Recessions come and recessions go, but luxury never goes completely out of style, even if sales were subdued following the September 11 tragedy. Some individuals with deep pockets and others with high ambitions are always willing to spend prodigiously on common items like handbags and watches, provided they get what they want in return: quality, fashion and the envy of their friends.
It's the kind of behavior that keeps Paris-based luxury goods retailer LVMH Moet Hennessy Louis Vuitton in the money. While the past couple of years have been difficult for the luxury category as a whole, LVMH has managed a good showing. It posted a 30 percent jump in profits last year despite lower sales. Investors applaud that performance; the company's stock has risen 50 percent in the past 12 months.
LVMH's results were even better in the first quarter of this year, with sales up 10 percent — the first increase in five quarters. And the company told analysts that its 2004 financial performance would exceed earlier predictions.
LVMH is all about the power of brand, and its stable is jammed with famous names: Upscale leather goods retailer Louis Vuitton, its largest unit; wine and spirit makers Moet & Chandon and Hennessy cognac; fashion lines Donna Karan, Fendi and Givenchy, and others — watchmaker TAG Heuer, for example, and shirtmaker Thomas Pink.
The company's strength owes a lot to customer loyalty — especially to Louis Vuitton, which analysts estimate accounts for about 60 percent of LVMH's earnings. Demand for its products — from $100 coin purses to the new $5,500 Theda multi-buckled, gilt-trimmed handbags in colors such as turquoise and pink — is so strong that Vuitton's margin topped 45 percent last year; its U.S. sales alone grew 38 percent.
To meet the demand, Vuitton is expanding. In February it opened its largest retail center ever, an opulent 14,000-square-foot, four-story store at Fifth Avenue and East 57th Street in Manhattan. It will open an even larger “global” store in Paris at the end of the year, as well as stores in Shanghai and Tokyo's Ginza district.
In addition, notes LVMH fashion group senior vice president John Slavinsky, Louis Vuitton stores will open this year at Florida's Palm Beach Gardens, Fashion Valley San Diego, St. Louis's Plaza Frontenac, the South Park Mall in Charlotte and the Garden State Plaza in Paramus, N.J. The company also will enlarge a number of leased departments in Saks and Neiman Marcus stores and will double the size of its Rodeo Drive store in Beverly Hills, he says.
In all, Louis Vuitton now has 96 stores open in the United States, which Slavinsky says is almost evenly divided between freestanding stores and leased in-store boutiques.
Slavinsky says the overall outlook for an expansion of LVMH's fashion brands is “positive — not aggressive right now, but it's positive.” In October it will open stores for three of its fashion lines — Thomas Pink, Pucci and Celine — in the expanded Forum Shops at Caesars Palace in Las Vegas, and next year will bring Louis Vuitton stores to Atlantic City and Las Vegas.
LVMH's brands “are very well sought after within shopping centers,” says Joe Tagliola, senior executive vice president of Westfield America, which has LVMH retailers in about 10 of its 66 properties. “It helps us get additional tenants in the centers. They are a great complement to any of the majors.”
John Schroder, Westfield's joint chief operating officer in the U.S., notes that Louis Vuitton operates in its Century City center in Los Angeles, its Valley Fair mall in Santa Clara, Calif. and in several others, and that negotiations are under way for more. Of Westfield's properties, he says, “my guess is that LVMH and its stable of brands is probably appropriate in 10 or 11,” adds Tagliola. “We'd love to do more business with them where it's appropriate.”
Vuitton also is paying careful attention to new and emerging markets. Last year it opened a store in New Delhi, its first in India, and two in China. “China, where the economy is booming, is a market with considerable potential for cognac, fashion and perfumes,” LVMH chairman, Bernard Arnault, told stockholders this year.
Beyond Vuitton and other bright spots such as wines and spirits, there have been challenges as LVMH balanced growth with the need to prune underperforming operations. After the luxury category slowed in 2001, Arnault began selling some weaker lines. In the past year, LVMH unloaded Pommery champagne and Ebel watches.
Another problem area has been the company's DFS duty-free shops. DFS's operations at about 150 airports were slammed in the late 1990s by a drop in Asian tourism, and the problems grew worse after September 11. To reduce losses, LVMH has restructured its operations and closed shops, including one in San Francisco, and has renegotiated airport leases. In Guam, for instance, it cut its fees in half. As a result of such cost-cutting, DFS earned money last year, LVMH says.
Meanwhile, the Sephora perfume stores turned a profit for the first time in 2003 as LVMH opened 24 new stores, 10 of them in the United States. (It also closed some underperformers.) It plans 15 more U.S. stores this year, three of which opened in California in April, at the privately owned Vintage Oaks center in Novato, the Manhattan Village Shopping Center in Manhattan Beach and Taubman Centers' Beverly Center in Los Angeles.
“We do a good business with Sephora,” says Tagliola, adding that the retailer “is really hitting on all cyclinders.”
Among the biggest changes have been in the Donna Karan line, which LVMH acquired in 2001 and immediately began restructuring. The goal was to strengthen the brand by making it less mass-market, in part by removing it from discount stores.
In 2002, shortly after buying the business, LVMH restricted its men's wear distribution to freestanding Donna Karan stores in an effort to bolster perceptions of exclusivity in the brand. Last year LVMH continued its reworking by closing unprofitable Donna Karan stores, which reduced sales for the line by 30 percent. (There are now 13 Donna Karan stores in the United States, along with three Donna Karan Collection stores.) It also reduced its merchandising licenses and focused more on high-end retail outlets.
Donna Karan “was overstored,” says LVMH's Slavinsky. “There were way too many outlet stores. Our first job was really to close a number of those locations. In a true outlet scenario, for every 10 stores you might have one outlet. We had pretty much the reverse of that.”
LVMH is working to get its Fendi line “back on track” by renovating all eight stores across the U.S., a job that will be finished next year. After that, “We'll look at new locations,” he says.
In an analysis of LVMH last year, Kannan Ramaswamy, a professor at Thunderbird: The American Graduate School of International Management, noted that LVMH has the largest network of company-owned stores in the luxury-goods business — more than 1,275. He said the company's more than two dozen large “global” stores have “a halo effect on sales at smaller LVMH stores … in close proximity to a global store.”
Ramaswamy also noted that LVMH's success hinges on two things: the nurturing of its star brands through innovation, and a strong focus on quality. To foster innovation, it has created a decentralized design structure with a relatively small group of managers; designers like Marc Jacobs, who is widely credited with revitalizing Vuitton after he joined the line in 1998, are given wide latitude. Its focus on quality is designed to convey value to consumers — the sense that a $150 Vuitton coin purse is indeed worth the investment.
Despite worldwide softness in the sale of luxury goods, LVMH Moet Hennessy Louis Vuitton has cemented its position as the world's largest and most profitable player in the category. To stay there it must keep its customers loyal and its brand strong, and find new markets worldwide.
LVMH is working hard to keep its star brands in the limelight, opening new stores in New York and Paris and constantly reinforcing the value of its brands. It also is staying firmly focused on the bottom line, closing underperforming stores and renegotiating leases.
Brand is everything in the luxury markets in which LVMH operates. Creating allure is crucial when it comes to $1,000 TAG Heuer watches and $5,000 Vuitton handbags.
The company's profits soared 30 percent in 2003 despite sluggish sales as margins at flagship Louis Vuitton topped 45 percent. In the first quarter, sales rose 10 percent on an adjusted basis — the first increase in five quarters.