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TEACHING NOTE
CASE 22
LVMH in 2016: Its Diversification
into Luxury Goods
Overview
Louis Vuitton Moët Hennessy (LVMH ) is the world’s largest luxury products conglomerate with a business
portfolio that includes some of the most prestigious brand names in wines, spirits, and champagnes, fashion,
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
yacht producer, a 19th-century-styled French amusement park, two prestigious Parisian department stores, duty-
free stores, a retail cosmetics chain, high-end luxury hotels, and a variety of French media properties.
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
attractive returns for shareholders and had made its CEO, Bernard Arnault, the world’s 14th wealthiest person.
Arnault placed an emphasis on internal growth by exploiting common strategies and capturing synergies
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
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
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
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
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.
*
Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods
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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
of the Connect Library.
You may also find it beneficial to have your class read the Guide to Case Analysis that follows Case 31 and is
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
prepare a case for class discussion, oral presentation, or written analysis.
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
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
for discussion of an assigned case (or to develop a substantive written analysis or oral team presentation).
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’
recommendations left to be graded by the instructor.
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
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,
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.
Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods
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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
ratios in the Appendix of the text as a guide in doing your financial analysis.)
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?
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?
Teaching Outline and Analysis
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?
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
emphasis on growth areas in the Asia-Pacific region, most notably in China. Students should see that:
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,
Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods
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TABLE 1. Appraising LVMH’s Horizontal Diversification Strategies
Strategic intent Plusses Minuses
Leverage global scale economies
Reduced transport costs, increased
Highly dependent on favorable
luxury branded goods
Heighten product differentiation
via Integrity & quality
Exclusivity is fundamental to strategy
& to protect global luxury product-
Unclear if culture and values will
be shared and implemented by
reduce rivalry
across global markets, little need for
localized production
markets
Enhance flexibility & dynamic
Potential to develop ‘tailored luxury
Unknown impacts of innovation on
some of the underperforming brands or groups may need to be sold or spun off.
3. Is LVMH’s international strategy best characterized as a multi-domestic strategy, global
strategy, or transnational strategy?
Students should be directed to carefully review Figure 7.2:
nAn international/global strategy is a strategy for competing in two or more countries simultaneously.
nA 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
conditions.
Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods
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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
Cons:
Question marks:
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?
LVMH has built strong intangible assets in most of its brands, which have shown up in its ability to maintain
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
shown in Table 2.
TABLE 2. Business Group Performance Analyses for LVMH, 2014 – 2015
Revenues,
Year-on-Year
Income from
Operations,
Year-on-Year
Operating
Investments,
Year-on-Year
Cash flows,
2015
Cash flows,
2014
Case 22 Teaching Note LVMH in 2016: Its Diversification into Luxury Goods
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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
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.
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%
Net income /Total assets (ROA) 6.20% 10.58% 6.17% 6.86%
Return on Equity (ROE) 13.85% 24.55% 12.39% 13.34%
Leverage
Total debt: Total assets, % 55.21% 56.89% 50.20% 48.60%
Total debt: Equity, % 123.27% 131.98% 100.82% 94.54%
LT debt: Equity, % 74.05% 79.05% 58.62% 57.59%
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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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%–
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.
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
both the pros and cons of LVMH’s current portfolio strategy. These can be summarized as follows:
n Although LVMH is as of 2016 a dominant competitor in many luxury goods markets, its size may
ultimately become its enemy.
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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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
Epilogue
Case updates can be found at LVMH’s website: https://www.lvmh.com. For investor information and recent
press releases, go to: https://www.lvmh.com/investors.