LVMH Chief Aims High With His Wager On Tiffany -- WSJ

By Matthew Dalton

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 26, 2019).

PARIS -- Tiffany & Co.'s underperforming operations are about to get an overhaul from one of the world's most exacting executives, French billionaire Bernard Arnault.

With LVMH Moët Hennessy Louis Vuitton SA's $16.2 billion purchase of Tiffany, announced Monday, Mr. Arnault plans to pour marketing resources into the high-end of Tiffany's jewelry line, focusing attention on its high-carat diamond necklaces rather than less-expensive silver jewelry. He also wants to launch new product lines and improve the performance of Tiffany's far-flung network of 321 boutiques in more than 20 countries.

The chief executive is readying a playbook that he has used to build some of the world's most successful luxury brands at LVMH, now one of Europe's most valuable companies. His task is to reinvigorate a storied brand that has been solidly profitable but whose sales have stagnated in recent years. Comparable sales at Tiffany have declined for two straight quarters because of a drop in tourist spending in the U.S.

LVMH is paying all cash for Tiffany's shares and will finance the deal by issuing bonds. Executives expect it to close in the middle of next year following antitrust approval by the U.S., the European Union and others.

Mr. Arnault's strategy calls for labels to benefit from LVMH's deep pockets, sometimes for years, to make necessary investments. Mr. Arnault said the purchase of the high-end jeweler Bulgari in 2011 offered a model for the Tiffany buy, requiring major investments in marketing, boutique design and communications. Eight years later, the brand's revenue has nearly doubled and its profit has increased fivefold.

Because those investments take years to bear fruit, Tiffany is better off inside LVMH, away from the glare of investors scrutinizing the company's results, Mr. Arnault said. LVMH owns 75 brands, including luxury giants such as Louis Vuitton and Dior, but doesn't disclose the performance of individual labels.

"We will plan long-term," Mr. Arnault said in an interview. "Often with American brands traded on the stock market, the emphasis is placed on the results of the quarter. It's not at all the same strategic focus."

Mr. Arnault has also pioneered the use of distinctive architecture in building boutiques, making them destinations for well-heeled tourists around the world. Customers routinely line up to get inside Louis Vuitton shops, some of which feature white-glove service for top clientele.

Last month Mr. Arnault made a visit to Seoul to inaugurate a Louis Vuitton boutique designed by architect Frank Gehry. Mr. Arnault quietly took time to pop into a Tiffany boutique nearby.

As Mr. Arnault browsed the store, he noticed the glass on a display case was dirty and took a photo of it, telling his team that it was an example of management failure, a person familiar with the visit said.

"There are things that are terrific, and there are things that must be improved," Mr. Arnault said in the interview, when asked about the episode. "I look at the details."

Tiffany is set to receive such scrutiny on a permanent basis once the deal is completed. Mr. Arnault regularly visits the boutiques of his biggest brands in the French capital and on trips abroad to inspect their operations.

"Each week I make notes, whether it's at Vuitton, Dior or other brands," Mr. Arnault said.

Tiffany's boutiques are less profitable than those of Cartier and Bulgari, its major competitors. To address that, LVMH could tighten its retail network in the U.S., where it has more than 100 stores, says Erwan Rambourg, an analyst at HSBC. Those stores tend to sell the brand's less expensive jewelry.

Or it could boost efforts to attract Chinese shoppers, who tend to be more profitable clientele than their Western counterparts.

"Tiffany is under-indexed with the Chinese," Mr. Rambourg says. "The Chinese consumer really likes Tiffany but obviously you need to invest more to develop the awareness."

Despite the problems that struck him in Seoul, Mr. Arnault sees a huge advantage in Tiffany's retail network: The brand sells almost exclusively through its own stores, not department stores or other third parties.

Mr. Arnault frowns on his brands selling wholesale, although some of the company's smaller ones do. That relinquishes control over pricing, allowing independent retailers to sell at a discount, and the look of stores where the brands' wares are displayed.

Louis Vuitton and Dior, for example, sell almost exclusively through their own stores. Louis Vuitton never holds sales. And both brands gain intimate knowledge of their clients' spending habits, data that would be collected by the independent retailer if those brands didn't rely on directly operated stores.

"Tiffany is in direct contact with its clients. It's one of the few jewelry brands in that position," Mr. Arnault said. "This is a fantastic benefit."

Mr. Arnault says that he expects Tiffany to boost LVMH's operating profit -- EUR10 billion in 2018 -- by around EUR500 million (about $550 million) in the first full year the jeweler is included in its results. The acquisition will be financed by issuing bonds at ultralow interest rates now available to LVMH of less than 1%.

Write to Matthew Dalton at Matthew.Dalton@wsj.com

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November 26, 2019 02:47 ET (07:47 GMT)

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