New product introductions vs. product availability
In the spring of 2004, Mr. Marcello Bottoli, CEO of Louis Vuitton, the largest and most profitable subsidiary of LVMH (Louis Vuitton-Moet Hennessy), the #1 luxury goods company in the world, was called upon to arbitrate a ongoing conflict between Mr. Jean-Marc Loubier, the company’s vice president for marketing and sales, and Mr. Emmanuel Mathieu, the vice president for manufacturing and logistics. For several months, these two senior managers had been bickering about how to solve the out-of-stock problem Louis Vuitton’s 300 company-owned stores around the world were increasingly frequently faced with. Jean-Marc Loubier blamed the situation on the lack of flexibility and responsiveness of the company’s supply chain while Emmanuel Mathieu faulted the recent increase in new product introductions, combined with very poor forecasting of demand. Marcello Bottoli had mixed feelings about the whole issue. On the one hand, close to perfect quality was critical in a business where customers might be paying up to €1000 for a pair of shoes and €3000 for a handbag, and he felt very reluctant to disrupt Louis Vuitton’s traditional and proven manufacturing process. On the other hand, the rapid pace of new product introductions had been a decisive factor in the company’s 20% average growth rate in the previous three years and, in a business like that of Louis Vuitton, it was very difficult to predict how customers would respond to new products, no matter how much money, time and effort were spent on market research. Still, despite the advantages resulting from the snob-appeal attached to those products that turned out being hard to purchase, the opportunity cost of stores being out of products customers wanted had to be very high. So Marcello Bottoli was determined to find an appropriate solution to the problem very rapidly.
The Luxury Good Industry
Luxury goods have alternatively been described as “products no one needs” or as “items that serve little purpose in the lives of consumers, except to fulfill dreams”. With such a fuzzy definition, it was no wonder the precise boundaries of the “luxury goods industry” remained blurred, at best. While haute couture, perfume and jewelry unquestionably belonged to the universe of luxury, segments of many other industries such as the hotel business, the automobile industry, wine and spirits, or even the airline industry might also have qualified as luxury businesses.
Very broadly speaking, products traditionally considered to be luxury goods pertained to two main categories:
1. Products targeted at individuals, which were often derived in one way or another from haute couture. This first category of luxury goods included such products as designer clothes, leather goods, shoes, eyeglasses, jewellery, watches, accessories, perfumes and cosmetics. Demand for fashion-related items was growing very rapidly. This growth was fuelled primarily by the ever expanding variety of accessory lines offered by luxury brands. In contrast, jewellery and watches were experiencing much slower growth. 2. Home furnishings and decoration, a more recent development in the luxury goods sector; this primarily covered china, crystal and silverware, and also included household linen, lighting and some furniture. This second category was growing very rapidly but only accounted for a fraction of the whole sector.
Overall, the luxury-goods sector had enjoyed very rapid growth for over 20 years. This was made possible by progressively opening up the market to a much wider range of customers. Very wealthy clients had traditionally been the major segment targeted by luxury brands but, in more recent years, the market was opening up to a wider set of potential buyers. Luxury goods were no longer reserved to an elite, but had come within reach of an increasing number of people. These new customers were younger and made...