France’s tradition of making exquisite luxuries dates back at least to the court of Louis XIV.
The sun king financed ébénistes (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 Moët 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 capitalization 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 Hermès clan is appalled that Mr Arnault is stalking their posh-bag-and-silk-scarf firm. The LVMH boss quietly amassed shares in Hermès. The Hermès family did not twig until 2010, when he revealed that LVMH owned 17% of the firm. Patrick Thomas, Hermès’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 Hermès family have scrambled to defend their empire. A separate family holding company now owns 50.2% of Hermès shares. On May 29th Hermès 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 licenses. 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). Céline, 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 Lévy, a former manager at Staples, an office supplier, as Sephora’s chief executive in Europe. Mr Lévy 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-colored 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.
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 Hermès shares it can get its hands on. The family’s defenses look robust, but Mr Arnault will not give up easily. Hermès is a great brand; Mr Arnault no doubt thinks he can make it bigger. Plus, he is anxious to pre-empt a bid for Hermès 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.
