Internal competition for budgets and support operations As part of the luxury conglomerate, the pure player will face a strong competition with the other brands to maximise its share of the overall budget. The focus may be more on “internal politics” than on business and creative management, as the level of financial means in the luxury industry are key to foster performance development through strong advertising, extensive promotional marketing, resources in creative development. The final decision in terms of budget allocation is likely to be made by the corporate structure on past result criteria rather than on future performance assessment. Therefore a pure player, being considered a small part within the conglomerate brand portfolio, may not receive the required budget for implementing its business development plan. Similarly when negotiating commercial agreements with suppliers and distributors, the heads of the functional divisions, such as Purchase and Sales, might only consider the increase in the total group business share that a single player will bring, without considering its specific needs to further expand. Therefore the outcome in terms of delays, discounts, retail presence are likely to be negotiated at a group level, but may not ultimately be redistributed to the single player. Since the suppliers and distributors are concerned with the profit derived from each specific brand, they might give better overall conditions considering the share of the luxury conglomerate in their businesses. The real advantages in terms of supplying delays, shelf-space, etc., might primarily benefit the “biggest” brands. The single player might lack the advantage of being a part of the Luxury conglomerate, while contributing to increase the bargaining power of the functional managers, by enlarging the base of the negotiation. Profitability focus hindering creativity development A luxury conglomerate tends to create a pressure on financial results at the level of each division and induce a form of competition between brands. This is likely to hinder the creative process, which is the underlying support of the brand, we previously defined as one of the key asset of a luxury goods player. The focus on results and profits might represent a risk in the longer term as managers will tend to abandon new creative product projects that may not be an immediate commercial success. In the longer run the risk is to loose the originality and identity of the brand and indirectly destroy the future consumer base, as they might no longer be attracted by the creative style of the brand and therefore not be willing to pay for the premium linked to any luxury product. Another distortion that might be generated by a conglomerate is a too radical transformation of the brand, without maintaining the link with the history of the brand. For example LVMH tried to revitalise the Givenchy brand by brutally changing the designer and assigning ambitious commercial targets to the new creator and his team. However the new products did not match anymore with the “spirit” and original
INSEAD MBA – “Can Luxury Goods Conglomerates sustain above-normal returns? The Gucci Group case”
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