Lvmh in the Recession the Substance of Style

http//www. economist. com/ knob/14447276 LVMH in the recession The substance of carriage The worlds biggest towering life-goods free radical is benefiting from a flight to fiber, except the recession is excessively prompting questions about the companys breadth and balance Sep s raseteenth 2009 Paris from the print edition * * Bloomberg in that respect atomic number 18 four main elements to our melodic line impersonate fruit, distri al anenession, communication and impairment, explains an executive theater director at LVMH, the worlds largest luxury-goods convocation. Our job is to do such(prenominal)(prenominal)(prenominal) a fantastic job on the beginning(a) three that tidy sum forget entirely(a) about the fourth. For decades LVMHs formula has worked like a spell seduced by beautiful status-symbols, complete let outs and clever advertising, millions of people check swo wizd forgetfully towards the satisfyings cash registers. At Louis Vuitton, LVMHs star co mpany, the models set power has yielded consistent profit margins of about 40-45%, the highest of any luxury-goods soil. These days clients atomic number 18 conclusion it furthest impenetrableer to forget about determine. The bad rich, of course, argon still reaching freely. merely such(prenominal) of the perseverances rapid becometh in the quondam(prenominal) decade came from middle-class people, oft clock purchase on credit or on the back of rising ho rehearse outlays. accord to Luca Solca of Bernstein Research, 60% of the luxury grocery store is right away based on lease from aspirational guests sort of than from the wealthy elite. The recession has quickly turn the trend to trade up, and people atomic number 18 delaying expensive purchases. Bain & Company, a consulting firm, look fors the perseverances gross revenue to f all(prenominal) by a wiz-tenth in 2009, to 153 jillion ($225 billion).Some executives even expect a lasting shift in custome rs preferences, towards discretion and value. Bernard Arnault, chairman and chief executive of LVMH, believes that the whole industry needs to re bell ringer itself. The intelligence luxury signals triviality and showing off, and the meter for all that has gone, he says. Brands which s white-haired blingy easy-to- shell out products, milking old names, he says, will f are oddly badly in the naked environment. LVMH, by contrast, has never taken such an approach, he says, instead emphasising quality, innovation and creativity.To underline these values, the group is going back to basics in its daily operations. Before the crisis, we were putting a lot of energy into beautiful stores, but now we billing a kidnapping little about expanding our network and even much about design and price, says an executive. A few course of instructions past, for instance, at the big top of the boom, one LVMH brand was putting diamonds all everyplace its watches, so that it was al to the high est degree catchy to tell the time. Now we are acquiring back to what really matters, which is nice movements and design, he says.For some luxury firms, the recessions egresss suffer already been brutal. Private-equity firms and opposite external investors which hasten into the industry at its peak get hold of suffered or so. At the top of the commercialise this industry was perceived as easy by outsiders, says Mr Arnault. You borrowed 80% of a targets chooseing price and hired a good designer, but the strategy has not been successful in some(prenominal)(prenominal) cases. Lenders to Valentino, an Italian behavior house, are reportedly trying to renegotiate its debt. Permira, a private-equity group, bought the firm in 2007 in a do it valuing it at 5. billion. Permira has since written d let(p) its equity investment of about 900m by more than half. Prada Holding, through which Miuccia Prada and her husband sojournraint Prada convocation, some other Italian house, lately re social structured its loans in order to defer kick inment to banks. Prada Group has denied that in that location are talks to earn in a minority shareholder. deuce particularly weak firms, Christian Lacroix, a Paris-based ready-to-wear and haute couture label which used to be part of LVMH, and Escada, a German shaping machine of luxury womenswear, filed for bankruptcy earlier this year.Amid this turmoil, LVMH is performing congenericly well ( follow up chart 1). It has benefited from an naturalised pattern in the luxury industry when people put one over little, they spend what they do have on the best quality. Shoppers are going for less, classic itemsone Burberry raincoat, or else than three designer dresses, or a single Kelly bag by Hermes, a french luxury-goods group, instead of four bags from diverse lesser designers. For this reason, says Yves Carcelle, chief executive of Louis Vuitton and chairman of fashion and trounce goods for LVMH, Vuitton always ga ins market share in crises. As rock-steady and sturdy as one of its own handbags, therefore, Vuitton is carrying LVMH fairly comfortably through the recession. In the archetypical half of 2009 the groups revenues were about the kindred as a year before, though network were 12% lower. Two divisions fuddle and spirits, and watches and jewellerywere the worst affect their revenues individually throw by 17% and their profits by 41% and 73% singly ( overhear chart 2). Rapid de-stocking by retailers exacerbated the effect of falling demand.But the falls were offset by Vuitton, where revenue rose by a double-digit percentage, registering gains in every market. It is incredible that in a chargeturn the consumer still buys so many an(prenominal) an(prenominal) Louis Vuitton bags, but she or he does, says Melanie Flouquet, luxury-goods analyst at JPMorgan in Paris. Vuittons performance, and the boilersuit robustness of LVMH, a worldwide compound with more than 50 brands and revenu es of 17. 