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Vertical Integration in the Luxury Sector

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Vertical Integration in the Luxury Sector Vertical Integration in the their economic model– and the consequen - ces it has had on the way the luxury sector Luxury Sector: Objectives, functions. A company is considered to be vertically Methods, Effects integrated when it is present at a number of Franck Delpal successive stages of the production process. However, a number of studies have outlined the various methods of integration, that go well beyond the simple full ownership of two successive production phases. Harrigan thus defines the different degrees of integra - tion implemented by companies, from complete control to total dis-integration via intermediary levels that concern only a selection of the production process or forms of control that are alternative to ownership (quasi-integration, vertical restrictions…). This analytical table corresponds more to The luxury market has grown impressively the diversity of the practices observed. over the past three decades. The figures Schematically, in the case of luxury fashion, supplied by Bain & Company testify to this we can outline four distinct phases in the fact: sales of luxury products went from 72 making of a product: billion Euros in 1994 to 168 billion Euros in 2010, which makes an annual growth rate – Design; average of 5%. Fashion items (ready-to- – The production of intermediary goods wear, shoes, leather goods) still retain a (fabrics, leathers…); considerable market share as they represent – Manufacturing the finished product; half of this figure. In addition to its econo - – Distribution, wholesale then retail. mic weight, the luxury fashion sector merits We are aware that this level of simplification analysis due to the evolution in its structure forces us to set aside numerous essential (number, size and organisation of compa - divisions in a company (quality control, nies) over the past few years. Companies advertising…) in order to solely concentrate whose main profession is fashion have on the activities that are visibly necessary to experienced much more structural change actually make the product. While design than other companies that began as jewel - remains the backbone of all luxury compa - lery makers, watchmakers or perfumers. nies, we will highlight the fact that most of The big players in the market are thus sho - them are heavily involved in the production wing a higher level of internationalisation phases, whether this is directly or indirectly, and diversification, as well as much more and in distribution. In addition, some of the vertical integration compared to earlier bigger names have already taken over the decades. Vertical integration as a strategic supply of raw materials for the most part in orientation is the subject of this paper. leather tanning. The objective is to outline the causes of the I am basing my findings on a monographic process through a series of case studies analysis of French and Italian luxury com - –whether it results from changes in the panies that was carried out for my PhD for basic market conditions or is a deliberate the université Paris-Dauphine as well as a strategy on the party of the players to change series of studies carried out by the Institut Français de la Mode. This approach was – Technological change. Faced with rapid chosen as the luxury sector is not like any technological advances, companies may other sector as it encompasses a part of other choose to outsource in order to avoid inves - sectors (clothing, accessories…) and doesn’t ting heavily in technology that may not last. really exist as an aggregate. The terms that I should add that on a more managerial define the content of the statistical data that level, new technologies and information is used to scientifically validate economic systems have enabled the implementation theory do not take it into account, which of more complete and more reactive chec - makes any in-depth statistical analysis of king procedures which reduce the risk of the luxury business very complex. This suppliers and sub-contractors not respec - limitation is compounded by the availability ting their commitments. or lack of data in a sector where there is a – Market globalisation. This has led to a very high level of secrecy. The main sources redistribution of the cards between compa - of these monographs are the available litera - nies, as they now have to face competition ture about the companies (books, annual from other countries. Opening borders and reports, case studies, press) in addition to a more and more out-sourcing abroad often number of semi-directive interviews with go hand in hand as shown by McLaren. some companies who accepted to answer These decisions rely on strategies devised in my questions. a macroeconomic environment in full upheaval. In the fashion sector, not inclu - Originality in the luxury industry ding luxury, the growing opening of economies has considerably upset the value A number of