Kering SA Probing the Performance Gap with LVMH Case Study Discussion For this discussion, you will explore the relationship between financial analysis and

Kering SA Probing the Performance Gap with LVMH Case Study Discussion For this discussion, you will explore the relationship between financial analysis and strategic analysis in a review of the case study Kering SA: Probing the Performance Gap with LVMH (Case #2 from your textbook). Read: Chapter 2, “Putting Performance Analysis into Practice.”

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How well is Kering performing relative to LVMH?
From (a) the financial data and (b) what we know about Kering’s businesses, can we identify the sources of Kering’s inferior performance?
How are the shareholders and stakeholders affected by the performance?
What can Kering’s management do to close the gap with LVMH?

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Use Saudi Electronic University academic writing standards and APA style guidelines. Case 3 K
ering SA: Probing
the Performance Gap
With LVMH
In March 2013, the French fashion and retail giant Pinault-Printemps-Redoute (PPR)
changed its name to Kering. According to CEO François-Henri Pinault: “Kering is
a name with meaning, a name that expresses both our purpose and our corporate
vision. Strengthened by this new identity, we shall continue to serve our brands to
liberate their potential for growth.” The change in name followed the transformation
in the business of the company.
PPR was primarily a retailing company: it owned the department store chain Au
Printemps, the mail-order retailer La Redoute, and the music and electronics chain
Fnac. However, the acquisition of 40% of the Gucci Group in 1999 (later increased
to 99.4%) marked the beginning of a transformation from being a retailing company
to a fashion and luxury goods company. Table 1 shows the main acquisitions and
divestments of PPR/Kering.
This was not the first transformation that the company had undergone. PPR/
Kering was the creation of the French entrepreneur Francois Pinault who had
established Pinault SA as a timber trading company before acquiring retailers Au
Printemps and La Redoute. In March 2005, Francois Pinault was replaced by his son,
François-Henri Pinault—a graduate of HEC School of Management—as chairman
and CEO of Kering. The Pinaults’ dominance of Kering is ensured through the role of
the Pinault family’s holding company, Groupe Artémis, which owns 40.9% of Kering.
(Artemis also owns Christie’s, the auction house, and the Château Latour vineyards.)
In recreating itself as a diversified fashion and luxury goods company, Kering has
been widely viewed as modeling itself on LVMH—the world’s leading purveyor of
luxury goods. However, despite the close parallels between the two companies—
and their leading families, the Pinaults and the Arnaults—Kering has underperformed LVMH. 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. (Figure 1 charts changes in Kering’s share price.)
It was widely believed that LVMH’s superior performance would continue: of the
investment analysts surveyed by the Financial Times during summer 2015, 62% rated
LVMH as a “buy” or “outperform” as compared with 36% for Kering.
Efforts to boost Kering’s performance included a shakeup of the management of Gucci—chief executive Patrizio di Marco was replaced by Marco Bizzarri
and Creative Director Frida Giannini by Alessandro Michele—and exploring the
This case was prepared by Robert M. Grant. ©2015 Robert M. Grant.
460 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
TABLE 1
Kering’s principal acquisitions and divestments, 2000–2014
Year
Business
2000
2001
Acquisition of Boucheron (jewelry and perfumes)
Acquisition of Bottega Veneta and Balenciaga
Launch of Stella McCartney and Alexander McQueen brands
Ownership of Gucci Group increased to 99.4%
Sale of Facet (financial services), Rexel (distributors of electrical equipment)
Sale of Printemps
Acquisition of 62% of Puma
Acquisitions of Dobotex (manufacturer of Puma socks and apparel) and Brandon (corporate merchandising)
Acquisitions of Cobra and Volcom (sports equipment suppliers) and luxury menswear supplier, Brioni
Divestment of Fnac
Sale of Redcats online businesses
Joint venture formed with Yoox for online sales of luxury brands
Acquisition of Christopher Kane (fashion clothing), Pomellato (jewelry) and France Croco (processor of
crocodile skins)
Sale of La Redoute and Relais Colis (parcel delivery)
Acquisition of Ulysse Nardin (watches)
2004
2006
2007
2009
2010–2011
2012
2013
2014
Source: Tables 1, 2, 3, A1 and A2 are based upon information in Kering Financial Documents for 2014, 2012, and 2010.
possible sale of its sportswear company, Puma. However, if Kering was to close the
performance gap between itself and LVMH, a critical first step was to understand the
sources of that performance differential.
