Decreasing Profitability of Christian Dior

 

Company Overview

With around 80,000 employees, designers and craftsmen, Christian Dior is headquartered in Paris, France. Through licensed distributors, manufacturers and exclusive boutiques, the company distributes and markets its products internationally in the markets of Asia, United States and Europe. While the primary focus of the company is the production and marketing of fashion products such as leather goods, cosmetics, jewelries, watches, perfumes and apparel, it has also stepped into the production and distribution of wines and spirits. The company is quite successful in all the areas of production and marketing.

The specialization of Christian Dior is in the production and marketing of several products haute couture, which are distributed under the name of Christian Dior group. The group of wines and spirits include the brands Hennessy, Veuve Clicquot and Moet & Chandon. Leather and fashion good include the Fendi, Givenchy, Celine, and Louis Vuitton brands. Jewelry and watches include the Chaumet, TAG Heuer and Zenith brands. Perfumes and cosmetics are distributed under the brands of Christian Dior, Guerlain and Kenzo (Datamonitor 2010).

The brands such as Sephora, Le Bon Marche and DFS are a part of selective retailing by Christian Dior. These high-end luxury brands contribute to a strong portfolio for the company which provides a comparative advantage to Christian Dior. However, the company has to fight the sale of copied products in the market which has a negative effect on the revenues of the company. The designs that take a lot of expenditure to be developed are copied by the other distributor which affects the sales of the company. Therefore, Christian Dior has to survive and make profits in the environment where it has to make parallel distribution and sell its products amongst the counterfeit products.

History of Christian Dior

The house of Christian Dior was formed in 1946 and since then it has ruled the world of fashion in France as well as United States and other countries in Europe and Asia. The traditional French couture culture was blended with the modern business practices to become the world’s leading fashion house. Christian Dior engaged in licensing practices providing licenses to retailers and fashion houses around the world to manufacture and distribute products under the name of Christian Dior (Blaszczyk 2008).

Distinctive Features of Christian Dior

The greatest distinctive feature of Christian Dior was its ability to generate enormous finances in that era where the couture houses were basically run by families for generations and they did not much expand (Blaszczyk 2008). However, the entrepreneurial success of Christian Dior depended upon its ability to gather finances and invest it in the business in the proper places. This gave way to innovation as well as boost to the capital to invest in new products.

The second distinctive feature of the organization was that the owner and the head designer of the couture house was a very talented person, Christian Dior himself. He had an excellent taste for fashion and started up by working with other couture houses which were famous for their fashion and products France at that time. He also had a support of craftsmen and artistic talent around him who made great implementations of the designs that Dior made. These people provided technical support and they would help Christian Dior in the qualities in which he lacked. Together with the technical support of the craftsmen, Dior was able to produce quality products with unique designs which made him distinct from others.

SWOT Analysis of Dior

Strengths

The group houses a great number of luxury brands which can help the company in quickly establishing a market presence in the new markets or countries. The brands housed under Dior group have a lot of influence over the fashion industry of the world. Hence, this high brand awareness can attract customers in a new market too.

Many high-end luxury products are included in the portfolio of Christian Dior group. In each category of products, the company offers a range of brands. The most popular brands related to fashion and leather products include Donna Karan, Pucci, Louis Vuitton, Fendi, Givenchy, Celine, Loewe, Kenzo, Berluti and Thomas Pink. These brands are shopped by the Hollywood stars and worn on red carpet events too. The cosmetics and perfume brands owned by the group include Christian Dior, BeneFit Cosmetics, Make Up for Ever, Guerlain and Perfums Givenchy. These cosmetics are used by the best models and makeup artists of the world. TAG Heuer, Chaumet, Fred, Chaumet and Zenith are the highly recognized brands in the world of jewelry and watches. The brands of wines, cognac and spirits include Moet & Chandon, Hennessy, Veuve Clicquot, Belvedere, Glenmorangie and Chateau d’Yquem.

