2012-06-07 11:46:12
rlp
Jun 2nd 2012 | PARIS | from the print edition
FRANCE S tradition of making exquisite luxuries dates back at least to the
court of Louis XIV. The sun king financed b nistes (cabinet-makers),
tapisseurs (upholsterers), menuisiers (carpenters) and other artisans who made
beautiful and largely useless things for the court of Versailles. Bernard
Arnault might be his heir.
Mr Arnault is the chairman, chief executive and controlling shareholder of Mo t
Hennessy Louis Vuitton (LVMH), the world s largest luxury group. Over the past
quarter-century he has transformed a small, nearly defunct clothing
manufacturer into a conglomerate that controls more than 60 luxury brands.
Credit Suisse, a bank, predicts that LVMH s combined sales will reach 27
billion ($33 billion) this year. Its profits in 2011 were 3.5 billion and its
market capitalisation is a cork-popping 62 billion. LVMH is more profitable
than other luxury groups.
LVMH is like a mini Germany, boasts an insider. Like that country s
Mittelstand, it has built a reputation for craftsmanship and quality that
people are happy to pay extra for. The difference is, the Mittelstand makes
unsexy things such as machine tools and shaving brushes, whereas LVMH makes
champagne, handbags and other objects of desire (see chart).
From Louis XIV to Louis V
Also like the Mittelstand, LVMH energetically pursues opportunities abroad.
After years of hard marketing, it has persuaded much of Asia s new middle class
that its wares confer a whiff of European sophistication. Sales in Asia (Japan
excepted) accounted for 27% of the total in 2011, up from 17% in 2001. In
Japan, which generated 15% of the group s sales a decade ago, a startling 85%
of women now own a Louis Vuitton product. It takes a rare talent to be
ubiquitous and yet retain an air of exclusivity.
A final similarity is that, like the Mittelstand, LVMH is made up of lots of
family firms. The difference is that the ones that make up LVMH have been
swallowed by a hungry conglomerate.
Some didn t object. Last year LVMH bought Bulgari, an Italian jeweller, for
4.3 billion. The Bulgari family were happy to take the cash. Their business had
hit a rough patch after the collapse of Lehman Brothers in 2008, and they
thought Mr Arnault would make a good sugar daddy for their brand.
Other prey tries harder to fly away. The Herm s clan is appalled that Mr
Arnault is stalking their posh-bag-and-silk-scarf firm. The LVMH boss quietly
amassed shares in Herm s. The Herm s family did not twig until 2010, when he
revealed that LVMH owned 17% of the firm. Patrick Thomas, Herm s s chief
executive, likened the assault to the rape of a beautiful woman. (A sense of
perspective is not essential in the luxury business.) Mr Thomas asked Mr
Arnault to reduce his stake to 10% to show that his intentions were not
hostile. Fat chance. LVMH now owns 22.3%.
The Herm s family have scrambled to defend their empire. A separate family
holding company now owns 50.2% of Herm s shares. On May 29th Herm s announced
that a family member, Axel Dumas, would succeed Mr Thomas (an outsider) as
chief executive some time after 2013. And the family proposed a statute
requiring all stakes exceeding 0.5% to be registered in the shareholder s name,
so that predators can be spotted from afar.
The art of the luxury makeover
Mr Arnault s empire-building creates economies of scale. A study by the Boston
Consulting Group finds that a retail brand saves around 30% of its commercial
costs (advertising, rent, shop assistants and so forth) each time it doubles in
size. But this is not why Mr Arnault keeps buying brands, says Erwan Rambourg
of HSBC, a bank. Rather, he is driven by the belief that he can take any fine
luxury brand and make it bigger, while still maintaining healthy profit
margins. His record is pretty good.
For example, when he bought Christian Dior in 1984, the French fashion firm was
in poor shape. Its founder had licensed his name to legions of firms, which
slapped it on everything from sunglasses to nighties. The brand was cheapened.
Mr Arnault spent more than a decade buying back 350 licences. He revived the
Dior name by hiring a brilliant designer, John Galliano. Mr Galliano later fell
from grace, but the brand was healthy again, and profitable.