Kering in 2015
In 2015, Kering SA operated in two segments:
??
Luxury: designs, manufactures, and markets ready-to-wear clothing, leather
goods, shoes, watches, jewelry, fragrances, and cosmetic products through a
number of high-profile brands.
FIGURE 1
The share price of PPR/Kering, 2000–2015
? (log Scale)
200
150
100
50
30
2001
2003
Source: Yahoo! Finance.
2005
2007
2009
2011
2013
2015
Case 3 Kering SA: Probing the Performance Gap With LVMH?? 461
FIGURE 2
Kering Group: Simplified organizational chart, January 2015
KERING
Kering Americas
Kering Corporate
Kering Asia Pacific
Sport & Lifestyle
Division
Luxury Division
YSL
Puma (86%)
Volcom
Gucci
Electric
Boucheron
Bottega Veneta
Balenciaga
Alexander McQueen
Brioni
Christopher Kane
(51%)
Qeelin 78%
Pomellato (75%)
Source: Kering Financial Document, 2014.
??
Sport & Lifestyle: designs and develops footwear, apparel, and accessories
under the Puma, Volcom, and Electrics brands.
Figure 2 shows Kering’s organizational structure. Table 2 shows the performance
of major brands.
Table 3 shows revenue by geographical region.
Kering’s states that its mission 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—this is what Kering calls
Empowering Imagination.”1
Kering’s strategy comprises a combination of organic and external growth:
??
Organic growth involves “(i) launching new product categories and continuously
refining existing lines; (ii) strengthening distribution channels through selective
expansion of directly-operated store networks, close relationships with thirdparty retailers, and implementation of a dynamic e-commerce strategy;
(iii) enhancing sales performance, notably through increasingly efficient
462 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Table 2
Kering Group: Performance of the major brands (€ millions)
Revenue
Op. Incomea
Op. margin
Net assets
Brand
2014
2013
2014
2013
2014
2013
2014
2013
Gucci
Bottega Veneta
Saint Laurent
Other luxury brands
Total Luxury Division
Puma
Other sport/lifestyle brands
Total Sport & Lifestyle
Division
3497
1131
707
1424
6759
2990
255
3245
3561
1015
557
1337
6378
3002
245
3247
1056
357
105
147
1666
128
10
138
1132
331
77
144
1684
192
9
200
30.2%
31.6%
14.9%
10.3%
24.6%
4.3%
3.7%
4.2%
31.8%
32.5%
13.8%
11.6%
26.4%
6.4%
3.5%
6.2%
6373
1072
547
2551
10542
4399
277
4675
6355
532
1005
1935
9826
4335
418
4753
Note:
a
Recurrent operating income. Excludes impairment of goodwill, restructuring costs, etc.
??
merchandising, in-store excellence, sophisticated customer intelligence, and
relevant, well-targeted communications.”2 For example, in 2014 Gucci launched a
range of cosmetics. Another strategic initiative is the development of an integrated
approach to eyewear comprising an internal value chain for product development, supply chain management, brand strategy, and sales and marketing.
External growth involves acquiring brands with “exceptional brand identity,
well-rooted values and a sought-after legacy; a unique scope of expression
through lasting codes and language, often referred to as their DNA; an ability
to broaden their territories independently or through alliances; and an aptitude
to gradually expand their market coverage beyond their current borders.”3 For
example, Kering’s acquisition of watchmaker Ulysse Nardin was based upon
its complementary relationship with Kering’s other watch brands and Ulysse
Nardin’s potential for geographical expansion, especially in Asia-Pacific.
Synergies across Kering’s businesses are achieved through:
??
Talent development and deployment: “The idea behind the HR strategy is for
the brands to flourish through access to a shared talent pool [which] primarily targets the top 200 managers of the Group.”4
TABLE 3 Kering Group: Sales revenue by geographical region
Western Europe
North America
Japan
Eastern Europe, Middle East and Africa
South America
Asia-Pacific (excluding Japan)
Total revenue
2014
€million
2013
€million
Reported change
(%)
Comparable
change (%)a
3,152
2,147
963
728
465
2,583
10,038
3,022.0
2,032
968
710
475
2,449
9,656
+4.3
+5.7
–0.5
+2.7
–2.2
+5.4
+4.0
+1.6
+5.5
+7.3
+4.9
+9.0
+5.3
+4.5
Note:
a
Change in revenue after correcting for changes in exchange rates.
