Will the Recession Kill the Luxury Industry?

Luxury Industry Survey:

Will the Recession Kill the Luxury Industry?

Dissertation Proposal 

CONTENTS 

1. PREVIEW

 

2. INTRODUCTION

 

3. BACKGROUND

 

4. STATEMENT

 

5. RESEARCH QUESTION AND OBJECTIVES

 

6. LITERATURE REVIEW:
1. Nature of outsourcing
2. Brand management
3. Practical issues
4. Impact the outsourcing: Uzbekistan overview

 

7. METHODOLOGY

 

8. REFERENCES

 

9. BIBLIOGRAPHY

 
 
 
 
 
 
 
 
 
 
 

1. PREVIEW

 

This proposal is devoted to the practice of modern corporate strategies in the unique branch of the world economy - the luxury industry. We consider the processes occurring in the industry in terms of unfavourable to the growth of this industry.

In the conclusion there will be examined the sustainability of the strategies used against the background of the serious problems that facing the industry. 

2. INTRODUCTION

 

Today the luxury industry is one of the important components of the global economy. This group includes luxury clothing of high fashion, expensive accessories, perfumery, cosmetics, home furnishings, luxury watches and jewellery, high quality wines and spirits as well as luxury cars and upscale tourism.

According to the European Union statistical agency Eurostat, the annual sales of listed species goods excluding automobiles and tourism reached about $ 60 billion. Leaders of sales within the industry sectors are clothing, perfumery and cosmetics, leather products and accessories. Also they have a relatively high rate of sales growth, with the exception of perfume and cosmetics.

The main markets for Vehicles goods were and are North America, Western Europe and Japan. But Company producing luxury items, more attention is being placed in such a promising new markets such as China, India and Russia. Currently, the Chinese market, estimated Expert company Goldman Sacks, 12% of the world luxury market [Jones, 2005], and by 2015, according to the forecast auditing firm Ernest & Young, its share reaches 29%, showing 20% annual growth [Windle, 2005]. 
 
 
 
 
 
 

3. BACKGROUND

During the 1990th and the first five years of the new century, global luxury industry has developed unevenly. Changes in the growth dynamics of the industry were initially closely linked to the changing economic situation in the world. For example, sales began to grow rapidly after 1993, when the growth rate of the world GDP was growing, but with the fall in the growth rate of world GDP in 1995, growth in sales volumes have started to decline (Table 2) 

Annual growth in sales of luxury

 (1992-2003 years.),%

Table 2. Merrill Lynch, Lexis Nexis. 

After the relatively successful in 1997 the luxury industry started to develop in cycles, ie, periods of rapid sales growth interspersed with relatively sluggish. This pattern was associated with economic and political events happening in the world. Thus, a slowdown was observed after the Asian economic crisis in 1997, as well as the collapse of the excessively overheated stock market of high-tech companies in 2000. 

Significant role in slowing sales growth in 2002-2003 played terrorist attacks in the USA in September 2001 and the subsequent large-scale military action in Iraq. Thus, during the last decade, the most affluent periods for the growth of the luxury industry were the 1997 and 1999-2000, when the pace of annual sales growth were fluctuating around 12%. 

In recent years the development of the luxury industry began to play an important role so-called democratization of the market, where luxury goods began to be interested buyers of moderate means. For various reasons, including psychological and emotional, and the middle class began shopping in expensive boutiques luxury goods (perfumes, accessories, wine, etc.), while moving to buy cheaper clothes, shoes, food, in the wholesale stores and supermarkets. However, this new segment of the market more sensitive to economic changes. 

In the history of the luxury industry the best known brands have won the French Chanel, Christian Dior, Cartier, Louis Vuitton; Italian Georgio Armani, Gianni Versace, Prada, Gucci and others. Their number continues to operate as independent business companies, while others - as part of larger corporations. 

Currently, the luxury industry is allocated a group of companies which, regardless of their status are major players in the industry. This first such multi-brand conglomerates, as the French group of companies LVMH Moet Hennessey - Louis Vuitton and Hermes, an Italian group Gucci (now almost entirely owned by Dutch group PPR), as well as an Italian multi-brand group of Prada Group. To the leaders are also an Italian group Armani and British group Burberry, famous Italian and American fashion company Bulgari and Tiffani & Co, as well as the American accessories manufacturer Coach Company and the Swiss watch manufacturer Swatch group (Table 3). 

