This report will use PESTEL analysis to analyse the Moët Hennessy Louis Vuitton’s (LVMH) perfumes and cosmetics companies’ macro environment and SWOT analysis to analyse its micro environment based on the UK market. The degree of threat and/or opportunities will be assessed in Macro environment conditions. Furthermore, Porter’s five forces will be use to analyse the existing and potential new competitors of LVMH’s perfumes and cosmetics companies. Then, there will be a predicate performance of those perfumes and cosmetics companies for the next 3-4 years

Contents

Summary 2

Contents 3

Introduction 3

LVMH’s Macro Environment 4

LVMH’s Micro Environment 9

Exciting and potential new competitors 11

Performance outlook for perfumes and cosmetics market of LVMH over 3-4 years 12

Recommendations 13

Conclusion 13

References 13

Appendix 1 15

Appendix 2 16

Introduction

This report will focus on analyse the macro environment as well as micro environment of perfumes and cosmetics companies which owned by Moët Hennessy Louis Vuitton (LVMH) in the UK market. The analysis includes assessment of the degree of threat and/or opportunities in that environment conditions, as well as the existing and potential new competitors. Then, there will be a predicate performance of those perfumes and cosmetics companies for the next 3-4 years. After that, there will have recommendations as well as a conclusion.

Background

Moët Hennessy Louis Vuitton (LVMH) Created in 1987, it produces and retails luxury goods under various categories and brands. According to Bernstein Research (2009) :’LVMH is the strongest player in the luxury goods industry, a giant in an industry where fixed costs make scale paramount.” LVMH is headquartered in Paris; perfumes and cosmetics companies of the LVMH group include Parfums Christian Dior, Guerlain, Parfums Givenchy, Kenzo Parfums, Benefit Cosmetics,Make Up For Even and Acqua di Parma.

LVMH’s Macro Environment

In 2009, retail sales of perfumes and cosmetics products increased by 6.5%, to £2.18 billion in UK. The macro environment will influence on every single industry, it is necessary to be analysed before managers made their decision. PESTEL analysis is usually used to analyse company’s Marco environment. Before the PESTEL analysis, the critical success factors in the perfumes and cosmetics industry are branding, advertising and distribution.

The economic trend is the most important factor which will influence the whole industry which includes Gross Domestic Product (GDP), rate of inflation, disposable income, population and unemployment rate.

Gross Domestic Product (GDP) of UK at current prices has rise 3.5% from 2007 to 2008 according to the Table 1.1below.

The change has decreased since 2006, but as Key Note (2010) illustrated:” Although this rise in GDP is weaker than the average forecast of 0.4%,it brings to an end six consecutive quarters of contraction, suggesting the UK’s tenuous exit from recession.” Which means the economy in UK is started recovery or already stopped recession from 2010. It is good news for most industries; also bring opportunities to perfumes and cosmetics market.

As Table 1.2 shows the inflation has decreased slightly by 0.3% to 4% in 2008. The purchase power of money has increased will caused people willing to purchase more products or expansive products which means there would be more customers for LVMH’s perfumes and cosmetics companies.

The household disposable income per-capita increased by 4.1% in 2008. (See Table 1.3 in appendix 1) but the Value-added Tax (VAT) has increased 2.5% from 2008 to 2010. The rise of VAT could restrict increase in consumer spending. It is threat for the market.

As can been see from the Table 1.4 the population in UK has increased by 0.7% to 61.4 million in 2008. As can be seen from Table 1.4 the population in UK has a steady increase about 0.7% each year. However, it might not benefit the LVMH’s perfumes and cosmetics market, because most young people cannot afford the luxury products. But in other hand, population of women is more than man’s which means, they could be the potential customers in the future.

Table 1.5 shows that the unemployment rate has increased 5.8% from 2007 to 2008. according to Key Note(2010):” Figures released in January 2010 show that the employment rate for people of working age was 72.4% for the 3 months to November 2009, which was the lowest level since the winter of 1996/1997.” The situation is not optimistic, but the rich are still free to buy luxury products.

Besides the economic trend, new policy trend will also influence LVMH’s development in UK market. According to UK government budget 2010 which showed below net tax rises of £6.255billiosn with spending cuts of £8.855billions until the end of 2011. After that, the net tax rise of £8.23billions and spending cuts of £31.9 billion in 2015. Which will have long-term influence on customer’s buying behavior.