Sometimes Mr Arnault overpays for his trophies. Sephora, a cosmetics retailer,
and DFS, a duty-free shop, started to leak cash almost as soon as LVMH bought
them (in 1997 and 1996). C line, a fashion brand, did not make money for years.
Nor did Kenzo, another fashion firm.
It took Mr Arnault years, and several false starts, to fix these businesses.
Early on, Sephora s shops were too big: they looked like supermarkets, which
created the wrong mood. In 2003 Mr Arnault appointed Jacques L vy, a former
manager at Staples, an office supplier, as Sephora s chief executive in Europe.
Mr L vy shrank the stores, added nail bars and hair salons, and introduced a
wide range of own-brand lotions and potions. Sephora now reports good profits.
So does DFS. LVMH does not publish the figures for its individual brands, but
analysts estimate that fewer than five of them lose money.
Though he would be loth to admit it, Mr Arnault s other reason for gobbling up
new brands is that his empire is dangerously overreliant on a single one. Louis
Vuitton, a maker of monogrammed bags and belts, accounts for 37% of the group s
sales and most of its profits.
Under Yves Carcelle, who has run it since 1990, and Marc Jacobs, its creative
boss since 1997, Louis Vuitton has been a cash-stuffed suitcase that never
empties. It finds the best leather, turns it into flawless products and markets
them deftly. So as not to dilute its cachet, it never offers discounts. It has
grown at a staggering pace. At some point, however, it must slow down.
In the first quarter of this year, sales of LVMH s fashion and leather-goods
division (ie, Louis Vuitton plus a couple of smaller brands such as Fendi)
jumped by 18% in America, 12% in Europe and 10% in Asia. That may sound zippy,
but investors were accustomed to much zippier growth in Asia. LVMH s shares
slipped on the day of the announcement.
Insiders say they are not worried. Results for the group were otherwise
excellent: a forecast-beating 25% increase in sales, to 6.6 billion. Chinese
shoppers are not falling out of love with Vuitton handbags. They are simply
buying them while on holiday in France, where they are roughly half the price.
And even if China slows, there s always India and Indonesia, where the
bag-buying has barely begun.
Granted, some shoppers may be tiring of the ubiquitous monogrammed logo. (In
Japan, it hardly makes you stand out.) So Vuitton is moving away from the
monogram, which today adorns only about a quarter of its products. Sofia
Coppola, a film director, has designed a range of single-coloured bags for the
company.
Luggage s lustre lost?
Still, the firm is showing signs of maturity, which it fears as its customers
fear old age. Mr Carcelle is leaving his job at the end of the year. A former
luxury executive recalls that Louis Vuitton s bosses used to say that the day
we launch a fragrance, we don t have growth any more. After shelving the idea
in the past, Louis Vuitton is about to launch its own scent.
Bags of money
Small wonder Mr Arnault wants to spread his bets. Today, LVMH is the world
leader in what industry folk call soft luxury (leather accessories), plus
champagne and cognac. Mr Arnault wants to be number one in hard luxury
(watches and jewellery) as well. This is why he paid so much for Bulgari; there
are not many global jewellery brands and they are seldom for sale. Still, some
analysts have doubts. LVMH needs to bolster its watches business, but Bulgari s
strength is rings and necklaces, argues Luca Solca of Cheuvreux, a broker.
The next target will be harder to catch. LVMH will buy any Herm s shares it can
get its hands on. The family s defences look robust, but Mr Arnault will not
give up easily. Herm s is a great brand; Mr Arnault no doubt thinks he can make
it bigger. Plus, he is anxious to pre-empt a bid for Herm s by Richemont, which
would make the Swiss group a serious rival to LVMH.
Mr Arnault is 63. Two of his five children already work for his group. His
daughter Delphine is helping to run Christian Dior; his son Antoine is in
charge of Berluti, an Italian shoemaker. One of them might one day lead the
group. But their father s stylish shoes will be hard to fill.
from the print edition | Business