In analyzing the performance of major global luxury goods companies, the first and second leaders in total revenue are LVMH and Kering, respectively. In many ways, the two companies mimic each other and have similar setups (corporate parent of multiple fashion and luxury brands).
However, LVMH is diversified across multiple categories that all relate back to a theme of luxury, whereas Kering is split between high-end brands and sports brands.
As stated in the case reading…
“During the ten-year period under the leadership of François-Henri Pinault (March 2005 to March 2015), Kering’s share price growth was 121% compared to 271% for LVMH. Kering’s Revenues had declined by 41% over the period, compared to LVMH’s growth of 100%, while operating profit had grown by 21%, compared with 67% for LVMH.”
Stock market valuation is the best available measure of expected future cash flows of publicly listed companies. The lower change in the market value of Kering compared to LVMH shows a shows a less effective CEO performance; the market is implying a lower cash flow generation in his strategy.
A cursory analysis of 2014 profitability ratios shows that the Return on Capital Employed (ROCE) is 8.9% for Kering and 13.2% for LVMH. Similarly, the Return on Assets (ROA) is 10% for LVMH and 7% for Kering.
These differences can be attributed primarily to the Kering Sports division’s Operating Income performance (4.3%), which skewed overall performance downward (18%). The luxury goods sector, when analyzed separately, realized 24.6% in operating income. This compares to LVMH’s fashion and luxury goods unit, which has a 29% operating income ratio. Without the complication of the sports division, Kering’s luxury sector comes closer to competing with LVMH’s.
Puma makes up the bulk of the Kering sports division, and is significantly underperforming relative to the rest of Kering’s portfolio. Though both Kering and LVMH are diversified, one could argue that Kering has reaped less value from its spread across luxury and sports than LVMH has across wine, spirits, luxury (including watches and jewelry), perfumes, and retail.
Kerings mission statement is “to offer products that enable its customers to express their personality. To reach this goal, the Group empowers an ensemble of powerful, complementary brands to reach their full potential, while ensuring that each of them stays true to its own values and identity.”
The sports and lifestyle division is not coherent with this mission. Considering Puma and Volcom as complementary of Luxury brands is very difficult. It will be an expensive and long process for Kering to take these brands to a luxury market, it’s preferable for them to launch a sports and lifestyle product line under one of their luxury brands, if they are indeed focusing on luxury primarily.
One could also attribute some loss of growth on Kering’s part to its heavier reliance on Japan and lower penetration in emerging markets. Japan’s market growth for luxury is mature and slowing, compared to those of mainland Asia (China, India, etc.), which are newer and still growing.
LVMH has historically been a first-mover, which helps with brand recognition and positive association. In the last five years, it has opened stores in places like Kazakstan, Mongolia, and further into China and Russia. Though these fledgling luxury markets fluctuate, the long-term growth prognosis is positive.
Even in North America, a mature but still important luxury market, LVMH is more omnipresent than Kering, with stores in nearly every major city.
Some key business differences between the two companies’ respective headline brands are worth noting. At Louis Vuitton (LV), nothing ever goes “on sale,” at any of its corporate-owned and operated stores throughout the world.
There are also no franchises. Thus, shoppers always pay full price, and are afforded a carefully-controlled experience wherever they shop. As stated by our guest from LVMH in the MBA opening week, Louis Vuitton is primarily a retail company, and they make money controlling the retail environment closely.
Whereas Louis Vuitton limits its distribution and discounting, Gucci, Kering’s most important brand, has numerous franchise and wholesale agreements for retailing, and goes on sale at the end of each season, like most other luxury brands.
Though not in the case reading, a greater portion of Kering’s business is from ready-to-wear than in LVMH’s luxury arm, which is focused primarily on leather goods and accessories. This creates more logistical problems for Kering with sizing, quality and construction, and end-of-season stock.
Looking forward, it seems as though Kering’s biggest challenge in “closing the gap with LVMH” is its portfolio of brands and relative lack of focus on core competencies. Its luxury sector does quite well already. With some tweaks, like greater market penetration and making wholesale a smaller portion of the business, Kering could be more competitive with LVMH, on the rubric that is currently set by LVMH.
Whether to improve its sports sector by letting go of Puma or investing more in it, via rebranding/overhaul, is unclear. Having owned a majority stake since 2007, it seems there has been plenty of opportunity to improve performance.
Nonetheless, sports brands and luxury have converged somewhat, thanks to brands and trends that blur the distinction between the two. Lululemon Athletica is a good example of a sports brand that has elements of luxury in its business practice, like rarely discounting stock. Conversely, many luxury brands now produce athletic sneakers as part of their offering.
As implied by its name Kering (homonym for “caring”), the company has other goals as well, like environmental sustainability, with labels like Stella McCartney, which uses no animal products, and a voluntarily-produced Environmental Profits & Losses statement, first released in 2015. These may not address short-term profitability but could pay off in the longer-run, as consumers become more interested in mindful consumption and natural resources become more difficult to source.