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LVMH Moet Hennessy Louis Vuitton SA

Company Profile Publication Date: 30 Sep 2010

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LVMH Moet Hennessy Louis Vuitton SA

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LVMH Moet Hennessy Louis Vuitton SA TABLE OF CONTENTS

TABLE OF CONTENTS Company Overview..............................................................................................4 Key Facts...............................................................................................................4 SWOT Analysis.....................................................................................................5

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LVMH Moet Hennessy Louis Vuitton SA Company Overview

COMPANY OVERVIEW LVMH Moet Hennessy Louis Vuitton (LVMH or “the company”) produces and retails luxury goods under various categories and brands. The company is headquartered in Paris, and employs 77,302 people. The company recorded revenues of E17,053 million ($23,782.1 million) during the financial year ended December 2009 (FY2009), a decrease of 0.8% compared to 2008. The operating profit of the company was E3,161 million ($4,408.3 million) in FY2009, a decrease of 9.3% compared to 2008. The net profit was E1,755 million ($2,447.5 million) in FY2009, a decrease of 13.4% compared to 2008.

KEY FACTS Head Office

LVMH Moet Hennessy Louis Vuitton SA 22 avenue Montaigne 75008 Paris FRA

Phone

33 1 44 13 22 22

Fax

33 1 44 13 21 19

Web Address

http://www.lvmh.com

Revenue / turnover 17,053.0 (EUR Mn) Financial Year End

December

Employees

77,302

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LVMH Moet Hennessy Louis Vuitton SA SWOT Analysis

SWOT ANALYSIS LVMH Moet Hennessy Louis Vuitton (LVMH or “the company”) produces and retails luxury goods under various categories and brands. The company over the years built a portfolio of strong brands which enhance the competitive positioning for the company. However, declining luxury markets in the US, Europe and Japan, three key markets for LVMH, will impact the revenues adversely. Strengths

Weaknesses

Strong brand positioning Association with celebrities and major events Lower operating gearing compared to peers

Limited presence in the retail segment increases the vulnerability to retailer destocking Weakness in the champagne segment

Opportunities

Threats

Growing luxury market in emerging economies will drive top line growth Women’s accessories is a pocket of growth amid low growth developed markets Chinese tourism – opportunities for selective retailing division

Luxury markets in the US, Europe and Japan are fragile with structural declines estimated in Japanese market Spending on wines and spirits is likely to be less as the consumers become frugal Counterfeit products leads to tarnished brand image and increased expenses

Strengths

Strong brand positioning LVMH has positioned its brands strongly in the luxury segment offering more than 60 different brands under the five core product categories. The company's brands have an established identity and value perception. According to a Millward Brown 2010 study, Louis Vuitton is the world's 29th most valuable brand and is estimated to be worth $19.8 billion. According to industry reports, due to such brand positioning, these luxury brands are able to sell their products without mark downs to promote sales. The luxury brands are less affected by the economic cycles due to factors like high customer loyalty, value perception, and image of the brands as being prestigious and are considered as unique heritage brands. LVMH showed a relative resilience against adverse economic backdrop in 2009 as well as in 2008. This indicates that LVMH, on the strength of its brands, is able to sustain growth in revenues in a tough economic situation. The brand has an established aspiring customer base across the world, owing to its superior brand image, which is enabling the company to penetrate quickly into new markets for all of its product categories.

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LVMH Moet Hennessy Louis Vuitton SA SWOT Analysis

Association with celebrities and major events LVMH brand has established log standing associations with celebrities and major events enhancing its luxury positioning. Moet & Chandon deployed its communications platform around major film events like the Oscars and Golden Globe awards, and festivals around the world and designed the event with its new international campaign, symbolized by Scarlett Johansson, the first Hollywood star in history to represent a champagne brand. Perfumes like J’adore is represented by Charlize Theron and Hypnotic Poison is represented by Monica Bellucci. Similarly, Tag Heur has a close association with Leonardo DiCaprio and has designed products centered around his preferences. The company has overall continuously involved celebrities and major events in its marketing strategy. Research shows that this increases the brand visibility and recall. Also, it targets the most important aspirational customer base effectively by enhancing the brand image. Building a brand is critical for luxury companies and associations such as these would add to the value associated with the brand. Lower operating gearing compared to peers LVMH has lower operating gearing compared to its peers. Operating gearing is the ratio of a company's fixed costs to its total costs. The higher the level of operational gearing, the greater the risk, since fixed costs have to be covered before a profit can be recorded. LVMH’s operating gearing is 3.1 while Burberry’s is 3.3, Richemont’s 3.4 Swatch’s is 3.8 and Bulgari’s is 5.9; on an average during 2006–09. This indicates that the company has more cushion to weather a declining revenue scenario effectively. This is because LVMH has lower fixed costs as a percentage of its sales. This leads to reduced business risk. Lower fixed costs will also enable the company to effectively adjust its cost structure to the revenues.

