Unlike to necessity goods, the demand of luxury goods increases more than proportionally as income rises. The global demand for luxury goods has been constantly increasing for the past few years; creating a reputation of resisting to economic recession by the sector. However those past few years show this industry is subjected to a cyclical dynamic, linked to economic variations. So there is a relationship between economic trends and luxury goods industry. The reasons of this slowdown are in a part linked to a recent strategy in the sector.
* Indeed, the will to canvas new customers from the middle class made this sector more vulnerable to economics variations. This wasnt true in the past, when only elite purchased luxury goods. * The integration of new advanced technologies and high-qualified workforces forced the sector to maintain high costs production The maturity of the luxury segment contributed as well to slow the growth of the sector. In order to compensate traditional mature markets in Europe, USA, and Japan, the industry tends to develop its activity in emerging markets, like India and China.
We also know there is a dual positioning today about customers: elite customers and mass consumption are the two elements on which companies will work with. The efficiency of those two targets will be determining on a company success. Remembering the luxury goods market is highly competitive, it matters to remind the key components allowing performance: high quality products, pricing positioning, design coherence, distribution network and price promotion. The goal is to combine those key factors with an efficient strategy.
These strategies generally are: * Consolidation: concerns mergers and acquisitions. The act of combining structures each other. It consists to absorb smaller companies in order to consolidate financial development. It allows keeping mature market by reducing competition and increasing brand value. * Globalization: concerns emerging markets. The growth of new areas, the development of tourism and web marketing allow to reach new markets where the demand is increasing. * Diversification: consists to increase profitability with greater sales volume gained from new products and markets.
Trough those elements, well try to understand better the luxury goods industry with a diagnostic and an analysis of the macro environment. Then well figure out which criterias are promoted by the companies given in example and determine what their respective strategies are. Finally well suggest a strategy for one of these groups in order to be a worth target for an investor. * I/ Macro environment analysis and actors description In this part, we will figure out a Pestel analysis to gain some info on market trends.
Then a Porter analysis will help to measure the attractiveness of the luxury industry. Secondly, we will use strategy segment on each company to understand better what they have in common and values they share. 1) Macro environment analysis * Pestel analysis will help to understand through criteria trends in the market. Political| Existence of free trade areas and creation of free trade policy that allow increasing trade exchanges between countries. | Economical| The sector is not recession proof and suffers of the global economic situation.
Mature markets (Europe, USA, Japan) are declining while emerging market are growing (e. g. : BRIICS)| Social| The luxury industry democratized its activity to a larger part of population. Also customers almost have same tastes for luxury goods around the world. | Technological | The sector of luxury increased a lot its investment in new technology. This implicates a high know-how and high-qualified workforce. | Environmental | Regarding the activity of the sector, luxury impacts differently on the environment. Craft industry for instance seems to be respectful of the environment.
| Legal | Intellectual property and IP rights creation are really relevant for the luxury industry. The knowhow and the brand are two crucial factors of success. For example, counterfeiting is a big issue for this sector. | Porters Five Forces framework helps to identify the attractiveness of the luxury industry through several factors. Threats of entry: Penetrating the luxury goods industry implies a high investments policy. New entrants compete against all the actors. Globalization make the new entrants in opposition with a worldwide market.
Plus they have to invest heavily in technologies, hire high-qualified workforce without speaking of distribution, marketing and distribution costs. Moreover, nothing allow to guarantee new entrants a strong brand image, necessary for any luxury brand. Threats of substitute: Due to the quality and the unique know-how to product luxury good, plus the fact they are not necessity good, there is no real threat of substitute in the sector. The main issue will remain counterfeiting. Power of buyers: As we already see, there are two categories of customers. The historical one is an elite which keep its bargaining power even in case of economic recession.
The other category concerns the democratization of the sector. It implies a bargaining power of a middle class, which is more sensitive to economic variation. The threat concerns these buyers. In term of b2b, retailers suffer from a small drop of bargaining power affecting the luxury sector. The power of suppliers: Their bargaining power is relatively low and is reduced even more when some firms such as Bulgari decide to direct their corporate strategy to a vertical integration of its suppliers (forward integration). Competitive rivalry:
The luxury goods industry is a low-concentrated sector with worldwide organisations willing to acquire smaller players in order to benefit from economies of scale. This tends to reduce the degree of competition within the industry. Moreover, increasing rivalry is expected in mature markets being at the shakeout stage of the luxury industry life cycle. As the growth rate starts to decline in these markets, competitors would be willing to strengthen their existing market shares. On the contrary, emerging economies represent white spaces or blue oceans for luxury brands to exploit so the rivalry is relatively low there.