             The Major companies of the world Luxury Industry

Table 3. Corporate Reports: Hoovers Online, http://www.hoovers.com  
 

The main geographical areas of expansion of markets for companies in this industry were the United States and Japan. Many firms have opened their first stores in these countries. For instance, Gucci global expansion began with the opening of stores in New York in 1953, and the first boutique company Tiffani & Co abroad appeared in Japan in 1972

Currently, the implementation strategy of global expansion, companies in the industry are trying to diversify their markets and increase presence in new, rapidly growing markets of Asia, Eastern Europe, Middle East, both adsorb on the traditional markets in Europe, North America and Japan, by doing so they have a policy of balanced presence in different countries. For example, Japan's experience in the middle of 1990th, when the sale of luxury goods because of the recession in the country decreased by 80%, showed that concentrate their sales in one market, no matter how promising it may be inappropriate. 

In international markets the expanding of personalized sales increasingly giving way to sales through standardized retail outlets. Luxury goods feel that demand has become more standardized, and therefore limited to only small adapting products to local markets.  

In the process of internationalization of production processes, some companies of the luxury industry posted its manufacture units in other countries where work force is cheaper. However, due to the sensitivity of demand to the quality of the company were forced to heed to the issue of what to produce on its own factories abroad and that trusted external foreign producers, in other words, transfer to outsourcing. For example, a group LVMH brings manufacturing processes abroad, but the products of their best brands prefer to produce in-house. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4. STATEMENT OF PROPOSAL

 

Global luxury industry recovers from the effects of the crisis  

The sales of luxury goods and premium category is steadily growing throughout the world, in the face of continuing global economic recovery.  

As the head of the French fashion conglomerate PPR, which owns such brands as Gucci and Yves Saint Laurent, François Pinault, the net profit during the first half of this year grew more than twice what is considered as an excellent result in modern economic reality continues to be unpredictable. 

Rapid recovery of Asian market has played a crucial role in the growth of the profitability of the industry.  

Net profit for the PPR in the first half rose by more than 113% to 403 million euros ($ 528 million) compared with the same period last year. About 53% growth of net profit to 1.1 billion euros and said the world's largest producer of luxury goods and fashion LVMH Moet Hennessy-Louis Vuitton. 

Profits are growing and other top companies such as Hermes (22.8% increment of sales), Burberry and one of the most famous world luxury watches Luxottica.  

Restoring the industry actually began in the Christmas period, amid a sharp rise in sales of premium products in China and other Asian countries.  

According to official figures, the largest decline in sales as a result of the crisis experienced in the segment of luxury watches, as well as alcohol, however, now produce such well-known brands such as Remy Cointreau and Laurent Perrier again eagerly bought up all over the world. 

On the basis of the above stated, there are hopes that the industry of luxury in the near future will become a great success for the international level and would not join a number of extinct businesses. 
 
 
 
 
 
 
 
 
 
 
 
 
 

5. RESEARCH QUESTION AND OBJECTIVES

 

Question:

Will the recession kill the Luxury industry? 

Aim of question:

The main question of this statement will contain one of the methods of survival of companies producing luxury goods during the recession.

The chosen method is focusing on outsourcing as a business model. 

Objectives:

To identify the main solution to the problem I have the option of a proposal to produce as outsource in Uzbekistan. In this proposal, I chose as the object of luxury industry - the direction of the production of leather handbags by LVMH in Uzbekistan. 

1. Undertake a full analysis of the tax system at the local level

 

2. Consider aspects such as import and export policy of Uzbekistan

 

3. Undertake a full analysis of internal resources as labour and raw materials

 

4. Consider the problem as administrative barriers

 

5. Gaining confidence in the production of Uzbek manufacturers

 

6. Development of outsourcing in other industries

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6. LITERATURE REVIEW:

 

To understand whether or not there would be success this sphere in Uzbekistan, we must firstly understand the nature of outsourcing. However, it is necessary to know whether the brand as LVMH allows to produce its luxury goods abroad, namely in Uzbekistan. The knowledge of brand management will help me. Then, for the productive work with the brand is necessary to consider some aspects of the practice of outsourcing as an example in China. And coming to the end, we proceed to consider the production of luxury goods in Uzbekistan as a country with favorable conditions for the organization of outsourcing. 

2. Nature of outsourcing

Outsourcing today gaining popularity in Russian companies. The concept of outsourcing includes the transfer of certain types of work to another subject. For example, a company can pass on outsourcing accounting - this is relevant for small businesses, cleaning, personnel, maintenance of computer networks, etc. 