(Sources: The Telegraph)

As the chart shows above that the richest which has 10% of the population will pay almost £1600 extra a year. But even the poorest are hit hard as well, having to pay an extra £200 per household. (Edmund Conway, 2010) this is not good news for the UK market. People’s disposable income will decrease which means although the recession is over, people still do not unable to afford luxury products. Furthermore, UK government decided to increase the VAT from 17.5% to 20% from 4 January 2011. According to BBC NEWS (2010) :”Chancellor George Osborne has denied that the poor will be most affected[from the VAT increase].’ The increase of the VAT is a threat to the UK market but not has big influence on the LVMH perfumes and cosmetic market because the poor are not their customers.

For the technology, anti-ageing skincare formulations have advanced and exploited by most of cosmetics companies; it will increase competition among the market. As the culture trend, due to the recession many people preferred to buy lower-priced products rather than luxury product, they may continue the habits under financial pressures ease. (Key Note, 2010) This may has threat to LVMH’s perfumes and cosmetics companies but may as executive of LVMH said, they do fantastic job on product, distribution and communication make customer forget about the high price. (Cited in The Economist, 2009) which means customer may think their products worth the price with the good quality. For the environment trend, greening business has been increasing popular, according to Rebecca Smithers (2010) :”Consumer spending on “green” goods … grew by almost a fifth over two years despite the economic downturn.” if perfumes and cosmetics companies seek a green way to manufactory its products they need technologic support but customer would more likely to purchase their products.

LVMH’s Micro Environment

To analyse LVMH’s micro environment, will help the manager to understand the company’s strength and weakness in order to catch the opportunities and fight the threats. In UK, the total expenditure on miscellaneous personal-care goods including perfumes, cosmetics and personal care and services increased by 1.6% in 2008. LVMH’s perfumes and cosmetics companies need to identify their resources at first. For example, Perfumes Christmas Dior UK Ltd has earned £130,000 profit pre-tax at the end of 2008 based on UK market. Guerlain Ltd has made £950,000 profits pre-tax at the same time. (Key Note, 2010)

A SWOT analysis for LVMH’s perfumes and cosmetics companies is below.

Strengths

Weaknesses

Strong brand positioning

Added value

Declining margins despite cost-cutting measures

Opportunities

Threats

Celebrity brand endorsements

Growing population

Increased counterfeit products

Intense competition

LVMH’s brand can be seemed as the strongest strength for LVMH. Due to the high customer loyalty, value perception, and image of the brands, the perfumes and cosmetics business group such as Parfums Christian Dior, Kenzo Parfums and Benefit Cosmetics are less affected by the economic recession. Customers are strongly believed in LVMH’s brand and those perfumes and cosmetics brand themselves.

The weakness for LVMH’s perfumes and cosmetics companies is that LVMH has implementing cost-cutting measures during first half of 2009, All the independent groups experienced rushed margins in that period. According to Datamonitor (2009) :” LVMH’s revenues have increased in spite of which the margins have reduced indicating that the company has not aligned its costs to sales and the current economic situation.” As a result, revenue from the Perfumes and Cosmetics segment decreased 4.4% in 2009 to 2.7 billion which only has 16% of 2009 revenue and 8% of fiscal 2009 operating profit. (LVMH annual report 2009)

LVMH’s promotional strategy involves celebrity brand endorsements. Natalie Portman has embodied in Parfums Christian Dior in 2010. According to Jennifer Weil (2010) :” Dior is the jewel in the crown of LVMH’s fragrance and cosmetics portfolio and has a history of working with actors on ads.” beauty celebrities is still going strong in advertisement those years. For example Lancôme recently added Julia Roberts to its lineup of faces, while Dolce & Gabbana has Scarlett Johannson in its makeup advertisement. An actress with strong personality would emphasis the image of the product to the customers. With reasonably high percentage penetrations, cosmetics and fragrances benefit from the growing population, and as mentioned before UK’s population has increase year by year.

The market of fake products has rapidly increasing all over the world. For example, according to BBC NEWS (2008) :”four perfume brands – Dior, Guerlain, Kenzo and Givenchy – sued eBay for what they called “illicit sales” of their products. They alleged that even auctions involving their legitimate perfumes were illegal, because only specialist dealers were permitted to sell them.” fake goods would damage LVMH’s brand as well as its reputation as LVMH treat its brands being its main assets. Increasing competition would put pressure on the luxury market share of LVMH’s perfumes and cosmetics companies. In addition, some of their competitors were the Winners of the FiFi UK Fragrance Awards 2009 such as Gucci, Chloé, Estée Lauder and Ghost (See Appendix 1) which is also threat for LVMH’s perfumes and cosmetics companies.

