THE LVMH GROUP LVMH, Mot Hennessy Louis Vuitton, operated five businesses: wines and spirits, perfumes and cosmetics, fashion and leather goods, watches and jewellery, and selective retailing. The group owned over 60 luxury brands.25 In 2011, sales were 23.6 billion and profits were 3 billion. Exhibit 2 gives the financial details of LVMH group and three of its competitors for 2009 to 2011. The group had enjoyed substantial growth in revenue and profitability over this time period. Acquisitions While it had grown over the last two decades both through acquisitions and organically, acquisitions had played a major role. The majority of acquisitions had been in companies that produced high quality luxury products. Some of the major acquisitions included Givenchy (1998), Cline fashions (1996), the winery Chteau d'Yquem (1996), the retail distributor DFS (1996), the perfume chains Sephora (1997) and Marie-Jeanne Godard (1998), Miami Cruise Line Service (2000), which owned duty free shops and the designer clothing company Donna Karen International (2000). It also had stakes in multiple luxury goods companies, including Fendi, numerous wine makers and brands such as Ole Henriksen and Nude Brands. In 2011, LVMH closed a deal to acquire the jewellery and watch maker Bulgari. Bulgari was a large player in the industry with 2010 revenues of El billion, and its integration into LVMH was expected to require substantial attention from the LVMH executive team. Other than Bulgari, LVMH made one other acquisition and invested in two companies in 2011. In general, the rate of acquisitions made by LVMH had fallen over the last few years, with greater emphasis placed on buying partial stakes in companies. In 2010, LVMH quietly acquired 17 per cent of the outstanding shares of its competitor Herms. Arnault purchased the shares through derivatives to circumvent the French law that requires a company to report more than a 5 per cent ownership interest. This ensured that he did not have to make his position public until a larger share had been acquired. Herms was surprised by the move and did not accept Arnault's assurance that LVMH had no intention to acquire Herms or seek a board seat. By 2011, LVMH's stake in Herms had increased to over 22 per cent. To prevent a possible takeover, members of the Herms family formed a holding company that controlled over 50 per cent of the company's shares. In 2012, Herms filed a lawsuit against LVMH, claiming irregularities in the way LVMH had acquired its stake. FASHION AND LEATHER GOODS GROUP The Fashion and Leather Goods group had a number of brands under its umbrella that sold handbags and leather goods. These brands included Louis Vuitton, Loewe, Fendi, Marc Jacobs, and Donna Karan New York. These brands had operated in different customer segments. Louis Vuitton had positioned its products in the absolute and aspirational customer segments. Loewe had been situated at the absolute customer segments and at the higher end of the aspirational customer segments. Prices for its handbags had started at $1,500, though most had been priced at between $2,000 and $4,000. Loewe's high-end handbags had been priced over $5,000 and they had emphasized their made-to-order offering, which had tended to be more expensive. Fendi and Marc Jacobs had offered products primarily to the aspirational customer segments. Handbag prices at Fendi had started at $600, though most handbags had been priced between $800 and $2,500. The high-end handbags had been priced around $4,000. At Marc Jacobs, prices had started at $800, though most of the handbags had been priced between $1,000 and $2,500, and high- end handbags had been priced between $10,000 and $25,000, though the selection at this range had been limited. Donna Karan New York, in contrast, had served the accessible customer segment and had priced its handbags between $150 and $500. Details about Louis Vuitton's products and prices are provided in the next section. The Fashion and Leather Goods group's financials are given in Exhibit 3. Revenues for 2011 had grown in euro terms by 15 per cent and organic growth, in constant exchange rate, was 16 per cent. Revenues in 2010 had grown by 20 per cent in euro terms and 13 per cent in organic terms.27 Revenues by region are provided in Exhibit 4. Even though the group had multiple brands, the largest brand, the one that drove the financial performance of the group, had been Louis Vuitton. As such the financial performance of the Fashion and Leather Goods group had been expected to largely mirror the performance of Louis Vuitton. In addition, decisions made by Louis Vuitton had a direct and substantial influence on the performance of the group. LOUIS VUITTON After taking control of LVMH, Arnault weeded out the old executives from LV and, in 1990, brought in Yves Carcelle as