Also an example of outsourcing is the transfer of professionals of the major works of the company. For example, a company engaged in your site. If your site is necessary in the unique content. The company turned to third-party copywriters, freelancers, who do this work for a fee. Or a more specific example of outsourcing from the same paths: the company already has a copywriter, but you want to write a professional text on legal topics. So the company is responsible freelance copywriter specializing in writing the texts of legal topics. I think I describes in detail the concept of outsourcing. 

Thus, outsourcing - the transfer of the organization under a contract specific business processes or production functions in the service of another company specializing in the relevant field. In contrast to the services and support services with a single, episodic, random and bounded beginning and the end, outsourcing is usually transferred responsibility for professional support uninterrupted performance of individual systems and infrastructure based on long-term contract (at least 1 year). Availability of business-process outsourcing is the hallmark of various other forms of service delivery and customer service.  

The main source of cost savings through outsourcing is to improve the efficiency of the enterprise as a whole and the emergence of the possibility of release of appropriate institutional, financial and human resources to develop new directions, or to concentrate on existing ones, requiring greater attention.

http://wapedia.mobi/ru/  

In this chapter, I will be guided by such sources as:

• The Outsourcing Revolution by Michael F. Corbett, USA, 2004
• Strategic Outsourcing: A structured Approach to Outsourcing Decisions and Initiatives by Maurice F. Greaver II, New York, USA, 1999

 

3. Brand Management

 

Brand management - it is the application of marketing techniques to a specific product, product line, or brand. Objective - Raising the profile of the product as perceived by consumers, increasing brand value. The value of the brand is that of profit, which brings the brand manufacturer: increase sales, increase prices, lower production costs. Accordingly, brand manager, in contrast to the marketing manager, has played a strategic role in managing the organization, 

Why brand managers must decide for themselves whether to produce or not the luxury goods abroad in recession? The issue is simple in essence. The fact is that if a company is ready to give their subsidies for the production of this product, whether it trusts the Uzbek specialists and raw materials that provides an outsourcing company for production. 

In this chapter, I will be guided by such sources as:

• Brand new justice: the upside of global branding by Simon Anholt, 2003, Oxford, UK
• The theory of the firm and Chinese enterprise reform: the case of China International Trust and Investment Corporation by Qin Xiao, 2004, New York, USA
• http://www.wikinvest.com/wiki/LVMH

 
 

4. Practical issues. Case of China

 

Today, the purchase of goods or manufacturing outsourcing in China - the only possible solution for many companies. The reason for this is the world's largest human resources in China, as well as minimal organizational costs of enterprises in China, due to a literate public policies and infrastructure in China.  

Accommodation at the enterprises of China, or the so-called outsourcing of manufacturing, using both large and medium-sized and small companies. Most manufacturing outsourcing in China enjoy the company of light industry, household appliances, instrumentation, information technology, electronics, furniture, interior design and decorating materials. Many of them bought goods from China alone a Chinese manufacturer.  

Production Outsourcing in the first stage begins with identifying potential suppliers of goods. From the long list of Chinese companies based on a set of standardized methods of analysis selected from 2-3 companies which are already using specialized for the industry analysis is the final choice of supplier of goods.  

When speaking about the manufacturing outsourcing in China should be borne in mind not only China but also Taiwan. Despite the fact that legislation and the tariff policy of all these three regions, historically and geographically similar, different, in general, we can think of them as a single region in terms of finding a supplier of goods. Thus it is necessary to take into account the differences, as in the historical specialization, and in the level of staff skills and the mentality of not only the above regions, and provinces of China. Specific differences and peculiarities of working with Chinese suppliers of goods is well known to our company and is one of the factors taken into account when determining the suppliers of goods in China. For a complex organization of production outsourcing to address the whole spectrum of problems in production and supply of goods in China will be most effective to involve a company specializing in these processes that can professionally and quickly as possible to organize them.

http://www.china-market888.ru/page82  

In this chapter, I will be guided by such sources as:

• The theory of the firm and Chinese enterprise reform: the case of China International Trust and Investment Corporation by Qin Xiao, 2004, New York, USA
• Annual Tax Report of People's Republic of China over the last 5 years

 

5. Implement the outsourcing: Uzbekistan overview

 

Today’s Uzbekistan has a large experience in handling outsourcing activities in its territory. Recent joint projects of machinery, textile and clothing industry shown by the fact that the profits from the production takes place to be as it is for investors and for the state. Extensive development of mechanical engineering at the territory of Uzbekistan is a huge potential for development of Uzbekistan and the index of the ease of production. In this proposal, I will complete undertake a full analysis of the tax system at the local level, consider aspects such as import and export policy of Uzbekistan and the problems linked with administrative issues, undertake a full analysis of internal resources as labour and raw materials. 