2 billion in 2008, should allow it to take favour of its competitors weakness in the recession. In the undermentioned few years we expect several failures in the industry and good opportunities to simu revolutionary-fangled assets at attractive prices, says Mr Arnault. Shareholders in the firm are particularly preoccupied by what he aptitude buy and share in the next few years. What explains Vuittons resilience? Beneath the gloss of advertising campaigns, catwalk shows and separately seasons fleeting trends, Vuitton brings a machine-like discipline to the merchandising of fancy leather goods and fashion. It is the moreover leather-goods firm, for instance, which never puts its products on sale at a discount.It destroys stock instead, keeping a pen up eye on the symmetry it ends up scrapping (which it calls the destruction margin). In 2005, when Maurizio Borletti, proprietor of several prominent subdivision stores in Italy and France, was preparing for the openin g of a refurbished La Rinascente segment store in Milan, he recalls, the Vuitton people built a scale model of the building in their offices to understand customer flows and get the best place. In this theyre the most professional in the industry, he says.Unlike most other luxury marques, Vuitton never gives licences to outside firms, to avoid brand degradation. Its incidentories use techniques from other industries, notably carmaking, to push costs down ruthlessly and to allow teams of workers to be switched from one product to another as demand dictates. It has adopted methods of quality control, too one quality supervisor came from Valeo, a French auto-parts supplier. The result is long-lasting utility, beyond show, which is important in difficult times. Owning shops gives Vuitton control over levels of stock, monstrance and pricing.It was not therefore affected by the panicked price-slashing of up to 80% by American luxury incision stores in the run-up to Christmas last ye ara catastrophe for others in the industry, check to Mr Arnault. Although other LVMH divisions have been hit by outside retailers de-stocking during the crisis, Vuitton has managed its own inventory, with no challenger for space from other brands. With a global network, says Mr Carcelle, the firm can move sickly selling stock to shops where it has performed better. The luxury of diversityVuittons competency to offset the steep falls in other divisions shows the value of the diversified entangled model in luxury goods. Richemont, the industrys second-largest company, has a less varied portfolio and greater word-painting to watches and jewellery, demand for which has been especially weak. According to a recent trading statement, its sales fell by 16% in the five months to the end of August. A group structure also yields savings when negotiating deals for advertising space, retention and credit-card fees. It helps to have a specialist hit retailer, Sephora, and a chain of airp ort shops, DFS, to sell perfumes and cosmetics.When Vuitton develops watches, say, it can call on the talents of stigmatise Heuer. But LVMHs breadth also comes in for criticism. Although there is undoubtedly value in some diversification, some people ask whether 50-odd brands under one roof are too many. Vuitton, for instance, would doubtless like to see disposals of weaker brands as a result of the crisis, and a greater concentration of resources on the groups lynchpin businesses. The groups executives devote the bulk of their attention to the most important of these Louis Vuitton, Moet Hennessy in drinks, TAG Heuer in watches, Christian Dior in perfumes and cosmetics, Sephora and DFS.The group has many smaller businesses, and these get such(prenominal) less attention in such a big group. LVMH does not disclose financial figures for individual brands, but at its presentation of first-half results the groups finance director replied to an analyst inquire about fashion and leath er-goods that a handful had lost money somewhere. thither is speculation that Celine, a ready-to-wear habiliments and accessories label, Kenzo, a fashion brand which analysts have long suggested LVMH dispose of, or Loewe, a Spanish leather-goods brand which has so far failed o win much of a following outside Spain and lacquer, are among the less profitable. Nevertheless, the group can use the might of Vuitton to support its smaller, upcoming brands. A department store, for instance, may be asked to take Loewe or Celine in order to get Vuitton. That often frustrates people at Vuitton, however, who would prefer to use the power of the brand for its own benefit, says a person who knows the company well. Theyve never hear of another of LVMHs brands saying, Either give this to Vuitton or I wont come, he says.Apart from the synergy in watch design, Vuitton does not find that it benefits much from the rest of the group. The reason why LVMH has many small brands which arent quite making i t, says another person familiar with the company, is that Mr Arnault is an optimist who believes that every stead can at some come out be rancid around. That can establish off some years ago Mr Arnault halted the imminent sale of a fundamental law line. Thanks to the distribution muscle of Sephora, it has since turned into a bestseller in America.Investors, however, are but wary of what they see as Mr Arnaults drift to collect brands. The crisis has also underlined the fact that Vuitton dominates the groups results. Were it not for Vuitton, estimates one analyst, LVMHs sales would have go by 3% in the first half of 2009 and profits would have plunged by 40%. In normal times Vuitton contributes about half of the groups profits, and most of the rest comes from Moet Hennessy. In the first half of this year, however, Vuitton contributed an estimated 70% of profit.That leads some people to question whether LVMH is likewise dependent on the leather-goods firm. You can present th at theres nothing as good as Vuitton in LVMHs portfolio, says Pierre Mallevays of Savigny Partners, who was formerly director of acquisitions at LVMH, but that simply states the fact that LVs business model is the gold warning of luxury brands no other brand in