In a few decades ago, the understanding toward the luxury good is just expensive and impractical in China. In fact, luxury goods do have a certain height in price, but almost luxury brands never forget the pursuit to quality. Every detail is ensured that products can meet the customers’ demands.
Louis Vuitton founded his company in 1854 in Paris. In 1990, Bernard Arnault assumed controlling interest of Louis Vuitton, purchasing LV in his multinational luxury goods conglomerate LVMH Moet Hennessy – Louis Vuitton. At the early stage, the company was devoted to produce high quality luggage and Louis Vuitton has been identified to the art of travel. However, in 1992, Louis Vuitton entered the Chinese market and the first store located in Beijing. At that moment, few Chinese know that the starting business of Louis Vuitton was “The Luggage” for travelers. Nowadays, Chinese buyers are Louis Vuitton’s biggest customers. According to the report from Bain & Company, Louis Vuitton is planning to set up more stores in the China market. However, the company sales and profits are falling due to several reasons. In this case, this paper is to figure out LV’s entry strategy into the China market by identifying the internal background of Louis Vuitton such as business model before entry to China or resources and external advantages that influence the development of Louis Vuitton from the perspectives of country factors and Chinese business environment.
II. Research Methods and Structure
The methodology of literature searches is adopted to this research paper. There are many resources on the annual reports of LVMH that are provided by consult company, and there are also a lot of existing studies on the development of LV in China. It should enrich my research paper by abundant literature search and literature review. However, I also use the SWOT analysis model to list the internal advantages and disadvantages of LV company, analyzing the operational plan for entering into China based on the Chinese market environment examination and including the power of parent company, structure and management modes, entry strategy and finance management as well as finance problem towards decline in profit and closing the stores frequently. At the end of the report, I will analysis the future trend of LV’s new strategy plan.
III. The internal and external Chinese business environment
The external business environment in China will be discussed in terms of the regulations of China government, policy about industry offshoring and China market. And it is undeniable that the cheap labor market is the most important internal environment in China. First, we talk about the China market for luxury goods. According to Yuval and Vinay and Cathy (2011), ‘China has increasing booming urban cities including the second and third-tier cities and the world second-largest GDP which means strong purchasing power the China consumers for luxury goods and great market potentials’. The China’s rapid economic development is the best explanation for reasons that LVMH continues to open new stores in second and third-tier cities. Nowadays, Chinese buyers will afford more than 30 percent of the global luxury market. Second, China’s younger population have lead to a “demographic divided” in the decades. The cheap labor attracts the LVMH to move their manufacture supply chain to China and the Chinese government always encourages foreign direct invested to expand the export. After offshoring LV’s industry, it is cheaper to export LV products to worldwide because of the tax refund policy. Until now, government regulations and policy are still positive for the development of Louis Vuitton in China, which indicates that if LV keeps adjusting itself to expand the advantages according to the Chinese business environment, it will continue to be successful over time.
Based on the internal and external Chinese business environment analysis, the understanding of the Chinese market environment helps LV to make the entering plan effectively, which includes consideration to utilize the internal advantage of LV and to adjust the modes of LV’s entry into china compare with successful cases in other countries.
IV. The internal advantage and disadvantage of Louis Vuitton (SWOT Analysis)
Advantage *Oldest French fashion houses with more than 150 years of history always represents the highest standard for fashion design.
*Rareness, unique and being superior to others
*hand made by master craftsman
*As one of the most recognizable luxury brands in the world because of its logo and classic monogram canvas
*Only do direct own business and never have franchise business
*Series of prestigious service such as private meetings for VIP consumers and custom manufacturing
Weakness *Some products are too expensive, or LV’s premium price is too high.
*The LV product is only available in its exclusive stores, the rich in remote cities is difficult to buy LV goods.
*Fake good disrupts the market and affects brand and sale profits.
*Low production capabilities
*The design of LV relies too much on the monogram canvas. For example, when you got a lot similar monogram canvas LV product, you would like to see something new.
Opportunity *The company should increase advertising impact and depend on different countries.
*More luxury good about Chinese feature. To be honest, LV do have some design about Chinese feature. In my mind, these products are ugly design because they don’t understand the Chinese people prefer. Poor sale was an announcement that had it all.
*The company could expand new business to third and fourth-tier cities. They can just open one or two store in small cities as advertisement.
Threat *Financial crisis can influence the sale on luxury goods directly.
*Luxury market is subject to political problem, not only in financial crisis, but also the strength on relationship with China and France.
*LV always needs to adopt the current fashion trends and to keep their advantage because of threat from other luxury brands.
*Every new series product must be positioned carefully as not to shake the brand’s position as a leader in luxury market.
V. Organization Structure:
Rick S (2018) argues that a company’s organization structure must be designed to effectively meet its goals and objectives. Types of organizational structure in management can include flat structures as well as functional, product and geographical-structured organizations. With LV is an international company, which the management directly controlled the share by LVMH. The organization form of departmentalization is rather appropriate. The management department of LVMH is to delegate certain authority to the leader who is from LV China or LV Japan. As we all know, Louis Vuitton has a lot of store in China. It should be better if the center of power delegates authority to the managers in the different countries for allocating the resources or managing the stores more efficiently. Robbins, Mary & Nancy (2005) argue that If the business of a company is in fast pace and tend to change quickly, and is operated in diversified different areas, it should choose the form of decentralization. As an international luxury company, the business of LVMH cover everywhere around the world and change its fashion world quickly. Thus, the managing form of decentralization and the method of delegation is the most suitable for such a big company.