2) Actors comprehension Strengths & Weaknesses common to the companies Strengths * Strong network of distribution network * Expansion of foreign sales * Strong brand images including good management of design * High quality products * High value product giving elevated margins| Weaknesses * Cyclical industry, subject to economical variations * High cost production due to technology and high-qualified work force * High cost distribution, advertising, international development * Bad environmental ranking|
Strategy statement. Regarding the fact any luxury company pretty have the same goal which is to provide high-quality product and improve customer satisfaction through high skills and know how, it matters to observe what are they visions, objectives, and scopes. Bulgari: Opportunities & Threats of the environment.
Opportunities * Expansion of foreign sales * New area of development with emerging markets (China, Russia, India, Brazil) * Growth of the demand in those emerging markets, especially in China which becomes the bigger market of luxury * Possibility to use e-commerce and reduce costs| Threats * Slowdown of demand in hard luxury goods (jewellery & watches) * Cyclical industry, subject to economical variations * Decline of old mature markets USA, Europe, and especially in Japan with a 7% in 2007 * Oligopolistic context in Japan by LVLH & Hermes. | Strategy statement.
Regarding the fact any luxury company pretty have the same goal which is to provide high-quality product and improve customer satisfaction through high skills and know how, it matters to observe what are they visions, objectives, and scopes. Bulgari: * II/ Investment criteria analysis Geographical diversification The term refers to the strategy employed by companies of locating their operations in different regions or countries in order to reduce business and operational risk. As with diversification in general, geographical diversification is based on the fact that markets are different.
For example, if the US and European markets are already mature or declining because their economies are in a recession, an companies may choose to allocate a bigger part of his sales to emerging economies with an increasing market such as the BRICs (Brazil, Russia, India, China). High-growth countries may offset the effects of lower-growth countries. So we decided to highlights this important factor by showing how the market is shared by increasing markets (mostly emerging countries) and mature markets (e. g. Europe, North America).
| Bulgari| Burberry| Gucci| Richemont| Hermes| LVMH| TODs| Global| Mature markets| 74,5| 77,3| 75,2| 75,5| 79| 71| 85,4| 73,8| Increasing markets| 25,5| 22,7| 24,8| 25,5| 21| 29| 14,6| 26,2| Knowing the fact that emerging countries are increasing markets, the best strategy seems to be investing in emerging countries. In this case LVMH has the best position. Segment growth forecast Taking into consideration the segments forecast allows us to predict their evolution. The global market will progress but in a different manner.
Indeed for the period 2008 2012 we can predict a growth of minimum 10% for the following segment: home decoration products, ready-to-wear, accessories and leather goods. In a same time we can also predict a drop of 5% for those segments: jewellery and watches, fragrances and cosmetics, wine and shoes. In order to give you the best investment recommendation for a sustainable investment we decided to analyse this factor. Indeed we rated the firms following the segments growth forecast.
| Bulgari| Burberry| Gucci| Richemont| Hermes| LVMH| TODs| > 10%| 7,7%| 88,7%| 67,0%| 21%| 62%| 35%| 17,9%| < 5%| 89,1%| 0| 24,4%| 72%| 12%| 40%| 68,6%| Distribution channel It refers to the path through which goods and services travel from the vendor to the. A distribution channel can be as short as a direct transaction from the vendor to the consumer, or may include several interconnected intermediaries along the way such as wholesalers, distributers, agents and retailers. Each intermediary receives the item and adds its costs before sending it to the next one.
There are two main constraints of having intermediaries: more intermediaries there is, less control the company has on its distribution channel and furthermore each intermediary adds its cost. Into the directly operated stores we can also make out the franchised stores that are not controlled directly by the firm. To complete the distribution channel analysis we also established a ratio that correspond to the annual sales of the firms achieved in its own distribution network. | Bulgari| Burberry| Gucci| Richemont| Hermes| LVMH| TODs| Directly operated stores| 164| 97| 560| 678| 165| 2314| 150| Franchised stores| 42| 231| n.a| 574| 121| n. a| 71|
Sales through its own distribution network| 49%| 52%| 67%| 42%| 70%| n. a| 61%| * III/ Recommendations In order to summarize we bring all the investment criteria in a same board, ranking firms from 1 to 7 (1 is the best grade). | Bulgari| Burberry| Gucci| Richemont| Hermes| LVMH| TODs| ROI| | | | | | | | SMV| | | | | | | | Shareholder equity| | | | | | | | Portfolio| | | | | | | | Ethic| | | | | | | | Geographic| 2| 5| 4| 2| 6| 1| 7| SGF| 7| 1| 2| 5| 3| 4| 6| Distribution network| 7| 6| 2| 4| 3| 1| 5|.