Abstract
Fashion and Leather Goods Group is a subsidiary of the LVMH group of companies. The core business of the firm involves the distribution and retailing of fashion and luxurious goods. The company has operations in all continents of the world. The company has been able to achieve rapid growth especially in the UK market.
However, the company is concerned about the effects of the macro and micro environment on its performance in the UK market. Consequently, an analysis of the company’s macro and micro environment will be analyzed in this report. The findings are used to predict the growth of the company in the next three years.
Summary
Fashion and Leather Goods Group is the leading fashion company in the UK’s fashion market. The company has branches in all major cities in the UK. In the last three years, the company has been able to realize a steady growth in revenue and profits.
Currently, the challenges facing the company in the UK market include intense competition, threat of new entrants and the threat of substitute goods. However, the company has the success factors which include a well established brand and a large market share. Besides, the demand for fashion goods has begun to rise in the UK. Thus the company is able to maintain its current growth rate in the next three years.
Introduction
Fashion and Leather Goods Group
LVMH is a leading “global fashion and luxury goods company” (LVMH 2011). By market share, LVMH is the largest company in the global fashion and luxury goods industry (LVMH 2011). The group’s headquarters is in Paris France. The group has been in operation since the year 1854 when it was formed (LVMH 2011).
LVMH’s brand portfolio is well over 60 and the company is still committed to expansion by introducing new brands in response to changing tastes and preferences of customers (LVMH 2011). As a global leader, the company has stores in all continents. This means that it has a global presence and operates in all major cities of the world. LVMH had 2400 stores in different countries and cities as at 30th June 2010 (LVMH 2011).
The company had employed over 70, 000 people from different parts of the world as at 30th June 2010 (LVMH 2011). LVMH also has an elaborate social responsibility program that aims at improving the welfare of the community that it operates in. The company’s social responsibility initiatives include humanitarian actions, supporting young artists and promoting education (LVMH 2011). The success of the company is largely attributed to its stable financial growth.
The fashion and leather goods segment of the business is known for quality and style. The company’s mission is “to represent the most refined quality of western art de vivre around the world” (LVMH 2011). The fashion and leather goods segment recorded 14% increase in revenue in the last financial year (LVMH 2011).
The segment also realized a profit of 6.3 billion Euros over the same period (LVMH 2011). The segment’s product line includes trunks, jewelry, watches, shoes, and clothe items (LVMH 2011). Like any other company, the future of the group’s fashion and leather goods segment depends on the dynamics of both the macro and micro environment.
The segment will only be able to maintain its current growth rate if it is able to respond effectively to the dynamics of the market (Cao, Simzek & Zhang 2010, vol.47, pp. 1272-1296). It is against this backdrop that the macro and micro environment of the fashion and leather goods segment will be analyzed in this paper. The analysis will focus on the operations of the fashion and leather goods segment in the UK market.
The Macro Environment
The macro environment refers the external factors that affect a business and the industry that it operates in (Baye 2009, p. 56). The factors are considered to be external since the company has limited ability to influence them. This means that a single firm in the industry cannot take the responsibility of controlling the effects of the external factors.
The most common external factors that influence firms in the fashion and luxury goods industry include social, economic, legal, political, environment and technology (Baye 2009, p. 59). These factors can affect the industry and its firms in a positive or a negative manner. The success in the fashion industry demands effective response to these factors. Thus the above factors have affected the operations of LVMH’s fashion and leather goods segment in UK as follows.
Technology
Technology refers to the methods and strategies that are used by firms to produce goods or offer services. Technology is particularly important in the fashion industry due to the following reasons. First, technology determines the quality of goods that are sold in the industry (Baye 2009, p.56).
High quality is the driving force in the fashion industry (Johnson 2006, vol.7, pp.92-120). Thus the firms in the industry must adopt the best possible technology for producing goods. Second, it helps in the marketing of the various products that are offered in the industry. Finally, it helps the firms to improve their efficiency levels in order to reduce cost.