CEO. Under the new leadership and in partnership with Marc Jacobs as head designer, LV flourished. Amault and Carcelle brought attention to bear on the profitability and efficiency of the business. They continued the practice of selling only through company-owned stores, but they also made other changes. Unlike Racamier, under whose leadership 70 per cent of production was outsourced, the two brought production in-house, soon expanding the number of factories in France from five to 10. In 2004, they bought out distributors and took direct control of the distribution channel. According to Arnault, "If you control your factories, you control your quality" and "If you control your distribution, you control your image." In addition, in partnership with Marc Jacobs, an increased focus was put on new product designs and innovations that resulted in a slew of creative and successful products. LV products included a wide range of luxury fashion goods for women and men, including handbags, wallets, luggage, accessories, ready-to-wear clothes, shoes, watches and jewellery, though the company's mainstay, and what it was known for, was its collection of leather products. One area in which LV did not, in 2011, offer products was perfumes. This was an area into which the company was considering expanding. The perfume market stood at 19 billion in 2011 and was expected to grow by 5 per cent in 2012. The absolute and aspirational segment made up about 25 per cent of the market. Of note was that the parent organization, LVMH, had significant experience in the perfume products in its perfumes and cosmetics division. This division had industry leading brands, such as Christian Dior, Guerlain and Givenchy, under its umbrella. Pricing and Customer Segments LV's product portfolio included offerings for all three segments but had primarily focused on the Absolute and Aspirational customer segments. Prices for handbags had varied from a low of US$300 for clutches to a range of mid-priced products priced between US$750 and US$3,500. At the high end, handbags had been priced anywhere from US$3,500 to US$35,000, with some handbags selling for US$100,000 or more. The higher end handbags had included custom designed bags that took five months to deliver. In many of its stores, an area used to be reserved for the best customer to shop in privacy. In some cities, LV had owned private apartments and yachts, which included amenities such as butler service, where customers would be given design consultations and could be fitted. Prices had been tightly controlled. Products were never discounted or sold in value packs. LV, like many others in the industry, had considerable power to increase prices. While price increases had slowed after the 2008 recession, they started picking up in the second half of 2010. In 2010, prices in the euro zone were increased between 2 and 3 per cent. In 2011, prices were increased by 16 per cent in the United States, 5 per cent in Europe and 11 per cent in China. Some of these price increases were made in response to currency fluctuations. Between the second quarters of 2011 and 2012, overall prices were increased by 7 per cent. These price increases made up for the smaller price increases that had followed the 2008 recession. In the words of a senior executive interviewed for the magazine The Economist: There are four main elements to our business model product, distribution, communication and price. Our job is to do such a fantastic job on the first three that people forget all about the fourth.32 However, while prices had increased in 2011, customers, especially those in the accessible and aspirational segments, were becoming value conscious. It was therefore expected that future price rises would be more moderate. Distribution As previously mentioned, LV sold most of its merchandise through its own stores. The number of stores had increased from 368 at the end of 2006 to 425 at the end of 2008. By the first quarter of 2010, the store network had increased to 451.33 Fewer than 10 stores had been inaugurated in 2010, with the retail network totaling 458 stores by the end of the first quarter of 2011. These stores were located at prime venues in major cities. Stores in many of the cities were anchored by flagship stores; all stores were designed centrally at LV's main operations in France to communicate the company's French tradition and heritage as well as to provide a unique experience of opulence and luxury. Centralized control of the store designs allowed for a common brand image across them. Some had areas that were available to members only. Membership required recommendation by a current member, a one-time initiation fee and an annual membership fee. Per store, revenues were 12.7 million, more than double the per store revenue figures for Gucci and Prada.35