Weaknesses

Limited presence in the retail segment increases the vulnerability to retailer destocking LVMH has limited presence in the retail segment and hence highly dependent on sales to retailers. Retailers have been witnessing low confidence on the markets and are resorting to de-stocking of luxury products to avoid losses. The company’s wines and spirits, and watches and jewelry brands were most impacted by the crisis due to destocking at distributors and retail traders.The dependency on the retailers for sales and limited penetration into the retail channel will also hamper the market reach of these products. Therefore, LVMH’s revenues are vulnerable to the stock decisions made by the retailers. Weakness in the champagne segment Sales of champagne, a significant category for LVMH has been witnessing difficulties due to its positioning. In terns of presence, the sales of champagne are highly concentrated. About 80% of champagne is sold in Western Europe, where local unemployment is still rising. This is a luxury category that does not benefit to the same extent from strong demand in emerging markets offsetting

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LVMH Moet Hennessy Louis Vuitton SA SWOT Analysis

weakness in developed luxury markets. Also limited retail presence and limited presence in emerging markets have been contributing to declining revenues from the product category. Additionally, down-trading is still a big problem in champagne, particularly impacting the group’s prestige vintage volumes in particular. The champagne category has been exposed to sluggish markets and low priced alternatives which is leading to a weakness in the product category.

Opportunities

Growing luxury market in emerging economies will drive top line growth The luxury market in emerging economies is expected to experience robust growth in 2010. While developed economies are estimated to record flat or no growth in the luxury segment, Asia is estimated to record a growth of 10% in 2010. Globally, during 2003–08, 23% of the revenues came from the emerging markets and by the end of 2010, 40% of the revenues are expected to be derived from BRIC countries alone. Growing high net worth individuals (HNWI) concentration in these countries is estimated to drive the sales of luxury goods. The Asia Pacific HNWI population rose 25.8% overall to three million, catching up with Europe for the first time, after falling 14.2% in 2008. In 2009, the Asia-Pacific region contained eight of the 10 economies with the highest growth in HNWI population, led by Hong Kong where their numbers doubled as the stock exchange soared by 73.5%. The other Asia-Pacific economies on the global top 10 list were India, Taiwan, Australia, Singapore, Indonesia and Vietnam, in that order. In another separate study, it was found that China had overtaken India in having the most number of billionaires, but India remained home to the region's wealthiest individuals. Ten of Asia's top 25 billionaires were from India. The combined wealth of Asia Pacific's HNWIs is estimated to grow at an annual rate of 8.8% until 2018, faster than the global average of 7.1%. These factors are estimated to enhance the demand for luxury goods. Similar trend is observed in other markets. Russian luxury is reviving as was noticed that in the first semester of 2010 the market added 15% compared to the same period in 2009, and real growth made 11%. The situation is in line with the general trend – along with financial reports for the first six months world luxury market will add 11% for 2010 which is more than the expected 9-10%. The Middle Eastern luxury market is worth about $8.53 billion in annual sales, which is about 4.5% of world sales, according to recent industry estimates. Middle Eastern region comprises the largest share among the high growth economies. In comparison, India represents only 0.5% of global luxury sales and Brazil 0.7%. Despite this, Indian and Brazilian economies comprise a large aspiring customer base, who have traditionally been the drivers for luxury, making these countries highly attractive. LVMH has been focusing on increasing its investment in such emerging economies where high growth rates can be experienced. Slow growth in the Japanese, the US and the European markets has been off set by the strong momentum in Asian markets other than Japan, Russia and Middle East. China has become the biggest market for Hennessey cognac and has a large customer base for Louis Vuitton brand. LVMH has been assessing the trends in these Asian economies and accordingly took initiative to penetrate these markets effectively. Growing wealth of HNWIs and

