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The Luxury Goods Industry Presented By: Luben Blagoev, Stephanie Garisto & Ana Radunovic

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Agenda <ul><li>The Luxury Good Industry </li></ul><ul><li>Key Factors Influencing Performance </li></ul><ul><li>The Consumer </li></ul><ul><li>Globalizations and the Industry </li></ul><ul><li>Case Study: LVMH & Ralph Lauren Strategies </li></ul><ul><li>Theoretical Analysis </li></ul><ul><li>News Update </li></ul><ul><li>Conclusion </li></ul>

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The Luxury Good Industry <ul><li>LUXURY: The habitual use of, or indulgence in, what is choice or costly, whether food, dress, furniture or appliance </li></ul><ul><ul><li>Luxury equates to Desirability </li></ul></ul><ul><li>The world of Luxury and Luxury goods </li></ul><ul><li>Reputation: “Luxury is supposed to be immune to market fluctuations because its value is by definition - timeless and transcendent” </li></ul>

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The Luxury Good Industry Continued... <ul><li>Economics defines a luxury good as one for which demand increases as income increases </li></ul><ul><ul><li>Unlike inferior goods, they are related to price and high-income individuals </li></ul></ul><ul><li>Establish image via pricing, exclusivity, limited availability, quality and location </li></ul><ul><li>High pricing gives the product its prestigious nature, and implies high quality. </li></ul>Veblen Good

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Market Trends <ul><li>Overall world market is estimated at $170 Billion USD growing at a rate of 7.9 % </li></ul><ul><li>Sector Breakdown : 1. Luxury Beverages 2. Fashion Accessories 3. Cosmetics and Fragrances 4. Watches and Jewelry 5. Luggage and Handbags </li></ul><ul><li>Key Trends: Globalization, Consolidation and Differentiation </li></ul><ul><li>R&D and Innovation </li></ul>World Luxury Goods Market by Product Sector

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Factors Influencing Performance <ul><li>Global Economy </li></ul><ul><li>Economic Times and Disposable Incomes </li></ul><ul><li>Consumer Perception </li></ul><ul><li>Marketing and Media Coverage </li></ul><ul><li>Oligopolistic Pricing </li></ul>

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The Consumer <ul><li>Demographics of the Consumer Age, Sex, Income </li></ul><ul><li>Consumer Loyalty </li></ul><ul><li>Expectation of Quality and Value </li></ul><ul><li>Consumer Price Sensitivity: Introduction of the New Luxury Consumer </li></ul><ul><li>Consumer Market Breakdown </li></ul>Demand for Luxury Goods by Geography 2004

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Globalization <ul><li>Definition: The increase in connections around the world, resulting in a more standardized life . It can be more broadly defined as the worldwide process of homogenizing prices, products, wages, rates of interest and profits. </li></ul>

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Pros Cons Reduction in Protectionist Barriers Few Companies Own Market Share Lower Costs of Production Consolidation Expansion of Global Demand Outsource Production at the Expense of National Interests Tools Towards Future Progress Compromises Luxury Experience Creation of Economic and Political Ties Upsurge in Number of Multinational Counterfeit Operations

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Discussion Question Does the luxury goods industry benefit from the implications of globalization?

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Case Study: LVMH <ul><li>History of the Company - LVMH Values </li></ul><ul><li>Excellent Fundamentals 1. Presence in all luxury sectors 2. Geographic balance amongst three continents 3. Multi-brand strategy 4. Synergistic approach </li></ul>LVMH Sales 1992 - 2000

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LVMH’s Strategies Strategies <ul><li>Synergies </li></ul><ul><li>Acquisitions - Expansion of Brand Portfolio </li></ul><ul><li>Financial Data </li></ul><ul><li>Ownership of Distribution Channels </li></ul><ul><li>Continuous Innovation and R&D </li></ul><ul><li>Expansion into high growth markets </li></ul><ul><li>THE BRAND NAME - “MADE IN FRANCE” </li></ul>

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Goodwill 4.4 Billion Euros Marketing and Selling Expense 6.1 Billion Euros Revenues 17.2 Billion Euros Net Income 2 Billion Euros *Based on 2008 Annual Report for LVMH

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Case Study: Polo Ralph Lauren Corp. <ul><li>History of the Company - Values </li></ul><ul><li>4 Product Production Categories 1. Apparel 2. Home 3. Accessories 4. Fragrances </li></ul><ul><li>Business Model: Retail, Wholesale and Licensing </li></ul><ul><li>Brand Expansion Strategy </li></ul><ul><li>Financial Data </li></ul><ul><li>Move from Domestic to a Global Market </li></ul><ul><li>THE BRAND NAME - “MADE IN CHINA” </li></ul>

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Goodwill $0.97 Billion USD Marketing and Selling Expense $1.93 Billion USD Revenues $4.8 Billion USD Net Income $0.4 Billion USD *Based on 2008 Annual Report for Polo Ralph Lauren Corp.

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Theoretical Analysis <ul><li>While many European firms claim that manufacturing occurs at home, Polo Ralph Lauren and many American firms outsource production </li></ul><ul><li>Ralph Lauren is utilizing an Offensive Relocation Strategy </li></ul><ul><li>In theory, moving production offshore to LWCs decreases costs, thereby: </li></ul><ul><ul><li>Enabling greater economies of scale </li></ul></ul><ul><ul><li>Ultimately capitalizing on de-localized production </li></ul></ul>

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<ul><ul><li>Countries should specialize and trade based on Absolute Advantage </li></ul></ul><ul><ul><ul><li>Results in the world using its resources more efficiently and total increase in world output </li></ul></ul></ul><ul><ul><li>Realistically, countries should specialize and trade based on Comparative Advantage - the ability of a country to produce a good at a lower (opportunity) cost than another country </li></ul></ul><ul><ul><ul><li>Many developing countries boast a comparative advantage in labour </li></ul></ul></ul>Theoretical Analysis Continued ... David Ricardo’s Theory of Free Trade and Comparative Advantage

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Production and Consumption With Specialization and Trade <ul><li>Taking advantage LWC’s comparative advantage has allowed Ralph Lauren to shift to a higher to a new Production Possibility Frontiers (PPF) </li></ul><ul><ul><ul><li>Curve showing various combinations of two goods that a country can produce when ALL of a it’s resources are fully employed and used in their MOST efficient manner </li></ul></ul></ul><ul><ul><li>A shift in a firm or country’s PPF can be attributed to improvements in technology or more efficient factor resources, such as labour </li></ul></ul>Theoretical Analysis Continued ...

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Empirical Analysis Beyond economic theory, however, there are several modes of reasoning for and against moving production offshore: For Against Reduction in Protectionist Barriers Counterfeit Operations Lower Costs of Production Idea of Sweatshops Tools Towards Future Progress Conflicts with National Interest Creation of Economic and Political Ties Compromises Brand Image and Idea of Luxury

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NEWS UPDATE Wall Street Journal Friday March 20th, 2009