On a crisp late October afternoon in Paris Bernard Arnault, Europe’s richest man, is talking about his upcoming trip to one of the fastest-growing outposts of his LVMH empire: Mongolia, of all places. “I like to see the reaction of the people in the shops,” says the 61-year-old mogul in lightly accented but supple English. Dapper and slim, he wears a navy suit and matching tie made by his flagship fashion label, Christian Dior, and handmade black loafers by Berluti, one of the lesser known but most exclusive of the 60-plus brands in his stable. “I also like to see the competition,” he adds. “I am quite competitive. I want to stay ahead and increase our advance.”
Ahead he is by a long shot, not just in numbers–LVMH stock rose 60% in the last year, vaulting his net worth to $39 billion–but also in global reach. Arnault has long made a crusade of bringing haute couture to the developing world, to places like China, where the first Louis Vuitton store opened in 1992, and India. Now he is staking a claim in central Asia, better known for yurts, nomads and yak milk than Fendi bags and Guerlain perfume. But last year LVMH Moët Hennessy Louis Vuitton, as it is formally known, opened a store in Mongolia’s capital Ulaanbaatar, a metropolis of 1.1 million, 120 miles from the Russian border; weeks ago it set up shop in Inner Mongolia’s Hohhot, within the borders of China. The first store is already profitable.
In early November Arnault visited six Asian cities in seven days in his private jet, accompanied by two close advisers: daughter Delphine, 35, number three at Dior, who oversees the stores; and Dior chief and longtime consigliere Sidney Toledano. At the end of the month Arnault will return to Asia with his son Antoine, 33, communications head of Louis Vuitton. The days will be long and focused on details. “Sometimes he adjusts a bag on a store shelf by 5 centimeters,” says Antoine. “At 10 p.m. he’s still going. He’s got an energy that’s just amazing.”
He will need it. To maintain LVMH’s blistering growth–and its perch as the world’s largest purveyor of luxury goods–Arnault must continue to push into more remote regions of the globe. Among its 2,468 retail stores there are now outposts in Ho Chi Minh City, Vietnam; Phnom Penh, Cambodia; Yekaterinburg, Russia; Macao; and Abu Dhabi. (Under consideration: Lhasa, Tibet.) “Today it’s clear that the world is driven by the growth of Asia and emerging countries,” says Arnault. “Vuitton has always been a pioneer. We were the first to arrive in China. There were only bicycles when we opened there, no cars.” Now there are 35 stores in China. While Asia (excluding Japan) has accounted for 25% of total revenue this year, its growth rate outstrips every other geographic area. Operating profits in places like Brazil, China, India and the Middle East hover between 20% and 25%. That’s less than in Europe and the Americas, where spending power is mightier. But “saturation rates are higher” in the West, points out Allegra Perry, who covers luxury goods for Nomura in London. “So [LVMH] keeps spending in emerging markets, which are on the forefront of growth.”
But they’re also risky territory. Luxury goods follow cycles, and the industry has been in an upswing, despite the worldwide blues. That’s partly because the economies of developing countries–Mongolia, Lebanon, Poland and Vietnam among them–have been on fire. LVMH has been a pioneer in such markets, “starting with the millionaires and going down and down and down,” says Luca Solca, a retail analyst at Sanford C. Bernstein in Zurich. Arnault has enjoyed the fruits of first-mover advantage, planting his brands in the best retail locations at relatively low costs.
Scalding economies cool. As its GDP galloped along at 9% or 10%, the People’s Bank of China recently raised interest rates to calm inflationary fears; a jolting pullback in consumer spending could hurt LVMH. “If China has a cold,” opines Solca, “luxury goods get pneumonia.”
Arnault is well prepared. He has survived recessions and the consequences of terrorist attacks and SARS scares. He is battle-hardened from many corporate fights. He has put in place a creative management group that thinks long term.
Capturing developing countries is just one piece of LVMH’s strategy. Arnault sees unexploited possibilities in richer countries, too. That insight is driving new store openings or expansions this year in Paris, London and Dusseldorf, in Santa Monica and New York. “They look at pockets of wealth,” says Antoine Belge, who covers LVMH for HSBC in Paris. The company is also keeping its eye on the U.S. immigrant population, Belge says, because “people of Hispanic and Chinese origin spend more on luxury goods.” So, apparently, does the population at large. During the worst of the downturn last year, he adds, “some American women decided they would spend less on food or travel and buy a Louis Vuitton handbag.” Proof : While sales slipped 0.8% from 2008 to 2009, to $23.5 billion, and profits dropped 7.6% to $2.7 billion, net profits and revenue in the first half of 2010 have snapped back 53% and 16%, respectively, as LVMH earned $1.4 billion on sales of $12.6 billion.