V. Enter strategy and process:
David & Cynthia (2004) argue that the entry modes for international companies need strategic alliance, exporting, licensing or franchising, a new wholly owned subsidiary, and acquiring established enterprises. Although the first LV store which opened in Beijing does not advertise on TV and newspapers, it is successful to keep a sense of mystery at that moment in China. The company try to promote the brand through local high-class events to reach a wider audience. It is worth mentioning, because LV has its own stores in China, LVMH group hold wholly-owned subsidiary to enter Chinese market for keeping its unique and independent brand value. In other words, there is no Chinese partners to cooperate with LVMH. At the beginning of the first store, the company only hires the salesperson from their special Louis Vuitton training program in Paris, even the foreign salesperson from Pairs provide support and guide the Chinese salesperson because the transitional period was so important at that moment in China. On the other hand, where to enter into market is also important for LVMH operation in China. LV has already opened many stores in mainland China and some of these stores open in same time. Most of its focus is the first-tier cities such as Beijing, Shanghai and Hongkong and less second-tier cities. For instance, nearly 55% of LV’s stores in China are in Beijing, Shanghai, Hongkong and Macau. Of course, there are enough rich people in second-tier or third-tier cities. At the early stage, this does not affect the sale because the rich from second-tier cities can move to anywhere in China.
On the other side, LVMH is very clear that the tourist such as Hangzhou, Chengdu and Chongqing are very important for expanding their business strategy. Many times, tourists are more likely to purchase the luxury products when they are happy in the holidays. Also, the renting fee of second-tier cities is cheaper compare with Beijing and Shanghai, especially in the center of business circles. Thus, LV always put their eye on the growth rate of these second-tier cities and become pioneer in the settlement of store in second-tier cities.
For special marketing plan, Louis Vuitton targets the following two groups: wealthy middle-aged women who are under the age of fifty and affluent young generation or elite aged 18 to 30 years old who have excellent income or rich family. We all know that Chinese family spoil their children, especially in rich family, the young can always easily get parents’ money to purchase luxury goods. Thus, the preference of design is to attract young’s eyes and LVMH prefer to choose the young Chinese superstar as its advertising ambassador. In terms of advertising, LV centers on delivering its unique value and product attributes to every buyer and it choose its spokesperson cautiously. In the result, emphasis on young is highly profitable in return.
VI. Finance management and local business operation
In terms of finance management of Louis Vuitton in China, Fani (2014) argue that Over the past five years, the luxury-retail business has been reliant on price hikes that far outpace inflation to compensate for stagnant sales growth. And here is interesting thing that in the four years ago, a Chanel bag cost 70% more than its’ price in China. It is obviously unreasonable for Chanel Company to deal with high inflation in China. However, a classics LV travel bag is around 25% more expensive in 5 years. In my view, although high inflation has bubbled up in china, Louis Vuitton try its best to adapt the local business environment. LV adjust its finance management according to the inflation situations of China. On the other hand, China government control its currency which means exchange rate is much more stable than other countries. The depreciation of currency will benefit the export of home country to foreign country. That is one reason why Louis Vuitton move its industry and manage its supply chain in China. It is kind of benefits from the Chinese environment. In terms of local operation management, LVMH could prefer local debt financing in China because government devalue the CNY in the currency market. In theory, LVMH transfers its cash to repay the debt in CNY, which reduce the transaction costs. The company take advantage of regulation to get the subsidiary in another way.
VII. Strategy transformation and business model revision strategy:
As for current strategy, LV should stick to its successful strategy of selling their product to buyers directly through its store. However, LV make the important change to add the Online shopping for adopting new business environment. In the past, if consumers find something what they like in the LV official website, they should make a call to the LV staffs and ask them whether this product is still available or where they can buy this. Better yet, upscale brands in Western Market require credit cards, and most of the time, luxury brands only accept Visa, Mastercard or American Express in other countries. However, WeChat pay and Alipay has already become the most important marketing media in China, LVMH changed their mind and cooperated well with WeChat pay and Alipay in China. It is a very efficient and convenient way that complies with the payment method of the Chinese people very well.
On the other side, at least 70% of Chinese use Taobao as a daily must in China. Online shopping business such as Taobao and Jindong has reached high turnover in recent years. It is possible for LV to set up Official Online Store on Taobao or Jindong which conforms to Chinese shopping style under the circumstance of the China market. Anyway, I found that Burberry as the leader of British luxury fashion house has already set up its official website on the T-mall. So, I think it is time for LV to lay down its face and prepare to enter the new market since the e-commerce of China is become mature.
In terms of pricing strategy, Louis Vuitton figure out (2018) “in consideration of the recent cuts on import duties and value-added tax, Louis Vuitton China has decided to mark down prices on a wide range of items to fully support the government’s efforts to reduce the price premium for luxury goods sold in China and overseas. Louis Vuitton China will continue to support the government’s efforts.” It is the biggest news about Louis Vuitton recently. I believe that luxury consumers would buy cheaper LV products via purchasing agents because of the middle part of the profits. It is safe to say that, it is the same LV product may have different prices in different markets depend on the countries, even if the same enterprise has different pricing strategies due to different regions. But, Louis Vuitton set up its supply chain in China and take advantage of cheap labor market for lowering the operational cost. To this day, it is the first time for Louis Vuitton to change its price strategy. It will be better for LV to keep same price in different countries in the future, which means Chinese consumers don’t fly to France to get the LV products due to price difference. In the long run, I think LV must apply the same pricing strategy for boosting its sale in China.
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