In this chapter, I will be guided by such sources as:

• Annual reports of textile and clothing manufacturers based in Uzbekistan
• Administrative regulations of the Republic of Uzbekistan
• Tax and custom regulations of the Republic of Uzbekistan

 
 
 
 
 
 
 
 
 
 
 
 

7.   METHODOLOGY

To determine whether it is profitable to produce luxury goods in the territory of Uzbekistan, I am planning to make a comparative analysis of the data to find the correlation between the two sides, here I explain how:  

1. Outsourcing strategy for LVMH in China:

Based on the annual reports of the company I will analyze the income growth of 15 workshops of the company LVMH, 5 of which are directly based in China.

All necessary data on the share price, indexes and stock returns are available on the company's website: www.lvmh.com.

In addition, I will trace the interview administration of the company, which are directly involved in the daily trading of the stock market.  

Objective: to determine how big the presence of human factor in the decision-making process with regard to outsourcing and its impact on their decision-making and business activity  

2. Find updated information on research in the luxury industry and its development during a recession such reviewers as Abrams Research (www.abramsresearch.com).  

3. As the main source of research, I will take into account the most recent annual report LVMH, which is available directly on their official website.  

4. As a comparative analysis, I am planning to compare several reports of manufacturers of the Uzbek market of production and sales, such as UzbekTashSelMash, UzDAEWOOauto, which perform the function of foreign companies outsource.  

5. Conduct quantitative analysis of the outsourcing business model in order to determine the impact on the Uzbek industrial base justification funds invested by LVMH and profit in the future.  

There are various methods and models published in magazines, in order to assess the impact factors of foreign trade and interstate market and price policy of the luxury industry.

For the most appropriate model for our research, I will analyze the work as follows:

• The Outsourcing Revolution by Michael F. Corbett, USA, 2004
• Strategic Outsourcing: A structured Approach to Outsourcing Decisions and Initiatives by Maurice F. Greaver II, New York, USA, 1999
• Brand new justice: the upside of global branding by Simon Anholt, 2003, Oxford, UK
• The theory of the firm and Chinese enterprise reform: the case of China International Trust and Investment Corporation by Qin Xiao, 2004, New York, USA

 

The results of my research will be based on scientific books, journals, reports, data and information related to this industry. 

8. REFERENCES

• CORPORATE STRATEGY IN THE WORLD Luxury goods industry by G.A. Papiryan, LG Consulting, 2006. Russia

• Merrill Lynch Research; Eurostat, 2009
• Corporate Reports: Hoovers Online, http://www.hoovers.com
• Corporate web site of LVMH Group, http://www.lvmh.com
• Corporate web site of Gucci Group, http://www.guccigroup.com
• Betts K. 2006. The height of luxury. Time
• Jones A. 2005. Chinese tourists: Industry is pinning hopes on rapid expansion of latest market segment. Financial Times http://www.ft.com
• LVMH: Hardly Growth Trough Acquisitions. 2002. Lehman Brothers Global Equity Research. Lehman Brothers: N. Y.
• Matlack C., Brady D. Berner R., Tiplady R., Tashiro H. 2004. The vuitton money machine. BusinessWeek (22 March). http://www.businessweek.com
• Tagliabue J., Horyn C. 2001. Suddenly, at LVMH, money is an object. New York Times http://www.nytimes.com
• Wetlaufer S. 2001. The perfect paradox of star brands: An interview with Bernard Arnault of LVMH. Harvard Business Review 79 (9): 116–123.
• Windle C. 2005. China luxury industry prepares for boom. BBC News. http://bbc.co.uk
• http://wapedia.mobi/ru/
• http://www.china-market888.ru/page82

 
 
 

Business Journals:

• Abrams Research Luxury Brands Survey & Report, May, 2009
• LVMH: Annual Report, 2009

 

Main sources:

• Official web site of LVMH Group, http://www.lvmh.com
• Official web site of Gucci Group, http://www.guccigroup.com
• Official web site of Prada, http://www.prada.com

 

9. BIBLIOGRAPHY

• The Outsourcing Revolution by Michael F. Corbett, USA, 2004

• Strategic Outsourcing: A structured Approach to Outsourcing Decisions and Initiatives by Maurice F. Greaver II, New York, USA, 1999
• Brand new justice: the upside of global branding by Simon Anholt, 2003, Oxford, UK
• The theory of the firm and Chinese enterprise reform: the case of China International Trust and Investment Corporation by Qin Xiao, 2004, New York, USA