The year is 1987, Moët-Hennessy is facing the possibility of a takeover and Louis Vuitton is reaching record sales numbers. In this final part of our series on LVMH we will explore the 1987 merger between the three brands. The ups, the downs, and the eventual dominance of LVMH.
The Beginning of a Beautiful Friendship?
Four billion dollars. That’s how muchmoney the merger effected between the two luxury goods giants, Louis Vuitton and Moët-Hennessy. It was a mutually beneficial agreement. Both brands got what they wanted: Louis Vuitton was allowed to expand its investments and Moët-Hennessy was saved from the threat of a takeover. The merger respected each company’s autonomy over its own management and subsidiaries leaving little room for manipulation of one over the other.The merger seemed to have paid off as total profits for 1988 were reported to be 49% higher than 1987. By 1989, Louis Vuitton was operating 130 stores worldwide.But behind the scenes, both brands were jumping at their own shadows.
At the time of the merger, Moët-Hennessy was three times larger than Louis Vuittonso their president, Alain Chevalier, was named the chairperson of LVMH and Racamier, from Louis Vuitton, became the executive vice-president. Massive disagreements followed. Louis Vuitton thought that Moët-Hennessy was ungrateful to their saviours and that they were attempting to absorb Louis Vuitton’s operations. Racamier and the Vuitton family owned 60% of Louis Vuitton, but after the merger that sizeablepercentage shrunk to a mere 17% share of LVMH as a whole.
Infighting began between Chevalier and Racamier. When these disputes could not be settled out of court, the lawyers were called in to decide who would run LVMH. When this went nowhere, Racamier made the biggest mistake in his business career, calling Bernard Arnault.
A Wolf in Sheep’s Clothing
Arnaulthad started his business career in 1971 working for his father’s company Ferret-Savinel. Working up the ranks, he became president of the company from 1978 to 1984. This wasn’t enough for Arnault.
In 1984 he acquired the luxury goods company FinanciereAgache. After becoming the CEO there,he subsequently bought something he had his eyes on for some time. The nearly bankrupt textile company Boussac, who owned the brand Christian Dior. So, once Arnault acquired ithe sold nearly all the company’s assets except Dior and the department store Le Bon Marché. Since then, he continued his acquisitions to grow his own luxury goods empire.
When Arnault got the call from Racamier, he had dollar signs in his eyes. Racamier had invited Arnault to acquire stock in the company in order to help consolidate his own position in LVMH. Arnault couldn’t believe his luck. He took that invite and decided to make something of this opportunity.
In July 1988, Arnault provided $1.5 billion with the help of French investment bank, Lazard Frères, and Irish liquor giant, Guinness, to hold 24% of LVMH’s shares. Originally, Guinness had been brought on as an investor by Chevalier in hopes to have an ally against Racamier. It seems Arnault provided a better deal to Guinness than Chevalier. Rumours spread that Louis Vuitton was buying LVMH stock to form a blocking minority to prevent Arnault from gaining any more control of the company. In response, Arnault spent another $600 million to buy an additional 13.5% of LVMH making him the largest shareholder.
In January 1989,Arnault spent a further $500 million to gain control of a grand total of 43.5% of LVMH’s shares and 35% of its voting rights. Arnault had become the blocking minority rather than Racamier and Louis Vuitton. That same month, Arnault was unanimously elected chairman of the executive management board. Things were looking dire for Racamier.
Chevalier had no shares in either Moët-Hennessy or LVMH and so was powerless to stop Arnault’s advance. He was forced to step down as chairperson. Louis Vuitton’s saleswere performing well as their products totalled 32% of LVMH’s sales but Racamier could not hold onto his stake at LVMH. Arnault had the support of both the Moët and Hennessy families which put far more pressure of Racamier
Out of options, Racamier took Arnault to court and an 18-month legal battle ensued after Chevalier had stepped down. The courts eventually ruled in favour of Arnault.Racamier was forced to step down in 1990. It was the end of the line for Racamier at Louis Vuitton. But it was not the end of Racamier. He created another luxury goods conglomerate, Orcofi, with help from Paribas and L’Oréal. He passed away on the 19thMarch 2003 at the age of 91.
Arnault slowly began weeding out Louis Vuitton’s top executives to unite his fragmented luxury empire.It was done, Arnault had won and during the early 1990s, Arnaultcontrolled the world’s largest luxury empire with worldwide sales pulling in $5 billion annually. In 1990, LVMH’s market capitalisation was estimated at $10 billion. Arnault’s takeover of LVMH was complete, but now he had to pick up the pieces.
