Brands giant LVMH has built its name on luxury
Published 24/08/2015 | 02:30
The Guinness Group has cropped up in the most surprising places over the years but none stranger than in the middle of France's most spectacular corporate battle. It happened in 1987 in the midst of a $4bn plan to merge Louis Vuitton, the enormously successful producer of luxury bags, and Moet Hennessy, the legendary French drinks company.
The tussle did not last as long as the French Revolution, and mercifully the guillotine was not thought necessary, but the tensions, the legal battles and unbending determination of the players was not unlike what happened in Paris 198 years earlier.
A young property developer, Bernard Arnault, (now the richest man in France) was persuaded to buy shares to help solve the disagreements. It took some doing but with the help of Guinness, Arnault (with half an eye, no doubt, on the career of Napoleon Bonaparte), ended up with a controlling interest of 45pc in the luxury goods outfit. He still controls 45pc, and Guinness, now part of Diageo, has fetched up with 34pc of the drinks wing, Moet Hennessy. The rumour mill suggests that Diageo might soon be in the mood to sell. However the focus today is on LVMH, parts of which can be traced back to the time of Louis XV, or Louis the Beloved, as he was known (to some). While the history of the various elements of the group are interesting (and have strong Irish links) the present corporation really began wheeling and dealing when Arnault took over in 1987 and turned it into a global empire, through a lot of marketing savvy.
Today it is a global, diversified luxury goods behemoth, with a range of products, from whisky to perfume, designer bags to cognac, and watches to champagne, with the most famous top-end brands like Christian Dior, Tag, Dom Perignon and Krug.
The group has 120,000 employees, 3,700 stores, revenues of €31bn, and a market cap of €78bn. What I found fascinating is that it spends 2pc of sales chasing fake products. That means hundreds of millions worth of company funds are set aside to chase down those ripping off the LVMH brands - and not always very successfully, if Continental outdoor markets are any guide.
The group reports on five different sectors. These are wines and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewellery and selective retail operations. Fashion and luxury goods are the 'star' of the group, with over 50pc of group profits.
Its brands include Fendi, Marc Jacobs, Louis Vuitton, Kenzo, Thomas Pink, Givenchy and many more. In keeping with its image, its products are sold only at the 'high end' of the market.
Two of its divisions, wines and spirits and perfumes and cosmetic, have similar revenues at €4bn each, but margins in the drinks business are almost three times higher than perfumes. However, wine/spirits revenue declined last year. Positive demand and price increases of cognac in the USA did not offset the decline in China. Perfumes and cosmetics performed well last year, with revenue growth up 3pc to €4bn, boosted by US and Asia sales. The company's watches and jewellery lines feature brands like Tag and Zenith, Bulgari and Dior but results last year were disappointing. Its selective retail operation, which includes duty-free shops at airports and cruise liners together with Sephora, a beauty chain, accounts for 30pc of group turnover.
In the last five years, investors in LVMH have done well. Earlier this year the shares reached a record €175 per share - since then they have slipped to the low €150s. Five years ago they traded in the 60s. At the same time, group revenues have risen from €20bn in 2010 to €31bn last year. Last year's profit of €5.6bn also includes income from the sale of Hermes shares. LVMH half-year results show key brands performing well, with Japan, US and Europe driving growth. However, the outlook for luxury goods is of some concern, with the recent Chinese stock market turmoil and currency devaluation taking their toll. Companies like LVMH, however, usually weather the storm. Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.