Why LVMH needs to rationalise its brands

Luxury goods group LVMH aims to appeal to the man who appreciates the fine things in life. He drinks Hennessy cognac and Dom Perignon champagne which he shares with his wife. She has similarly luxurious tastes, and wears a selection of Guerlain perfume, Dior lipstick and powder which she carries in her Louis Vuitton bag.

The company which owns all the above brands and which so embodied the Eighties ethos, is now in the middle of a cost-cutting drive.

The decision last week to pull media buying and planning out of CIA in the UK and into Initiative was part of this: the aim was to channel media buying activity in Europe through a smaller number of suppliers (MW August 13). The company is also understood to be merging its distribution and warehousing activities for its perfumery divisions in this country.

Sensible housekeeping you may think – and with 1997 profits (net income) up nine per cent to Ffr 4.87bn (487m) and sales of Ffr 48bn (4.8bn) the company looks in good shape.

But observers suggest the group’s large portfolio of brands is unwieldy. Its perfumery division has come in for particular criticism. It forms part of the fragrance and cosmetics division which saw comparatively flat figures of four per cent growth.

“Here you have a conglomerate with lots of brands, but there really is no reason why they should be together,” says one analyst.

Another adds: “You could argue the company has a lot of breadth but not much depth. Perhaps the big question is whether it is possible to group brands over such a diverse range of sectors.”

Certainly companies with a narrower focus, such as Chanel which specialises in fashion, cosmetics and perfumery, have adapted to changes in the market apparently more successfully and without alienating more traditional customers.

Chanel successfully launched the Allure perfume two years ago, which is aimed at a younger market. In contrast, Guerlain’s Champs Elysées perfume, which used French actress Sophie Marceau in its ads, has been a disappointment and the company described it as performing “below expectations”.

“The problem LVMH faces is a cultural one,” says one source. “It’s still trying to sell French culture, which has become rather hackneyed, alongside many of its brands. There is also not a great deal of difference between the ads. For example, if you pulled the Givenchy name out of one of its ads and added a Dior label would you really be any the wiser?”

Other critics say LVMH’s perfumery and cosmetics division has become too focused on upmarket women, whereas other companies have broadened their appeal. “These are luxury items, but they are not big ticket prices – for example a bottle of perfume costs about 30. The company sees itself as desperately upmarket but in unit terms it’s not,” says the source.

The perfumery market is under additional pressure. Sylvaine Massot, analyst at Morgan Stanley, says: “Perfumery products are simply not producing the margins they should be. Whereas margins used to be in the mid-teens, they are now down to single figures. The company will have to cut costs and find economies where there is synergy across say sourcing and distribution.”

The different perfumes Guerlain, Dior and Givenchy are currently run with separate management and separate warehousing. Centralisation of operations is believed to be under consideration, but the company refuses to comment.

There are other factors that LVMH must address. The company reported a five per cent decline in first half sales in July and said it was taking a “cautious view” of the second half of the year.

The purchase of duty-free shopping chain DFS in Asia, with hindsight, looks ill-advised in the short- term, given the state of the Asian market. And while the champagne business may look unstoppable, figures could well be artificially skewed upwards in the short-term because of the millennium celebrations. The cognac and spirits division profits (income from operations) were reduced by 13 per cent in 1997 compared with 1996.

But some observers believe LVMH has nothing to worry about over the short term. ABN Amro analyst Matthew Jordan says: “It does have problems, but they’re not related to its brands, they’re more to do with the Asian crisis. It does understand rich consumers. For example, even though cognac is being squeezed badly, Hennessy is up in the US and that’s been through clever target marketing.”

The diversity of the portfolio is seen as an advantage by some. But if the rest of the world follows Asia into recession, LVMH will be forced to rationalise its portfolio and find other ways of appealing to the lover of the good life and his wife.

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