The success of Fashion and Leather Goods Group is partly attributed to the use of modern technology across all segments of the business. The group has adopted the use of e-marketing to reach its potential and existing customers in the UK market (LVMH 2011). The company has taken advantage of the cheap and fast internet technology that is available in UK to market and sale its products. This has enabled the company to obtain market intelligence within the shortest time possible and at lower cost.
The sharp increase in the company’s sales volume is attributed to the use of an online sales system that enables the customers to buy items instantly (LVMH 2011). The company uses modern technology in its production plants in order to improve efficiency and reduce costs. The use of a well developed distribution network has enabled the firm to serve every segment of the UK’s fashion market.
Economic
Economic factors relates to the performance of the UK economy and how it affects the operations of the fashion industry and its firms. Economic factors are very important since they determine the demand for the fashion items (Baye 2009, p. 57). The last economic crisis adversely affected the growth of the UK’s economy.
This led to a reduction in disposable income and a decline in purchasing power among the citizens. This means that the demand for the company’s products was negatively affected by the crisis. The crisis also led to an increase in oil prices. This translated into high costs of production and distribution in the industry.
The company responded to the increase in the costs of production by raising the prices of its merchandise. However, this had a negative impact on sales since the products became more expensive. Despite these setbacks, the company still managed to increase its revenue by 59 million Euros (LVMH 2011). This confirms the company’s resilience to the effects of economic factors.
Social
Social factors refer to the cultural values and practices that are associated with the citizens of UK. The social factors are the most influential in the fashion and luxury goods industry.
The citizens of UK have an “insatiable appetite for luxury goods” (Economist 2011). This means that the citizens value luxurious goods that are associated with high quality. Social stratification in the UK is based on personal possessions and achievements. Thus those who are able to afford luxurious goods are ranked in the upper class of the society. Consequently, the citizens are striving to acquire luxurious goods.
This has led to an increase in demand for fashion goods. The people of UK are also very keen on the quality of products (Economist 2011). Fashion and Leather Goods Group has become the preferred retailer of fashion products in the UK due to the high quality of its merchandise. The culture of conspicuous spending on luxurious fashion items has enabled the company to maintain high sales volume in the UK market.
Environment
Environmental factors relates to the weather patterns in UK and how it affects the fashion industry. The changing weather patterns influences the customers’ choices for the various fashion items. For example, leather jackets are highly demanded during the winter season as compared to the summer period (LVMH 2011).
Fashion and Leather Goods Group has been able to understand the shopping patterns of the UK’s citizens in responses to the various weather patterns. Consequently, the company has been able to stock the right items at the right time. The company always keeps a record of the customers’ purchases over a long period of time. These records are used by the company to predict the possible changes in consumers’ tastes and preferences.
Legal
Legal factors relates to the rules and regulations that govern the operation of fashion companies in the UK. The fashion industry is highly liberal and the legal factors have minimal effects. The legal factors that have significant effects on the fashion industry include the taxation of the fashion items.
Luxurious goods are highly taxed as compared to other goods that are sold in the country. The rationale behind the high taxation is that luxurious goods are not necessities (Groucutt, Leadly & Forsyth 2004, p. 89). Thus accessing them is not the priority of the government. The high taxes are usually transferred to the customers through high prices and this discourages expenditure on such items.
Political
Political factors relates to the governance of the country in which the business is operating in. The political factors are reflected in the trade and development policies that are applicable in a given country. The UK government has always focused on deregulating the fashion industry and this has led to high levels of efficiency in the industry. Fashion and Leather Goods Group has been able to take advantage of the little government interference in the industry and expanded its operations into all major cities in the UK (LVMH 2011).
The stable government of the UK has also created an environment that is conducive for business. The UK enjoys strong political ties with major economies such as China, France and the US. This has translated into fair terms of trade between UK and the above countries. Consequently, Fashion and Leather Goods Group has been able to import its supplies easily from the mentioned countries.