The brand Louis Vuitton, which is famous for trend setting leather goods and fashion designs, appeared in the Business Week’s 2009 annual ranking about the best brands and the brand was positioned 16th out of 100 best brands. This strong portfolio of luxury brands under Christian Dior has provided competitive advantage to the group and has allowed opportunities of customer penetration and better visibility (Datamonitor 2010).

The second strength of the group is that the diverse geographical presence of the company’s stores and manufacturing facilities has reduced the risk of business and enhanced the reach to customers. The products of Christian Dior are distributed through the licensed distributors and company operated retail shops across Europe, United States and Asia. The company has been able to establish a strong market in the developed nations around the world like United Kingdom, Japan, United States and it is currently expanding into the developing markets of the Asian Continent.

Through establishing its presence in diversified regions of the world, the company has promised a continued stream of revenue and reduced the business risk and country risk as well. The problems that are faced in one country are offset by the favors of another country where business is flourishing. In addition to this, the company has also stepped into the developing Asian economies which had not been affected much by the financial crisis and hence will benefit from the increasing consumer expenditure there. The falling revenues from other matured and concentrated markets of Europe and United States are being compensated by the Asian region, from where the revenue stream is increasing each year. In 2009, 22.6% of the revenues were generated from the Asian markets which did not include Japan.

Weaknesses

Shifts in consumer preferences towards value products from luxury products in Europe, Japan and United States has caused destocking of luxury brands of Christian Dior in retail stores. In this global financial crisis, where the unemployment rate has reached around 10% in the United States, the consumers are spending on the goods that have the best value for money. The markets of luxury products have been facing a slowdown of demand in the largest markets of Christian Dior. Previously, these markets had a great potential for luxury market as there was a large base of consumers who were inclined to luxury products. The economic recession in the world has affected this pool of consumers and this trend of expenditure on value products is expected to continue for some time. This reduced spending on luxury brands has caused the retailers to destock the products of Christian Dior and they prefer to keep value products in stock as they are in demand now. The company has most of the brands in the category of luxury products which are affected negatively because of this recent trend.

Almost all the brands of Christian Dior are affected by the seasonality of demand. There are a lot of variations in demand of these products all year round. Almost 30% of the total sales of Christian Dior products are made during the holiday season near the end of the year. Major proportion of the sales are generated during this peak season and for any reason is the sales are affected in this period, it will affect the profitability of the company. It becomes very difficult for the company to generate sales revenue in the other quarters of the year as the peak season occurs usually in the last quarter of the year. This also increases the inventory levels that can cause the company to raise the operating costs.

Opportunities

There is an increasing demand of cosmetic products in the market, especially in the developed nations of the world. This is because of the changing needs of the aging population and awareness of skin care and wellness of the body. Psychological motivations because of the trends in the society have also caused the demand of cosmetics to rise in the recent years and will continue to do so in the future. The cosmetic industry has grown at a rate of 3.4% per year for five from 2003 to 2008. Moreover, the cosmetic industry is forecasted to grow at a rate of 2.9% for the period 2009-2013. The perfumes and cosmetics division under Christian Dior includes several well known brands such as Parfums Christian Dior, Givenchy, Guerlain, Make Up for Ever and Kenzo. If Christian Dior leverages its product portfolio distributed under these brand names, it could gain a lot from the potential market.

The growing demand of the luxury products in the emerging markets of the world such as the Asian economies can generate large sums of revenues. The developed economies are expected to show no signs of improvements in 2010, but the developing economies are expected to witness a healthy growth. By the end of 2010, more than 40% of the total revenues of Christian Dior are expected to be generated from the Asian economies as the Asian region is forecasted to grow by 10% in luxury segment.