Exciting and potential new competitors

Pinault-Printemps-Redoute (PPR) and Compagnie Financiere Richemont are the most direct competitors to LVMH. PPR is a French luxury holdings company that includes Yves Saint Laurent and Gucci, and Compagnie Financiere Richemont which is a Swiss luxury company that includes such brands as Cartier and Mont Blanc. Other competitors include Givaudan, International Flavors & Fragrances, Polo Ralph Lauren Corporation, Signet Group and Tiffany. (Datamonitor, 2009)In order to develop the competitive advantages of LVMH’s perfumes and cosmetics companies, Porter’s five forces model (see Appendix 2) will be used to analyse its competitive environment.

In perfumes and cosmetics industry, suppliers’ bargaining powers are really low because the raw materials are not rareness and there are many suppliers in that industry. Furthermore, the bargaining power of buyers are concerned to be low for LVMH’s perfumes and cosmetics companies because some products are undifferentiated, buyer can switch to others, such as almost every cosmetic company has eye-line or brush. The entry barriers are little bit high in perfumes and cosmetics industry, there are major economies of scale and new companies need to access distribution channels as well as it require capital. LVMH’s perfumes and cosmetics companies has face high threat of substitutes, the function of those products are undifferentiated, only the brand is unique. Therefore, the extent of competitive rivalry is really high of LVMH’s perfumes and cosmetics companies.

Performance outlook for perfumes and cosmetics market of LVMH over 3-4 years

Key Note (2010) has forecast UK market for perfumes and cosmetics as the table shows below.

Over the forecast period (2010 to 2014), retail sales of cosmetics are expected to increase in value by around 80millions, while perfumes increase by around 47millions in the whole UK market. As illustrate in LVMH’s annual report 2009, perfumes and cosmetics companies of LVMH will continue to illustrate their commitment to quality and creativity and maintain an offensive position in terms of innovations and advertising expenditures. LVMH’s perfumes and cosmetics companies would through acquisitions or picking up failed companies’ customers to gain market share.

LVMH will provide many events and launches for all the Perfumes and Cosmetics brands. For example, Parfums Christian Dior will continue to focus on creating value for its star products. All the LVMH’s perfumes and cosmetic companies will focus on major media investments in order to support the new products launched to anticipate the sales and to prepare and strengthen the long-term growth of the brands in UK. (LVMH 2010 first half report)

Recommendations

LVMH’s perfumes and cosmetics companies would seek green way to production in order to take social responsibility. They should also try to minimize the number of animal used in animal testing in cosmetics.

Conclusion

The Macro environment seems not so optimistic for luxury products in UK due to the increase of VAT and government expenditure. The Micro environment of LVMH’s perfumes and cosmetics companies has intense competition. But overall, there still many opportunities for LVMH’s perfumes and cosmetics companies.

References

BBC NEWS (2008), Court fines eBay over fake goods. [WWW] BBC NEWS. Available from: http://news.bbc.co.uk/1/hi/business/7481241.stm [Accessed 3/1/2011]

BBC NEWS (2010), Spending Review: Cuts” to affect poorest most”. [WWW] BBC NEWS. Available from: http://www.bbc.co.uk/news/business-11598234 [Accessed 30/12.2010].

Bernstein Research (2009) LVMH: King of Luxury Jungle. September 2009. U.K: Sanford C. Bernstein Limited.

Conway, E. (2010) Budget 2010: Your five-minute guide. The Telegraph. Weblog [Online] 22nd June. Available from: http://blogs.telegraph.co.uk/finance/edmundconway/100006536/budget-2010-your-five-minute-guide/. [Assessed 16/12/2010]

The Economist (2009). LVMH in the recession: the substance of style. [WWW] The Economist. Available from: http://www.economist.com/node/14447276 [Accessed 15/12/2010]

Datamonitor (2009) LVMH Moët Hennessy Louis Vuitton SA. August 2009. Europe: Datamonitor plc.

LVMH (2009) LVMH annual report 2009. France: Louis Vuitton Collection. ISSN: 1292-3737.

LVMH (2010) LVMH 2010 first half report. France: Louis Vuitton Collection. ISSN: 1292-3737.

KEY NOTE (2010) Market Report Plus 2010: Cosmetics & Fragrances. 23rd ed. Hampton: Key Note Ltd.

Porter, M. (1980) Competitive Strategy. Free Press.

Smithers. R.,(2010) Ethical consumer spending bucks recession with 18% growth.[WWW] The Guardian. Available from http://www.guardian.co.uk/environment/2010/dec/30/ethical-living-fair-trade [Assessed 20/1/2010]

Weil, J. (2010) Portman New Face for Parfums Christian Dior. Women’s Wear Daily. Vol. 199, Issue 119.

Appendix 1

(Cited in Key Note, 2010)