The Micro Environment
The micro-environment refers to the factors that affect the performance of the firm in the market. The effects of the micro-environmental factors relates to the competitiveness of the firm in the market. The effects of these factors in the UK fashion industry and how they affect Fashion and Leather Goods Group can be explained using the porter’s five forces model and the SWOT analysis.
Power of the Buyer
The power of the buyer (fashion companies) is low in the UK fashion industry. This is attributed to the following factors. First, there are very many fashion companies as compared to the suppliers of the fashion items. This has led to inefficiency in the industry since the delivery of orders is sometimes delayed due to limited production capacities (LVMH 2011).
Major firms like Fashion and Leather Goods Group have established their own manufacturing plants in response to the high concentration of suppliers in the industry. Second, the switching costs are low in the UK fashion industry. The incumbent firms can easily shift from selling luxurious goods to other lines of businesses such as selling cheap clothes. Third, the suppliers’ products are highly differentiated. In most cases the manufacturers of the fashion items supply finished products (Varian 2007, vol. 2, pp. 96-108).
Besides, the goods are usually made according to the specification of the clients (retailers). The suppliers’ products (raw materials) are very important to the quality of the buyers’ products. The quality of fashion items such as handbags depends on the material that is used to manufacture them. A low power of the buyer means that the buyers are price takers. This means that Fashion and Leather Goods Group can not easily negotiate for the supply of its merchandise at lower prices.
Power of the Supplier
The power of the supplier is high in the industry due to the following reasons. First, there is a high concentration of suppliers. This means that there are more buyers (fashion companies) as compared to the suppliers. Second, the buyers are not very important to the suppliers. This is because there are alternative distribution channels such as supermarkets that the suppliers can use to reach the market. Besides, some manufacturers have their own retail outlets.
Third, the manufacturers’ products are highly differentiated and can be sold directly to the market (Johnson 2006, vol.7, pp.92-120). However, availability of substitutes to the suppliers’ products is very high in the industry. The high power of suppliers means that Fashion and Leather Goods Group can be exploited by suppliers through high prices of supplies.
Threat of Substitutes
The threat of substitutes is very high in the industry. The high threat of substitutes is attributed to two reasons. First, the substitutes are highly differentiated. Fashion and luxurious goods are facing stiff competition from the general clothes and shoes industry.
Besides, dishonest traders especially from China have been able to manufacture counterfeit products that are more or less similar to the various original fashion and luxurious goods (Varian 2007, vol. 2, pp. 96-108). Second, the counterfeits are very cheap as compared to the original items. The low prices make it extremely difficult for the original products to compete with their counterfeits in the market. The high threat of substitute goods limits the firm’s ability to maintain its market share in the UK market.
Threat of New Entrants
The UK fashion industry is characterized by high economies of scales. Most firms in the industry have countrywide branch networks and regional distribution centers. Besides, their products are usually delivered by the suppliers at minimal costs (LVMH 2011). There is high level of product differentiation especially among the retailers. Most products are made according to the tastes and preferences of the customers.
Most firms are also focusing on modifying their products in order to make such products unique and more appealing to the customers. The capital requirements for joining the industry are relatively low. This is based on the fact that investors can establish small but profitable fashion firms (Lynch 2009, p. 89). The low cost of joining the industry is responsible for the large number of small fashion companies in the UK.
The incumbent firm’s switching costs are also very low in the industry. The government has never been keen in providing subsidies to fashion firms since their line of products are not necessities. These trends indicate that the threat of new entrants is relatively high in the industry. This means that Fashion and Leather Goods Group is likely to loss part of its market share as more firms join the industry. The company’s sales and profits will definitely decline as it losses its market share to new entrants in the market.
Intensity of Competitive Rivalry
There are very many firms (competitors) in the UK fashion industry. The liberalization of the industry and the ever increasing demand for fashion and luxurious products has prompted many firms to invest in the industry (Economist 2011). The main players in the industry include specialized fashion companies, supermarkets and retail fashion shops. The fixed costs are very high since the industry is labor intensive.
