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Dese, Doms And Diors

France’s Bernard Arnault has built the LVMH empire in the style of our own leading corporate raiders. Plus ca change…

In this bicentennial of the French Revolution, a youngish and somewhat mysterious entrepreneur is revolutionizing some of France‘s most basic businesses. He’s doing so by seizing control of France’s largest maker of the goods for which the French are famous-and by seizing it in a manner reminiscent of the most dramatic corporate raiders in the US. He’s doing it so successfully that he may be setting a new pattern of financial engineering not only for France but for the whole European Community.

As new chairman and chief executive of Louis Vuitton Moet Hennessy (LVMH), 40year-old Bernard Arnault heads the world’s largest empire of luxury goods. Among his “products” are Christian Dior, Dom Perig-non, Hubert de Givenchy, Hennessy, Moet et Chandon, Céline, and Louis Vuitton. The mystery is how this manfrom the French provinces, with no deep background in wine, fashion, or finance, came to the throne-though it seems to be by a French mélange of the U.S.’s most exotic takeover methods, backed and perhaps led by extraordinarily “creative” investment banking

To one of France‘s most brilliant financial strategists, Bernard Arnault is something of a combination of Ronald Perelman of Revlon, Nelson Peltz of Man Group and T Boone Pickens-with somebody of the stature of Michael Milken in the background. Moreover, Arnault shares one characteristic of some of the top American takeover specialists: He maintains control of massive institutions with minimal use of his own funds. He has cemented his position at LVMH through his association with Britain‘s huge Guinness group, which has put over a billion pounds into the entities through which Arnault controls LVMH.

This is the kind of financial legerdemain that has brought Arnault virtually out of nowhere in the past five years. Born to a solid bourgeois family near Lille, he spent 10 years in his father’s construction and development company without gaining fame or noteworthy distinction. In 1981 he took off for the US. and spent the next three years, also without fame or noteworthy distinction, in Florida real estate.

In 1984, Arnault emerged from obscurity by seizing control of one of France‘s largest retail organizations. Although the Boussac group, which included among other businesses Dior, Bon Marche, and Belle Jardiniere, had been in severe financial difficulties for several years, some of the biggest names in French business, sensing that the Socialist government elected in 1981 was becoming less socialist, saw it as a prize. However, Bernard Arnault and another of the biggest names in French business, the investment bank Lazard Freres, decided that Arnault should win the prize. And since what Lazard decides in France frequently goes, it was indeed Arnault who won.

Lazard’s judgment seems to have been confirmed by financial results. Partly by massive dismissals-including many at the corporate level-Arnault turned Boussac around, and by 1988 he was ready for still bigger game. His eye, and Lazard’s, fell on LVMH, a conglomerate of luxury goods created the previous year by the merger ofLouis Vuitton and Moet Hennessy. While this marriage appeared to be made in heaven, it soon also appeared to be falling apart. Guinness, which had joined with Moet Hennessy in 1987 to strengthen the global distribution of both firms’ brands (those of Guinness include Johnnie Walker, Dewar’s, White Horse, Bell’s, Gordon’s, and Tanqueray), was brought in as a major shareholder in the hope of stabilizing the situation. So was Bernard Arnault.

There is a question, of course, of whether the edce is solid. “It’s a house of cards,” says one banker who knows it well, and one investment director who owns a lot of LVMH stock worries that Arnault “may have gone to the well too often.” But most analysts and investors disagree. Walter Peters, chairman of Manhattan-based Unicorn Group International, which manages some $3.5 billion for European and Middle Eastern investors, sees the structure as perfectly sound: “It’s remarkable how rapidly [Arnault's] acquisitions are integrated,” he says, “and his companies spin off so much cash flow that they allow him to do what he wants.” And the judgment of Paris‘s bourse is most significant: LVMH is valued at around $7 billion-the highest market capitalization of any company in France, and nearly twice that of such famous old-line companies as Paribas, Societe Generale, and Thomson CSF.

With the markets thus firmly behind him and enough acquisitions under his belt for the moment, Arnault appears to be turning his attention to managing what he has. On the wines and spirits side of his business, in which “size is very important,” he believes LVMH has enough products and sales for critical mass and that the distribution agreement with Guinness gives both firms tremendous clout in world markets. “It is very difficult for competitors to break into this sector,” he maintains. “There are in the world perhaps four big enterprises-of which we are one-in wines and spirits today, and I think that number will go down as the years pass.” The number of major distributors will also go down, he believes, as it has in the U.S. “In New York State, for instance, until recently you had four. Now there are only three, and perhaps in 10 years there will be only two.”

In most other LVMH activities, size is less important, according to Arnault, “because distribution is very selective.” For instance, “We have boutiques for Louis Vuitton, and we’re going to put together a network of stores for Dior” With perfumes, however, volume does become important again. “With Dior or Givenchy,” Arnault observes, “we have critical mass, and we could certainly have an additional brand which we could distribute through the same network.”