There are a growing number of individuals in these countries that have a high net worth and these individuals are expected to derive the sales of the luxury products. There are a growing percentage of millionaires in India, South Korea and Russia with a growth rate of 15-21% per year. Russia alone has more than 100,000 millionaires who have a combined wealth of US$ 300 billion. As compared to 2.9 million millionaires in United States and 2.8 million in Europe, Asia Pacific region had 2.4 million millionaires in 2008. The global average wealth is expected to grow at 7.1% whereas the combined wealth of the Asia Pacific is expected to grow at a staggering 8.8% (Datamonitor 2010). This increase in the wealth is anticipated to enhance the demand for luxury goods in this region.

China proved to be a success for Christian Dior as the second largest number of sales of wines and spirits were made in this country. In the Middle East also, the regions like UAE and Saudi Arab is proving to be a success as Christian Dior recently opened its boutique in Dubai Mall. Increasing demand for luxury products in these markets is an opportunity for Christian Dior to enhance its profits and expand its market.

Increase in the internet penetration and the use of ecommerce in Europe and United States is a great opportunity for companies like Christian Dior who have not yet exploited the areas of online shopping. Internet penetration if not only increasing in these developed countries but Japan, Singapore, Malaysia, India and China also have a large population who are regular users of internet. Use of ecommerce in business can help them save costs of retail shops and expenditure to build new stores.

Threats

The impact of counterfeit products has a direct impact on the revenue streams of the company and also on the brand image of the products. For Christian Dior, the brands are a major asset for the company and it has taken decades to build up this brand image in the luxury market. However, the abundance of counterfeit products available at a lower cost poses a great threat to Christian Dior and all the brands owned by it. These counterfeits are low quality goods that have similar designs to Christian Dior. Usually, these products circulate in the gray market of Europe and Asia. The company has already taken action to fight these counterfeit product owners and has collaborated with government agencies. However, the cost of fighting counterfeit products has reduced the operating profit in recent years as the lawyers, custom officers and government authorities take a lot of money. In 2000, the cost of these actions amounted to US$ 18.1 million and still there were large number of products that were sold illegally under the name of Christian Dior.

The second greatest threat is from the economic slowdown in the world these days. In 2009 alone, the global luxury market fell down by an estimated value of 9%. The sale in the United States is expected to fall down by 16% in 2010 and 10% in Japan. The market is not expected to recover from the recession till 2012 which will have a huge impact on the profitability of the company. The fall in employment levels has caused the consumers to tighten their budget on luxury expenditure.

Reduction in the leisure and business travel throughout the world will also cause reduction in sales. In 2009′s first quarter alone, the number of international tourists was down by 8% since 2008. It has been noticed that around 80% of the purchases were made by the Asians when they went abroad. The air travel has also reduced by 5.3% in 2009 and it is expected that it will be a long time till the recovery of air travel. The United Kingdom airports face the largest decline in the number of passengers since the last 65 years. Christian Dior’s business model places a great deal of importance on the international travelers and hence they are the primary customers. Most of the boutiques and retail stores of the company are in resorts and hotels and most of the duty-free products are sold in duty-free shops in airports. Hence, the decline in air travel has brought about a decline in passengers and tourists which has negatively impacted the profitability of the company (Datamonitor 2010).

Organizational Structure

The Board of Directors includes the Chairman, Vice Chairman and the CEO of Christian Dior along with the eight other directors. The executive management is headed by the CEO, Sidney Toledano who heads the performance audit committee. Nominations and compensation committee is headed by the Chairman and includes two other members too. The statutory auditors include Ernst & Young and Mazars.

Profitability of the Company in Recent Years

Christian Dior group recorded a fall of net profit of 12.7% in the year ended 2009 as compared to 2008. In 2009, the net profit was reported to be US$ 969.3 million while in the previous year, that was 2008, the net profits were US$ 1092.4 million. The revenues generated from the sales of the group during the financial year 2009 were recorded to be US$ 24,747.7 million which was decreased by 1% when compared to 2008. The operating profit showed a decrease of 8.8% in 2009 as compared to the previous year. The operating profit for the year ended 2009 was US$ 4,412.6 million for the Dior group.