Capitalizing on familiar territory, LVMH recently announced it had paid $2 billion for a 17.1% stake in Hermès International, the highly profitable maker of silk scarves, ties and the top-selling Birkin bag–and long a target of Arnault’s acquisitive desires. The investment (at a bargain-basement $112.50 per share, thanks to a derivative contract called an equity swap) is a coup for LVMH; as one of the few remaining stand-alone luxury brands not owned by a conglomerate, Hermès would have been the golden fleece for competitors Richemont and Gucci. Though LVMH quickly denied it would try to take control of the 173-year-old Hermès, the stage is clearly set. It may be a long drama: Three-quarters of the company is still in the hands of 200 Hermès family members. Winning them over could take decades.
That’s okay; LVMH is built to endure. Its dozens of iconic wines and spirits (including Moët & Chandon and Veuve Clicquot), fashion and leather goods (Vuitton and Dior), perfumes and cosmetics (Givenchy and Guerlain), jewelry and watches (including TAG Heuer) and duty-free shops span mid- and high-priced goods, mass and class. Prices range from $12 for lipstick at Sephora to around $2,800 for the popular Lady Dior handbag and $21,000 for a Hublot watch. All divisions have performed well since January, especially the fashion and leather group, where sales popped 20%, and watches and jewelry 29%.
For Arnault these are not just products with plump profit margins (50% for Dom Pérignon, 40% for Vuitton). They are living artifacts of a great nation. “I see myself as an ambassador of French heritage and French culture,” he proclaims. “What we create is emblematic. It’s linked to Versailles, to Marie Antoinette.” And beyond. Among his massive collections are a hat worn by Napoleon and a 1951 fashion sketch by Christian Dior. At the same time Arnault infuses many of his brands with a cutting-edge hipness.
He transformed Louis Vuitton, known as a sturdy, if hopelessly staid, trunkmaker. When Arnault finally took charge of LVMH in 1990, after an acrimonious, three-year-long struggle, he brought in American fashion designer Marc Jacobs, who introduced a ready-to-wear Louis Vuitton fashion collection and collaborated with high-profile contemporary artists like Takashi Murakami. The Japanese artist redid the brown-and-tan LV logo in bright colors and manga cartoon figures, in a special line of bags that scampered off the shelves. At Dior Arnault hired bad-boy Brit John Galliano to shake up the grandmotherly label.
Arnault is said to get along famously with the eccentrics he hires to make over his brands.(“I remember precisely the first time I met [Galliano] in my office. My assistant said, ‘There is a very strange guy in the lobby with rasta hair and a T-shirt.’”) But in an interview he comes across as reserved, preferring to sit in an antechamber rather than inside his more comfortable, spacious corner office on the tony Avenue Montaigne. “The key to success is this duality–timelessness and the utmost modernity,” he says.
Another expression of Arnault’s allegiance to modernity is his vast corporate collection of more than 1,000 works of modern and contemporary art, which he’s decided to showcase in his audacious new museum designed by Frank Gehry and built at a reported cost of more than $200 million. Set to open in late 2012 in the middle of a fabled Paris greenspace, the Bois de Boulogne, the giant glass-encased structure will look like “an iceberg dressed in a cloud,” as Arnault cultural adviser Jean-Paul Claverie has described it (see p. 72). Known officially as the Louis Vuitton Foundation for Creation, the museum complex will also have an auditorium and restaurant and will serve as a monument to Arnault’s role as global arbiter of taste, while telegraphing his corporate brands’ commitment to art and high culture.
How to keep all this going, controlling LVMH’s image and quality along with hundreds of products moving through the vast circulatory system of suppliers, manufacturers, retailers and marketers, keeping 76,000 employees focused on and proud of their work? Force of character–there is a superabundance of that–drives a lot of it. But that’s clearly not enough. “One key element of management of a group like this is decentralization,” says Arnault dryly. “You need the right team of inspired managers.”