One of LVMH’s trump cards; in Arnault’s opinion, is the exceptional public familiarity of its top brand names: Dior is probably still the best-known name in fashion, Dom Perignon the most famous of champagnes, Givenchy and Louis Vuitton both have great cachet, while Hennessy and Moet et Chan-don are the leading brands in their fields. His great advantage in this, Arnault believes, is that it is becoming more and more dif- ficult to establish a luxury brand name: “There will be fewer and fewer that will be known around the world, and a number of them will be ours.” His reasoning? “With the accelerating internationalization of business, with the growing cost of advertising and of retail outlets, you need more and more investment to launch a new perfume, to open new stores simultaneously in America, Tokyo, and Singapore.”

For example, Arnault launched the Christian Lacroix fashion house (named for the top designer Arnault hired to head the new venture), which has become one of Paris‘s top maisons de couture in an amazingly short three years. Arnault reportedly invested close to $10 million, and with his worldwide network of the perfumes of Dior already in place, he will be able to launch a new Christian Lacroix perfume next year.

The establishment of new worldwide luxury brands, he maintains, “is less and less within the reach of the entrepreneurs who generally develop the great brands in the .first place-which is why you see concentrations of brands like ours”

The viability of professional management in such businesses as high fashion perturbs some observers close to the scene, who question whether it will not stifle or at least crimp creativity. “Arnault is taking the myth out of haute couture,” says the thoughtful chief executive of a rival house who does not hesitate to charge $600 for a straw hat. Businesses like his, he maintains, have invariably been run by men and women for whom designers feel a considerable affinity; he questions whether they can produce great work when they’re run by “numbers” people-and whether businesses that are will not lower the whole framework and profitability of the high fashion world.

Arnault, however, reveals no such doubts. He anticipates strong sales growth, particularly in his top-of the-line products and more particularly in the countries of the Pacific Rim, and his major concern is about the counterfeiting of his product lines.

The concern expressed by some outsiders is whether, and how long LVMH will remain large enough for Arnault’s restless ambitions. While the English establishment pooh-poohs the idea that he may eventually try to acquire Guinness, one major institutional investor believes he might be able to take them over in five years. After all, the French establishment has pooh-poohed Arnault in the past. And Arnault has brought the world of Peltz, Perelman, and Pickens to Paris. Perhaps he’ll bring more of this new world into more of the old.

 

What are the toughest generic problems in running a global company such as LVMH today?

Because we do 70 percent of our sales outside France, we’re sensitive to changes in international trade rules, exchange rates, and everything to do with financial regulations. We’re also sensitive to increases in protectionism, and we’re very interested in anything that can help protect us against counterfeiting and all the problems of fraud we face.

Why does fraud in the form of counterfeiting affect you so much?

One of our characteristics is that we sell products with a high value added and high margins, which makes them especially interesting for counterfeiters to copy. We have cupboards of counterfeit products. For instance, we have as many as 50 samples of counterfeit Poison, the Dior perfume: whole cupboard full of counterfeit Poison! This is a problem we have to resolve, and it’s not always easy, because the cooperation of some governments is not always easy to obtain. In the Far East, for instance, it’s difficult to get effective collaboration to destroy the counterfeiting networks. In certain European countries it’s difficult, too. In Italy, it’s tough to fight because the “parallel economy” is highly organized: They even have stores that sell counterfeit Louis Vuitton luggage! The problem is so difficult because there is not always, in practice, much of a will on the part of governments to share in this objective of ours.

What’s the situation in the U.S?

It’s a big problem. You have only to walk down Fifth Avenue for someone to offer you a counterfeit bag by Vuitton or Gucci.

How have you found the attitude of the U.S. authorities in fighting this problem?

They are sympathetic, but their regulations are extremely complicated, and made more so by the rules under which “parallel imports” are legal; it’s difficult sometimes to find the line between what constitutes parallel imports and imports of counterfeit copies. It’s very difficult, given you can’t fight legally against “parallel imports”-purchases by distributors from sources other than us of products calling themselves such names as Dior and Celine.

Don’t you have trademark protection?

There are certain possibilities under U.S. law, but proceedings are apt to take a long time-a very long time.

Moreover, the counterfeiting is often done by circuits which are not in the “real” economy, circuits approaching the Mafia and similar organizations, so that sometimes it’s not only difficult but dangerous to fight them. Sometimes it can be very dangerous: For instance, we dismantled a network counterfeiting the products of Dior, and the president of our subsidiary had to be under police protection for a year.

How much of a problem for you are exchange rate variations?

They are a problem. However, given the way our business is spread around the world, we spread our risks. You can’t really have a simultaneous fall in the dollar, the yen, and the franc, so we’re relatively well protected. This wasn’t the case a few years ago, but now we have a balance of sales between Europe, North America, and the Far East, and therefore between the dollar zone, the yen zone and the zone of the deutschemark or European monetary system. Nonetheless, it’s a sensitive point:

Now, with the dollar down to around six francs, it’s less favorable, but in order to reduce such effects, we’ve been going in for more local production.

