lines — Wine and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches and
Jewelry, Selective Retailing, and Other — do you think is/are most important to LVMH’s future growth and
profitability? Should one or more of these current segments be discontinued? Why?

5. What is your assessment of LVMH’s financial performance over the 2012 – 2015 period? (Use the financial

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ratios in the Appendix of the text as a guide in doing your financial analysis.)

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6. What strategic issues confront LVMH in 2016? What market or internal circumstances should most concern

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CEO Bernard Arnault and his company’s senior leadership team?

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7. What recommendations would you make to Arnault to address the strategic issues confronting LVMH in
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2016 in order to sustain its impressive growth in revenues and profitability?
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Teaching Outline and Analysis
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1. What are the major elements of LVMH’s competitive strategy in the branded luxury products
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industry? How well do the pieces fit together? Is the strategy evolving?
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LVMH has an established portfolio of luxury brands, some of which have endured for decades, or even
centuries in several cases. Many of its iconic brands and logos have long traditions that contribute to demand
and provide difficult-to-replicate intangible assets. The company has expanded globally, with a particular
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emphasis on growth areas in the Asia-Pacific region, most notably in China. Students should see that:
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n LVMH’s strategy to confine retail store location to major cities and, via its DFS subsidiary, to major
international airports, provides its brands with a competitive advantage.

n That said, the luxury business in China is not likely continue to grow by double-digits indefinitely,
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accordingly some slowing of growth in the Asia-Pacific region appears inevitable.

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2. How have LVMH’s corporate strategy choices strengthened or weakened its competitive
position in the branded luxury products industry?
This is a good time to review the concept of horizontal scope, which refers to the range of product and service
segments that a firm like LVMH serves for global markets, which are considerable due to its presence in
nearly every sector of luxury branded products in almost every region in the world. According to the text,
increasing a company’s horizontal scope can strengthen its business and increase its profitability in five
ways: (1) by improving the efficiency of its operations, (2) by heightening its product differentiation, (3) by
reducing market rivalry, (4) by increasing the company’s bargaining power over suppliers and buyers, and
(5) by enhancing its flexibility and dynamic capabilities. LVMH appears to be strong in many of these areas,
but there are some drawbacks. For an appraisal of LVMH’s horizontal diversification (scope), see Table 1.

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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 4

TABLE 1. Appraising LVMH’s Horizontal Diversification Strategies

Strategic intent
Leverage global scale economies
to improve efficiency
Heighten product differentiation
via Integrity & quality
Better understanding customers to
reduce rivalry
Increase bargaining power over
Plusses
Reduced transport costs, increased
effectiveness of boutiques &
aftermarket support
Exclusivity is fundamental to strategy
& to protect global luxury product-
market leadership position
Iconic global brands well recognized
across global markets, little need for
localized production
Already global market share leader;
Minuses
Highly dependent on favorable
balances of trade, exchange rates,
interest rates; no particular evidence
of scale economies in production of
luxury branded goods
Unclear if culture and values will
be shared and implemented by
operators of retail outlets across
China, South America, and Russia
Cost to obtain access to global
markets
Slowing demand for certain

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buyers & suppliers to boost market power of buyers and suppliers in the categories of luxury goods due to

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share luxury segment is already weak changes in fashion and tastes

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Enhance flexibility & dynamic Potential to develop ‘tailored luxury Unknown impacts of innovation on

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capabilities via product innovation products’ to serve focal markets in existing luxury product life-cycles
emerging economies such as China (10 – 20 years)

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Ultimately, it may become quite difficult for LVMH to maintain such a broad portfolio of luxury brands, and
some of the underperforming brands or groups may need to be sold or spun off.

n While luxury is a strong-return business, building yachts, developing and maintaining boutique hotels in
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exotic locations, developing real estate for new stores, and providing customers with exclusive in-store
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experiences can together be expensive and drag down returns on capital.

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3. Is LVMH’s international strategy best characterized as a multi-domestic strategy, global

strategy, or transnational strategy?
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Students should be directed to carefully review Figure 7.2:

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n An international/global strategy is a strategy for competing in two or more countries simultaneously.

n A multi-domestic strategy is one in which a company varies its product offering and competitive
approach from country to country in an effort to be responsive to differing buyer preferences and market
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conditions.
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• This is a think-local, act-local type of international strategy, facilitated by decision making

decentralized to the local level.

n A transnational strategy (sometimes called “glocalization”) incorporates elements of both a globalized

and a localized approach to strategy making.

• This type of middle-ground strategy is called for when there are relatively high needs for local
responsiveness as well as appreciable benefits to be realized from standardization.

• A transnational strategy is a think-global, act-local approach that incorporates elements of both

multi-domestic and global strategies.