Fashion and Leather Goods Group for instance, has been forced to hire thousands of employees in order to serve its customers effectively. The storage costs are also very high since the fashion items are voluminous and thus require a lot of storage space. It is for this reason that Fashion and Leather Goods Group has focused its investments on big stores in every city. The level of product differentiation is also very high in the industry. However, the industry’s growth rate is slow.
The current slow growth rate is attributed to the effects of the recent economic crisis (Economist 2011). The above trends indicate that the intensity of competitive rivalry is very high in the industry. Intense competition is associated with pressure on prices (Serge 1990, p. 56). This means that fashion firms will have to reduce their prices in response to the intense competition that is being experienced in the market. Significant reduction in prices reduces the profit margins of the firms in the industry.
SWOT Analysis
The above analyses indicate that the Fashion and Leather Goods Group has the following opportunities in the UK market. First, the culture of conspicuous spending in UK has led to a steady increase in demand for fashion and luxurious goods (Economist 2011). Thus the company can expand its operations and increase its sales volume.
Second, the company can easily obtain its supplies from overseas economies at lower prices since UK enjoys favorable terms of business with major economies. This will enable the company to reduce costs and increase sales by charging low prices. Third, the economy of UK is steadily recovering from the effects of the recent economic crisis (Economist 2011). This means that an increase in demand for fashion items is anticipated in the industry.
The company is also faced with the following threats in the UK market. First, there is high intensity of competitive rivalry in the market. This limits the company’s ability to charge prices that can enable it to realize the optimal level of revenue. Second, the power of the buyer is low in the industry.
Consequently, the company is not able to negotiate effectively for the supply of its merchandise at low prices (Baye 2009, p. 78). Third, the high power of the suppliers means that the company is likely to be exploited through high prices. Finally, the high threat of substitute products reduces the competitiveness of the firm in the industry.
The company is associated with the following strengths in the industry. First, the company boasts of a well established brand that is known for quality and elegance (LVMH 2011). Second, the company’s financial position is very stable. Thus it can be able to fund its growth plan effectively.
Third, the firm has an efficient distribution channel that consists of a countrywide branch network. This enables it to serve the entire UK market. Besides, the company has adopted the use of modern technology for production, sales and marketing. Finally, the company owes its success to sound marketing and financial management strategies. The use of such strategies enabled the firm to realize increases in revenue and profits during the recent economic crisis (LVMH 2011).
The main weakness of the company is that it has focused its growth plan on expansion with little emphasis on research and development. The firm spends more on establishing new stores indifferent parts of the country. However, investment in the development of new products is relatively low.
Industry Life Cycle Analysis
The fashion industry in the UK is characterized by high level of product differentiation and innovation (Smith 2009, vol. 32, pp. 306-370). Several segments have also been developed in the industry. Such segments include jewelry, men’s wear, ladies clothes and shoes. The use of modern technology is also very common among the firms in the industry. However, the growth rate of the industry is slow. These analyses indicates that the industry is about to reach its maturity stage.
Outlook
The financial performance of the company indicates that it has been able to maintain a steady growth in revenue and profits in the last three years. In 2007 the company realized a total of 5.628 billion Euros in revenue (LVMH 2011). The figure rose to 6.010 billion and 6.302 billion in 2008 and 2009 respectively (LVMH 2011).
In the last financial year the company’s revenue grew by 14%. The SWOT analysis reveals that the company has the success factors that can enable it to maintain the current rate of growth in the next three years. This can be possible due to the following reasons. First, the economy is recovering from recession and thus the demand for fashion items is likely to continue to rise in the next three years.
Second, the company has already rolled out its short-term expansion plan that involves establishing new stores in the market (LVMH 2011). The new stores will contribute to an increase in revenue in the next three years. Finally, the small fashion companies are likely to exit the market due to the effects of the high intensity of competitive rivalry. Consequently the firm will have an opportunity to increase its market share and revenues.
References
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