Any examples in the U.S?

We’re the first French group to decide to manufacture sparkling wine in Arnerica. We’re doing so with champagne-making techniques, but we don’t call it champagne-which brings up an example of the kind of thing I was talking about. [In France] the term champagne is reserved for champagne made in the Champagne region, and labeling rights are strictly limited, but in the U.S. we have an American competitor which calls its sparkling wine “champagne.” And we haven’t yet succeeded in getting the U.S. government to prohibit use of the term.

Do you have any hope of doing so?

We’re working on it. But [the process] is very slow. We’ve been working on it for 10 years, and we haven’t got there yet.

Why is it so drawn out?

It’s very complicated because it brings up the problem of the relations between the U.S. and Europe, and the problems of agricultural imports and exports, tied into all the questions of GAIT. As soon as our problem comes up, it immediately gets mixed in with a maelstrom of other problems between the continents.

Moreover, whenever there is a problem in trade between the U.S. and Europe, the first threat the Americans make is to raise the tax on wines and spirits. Recently, when there was a problem about American exports to Europe of soybeans, we ran into a threat of this kind, an enormous one, of raising the duty on champagne and cognac by 50 percent. Of course this would have been catastrophic for us, but fortunately the problem was solved [before the duty was actually increased].

When 1992 comes, is this the sort of problem that’s likely to arise more frequently?

With 1992 it’ll be a global problem because Europe is seen abroad as creating a very strong ensemble: The impression overseas is that there will be a little too much protectionism in Europe against foreign goods, and the U.S., like other countries, can use arguments of this kind to vary its duties. Brussels and Washington have to work together to work things out.

What benefits will 1992 bring to LVMH?

It won’t change anything much, because we already have an organization which is completely international, we have a strong international culture, and we are already accustomed to working in all the countries of Europe. Moreover, we don’t actually think [all the planned regulations] will be in effect by 1992 because it’s so complicated to get all the countries in agreement. We doubt that all customs barriers will be eliminated. The only area where 1992 is likely to affect us is in the area of duty-free. In principle, as of 1992 there won’t be any duty-free because there won’t be any duties at any rate for travel within the European Community. So there will be a fall in those sales, but in comparison with our overall business worldwide, it’s a small thing.

So you’re not making any major preparations or changes in connection with 1992?

No.

Protectionism and 1992 apart, where do you see the best prospects for your group in terms of sales growth?

On the wines and spirits side, the market is flat in general because of campaigns against drinking and that sort of thing. However, in top-of-the-line products such as high-quality champagne and cognac, it’s rising, and in some countries, especially in the Far East, cognac consumption is rising very rapidly.

What about the other side of your group-the fashion goods, perfumes, luggage, and accessories?

The growth rate is higher. It’s the strongest at the moment in Southeast Asia, where buying power is growing rapidly, and in Japan and Korea, even China.

And you don’t face much competition in your top-of-the-line products, because the barriers to entry are too high?

That’s one of the principal assets of the group, that barriers to competition are high, and that explains why we can maintain high profit margins. To make a Dior today would be impossible. To make a Dom Përignon would be impossible. Thanks to our brands, we have a position which is extraordinary.

What are the major problems-and the major advantages-of producing goods such as those of LVMH in France today?

To begin with, there are a number of products that cannot be produced anywhere else: champagne and cognac are the obvious examples. Moreover, from the viewpoint of quality, the level is higher for a whole series of luxury products if they’re made in France than if they’re made elsewhere.

What about in terms of the costs of fringe benefits and layoffs, and of union relationships?

Fringe benefits in France are certainly high, and layoffs are difficult, but we don’t have this problem at the moment    we are limited more by constraints of production than of sales, and we are not so concerned with labor-cost problems. It’s worth noting that there has been a considerable evolution on the part of unions [in France]. They are much more understanding with regard to layoffs and they recognize that the important thing is that the business survives for the long term.

What are your plans in regard to your association with Guinness?

We have this cross-ownership with them which we shall probably increase. We now have 12 percent of their stock and we may increase that to 20 percent, while they have around 20 percent of us. In these circumstances we’d have two companies which are separate but very closely associated, and transnational, something which is often cited as the type of organization especially suitable for Europe post-1992.

What’s the rationale behind the increase in share participation?

It is to consolidate our ties, and to be sure, by being the number one shareholder in Guinness, of the future of our commercial ties. The same for them-[these ties are] as beneficial for them as they are for us.

Are you thinking of a still closer relationship with Guinness-even a merger, eventually?

No. We shall be separate companies.

You’ve achieved “critical mass” in your major businesses, but are you considering acquisitions that would fit in with your marketing and distribution systems?

The problem is that, at the moment, these businesses are being sold at high prices. As we already have the world’s most famous brands, with a few exceptions, it’s difficult for us to accept to pay a high price for entry into a business on which we don’t see the payback we would want. So our entry into acquisitions is at a measured pace, but we are looking at certain opportunities.

Including some in the U.S?

We have some ideas.

About john carson-parker