For Arnault that means a small group of a half-dozen trusted generals, most of whom head up his flagship brands, augmented by two of his children. They include Yves Carcelle, chief of Louis Vuitton; Toledano, who leads Dior; Pierre Godé, LVMH’s vice chairman; Philippe Pascal, in charge of watches and jewelry; Christophe Navarre, who runs wines and spirits; and Nicolas Bazire, chief of development and acquisitions. All of them, besides Antoine and Delphine Arnault, have worked with their boss since the mid-1990s, some longer. Arnault meets with each member of his inner circle at least once a week, going over performance figures and plotting strategy. It was Arnault who suggested to Carcelle that Vuitton hire Mark Jacobs in 1997 and who chose Galliano for Dior, moving him from Givenchy in 1996.
Arnault likes to see the company “on the ground.” He constantly prowls LVMH retail stores, firing off memos when he thinks the music is turned up too loud or the thermostat is set too low. The memos also include praise of employees he finds especially helpful or solicitous.
“He’s like a helicopter,” says Toledano. “He has a very big picture, but he can also go on the floor and see a product.” Less hands-on with the beverage group than he is with the fashion and retail side of the business, Arnault nevertheless tracks the progress of all the Moët-Hennessy brands, which include wineries in California and Australia. He has daily contact with cultural adviser Claverie. Arnault says he wants all his managers to take charge of their divisions as though they were family enterprises. “Louis Vuitton should be run as if Yves Carcelle owns the brand,” he says.
Ownership certainly applies to kinship. “Our goal for the group is to remain a family company,” Arnault declares. Though Delphine and Antoine say they were never pressured to work for their father, they felt included in the business from an early age. When Arnault was wrestling for control of LVMH in 1989, Antoine, then 12, remembers, “He was always explaining to me what was going on.” After he took over the group Arnault spent Saturday mornings in Paris, taking his son and daughter to visit LVMH-owned shops.
“He always said, ‘If you want to work with me, you have to work harder than the others and do well in school,’” recalls Antoine, garrulous and model handsome and, like his father, clad in a Dior suit, matching tie and Berluti loafers. After earning his M.B.A. at Insead, Antoine spent two years launching, then selling, an Internet venture and toiled for three months as a sales assistant at the huge Vuitton store on the Champs Elysées selling handbags, before taking a management post responsible for 13 stores outside Paris. Delphine also labored in the LVMH retail trenches, as a perfume salesgirl at the Paris Dior boutique. She studied at the London School of Economics and worked at McKinsey before joining her father’s company in 2000. (She is married to Alessandro Vallarino Gancia, who runs his own finance company and serves on Dior’s board.)
Unsurprisingly, both young Arnaults express reverence for their father. “I think he’s a visionary, one of the most visionary of his generation,” says Delphine. A strikingly tall, slim blonde, more shy than her brother, she was still in her office at Dior headquarters at 7:45 p.m. on a Thursday evening. “I feel very lucky to be part of what he is creating.”
Arnault has three other children from his second marriage, in 1991, to Hélène Mercier, a French Canadian pianist: Alexandre, 18, Frédéric, 15, and Jean, 12. These days Arnault does his Saturday morning retail tour with Alexandre, who has already expressed interest in joining LVMH.
Patrimony has deep roots. Arnault was raised to go into the family business, a construction company called Ferret-Savinel in the northern industrial city of Roubaix. At age 7 he visited building sites with his grandfather, learning the importance of hard work and giving Arnault “the flavor of entrepreneurship.” After earning an engineering degree at Paris’ prestigious Ecole Polytechnique in 1971, he joined his father, taking charge of the company at age 25. In the early 1980s he spent three years in the U.S. trying to establish a branch of the family business as a developer of Florida real estate. The venture didn’t work out, but Delphine and Antoine learned flawless English. Arnault brought home an aggressively American approach to taking over and running businesses. It has made him a terrifying competitor.
In 1984, when the French government was looking for someone to take over a bankrupt textile and disposable-diaper business called Boussac, Arnault convinced Lazard Frères to add $80 million to his $15 million of Arnault family money. The bedraggled company included one jewel, fashion house Dior, and Arnault quickly stripped away the other businesses. Dior had earlier sold its perfume brand to Louis Vuitton Moët-Hennessy (the result of a 1987 merger). Arnault coveted the label, so he used the $400 million from selling off Boussac’s assets and, backed by Lazard, took advantage of dissent within the Louis Vuitton Moët-Hennessy ranks, siding with Vuitton Chief Henri Racamier to oust Moët-Hennessy’s Alain Chevalier. Then, buying up sufficient shares and exploiting the courts to amend corporate bylaws, Arnault deposed Racamier and seized the entire company in 1990.
