Cash cows and dead horses: why luxury groups such as LVMH could emerge from pandemic leaner and healthier, by shedding unprofitable brands
- Will LVMH still have the resources to fund fashion brands that are struggling – names like Givenchy, Celine, Kenzo and Pucci – as sales plunge in wake of virus?
- Analysts back luxury groups’ strategy of adding big brands to their portfolios and showing patience with underperformers, but their hands could be forced
Pucci, Marc Jacobs, Givenchy, Berluti. These are names with a great pedigree in the fashion world, but unless you’re an industry insider you’re probably not aware that they’re all part of LVMH, the largest luxury group in the world.
According to Luca Solca, senior research analyst, global luxury goods at equity broker Bernstein, Louis Vuitton produced €11.5 billion (US$13 billion) in sales in the first quarter of 2019 and accounted for 70 per cent of the profits of LVMH’s fashion and leather goods division and 45 per cent of group profits as a whole.
LVMH does not break out sales for each of its brands but, as those numbers suggest, its lower profile labels are not profitable. Yet the group has been investing in them and propping them up for years, using its tried-and-tested formula of reviving moribund brands and giving them a shiny revamp.
Not all his investments are reaping rewards, however, especially in the fashion division, now helmed by former Dior CEO Sidney Toledano, whose job title is chairman and CEO of LVMH Fashion Group. (The conglomerate's top fashion brands Louis Vuitton, Dior, and Fendi are stand-alone business units, not part of this division.)
With the exception of Loewe, which has undergone a remarkable revival under British designer Jonathan Anderson, the rest of the brands under the fashion arm have struggled – even former success stories such as Givenchy and Celine.
Celine – which, after a stellar decade led by British designer Phoebe Philo, is undergoing a complete rebrand under former Dior Homme and Saint Laurent designer Hedi Slimane – has yet to find its footing as an arbiter of cool.
Pucci is limping along without a full-time creative head, while Kenzo, which had a good run when Humberto Leon and Carol Lim were turning out accessible designs, has not generated much buzz since the arrival of Felipe Oliveira Batista, who showed his first collection for the brand in March.
Over the years, LVMH has been reluctant to rid its portfolio of underperforming brands. The only exception was the sale of loss-making New York-based label Donna Karan to US company G-III Apparel Group in 2016.
There has long been talk that LVMH has considered selling another US brand, Marc Jacobs, but so far the company has managed to keep it afloat thanks to the popularity of Marc Jacobs Beauty and of its entry-level Snapshot bag, which has been a hit among mass consumers in China.
“Smaller brands play a role in an ideal BCG matrix – you don’t just want ‘cash cows’,” says Solca, referring to a popular portfolio management framework that helps companies decide how to prioritise their different businesses. “You also want ‘question marks’ that at one point may turn into ‘stars’.”
Recent moves suggest that LVMH is sticking to the strategy described by Solca.
In 2018 the company acquired another sleeping beauty, as the group often likes to refer to its acquisitions: Patou, a dormant French couture house.
In 2019, LVMH made headlines for its partnership with designer Stella McCartney, another “question mark” that could turn into a jewel thanks to her sustainability credentials, and the acquisition of US jeweller Tiffany & Co. for a whopping US$16.2 billion – now under review due to the fallout from the coronavirus pandemic.
According to luxury adviser Mario Ortelli, high-profile acquisitions like that of Tiffany and of Italian jeweller Bulgari in 2011, are the ones that will have a lasting impact on the bottom line of the group.
“In recent years LVMH has shown discipline in its merger and acquisition strategy by focusing on acquisitions of relevant size that can move the needle for the group, like Bulgari, Loro Piana, Belmond and Tiffany,” Ortelli says.
LVMH is not alone in relying on a few key powerhouses for revenue and funding underperforming labels with constant injections of cash.
The global health crisis could be an opportunity, or could make it necessary, for groups like LVMH to prioritise their tent-pole brands instead of devoting resources to labels that have little staying power and are likely to suffer severe long-term impacts.
But Bernstein analyst Solca believes getting rid of small brands isn’t a smart move. “It would be a better idea to develop them and get them to grow and blossom,” he says.
LVMH and other luxury groups are notoriously loath to sell their maisons and prefer to take a long-term view, hoping that a new creative director or management team, and some clever marketing, can turn things around.
It has happened before and it’s likely to happen again, but given the impact of the health crisis on the luxury industry – consultancy Bain & Company reports that it could see sales fall by 35 per cent in 2020 – these groups could end up smaller, holding fewer brands but ones that actually perform.
The South China Morning Post contacted LVMH, which said it does not comment on investment or divestment. Kering has not replied to requests for comments.