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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 5

Of the three types of international strategies, LVMH is most evidently following a global/international
strategy. Some pros and cons and question marks of this approach are as follows:

Pros:

+ Transfer of distinctive competencies to foreign markets

+ Ability to exploit experience-curve effects
+ Ability to realize location economies
Cons:

– Lack of local responsiveness

– Inability to realize location economies
Question marks:

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? Failure to exploit experience-curve effects

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? Continuously driven by pressures for cost reductions & challenges to integrate & convert local systems,

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styles, cultures, processes, etc.

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4. Does it make good strategic sense for LVMH to compete in all of its current segments?
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Which of its product lines — Wine and Spirits, Fashion and Leather Goods, Perfumes and
Cosmetics, Watches and Jewelry, Selective Retailing, and Other — do you think is/are most
important to LVMH’s future growth and profitability? Should one or more of these current
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segments be discontinued? Why?

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LVMH has built strong intangible assets in most of its brands, which have shown up in its ability to maintain
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high prices and deliver strong margins, though it is apparent that a number of brands in the portfolio tend
pull down the excellent returns of other brands.

Advanced or superior undergraduate students will analyze LVMH’s performance by business group, as
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shown in Table 2.
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TABLE 2. Business Group Performance Analyses for LVMH, 2014 – 2015

Income from Operating
Revenues, Operations, Investments, Cash flows, Cash flows,
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Year-on-Year Year-on-Year Year-on-Year 2015 2014

Growth Rate, % Growth Rate, % Growth Rate, % (note 1) (note 1)
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Wine & Spirits 15.9% 18.8% 53.3% € 1,262 € 1,114

Fashion & Leather Goods 14.2% 9.9% -5.5% 3,593 3,159
Perfumes & Cosmetics 15.3% 26.5% 3.6% 479 343
Watches & Jewelry 18.9% 52.7% 6.8% 427 263
Selective Retailing 17.8% 5.9% 2.6% 901 789
Other -7.3% -23.4% 42.2% (449) (397)
ALL SEGMENTS 16.4% 15.6% 10.1% € 6,213 € 5,271

Note 1: Cash flows by segment = (Profit from Recurring Operations – Operating Investments) + Depreciation and
Amortization.
Calculated using data in case Exhibit 5.

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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 6

n The analyses in Table 2 reveal that all of LVMH’s business groups—except “Other”—enjoyed double-
digit growth rates from FY2014 to FY2015

n The “Other” business group experienced negative growth in both Revenues and Income from Operations,
despite the highest increase in Operating Investment, from FY2014 to FY2015

n Although LVMH’s five primary business groups enjoyed increasing Cash Flows from FY2014 to
FY2015, the “Other” segment suffered increasingly negative Cash Flows during that period.

5. What is your assessment of LVMH’s financial performance over the 2012 – 2015 period? (Use
the financial ratios in the Appendix of the text as a guide in doing your financial analysis.)
Students should be able to use the financial information provided in case Exhibits 1 and 6, as well as
the financial ratios provided in the Financial Summary Table 4.1 (or the Appendix of the text) to make
calculations similar to those shown in Table 3.

TABLE 3. Selected Financial Statistics and Ratios for LVMH, 2012 – 2015

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Profitability 2015 2014 2013 2012

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Gross margin 64.80% 64.75% 65.50% 64.71%
Operating margin 17.90% 17.73% 20.22% 20.42%

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Net income, % sales (ROS) 10.02% 18.43% 11.79% 12.18%
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Marketing & selling expenses, sales -38.78% -38.33% -37.22% -35.94%
General & administrative expenses, % sales -7.47% -7.75% -7.63% -7.70%
Operating income/Total assets (Operating ROA) 11.08% 10.18% 10.59% 11.49%
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Net income /Total assets (ROA) 6.20% 10.58% 6.17% 6.86%

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Return on Equity (ROE) 13.85% 24.55% 12.39% 13.34%

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Activity
Total asset turnover (x) 0.62 0.57 0.52 0.56
Fixed asset turnover (x) 0.92 0.87 0.74 0.79
COGS/Inventories (x) 1.24 1.14 1.17 1.23
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A/R, days 26 27 27 26
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Leverage
Total debt: Total assets, % 55.21% 56.89% 50.20% 48.60%
Total debt: Equity, % 123.27% 131.98% 100.82% 94.54%
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LT debt: Equity, % 74.05% 79.05% 58.62% 57.59%

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Liquidity
Working capital (€ millions) € 6,251 € 5,935 € 4,382 € 4,791
Current ratio (x) 1.49 1.49 1.37 1.51
Quick ratio (s) 0.70 0.71 0.64 0.65

Calculated using data from case Exhibits 1 and 6.