With stability and unity returned to LVMH in the mid-90s, the focus became growth and expansion. The company spent $3 billion on acquisitions between 1996 and 1997. These acquisitions included the specialty retailer DFS Group Ltd. Arnault had invested $2.6 billion for a 61% interest in the company. This gave LVMH 180 boutiques in Asia. This focus on Asia came about due to the large counterfeit market thatAsia fostered.This was a way to establish a stronger presence in Asia for both greater market share and to combat counterfeiting.
Things were looking good. But it wasn’t smooth sailing after that. 1997 and 1998 were troublesome years for LVMH. The company was hit hard by a large economic crisis in Asia. The Asian market accounted for roughly half of LVMH’s total sales, so this economic downturn severely affected LVMH’s bottom line. Their investment in DFS wasn’t paying off either. For the first half of 1997, DFS profits declined by 50% and even in the first nine months of 1998, sales had declined by a further 22%.
LVMH wasn’t just suffering in retail. The wine and spirits segment were also slow to grow. Sales of cognac, like Hennessy, were falling. This was primarily due to the poor economic conditions experienced in Japan during the late 90s. Japan accounted for 20% of LVMH’s cognac sales. Cognac shipments went from 6.2 million bottles in 1996, to 5 million in 1997, to 4.3 million in 1998. All up, total cognac sales for LVMH fell by 13%.
What didn’t help sales was the amount LVMH was spending in an attempt to thwart a merger between rival liquor companies Guinness and Grand Metropolitan. Arnault insisted that this be stopped while the possibility of assuming control of Guinness was there if they were successful. They were, however, unsuccessful in this endeavour. This coupled with the financial struggles in Asia led to LVMH’s share price to drop 38% between July and November 1997.
Arnault was confident that this was just a temporary slump saying, ‘1998 was a year of consolidation and restructuring, aimed at laying strong foundations for resumed growth in 1999.’ The industry seemed to agree and so allowed LVMH to continue its acquisitions. They purchased Marie-JeannneGoadard to change many of their stores into their own Sephora stores. In their wine segment LVMH acquired premium champagne brand Krug from Rémy Cointreau. LVMH also bought a larger stake in Gucci, increasing their interest from 4.8% to 34.4% in 1999 with hopes of eventually acquiring the brand. However, this was not meant to be as French retailer Pinault Printemps beat them to the punch and acquired Gucci in mid-1999.
Aside from the Gucci acquisition falling through, 1999 was a great year for LVMH. The Asian economy was on the mend, increasing profitability. LVMH’s stock prices increased by 77% between January and August 1999. Sales for the first half of 1999 were €3.59 billion, a 16% increase over the first half of 1998. DFS was still operating at a loss but the margins were smaller indicating progress. Cognac and spirits were still struggling but their poor performance was being made up for by the wine segment whose profits rose 39%. Perfumes and cosmetics increased 45%, and fashion and leather goods jumped 15%. Once again, LVMH was back on top.
With sales doing so well, LVMH went full steam ahead with further acquisitions. They bought many fragrance and cosmetic brands in order to gain a greater foothold in the US and interestingly diversified further by opening a watch and jewellery division by buying Tag Heuer.
LVMH, A Giant
Sales in 1999 reached a record Fractional Flow Reserve of 56 billion, up 23% from 1998. The company recovered and solidified its position as the industry leader of the luxury goods market. Every single aspect of LVMH’s sales had increased either by a solid amount or by a sizable amount.
This trend has continued until the present day where talks of a Tiffany & Co. purchase are making headlines. Bernard Arnault has become a billionaire, who briefly surpassed Jeff Bezos as richest person in the world in December 2019 and again in January 2020. Bloomberg estimates his net worth at US$ 123.7 billion while Forbes estimates his total family fortune at US$ 160.8 billion.
Today, LVMH controls around 60 subsidiaries that each manage a small number of prestige brands, bringing the total up to 75 brands. It has recently been dubbed the most valuable company in Europe and if you’ve come this far you can understand why. With a mixture of luck, determination, ambition, and skill, LVMH have become a giant. It wasn’t the result of one person either, but many over the course of hundreds of years with different approaches and stories. But it was their similarities that brought them together: a focus on quality, skill, and luxury.
This has been our series on LVMH. Thinking back on it all one has to wonder what Richard Hennessy or Claude Moët would think about what each of their respective brands have achieved and what they have become. It has been a blast but seeing the length of these three articles, I can say that I’m glad it’s over. Here’s to seeing you next time over at Ten Pieces of Eight!