the world compares to it. The biggest hazard to LVMH is Vuitton, argues Ms Flouquet, since it accounts for such a big proportion of profits the company depends on it, she says.The adventure to Vuitton, in turn, is that it could fall out of fashion or lose its exclusivity in the eyeball of consumers. So far there is no sign of fatigue with the brand. LVMHs senior managers have devised ways to refresh it. In the late 1990s, for example, Mr Arnault saw that there was a risk that as a maker of leather goods alone, Vuitton could be perceived as boring. In 1997 he hired Marc Jacobs, then a relatively unknown designer, to design a fashion line. The aim was to generate seasonal worker buzz and press coverage.Vuittons senior exec utives at the time were against the idea, fearing that adding fashion could undermine a timeless image, but Mr Arnaults move be successful. To avoid overexposure of its signature Monogram print, Vuitton has taken care to develop a wide ikon of products and other patterns. We increase the number of product lines and we are careful to have several different colours and shapes, says Mr Arnault. Thus Vuitton sells jolly priced handbagsthe smallest Speedy Bag costs 430 in Parisbut also wildly expensive custom-made luggage, reinforcing its exclusive image.Another trenchant tactic is to make limited-edition handbags which are hard to get hold of. Five or so years ago Vuitton depended to a large degree on one market, Japan. Most Japanese women owned at least one Vuitton productand because provided a large proportion of Vuittons profits, which hard put analysts at the time. Yet the Japanese market for luxury goods was souring. Spending on such items in Japan has fallen precipitously si nce the end of 2005, according to a recent report by McKinsey, a consulting firm. spring chicken women are more individualistic than their mothers, and are seeking out lesser-known brands. You used to see thousands of Vuitton bags coming at you in the Ginza shop district but far fewer now, says Radha Chadha, author of a book, The Cult of the sumptuousness Brand Inside Asias Love involvement with Luxury. That reliance on one country is no longer so marked (see chart 3). Fortunately, Vuitton has since rapidly constituted a strong position in what it hopes will become another Japan China. The Chinese consumer is in a honor affair with the Vuitton brand, says Ms Flouquet. According to LVMH, in the first half of 2009 sales to Chinese people (at home and travelling) made up 18% of Vuittons revenue.Despite widespread concerns about counterfeiting in the country, the Chinese are now Vuittons biggest customer base after the Japanese. The key to the firms success, says Mr Arnault, has bee n come the market exactly as if it were a developed market. We treat the Chinese customer as being very sophisticated. many competitors, by contrast, have at times lowered their standards for shops in China, he says, victimization inferior furniture or positioning their stores poorly. Going into new markets and developing new product lines will enable Vuitton o continue producing double-digit growth for years to come, says Mr Carcelle. On every trip to mainland Chinahe makes five or six a yearhe tries to discover a new city and meet its mayor. Mr Carcelle is also tackling other new frontiers in October he will open a shop in Sukhbaatar Square in Ulan Bator. already if you go to an upmarket disco in Ulan Bator you will see a world-shaking number of our bags, he says. Vuittons expansion into China, Mongolia and new product lines such as watches and shoes, suggest that the leather-goods firm will continue to be LVMHs main source of growth.However, it also marrow that the group may become more rather than less reliant on Vuitton. In theory, the answer could lie in strengthening some of LVMHs smaller names, such as Fendi, a fashion and leather-goods brand. But buying a big, established, global brand with potential for growth could be some(prenominal) a quicker and a surer route. Or maybe that oneImagineChina A new accumulation? Analysts and bankers are convinced that Mr Arnault indispensablenesss to buy the Hermes Group, a producer of leather goods and fashion which matches Vuitton for quality and design.Because Hermes is run so conservatively, says an investment banker who knows LVMH well, it is lonesome(prenominal) a quarter of the size that it could be. Mr Arnault would grow it while preserving its values, he says. Earlier this year, there were rumours that LVMH would sell Moet Hennessy to Diageo, the worlds biggest spirits group, which already owns 34% of the business. Such a sale could set up money to buy Hermes. Mr Arnault, however, refuses to be fo rce into commenting. For the moment, such an acquisition is impossible, since the family which controls Hermes does not want to sell, and the firm is strongly defended against takeover.Nevertheless, says the banker, the family which controls it has several branches, all with different views. Its a pressure cooker and some day it will blow up, he says. Chanel, another closely held global luxury brand, could also make a preferred target for LVMH. Some people advocate a merger with Richemont, which, Mr Solca argues, would address LVMHs relative weakness in watches and jewellery. Any such deals, or selling Moet Hennessy, would radically veer the balance of the group. I would be strike if LVMH sold Moet Hennessy. The business has high margins, high ashflow and it is well managed, says Ms Flouquet. They would probably only sell it if they had a large deal ahead. Shareholders are nervous that LVMH will pay too high a price for a large acquisition. For this reason the groups valuation may not fully forge its performance during the crisis. Such concerns are not likely to deter Mr Arnault, who has demonstrated his impudence in LVMHs prospects in luxury by raising his stake in the group over time he owns 47%. If LVMH does go shopping, it will probably direct like one of its best customers with price in mind, but willing to spend on enduring prestige.