November 28, 2019
What do you buy the luxury group that has it all? More diamonds, apparently. On November 25, LVMH, already the largest beast of global luxury, announced that it was taking over Tiffany & Co, where Wall Street bond traders spend a few dollars to improve their chances of turning girlfriends into fiancées. The American brand will become the 76th maison of the Parisian group, joining champagne Louis Vuitton, Dior and Veuve Clicquot. How many more fit under the corporate umbrella of Bernard Arnault, LVMH's chief and largest shareholder?
The deal is priced as high as a perfect gem. LVMH will pay $ 16.9 billion, including net debt, equivalent to nearly four years of sales at Tiffany. However, the acquisition was received with the enthusiasm of a proper compromise. Luxury, once little more than a family-owned home-based industry in Europe, has become the preserve of some giant conglomerates. In recent decades, there has been a sense of inevitability when another well-known company has fallen into the clutches of LVMH or its rivals, Kering (home of Gucci and Balenciaga, among others) and Richemont (owner of Cartier and Montblanc).
The acquisition cementes LVMH's place at the height of the luxury world. His rise has been nothing short of dazzling since Arnault took office three decades ago. Its shares have risen threefold in the last five years, including a 60% run since January. At around € 206 billion ($ 227 billion), LVMH now competes with Royal Dutch Shell as the most valuable company based in the EU.
Arnault, whose family owns almost half of the LVMH (and a solid majority of voting rights), is considered the richest man in Europe. From the northern French city of Roubaix, he turned a family-owned business into property, then luxury. He bought Dior as part of a struggling textile asset package in the 1980s, then took control of LVMH. The cashmere wolf has all the resources of a $ 100 billion fortune, from a public art collection housed in a Parisian museum designed by Frank Gehry to his impeccable Christian Dior suits and a few newspapers.
"LVMH dominates a structurally favored sector driven by globalization and income inequality," says Luca Solca of Bernstein, a research firm. Your success is the result of being the right size – big – in the right business at the right time.
Start with the industry. Sales of luxury goods such as handbags, elegant watches and Hermès scarves have grown by about 6% per year since 1996, according to consultancy Bain. He estimates the sector will be worth € 281 billion this year. Chinese buyers, who barely appeared in 2000 but now account for a third of all sales, added much of the sparkling wine.
Size has brought more rewards. In a sector with high fixed costs – marketing spending but also attractive rents for flashy street stores – selling more translates into better margins. LVMH has achieved almost double the industry's growth rate in the last two decades and last year sold over 46 billion euros in extravagance (see chart). This is more than three times the value of Kering and Richemont, their closest rivals.
Arnault has emerged as Tiffany's most obvious buyer, in part because the scale generates advantages not available to small trinket sellers. This may seem strange at first. Compared to smaller industries, mergers in the luxury world offer few opportunities for cost savings or synergies. No one expects Tiffany watches to be sold at Louis Vuitton stores, for example.
But analysts think brands can do better within a conglomerate. Take Tiffany. Its shareholders had bothered management to improve margins and increase sales rapidly, unduly hastening its recovery efforts. LVMH says it will give Tiffany time and money, for example, to renovate stores and boost the luxury market. He did something similar with Bulgari, an Italian jeweler. Arnault said this week that profits have increased fivefold since LVMH took control in 2011. The group does not disclose the performance of each brand (its annual report contains more photos of jewel-loaded models than financial details), easing the pressure. on creative types to meet quarterly goals.
Scale also has more mundane advantages. Conglomerates have more influence when negotiating, for example, with owners of new malls in China. They can look for magazines to get better advertising rates. The high costs associated with setting up ecommerce websites can be shared.
Such advantages suggest further consolidation. But there are limits to LVMH and others. One is the supply. The timeless brands that conglomerates want by definition need a long history, and these are relatively few. Those who remain independent, such as Chanel or Rolex, preserve this status fiercely. Arnault circumvented this by subtly expanding the scope of luxury, for example by branching into hotels.
Another limit, which is particular to LVMH, is whether any group can handle so many different businesses. In other industries, conglomerates are considered difficult to handle and are out of fashion. Kering lost weight when he gave in to Puma, a sportswear brand, last year. So far, the climate is for building empires, not for dismantling them. Some wonder if Richemont and Kering can merge to increase their prospects.
LVMH is not without its challenges. The future of the luxury sector is uncertain. Growth in China will not last forever, especially if trade tensions continue. Even Dom Pérignon drinkers feel the impact of recessions. Marketing has had to evolve to attract millennials who care about Instagram and sustainability. More purchases are happening online, where lurking mastodons like Amazon and Alibaba.
Perhaps half of the company's profits come from a single brand, Louis Vuitton. Arnault has made it clear that LVMH is a family business and that one of his children (four of whom work in the business) will take over. At 70, he remains firmly in charge. But over time, the question of whether his heirs inherited his talent for whipping objects of desire will come into focus.
And can luxury continue to be sold to more and more people while keeping their cache? So far it has. But the industry that Arnault helped create is young, despite the timeless quality it seeks to exude. He thrived on spending extravagantly to get people to buy beautiful foreign things they didn't need. It is the archetypal business model of the time. But what if times change? ■
This article was published in the Business section of the print edition, under the title "LVMH Tests the Limits of Luxury"
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