Statement of Gains and Losses

Table 3- (Dior 2009)

(EUR millions)

2009

2008

2007

Net profit before minority interests

1,902

2,224

2,328

Translations adjustments

(127)

250

(570)

Tax impact

(20)

25

-

 

(147)

275

(570)

Change in value of available for sale financial assets

114

(186)

8

Amounts transferred to income statement

(11)

(66)

(29)

Tax impact

(26)

21

18

 

77

(231)

(3)

Change in value of hedges of future foreign currency cash flows

128

128

134

Amounts transferred to income statement

(118)

(211)

(173)

Tax impact

(2)

47

(43)

 

8

(36)

18

Change in value of vineyard land

(53)

172

80

Tax impact

18

(59)

(26)

 

(35)

113

54

Gains and losses recognized in equity

(97)

121

(501)

Comprehensive gain and losses

1,805

2,345

1,827

Minority interests

1,138

1,532

1,142

COMPREHENSIVE GAINS AND LOSSES, GROUP SHARE

667

813

685

 

Decreasing Profitability

The statement of gains and losses for the three years 2007, 2008, 2009 clearly shows the trend of decreasing profitability of the company. The net profit before minority interest has decreased from 2,328 million Euros in 2007 to 1,902 million Euros in 2009. The decrease in the net profit before minority interest from 2007 to 2008 was around 4.5% and from in 2009, the net profit before minority interest fell down around 14.5% in comparison with the previous year. However, the comprehensive gains and losses for the Christian Dior group were almost the same in 2007 and 2009. The reason was the high amount of translation adjustment that was made in 2007 that decreased the comprehensive profit for the group. For the sake of comparison and analysis, the net profit before minority interest will be used for a clear and better picture.

Analysis of Business Decline

License Royalties

The license royalties of the Christian Dior Group decreased by 3% in 2009 as compared to the previous year, according to the annual report of 2009. The main reason for this is the closing down of a number of licensed stores globally. The income from license royalties was 36 million Euros in 2008 and decreased one million Euros in 2009. The shift in the preferences of the consumers worldwide has affected the income from license royalties. Consumers have shifted their preferences towards more value goods from luxury market. This has forced many of the licensed manufacturers and licensed stores to close their operations or reduce the number of brands in their stores. The company also had to offer concessions on licenses especially the brands under the couture group.

Wholesale Activities

Revenues from wholesales have decreased heavily in 2009. There was a significant decline in the orders from departmental and super stores, especially in the United States which caused the fall in wholesale activities in 2009. The revenues generated from wholesale in 2008 were 164 million Euros compared to 134 million Euros in 2009, according to the 2009 annual report of the group. At a constant exchange rate, there was a decline of 18% in the revenues from wholesale activities in 2009 alone. The reason behind this is the rising unemployment rate in the developed countries and fall in real income.

Retail Activities

As compared to the first half of 2008, the first half of 2009 had weaker retail sales that were remarkably offset by the fourth quarter. In the fourth quarter, the retail stores of Christian Dior group witnessed a 6% rise at constant exchange rate. The main brands that contributed to this rise in retail revenue were those of leather goods and men’s apparel. This proved that the style of Dior was still in demand by the men, though the economic conditions were tough in the region of Americas and Europe. Middle East and Europe proved to be better and enduring retail markets than America despite of the economic downturn. There was only a fall of 2% in retail sales in the European and Middle Eastern region, according to the financial report of the Dior group.

There were also improvements in UAE, Russian and United Kingdom markets. The sales in Asia Pacific region also increased through the retail channel as there were openings of four boutiques in the regions. These new boutiques offered new and branded products to the Asian markets which were not available to them earlier. The regions like Singapore, Macao, Australia and South Korea have recorded positive growth in the retail sales suggesting that the market for luxury goods is not concentrated and offers a lot of opportunities to the Christian Dior group. Overall, Asian markets showed a positive growth of 6% in 2009 since the previous year.