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LVMH Moet Hennessy Louis Vuitton SA SWOT Analysis

access to a large customer base which in turn is growing at a fast pace will enable the company to enhance and diversify its revenue stream. Women’s accessories is a pocket of growth amid low growth developed markets Women’s accessories market is expected to record strong growth rates. The fashion accessories market was down 10% from January through December 2009, however, a strong first quarter in 2010 hints at a recovery. During the period January to March, fashion accessories sales were up 17%, and as a result, the market was down just 6% for the 12 months ending March 31, 2010. It was sales of women’s accessories that led the way for the first quarter of 2010. Total women’s fashion accessories were up 20%, driven by a solid performance in women’s handbags. Dollar volume sales of total women’s handbags were up 31% compared to the same period in 2009. Some of the drivers behind the growth can be found in the sales of handbags with an average price of $100. Sales of those bags comprised 46% of the total dollar sales in the handbag market. That translates to an increase of 9 share points in handbags with that price point, and suggests that women are beginning to spend on handbags again. The small leather goods category for both men’s and women’s had been a bright spot for all of 2009 and continues to post positive results for the first quarter of 2010. Dollar volume sales of small leather goods for both men and women were up 9% for the first quarter of 2010 and for the most recently reported 12 month period ending March 31, 2010, sales were up 3%. Purchases of wallets, mobile phone cases and wristlets were some of the key drivers of this growth. Several key markets for LVMH have been suffering low growth owing to the adverse economic conditions and sluggish recovery. Women’s accessories provide an opportunity for growth in these markets. Chinese tourism – opportunities for selective retailing division The selective retailing segment has bee witnessing constrained spending owing to lesser number of travelers. However, Chinese tourism is estimated to witness a robust growth. The tourism industry in China is one of the fastest growing industries and has witnessed continuous development and transformation driven by two decades long economic liberalization and the government's favorable policy framework. According to a research report, inbound industry in China will witness a significant growth during 2011–13, fueled by overseas investment and opening the domestic tourism market to foreign companies. Inbound tourism is projected to grow at a CAGR of around 8% during 2010–13. Besides, China is branding and positioning its tourism industry at the global level to fuel growth in tourism industry. Increasing number of tourist arrivals and simultaneous rising per capita spending by tourist will boost the tourist receipts in coming years. Moreover, the tourist receipts received by top five provinces in China ed for more than 60% of the total receipts generated during 2008. Of these five provinces, Guangdong witnessed more than $9 billion in receipts. Backed by cultural promotion, easing VISA regulations, and the government the industry is estimated to witness strong growth in number of tourist arrivals, which in turn will increase tourism receipts. China is expected to become the world's number one travel destination by 2020. LVMH has been focusing on establishing its selective retailing in China and presence in the segment will position the company at an advantageous position to enhance revenues from the growing tourism.

Threats

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LVMH Moet Hennessy Louis Vuitton SA SWOT Analysis