writers have covered the gro - chain. Now, most companies only retain the wing disintegration of companies over the activities that are essential to the creation of past few years linking this to a certain num - added value and the perception of that ber of changes on an individual and global added value by the client (design, distribu - level. Taking computers as an example, tion) and outsource manufacturing stages Quelin thus highlighted five factors that to sub-contactors located in countries where have pushed companies to outsource a part the cost of labour is lower (North Africa, of their activities. Asia…). – Focus on strategic activities. Only func - The fact is that the luxury sector has gone tions that contribute significantly to the the opposite way. Luxury companies have competitive edge of the company remain in- in fact gone for more integration in the pro - house. duction phase. – Economies of scale and cost. Quelin notes My thesis was based on the study of twenty that “in some cases, economies of scale are case studies of companies. Here we present easier to reach by the sub-contractor than ten of those which seem to best represent the user”. A sub-contractor that bulks up this mutation. These companies all have orders from a number of principals is thus different countries of origin, ages, speciali - in a position to produce more effectively sations and sizes. than if each principal owned their own pro - duction outfits. – Reorganisation policies. Companies have overall tended to refocus on their funda - mental profession and to get out of activities that are not directly related. Table 1 – Luxury companies that control the value chain upstream: how and why RAW MATERIALS EXPLANATIONS PROVI - COMPANY GROUP MANUFACTURING CONTROL SOURCING POLICY DED BY THE COMPANY Bought outside the 12 production sites in France for group for the most bags and small leather items. part. The company has 3 workshops in Spain, 2 in the U.S. The need to fulfil a just recently bought the LOUIS VUITTON LVMH all for leather products. 4 shoe growing demand and Tanneries de la workshops in Italy. Clothing manu - to maintain quality. Comète, in Belgium. facturing is outsourced. Fabric manufacturing is outsourced. 5 production sites in leather goods and shoes all in Italy run by local Outsourced. The com - partners. The company bought out Baby Dior is seen by pany commits many its licensee for children’s clothing the company to be a months in advance to (les Ateliers Modèles). CHRISTIAN high-potential acti - Christian Dior future purchases in Manufacturing takes place in France DIOR COUTURE vity in terms of image order and Thailand. The haute couture and turnover. to reserve the best qua - workshop is still in existence. In lity leather. ready-to-wear, the company deve - lops products but outsources manufacturing. The company possesses The company also controls 11 The guarantee of the 6 production sites for leather goods production sites. best possible quality, textiles and 4 Ready-to-wear is outsourced to sub- the need to train Hermès tanneries. it also HERMÈS contractors though the craftspeople for years International has a minority share - company ensures the design, deve - so that they can work holding in the lopment, pattern cutting, sourcing for the company. manufacturers Perrin, materials and quality control… who specialise in silk The Gucci Group bought out To control all of the YVES SAINT PPR Mendès in 2000. Mendès was licen - development and Outsourced. LAURENT (Gucci Group) sed to produce YSL’s ready-to-wear distribution process. line and owned 25 YSL boutiques. The company owns production out - To control quality fits for ready-to-wear, shoes, bags, ARMANI Armani Outsourced. and skills. knitwear, denim and children’s clothes. The company has three workshops (Casellina for leather goods, Baccio Outsourced. Gucci has for shoes Novara for women’s about 200 main sup - ready-to-wear) but the employees pliers for materials for Direct control of PPR focus on product development and GUCCI bags, 267 for elements quality, costs, timing, (Gucci Group) quality control. Production is for shoe manufactu - deliveries and stocks. carried out by a number of sub- ring. contractors: 500 in leather goods, 26 shoe factories, 4 of which are controlled by Gucci. The company owns production sites for accessories (leather goods), and partially for shoes and ready-to- Quality, unique BOTTEGA PPR Outsourced. wear. The latter is manufactured in skills, protection of VENETA (Gucci Group) part in factories that belong to the craftsmanship. Gucci group. RAW MATERIALS EXPLANATIONS PROVI - COMPANY GROUP MANUFACTURING CONTROL SOURCING POLICY DED BY THE COMPANY The company produces most of its To control quality, Della Valle products (shoes and bags) in its own TOD ’S Outsourced. efficiency and brand Group factories. Casual garments, jewel - prestige. lery, and glasses are outsourced. For shoes, bags and clothes, the company relies on a network of SALVATORE Outsourced to small workshops, all located in Italy.
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