Decrease in Profits from Separate Groups

Wines and Spirits

In 2009, the profits from the operations of Wines and Spirits group showed a fall of almost 30% since 2008. The lower sales volume was the main culprit in this case. Although a lot of advertising campaigns were made and expenditure was done on the promotional activities, but the fall in revenue did not offset these expenses. The economic crisis around the world has contributed to the falling sales of wines and spirits, especially the luxury brands. The company has not been able to position well in the market of wines and spirits, which includes cognac. China has reported the highest percentage increase in the consumption of wine. In 5 year period from 2004 to 2008, the country’s wine consumption rose by 80% (Cusson 2010). The Russian Federation has entered the top ten lists of wine consuming nations, whereas Italy has scored the number one spot. Hence, the market for wines and spirits has increased as the consumption in the countries rise. Christian Dior has not been able to reach the right customer that is the reason why it has made losses in this group.

Watches and Jewelry

Watches and jewelry group faced a decline of around 20% in 2009 compared to the previous year. This drop in revenues was majorly because of the change in the structure of the exchange rates. The brand image of certain watches and jewelry has been damaged because of forfeit products circulating in the South East Asia and in Europe too. People are reluctant in purchasing the highly luxurious watches and jewelry as they are not sure of the quality.

Cosmetics and Perfumes

The revenue from the sale of cosmetics and perfumes was recorded 5% lower this year with respect to the previous year. Revenue of 2,741 million Euros was recorded in 2009 for the cosmetics and perfume group. However, the net profit from the operations of this group did not change in comparison to the previous year. This was because of the control of expenditure and pricing of the products. The operating costs were also reduced in 2009 which did not decrease the net profit of the cosmetics and perfumes group.

Strong Culture and Fashion Image

The strong presence of style and fashion in the Christian Dior products has allowed it to make fortunes even in the time of economic recession. The strong culture that has been prevalent in the company since its birth has allowed the company to satisfy the shareholders and please the customers as well. However, the company’s revenue stream is falling down despite its expansion in the global economy. The reason behind this is that the company focuses on luxury products that are priced very high, but the preferences of the consumers are shifting from these products to value products are their real income is falling and unemployment is rising.

The Future Prospects

Christian Dior has bright future prospects as its products are being appreciated in the Asian and Middle Eastern markets. Dior group plans to expand deeply in Asian economies where there is a high growth rate of the economy. The countries like India, Pakistan, Singapore, Russia and China are expected to grow at a rapid pace in the next few years. The fashion market in these countries is not so concentrated like the European and United States markets. Therefore these markets present a golden opportunity for Christian Dior to open retail stores and dedicated shops in these regions to promote the products. It is a known fact that millionaires in the Asian regions are increasing each year by a significant percentage and hence they need luxury products like Christian Dior’s to spend on.

Works Cited:

Blaszczyk, R. Producing fashion: commerce, culture, and consumers. Philadelphia: University of Pennslyvania, 2008.

Cusson, J. “THE WORLD WINE AND SPIRITS MARKET WITH FORECASTS TO 2013 FROM THE VINEXPO / THE IWSR 2010 STUDY.” vinexpo.com. 2010. http://webcache.googleusercontent.com/search?q=cache:EySAcnplG-oJ:www.vinexpo.com/dyn/press/synthese-monde-2010—anglais-1.pdf+consumption+of+wines+and+spirits+in+2009&cd=3&hl=en&ct=clnk&gl=pk (accessed August 6, 2010).

Datamonitor. Christian Dior SA – C. Company Profile, London: Datamonitor Plc, 2010.

Dior. “2009 Annual Financial Report.” Dior Finance. December 31, 2009. http://www.dior-finance.com/en/pdf/Christian Dior 2009 Annual Report.pdf (accessed August 6, 2010).

Dior Finance. “CONSOLIDATED FINANCIAL STATEMENTS SUMMARY.” Dior Finance. 2009. http://www.dior-finance.com/en/etats_financiers_conso.asp (accessed August 5, 2010).

 

 

 

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