Luxury markets in the US, Europe and Japan are fragile with structural declines estimated in Japanese market Despite signs of recovery, the luxury markets in the US, Europe and Japan are estimated to record a decline in 2010. The US will generate a decline of 4%, with Europe and Japan are estimated to decline by 3% by the end of 2009. Although this still constitutes a significantly better performance than in the recent past, these markets still being some of the largest markets for LVMH, pose substantial threat to its revenues. The luxury market in Japan has structural issues that is likely to drive the market down even after many of the developed economies recover. Besides the recession and a decrease in the discretionary spending of consumers in Japan, there are several other major obstacles which make Japan a difficult market for existing brands to expand. The current landscape for luxury brands in Japan is oversaturated and many retail shops and fashion brands are completely closing down operations in Japan. The recent prevalence of online price comparison, exclusive shopping sites and the popularity of auction sites as well as Japanese consumers engaging in holiday shopping is making the luxury market even more competitive than ever. In addition, the priorities of the Japanese consumer are also changing and maturing.They are no longer so aspirational and are now buying mostly fast-fashion pieces and incorporating them with a high-end to luxury piece, usually an accessory; handbags, small leather goods or shoes. The time of the aspirational consumer and frivolous consumption in Japan is considered to be over and the economic indicators are still bleak. Japan’s second quarter 2010 GDP grew by only 0.1%, far less than had been forecast, unemployment rate for the month of June 2010 was 5.3%, meaning 3.4 million people were out of work, the second highest since November 2009. These factors are driving down the luxury market in Japan and the recovery has also been very slow compared to other markets. LVMH derives more than two-thirds of its revenues from Europe, the US, and Japan. The slowdown of luxury sales in these markets will impact the revenues adversely despite increasing focus on emerging, high-growth markets. Spending on wines and spirits is likely to be less as the consumers become frugal Recent industry reports suggest that frugality is wide-spread among the consumers and willingness to spend on luxury wines and spirits has declined. As noticed by the end of 2009, ultra- priced spirits were flat, for US food, drug, convenience, liquor and other select channels. On the other hand, value-priced spirits had the largest gain as sales rose by 2.7%. Sales of wine priced more than $20 a bottle fell by 3.7% in the 52 weeks ending January 2010 in the same channels, while sales of wine costing $3 to $5.99 increased by 8.7%. Consumers’ propensity to trade down during the recession reverses an industry-wide trend of moving up to high-end luxury wine and spirits. Until some time ago, high-end spirits saw growth of up to 14% a year, , but that has slowed to about 1% in 2009. The numbers are not expected to get much better in 2010 as unemployment continues to hover around double digits. Mid-priced spirits saw sales increase by about 1.2% in 2009 and private label wine is growing at a 30% clip over 2009, well over the category as a whole. This indicates that more consumers are shifting to value priced private label products. As a result, established wine and spirits companies that are positioned in multiple pricing categories and channels

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LVMH Moet Hennessy Louis Vuitton SA SWOT Analysis

stand the best chance of turning profit in 2010 as consumers continue to trade within the segments. Spirits drinkers also are trading down to value-priced drinks over high-end beverages. In 2009, gross revenue for super and high-end spirits fell 4.1% and 2.1% respectively while gross revenue for value-priced spirits increased by 5.1% in 2009. Even in , similar trends are witnessed. The value of champagne sold is set to fall at almost twice the rate of volume this year in , the drink’s home and its biggest market, as the recession causes consumers to pare spending, according to an industry report. The trend threatens the prospects of champagne titans, including LVMH, as well as the $4.4 billion global industry. French shoppers selecting a champagne for holidays are increasingly choosing cheaper options like Laurent-Perrier’s E10 ($13.9) brand Jeanmaire; Hubert de Claminger, which costs as little as E8.90 at Carrefour or Champagne Paul Breteuil, which goes for E10 at Auchan stores. LVMH and other makers of labels like Bollinger were forced to slash prices of some bottles by as much as 50% in the UK, the largest market after , to over some such shift in consumer behavior. LVMH has been developing its presence in the luxury spirits segment and has presence in luxury wine segment. The weakness in the segment is likely to hamper the development plans for the company and revenues from wines and spirits segment. Counterfeit products leads to tarnished brand image and increased expenses For companies like LVMH, brand is its biggest asset and counterfeit products tarnish the image. Increased counterfeit crime will hurt the brand image and converts into losses. The abundance of counterfeit goods and accessories is adversely affecting the sales of branded products. It is estimated that the loss due to counterfeit products convert into around E6 billion ($8.5 billion). With the advent of digital channels there has been a surge in the sale of counterfeit products and online sales of these products increased by 9% in 2009. LVMH’s brands have been facing increased counterfeit issues. More than $389,000 worth of counterfeit merchandise was seized by special agents with the US Immigration and Customs Enforcement Office of Homeland Security Investigations during a two-day enforcement operation targeting flea markets in the South Florida area that were suspected of selling counterfeit trademarked goods. Similarly, in another case fake Louis Vuitton hand bags, leather cases and accessories worth $4.6 million have been seized from a dozen stalls in a shopping mall and two warehouses in the Philippines capital. Counterfeit products, low on quality, hurt customer loyalty when they buy such products by mistake. LVMH has been having legal battles with some of the most popular retailers like eBay and Wal-Mart relating to sale of counterfeit products. This is also hurting the company’s relations with the retailers. Such litigations are also expensive and time consuming. Brands being its main assets, LVMH will have to divert significant amount of resources to protect its brands, in the backdrop of rising counterfeit crimes.

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