He took charge immediately, sweeping much of manufacturing and distribution under his control. In order to extend LVMH’s reach across a range of high-end brands, Arnault turned into a binge acquirer. Throughout the 1990s he paid billions of dollars for fashion labels that included Fendi, Kenzo and Thomas Pink; jewelry and watchmakers Chaumet, Zenith and TAG Heuer; and retail chains like DFS and Sephora. He also bought a handful of ultrahaute boutique companies like Berluti, which makes custom men’s shoes.
There have been spectacular busts. After failing to bag Sotheby’s, Arnault paid a reported $97 million for Phillips, a distant number three auction house, in 1999. Hurt by the plunge in business following Sept. 11, Arnault dumped Phillips in early 2002. His one attempt to create a fashion brand ended badly. Founded in 1987, Christian Lacroix–an eponymous label whose strategy was to start with couture items to grab attention, then introduce a ready-to-wear line–never quite clicked. Arnault unloaded it in 2005; it filed for bankruptcy last year. Most dramatically, Arnault tried and failed to turn a minority stake in fashion house Gucci into control of the company but lost to French billionaire François Pinault’s Pinault-Printemps-Redoute–setting up a rivalry on several fronts (including fashion and art collecting) that persists today.
Until his latest move on Hèrmes, Arnault contented himself with emphatic and creative brand extensions, infusing classy labels with a sense of contemporary cool, carefully controlling quality through his trusted aides. At corporate headquarters on Avenue Montaigne, which houses Paris’ biggest Dior boutique, Delphine oversees the haute couture atelier on the top floor, where three dozen seamstresses stitch triple silk organza, hand-painted with purple flowers, that will adorn a one-of-a kind gown designed by John Galliano that might cost $35,000. Each dress is fitted to its own custom-made white muslim dressmaker’s dummy, labeled with the client’s name, many of them the wives of Middle East oil barons.
Though the prices for these creations seem high, the labor costs are astronomical. It can take several hundred hours to produce a single garment. A loss leader for LVMH, haute couture underscores Dior’s image as the ne plus ultra in French fashion. It also supplies the costumes for the twice-a-year catwalks in Paris that generate excitement and new customers.
Antoine has made his own splash by convincing his father to run an arresting series of ads with luscious photographs shot by Annie Liebovitz of such familiar but surprising faces as Mikhail Gorbachev and Keith Richards. Arnault père resisted at first. After Antoine explained that Gorbachev would be shown with the Berlin Wall, he won over his father. “When I said, ‘It’s almost an homage to what he did,’ then he’s like, ‘It’s your business,’” recalls Antoine. Keith Richards was a tougher sell. “He didn’t know who he was,” Antoine smiles. An accomplished classical pianist whose favorite composer is Chopin, Arnault hadn’t heard the name of the Rolling Stones’ guitarist. The latest campaign, featuring rock star (and Forbes Media shareholder) Bono and wife, Ali Hewson, disembarking from a plane in the African bush, was also Antoine’s idea.
LVMH’s management team and family strategy are working well for now. One day, Arnault hopes, his three younger sons will step into the business. Who will succeed him? Whoever turns out to be best suited for the job, he always says. Don’t look for Dynasty-like intrigue. “I think we’re smarter than that,” says Antoine, leaning back in a leather chair. “We have a good 20 to 25 years to think about our future. He’s not going to step down anytime soon.”
The immediate future isn’t quite as clear. While an October Bain & Co. luxury market report forecasts continued growth in the sector of 3% to 5% in 2011, so much depends on the global economy. LVMH’s expansionist approach in markets like China holds huge prospects–and some peril. A significant slowdown means fewer customers for Lady Dior bags (that brand’s bestseller in China). Other hurdles loom. While China is the number one market for Hennessy cognac, Moët-Hennessy managers say they must contend with a feeble distribution system and prohibitive import taxes that can run as high as 50% in China and an astronomical 200% in India.
The puny recovery in Europe and the U.S. is another worry. There will be no more stimulus plans to hand extra dollars to consumers, as there were last year. The West still feeds LVMH two-thirds of its revenue. Arnault shrugs. “Right now we have a good equilibrium,” he says, referring to the three-legged revenue stool of Europe, the Americas (Brazil is a big growth market for the group) and Asia.
Economic calamity, corporate battles, self-made setbacks–Arnault has lived through them all before and emerged stronger than ever. As Vogue Editor in Chief Anna Wintour puts it, “I think he’s pretty much unstoppable.”luxury brands