Case 3 Kering SA: Probing the Performance Gap With LVMH?? 463
??
??
An e-business strategy developed initially for Gucci but then extended to
each of Kering’s brands.
A group-wide approach to sustainability that “represents long-term differentiation and competitive advantage by offering new business development
opportunities, stimulating innovation and in many cases helping to reduce
costs. It is also a motivating factor for the employees … The Kering sustainability department acts as a platform of resources to accompany the brands’
own activities.”5
Appendix 1: Kering SA: Selected Financial Data6
TABLE A1 S elected items from the financial statements of Kering SA, year to 31 December
(€million)
INCOME STATEMENT
Total revenue
Cost of sales
Selling, general and admin. expenses
Non-recurring net expenses
Other operating expenses, total
Total operating expense
Operating income
Net income from continuing operations
Net income from discontinued operations
Net income
BALANCE SHEET
Assets
Cash and short-term investments
Total receivables, net
Total Inventory
Total current assets
Property, plant, and equipment
Goodwill, net
Brands and other intangibles
Total assets
Liabilities
Accounts payable
Notes payable/short-term debt
Current portion long-term debt/capital leases
Total current liabilities
Total long-term debt
Total debt
Total liabilities
Total shareholders’ equity
CASH FLOWS
Net cash from operating activities
Total cash from investing of which
—Capital expenditures
2014
2013
2012
2011
2010
10,038
3,742
1,545
112
3,087
8,486
1,552
1,008
(479)
529
9,656
3,615
1,516
441
2,774
8,345
1,311
874
(825)
50
9,736
3,776
1,494
25
2,675
7,970
1,766
1,324
(276)
1048
8,062
3,087
1,229
24
2,245
6,584
1,478
968
18
986
11,008
5,639
1,637
98
2,405
9,779
1,229
709
255
965
1,196
1,168
2,235
5,273
1,887
4,040
10,748
23,254
1,527
1,069
1,806
4,925
1,677
3,770
10,703
22,811
2,168
1,061
1,737
5,460
1,376
3,871
10,490
25,257
1,316
1,183
2,203
5,277
1,372
4,215
10,331
24,954
1,449
1,317
2,227
6,940
1,424
4,540
10,200
24,695
983
1,254
1,247
5,780
3,195
5,696
12,620
10,634
766
540
1,310
4,559
3,133
4,982
12,224
10,587
685
362
1,223
4,381
2,989
4,212
13,843
11,414
1,536
892
1,095
7,072
3,066
5,053
14,029
10,925
1,928
372
1,799
6,495
3,148
5,319
14,095
10,599
1261
(903)
(551)
1521
(966)
(675)
1366
259
(442)
1,332
402
(325)
1,264
79
(305)
464 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Table A2
Kering Group: Divisional information
Luxury
Sport & Lifestyle
Brand
2014
2013
2014
2013
Brand value (€m)
Goodwill (€m)
Number of stores
Number of production & logistic units
Divisional revenue by product
Apparel (%)
Footwear (%)
Leather goods (%)
Watches & jewelry (%)
Other (%)
Divisional revenue by region
W. Europe (%)
N. America (%)
Asia Pacific (%)
Japan (%)
Other (%)
6578
2944
1173
140
6759
16
12
53
10
9
6629
2523
1088
110
6378
16
13
54
9
8
3887
1096
677
44
1666
40
40
–20
2523
1247
608
51
1684
43
39
–18
32
19
31
10
8
33
19
31
10
7
30
26
14
9
21
30
25
13
10
22
Appendix 2: LVMH: Selected Financial Data
LVMH Moet Hennessy Louis Vuitton SA (LVMH) is a Paris-based luxury goods company.
Tables A3 to A5 show financial data for the company and its main businesses.