Key highlights of these performance indicators include:

n LVMH’s relatively stable Gross Margins over the four-year period, peaking at 65.5% in FY2013 and
slightly dropping to 64.8% in fiscal years 2014 and 2015.

n Increasing Operating Expenses (primarily Marketing Expenses) as a percentage of total revenues,

causing Operating Margins (Operating Income as a percentage of Revenues) to drop from about 20% in
fiscal years 2012 and 2013 to about 18% in both fiscal years 2014 and 2015.
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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 7

n LVMH’s Returns on Sales (ROS) have fluctuated considerably over the four-year period, from a low of
about 10% in FY2015 to a high of about 18% in FY2014.

n LVMH’s Operating Returns on Assets have shown stability over the four-year period at about 10%–
11%. With the sole exception of FY 2014, regular ROA have been stable at about 6%. Similarly, Returns
on Equity (ROE) have remained stable at about 12%–13% with the exception of FY 2014, when ROE
exceeded 24%. One possible explanation for the dissimilar results in FY2014 is that LVMH reported an
extraordinary net gain in non-operating financial income for that year of about €3 billion.

n The primary four Activity Ratios for LVMH have remained relatively consistent over the four most
recent fiscal years. Total Asset Turnover has remained at about .60x, Fixed Asset Turnover has ranged
from .74x to 92x, inventory Turnover (COGS/Inventories) have fluctuated from 1.14x in FY2014 to
1.24x in FY2015, and Accounts Receivable Collection Period (days) have hovered around 26 days.

n Two primary measures of Liquidity—Current Ratio, and Quick (Acid-test) Ratio—have been consistent
from FY 2012 to FY 2015. LVMH’s Working Capital has steadily increased from €4.6 billion in FY
2012 to over €6.2 billion in FY2015.

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n LVMH has steadily increased its debt leverage from FY 2012 to FY 2015, possibly due to management’s

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conscious decision to take advantage of a combination of historically low interest rates (i.e. reducing the

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cost of long-term debt and increasing the costs of equity, making new equity sales less attractive than
borrowings in the financial markets) over that period. Total debt as a percentage of total assets increased

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from 48% in FY 2012 to nearly 57% in 2014 and about 55% in FY 2015. Total debt as a percentage of
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equity has increased proportionately as well, from about 94% in FY2012 to 132% in FY 2014 and 123%
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in FY2015. Long-term debt as a percentage of equity rose from 58% to about 75% over the four-year
period from FY2012 to FY2015.

n Returns on invested capital appear to have yielded sufficient free cash flow to pay down debt, pay
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dividends, and/or fund acquisitions.

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6. What strategic issues confront LVMH in 2016? What market or internal circumstances should
most concern CEO Bernard Arnault and his company’s senior leadership team?
Students should be pressed to present a balanced view of the strategic issues that Arnault faces, and consider
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both the pros and cons of LVMH’s current portfolio strategy. These can be summarized as follows:
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n Although LVMH is as of 2016 a dominant competitor in many luxury goods markets, its size may
ultimately become its enemy.
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n The company may find it hard to manage the creativity and exclusivity of brands that have become so
widely distributed.
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n Certainly, some of the success of this company is due to synergy and management ideas being shared
across
a portfolio of luxury brands, but it is our opinion that past success does not provide complete
assurance that these strategies can continue to be successful as LVMH grows.

7. What recommendations would you make to Arnault to address the strategic issues
confronting LVMH in 2016 in order to sustain its impressive growth in revenues and
profitability?
There is always the risk that LVMH may find that it cannot manage all of its brands, much less keep them
at the top of the pyramid of premium products forever. Global tastes in luxury drinks, watches and jewelry,
fashion, and accessories tend to ebb and flow. Demand for expensive items from drinks to diamonds to
watches can shift over time. As a global leader in luxury goods, LVMH has exposure to the macroeconomics

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 Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods 8

of Asia, tourism, and China’s long-term consumer growth in particular. Granted that wealthy consumers may
have savings to spend even in tough times, yet consumer sentiment can affect sales since ultimately many
luxury goods are not necessities. Furthermore,

n We believe that global expansion, renovation of existing retail outlets, and price increases that go with
product innovation will continue to be the key growth drivers for LVMH

n While luxury is a strong-return business, building yachts, developing and maintaining boutique hotels in
exotic locations, developing real estate for new stores, and providing customers with exclusive in-store
experiences can together be expensive and drag down returns on capital

n Selective divestitures may be required down the road in order to sustain growth and free cash flow, but
convincing CEO Arnault to part with any part of the existing portfolio is likely to be difficult

• Rationalizing LVMH’s portfolio may well need to be put into abeyance until Arnault’s successor
comes on board

n Owing to LVMH’s strong and increasing Free Cash Flows and the impending divestment of the DKNY

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operations, the company may be in a good position to:

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• Increase dividends for investors

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• Repurchase shares to boost its stock price

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Enter into selective acquisitions of other luxury brands that would complement its existing portfolio.
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Epilogue
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Case updates can be found at LVMH’s website: https://www.lvmh.com. For investor information and recent
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press releases, go to: https://www.lvmh.com/investors.

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