Ever since Michael Kors’ Capri Holdings announced the acquisition of Italian-luxury brand Versace, comparisons with 164-year old international fashion powerhouse LVMH have run rampant. My colleague Pam Danziger and I have been baffled because in our minds, we see both companies competing in different stages of the business cycle as LVMH has been in stability mode for many years while Capri Holdings is in the growth stage. By our own standards, these two companies are simply incomparable.
Capri Holdings is a relatively new concept with three different brands positioned in the market with unique goals. The challenge for Capri will be to synergize its parent brand strategy while, at the same time allowing the brand ethos of Michael Kors, Jimmy Choo and Versace to continue to produce a loyal following of customers.
A key component missing from the Capri business model is the appointment of an overriding steward of the ship — a CEO. This strategic leader would be tasked to create the business process across three very distinct brands to take advantage of scaling opportunities in marketing and operations, all leading to a strategic distribution plan.
LVMH, on the other hand, has perpetually exercised value precision and preemptive behavior. This 3P Distribution Model (Precise, Preemptive and Perpetual) begins with delivering consistent value to the target market for each of the six individual business segments operated by LVMH. It starts with precise positioning of each of the products to a keenly identified target market across each business segment: Fashion and Leather Goods, Wine and Spirits, Watches and Jewelry, Perfume and Cosmetics, Selective Retailing (Sephora and Bon Marché) and Other Activities (new publications and travel). It ends with delivering the products and services to the customer when, where and how they want it.
Preemptive distribution is being precisely where the consumer is at the right time, in the right channel with the right product and ahead of the competition. Robin Lewis coined the phrase preemptive distribution in The New Rules of Retail and explained it in detail. In an oversaturated marketplace where consumers have unlimited and instantaneous access to hundreds of equally compelling products, to win a consumer requires preemptive distribution: getting to precisely the right consumer, when, where and how they want it, and perpetually, ahead of the hundreds of equally compelling competitors.
LVMH is preemptive in their business strategy staying ahead of the competition through unwavering branding and creative innovations across the six business segments. The key differentiator is executing both precision and preemptive behavior consistently over time. To stay ahead of the competition, each individual LVMH brand operates with preemptive behavior that drives margin, profit and loyalty. LVMH’s 3P distribution strategy has been in practice for decades giving them an indisputable, sustainable, competitive advantage.
Capri requires someone experienced in executing perpetual distribution within the brands while also driving operational efficiencies across the brands. If they can master the LVMH model, it will drive operating income. The ability to master both perpetual distribution plus preemptive competitive behavior, is the differentiator of best-in-class companies.
Capri is going to need to play catch-up. Each of Capri’s three businesses are saddled with their own operating issues inherent to the individual brand. If Capri can recognize the strengths and the challenges of each brand, it can leverage top-down expertise across brands. But Capri will never achieve LVMH’s decades-old level of experience and expertise.
LVMH Brand-Dominant Through Diversity
Thanks to 70 brands in six business segments that have consistently performed well over time, LVMH has continued to dominate the high-end global luxury market. Brand diversity reaches a wide range of demographics from high-end to couture. Each brand has the autonomy and empowerment to make decisions that are relevant for its brand image, which allows individual teams to be highly engaged and motivated to serve their unique clientele.
Why LVMH does so well year after year after year has no simple answer. Keeping steadfast and clear on the strategic direction for the parent company is a key contributor. Allowing each brand and business segment the ability to run the business as a separate entity could turn most any company with 70 distinct brands on its head. For LVMH, however, the diversity of the business is what has kept the earnings on a steady climb. Clear, laser focus on brand strategy with each brand’s core customer is at the center of every decision.
The core strength of the company comes in the diverse nature of its business segments, geographic footprint, distribution model and brands. This is coupled with the steadfast leadership of the Arnault family that has been at the helm of this dynamic brand for 30 years.
LVMH revenue for 2017 was up 13 percent compared to 2016 and half-year results are 10 percent above the same time last year. The share price continues to climb and further distances itself from the CAC 40
Even during the tumultuous year of 2008, LVMH outpaced the CAC 40 for most months except November and December
The geographic footprint including 70 countries is well-balanced across the brands, which minimizes significant downtrend business based on economic factors. Top regions by revenue include Asia (28 percent), United States (25 percent) and Europe (excluding France, 19 percent).
The distribution model is a mix of retail and wholesale vertically integrated to provide complete LVMH control of the supply chain. Upstream and downstream control from production to distribution allows each brand to maintain consistency in product, service and brand image. The seamless experience across all touch points is a key point of differentiator from a customer perspective.
Top Performer-An Illustrative Example
The Fashion and Leather Goods segment is comprised of iconic brands like Louis Vuitton, Fendi, and Christian Dior but also includes various startup brands and collaborations. The XSupreme collaboration opened up paths to the younger millennial market, and demonstrated the ability of LV to balance innovation and iconic branding. The first smart watch and the Jeff Koons collection are examples of the breadth of innovation captured in 2017 for the brand. LVMH is committed to continuously helping innovative start-ups in the luxury market each year, for example, Fenty Beauty by Rihanna.
This segment has performed particularly well and is the most renowned segment with today’s consumers. The sustainable competitive advantage for this division does not lie within the context of luxury, but rather in the diverse nature of the fundamental business processes.
The Fashion and Leather Goods business represents 36 percent of the revenue for LVMH, growing significantly by 21 percent year-over-year with profit margins from reoccurring operations increasing 1.4 percentage points.
While the number of brands in this portfolio has remained consistent over the past decade, the number of branded stores and operating investments have increased. From 2008 to 2017, the store count has increased 62 percent and monetary investments by 82 percent. The business has shifted from a regional perspective over the past decade with a drop in the Japanese market offset by increases in Asia and Europe.
LVMH runs all six business segments in the same fashion resulting in a brand that thrives in domination by staying ahead of the competition while, at the same time, delivering value precision right where the customer is at the right time, in the right channel and with the right product. Exhibiting the 3P Distribution Process has given LVMH mega-brand status in the industry.