TABLE A3
LVMH’s businesses and brandsa
Revenue
(€million)
Op. profit
(€million)
Division
2014
2013
2014
2013
Major brands
Wines and
Spirits
3,973
4,187
1,147
1,370
10,828
9,882
3,189
3,140
3,916
3,717
415
414
2,782
2,784
283
375
9,534
8,938
882
901
Moët & Chandon, Dom Pérignon, Veuve Clicquot, Krug, Ruinart,
Mercier, Château d’Yquem, Château Cheval Blanc, Hennessy,
Glenmorangie, Ardbeg, Wen Jun, Belvedere, Chandon, Cloudy
Bay
Louis Vuitton, Céline, Loewe, Kenzo, Givenchy, Thomas Pink,
Fendi, Emilio Pucci, Donna Karan, Marc Jacobs, Berluti, Nicholas
Kirkwood, Loro Piana
Christian Dior, Guerlain, Parfums Givenchy, Parfums Kenzo, Loewe
Perfumes, Benefit Cosmetics, Make Up For Ever, Acqua di Parma
Bulgari, TAG Heuer, Chaumet, Dior Watches, Zenith, Fred, Hublot,
De Beers Diamond Jewellers Ltd (a joint venture)
DFS, Sephora, Le Bon Marché, la Samaritaine, Royal Van Lent
Fashion and
Leather
Goods
Perfumes and
Cosmetics
Watches and
Jewelry
Selective
Retailing
Note:
a
Net assets by business in 2014 were: Wines and Spirits €10,543m; Fashion and Leather €9,484m; Perfumes and Cosmetics
€1,397m; Watches and Jewelry €7,196m; Selective Retailing €4,849m.
Source: Tables A3, A4, and A4 are based upon LVMH Annual Reports for 2014, 2012, and 2010.
Case 3 Kering SA: Probing the Performance Gap With LVMH?? 465
TABLE A4
LVMH’s revenues by geographical region, 2014 (€million)
France
Europe (excluding France)
Asia (excluding Japan)
Japan
United States
Other countries
TABLE A5
3,212
5,830p
8,740
2,107
7,262
3,487
Selected items from financial statements of LVMH (€million)
INCOME STATEMENT ITEMS
Total revenue
Cost of sales
Selling, general, and admin. expenses
Non-recurring net expenses
Operating income
Net income
BALANCE SHEET ITEMS
Cash and short-term investments
Total receivables, net
Inventory
Total current assets
Property, plant, and equipment
Goodwill, net
Brands and other intangibles
Total assets
Accounts payable
Notes payable/short-term debt
Current portion long-term debt/capital leases
Total current liabilities
Total long-term debt
Total debt
Total liabilities
Shareholders’ equity
CASH FLOWS
Net cash from operating activities
Total cash from investing of which
—Capital expenditures
2014
2013
2012
2011
2010
30,638
10,801
14,117
289
5,431
5,648
29,016
9,997
12,979
116
5,898
3,436
27,970
9,863
12,164
174
5,742
3,425
23,659
8,092
10,304
95
5,154
3,065
20,320
7,184
8,815
155
4,169
3,032
4,091
2,628
9,475
18,110
10,387
8,810
13,031
53,362
3,606
—
4,189
12,175
5,054
9,243
31,599
21,763
3,397
3,132
8,492
15,971
9,621
9,058
12,596
56,176
3,297
3,661
1,013
11,639
4,149
8,823
29,297
26,879
2,187
2,173
7,994
14,167
8,694
7,709
11,322
49,850
3,118
—
2,950
9,405
3,825
6,775
25,426
24,424
2,448
2,750
7,510
13,267
8,017
6,957
11,482
47,113
2,952
1,825
1,219
9,594
4,132
7,176
24,742
22,371
2,511
2,155
5,991
11,199
6,733
5,027
9,104
37,164
2,298
823
1,011
7,060
3,432
5,266
19,966
17,198
4,607
(2,007)
(1,775)
4,714
(3,917)
(1,657)
4,115
(1,690)
(1,694)
3,907
(3,016)
(1,749)
4,049
(2,691)
(1,002)
Notes
1. Kering Financial Document 2014: 8.
2. Ibid.: 8.
3. Ibid.: 9.
4. Ibid.: 10.
5. Ibid.: 11.
6. LVMH 2014 Annual Report.

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