How Big Can LVMH Get?
This week’s blockbuster acquisition of Tiffany strengthens the French conglomerate’s position as luxury’s biggest player, putting rivals Kering and Richemont on notice.
Storied American jeweller Tiffany & Co has resisted takeover for years. When it finally agreed to a tie up with LVMH, it was in a deal of superlatives. The $16 billion dollar acquisition, announced Monday, is the largest ever in the luxury sector. It puts Tiffany in the hands of the world’s biggest luxury goods group, owned by France’s richest man.
The deal will elevate LVMH’s already solid lead in the luxury sector, giving it a bigger foothold in the US and, in one move, making its jewellery and watches segment much, much bigger. It’s a game changer for the division, putting it on a level with Swiss rival Richemont, the industry’s long-time leader in "hard luxury."
Though some question its luxury credentials and growth potential, Tiffany is one of the world’s few sizeable targets in branded jewellery. The deal strengthens LVMH’s large and diversified portfolio, something many investors have embraced as a sure-fire bet.
Earlier this month, LVMH’s market capitalisation passed the €200 billion ($224 billion) mark on the Paris Bourse for the first time. It’s now nearly three times bigger than arch-rival Kering and five times bigger than Richemont.
Within the luxury sector, it appears, bigger really is better. Indeed, the heft of its portfolio gives LVMH a significant edge in distribution and media, where it enjoys leverage with multi-brand retailers, mall owners, real estate developers, magazines, influencers and other key players in the fashion ecosystem. LVMH also has an advantage in attracting and retaining top talent, who it can offer better compensation, more interesting career opportunities and larger budgets.
“This deal just reinforces the reality that scale matters in the industry,” said Erwan Rambourg, global co-head of consumer and retail research at HSBC, in an email. The bank has noted the emergence of a “bling supremacy” and likened LVMH to the “Nike of luxury.”
“Luxury execs might not find this comparison flattering but it is a reality that scale and speed at LVMH have become so paramount that no other luxury competitor is now comparable as a result,” HSBC said in a note earlier this month.
As The Business of Fashion and McKinsey & Company’s The State of Fashion 2020 report suggests, fashion is becoming a winner-takes-all business. The industry’s top 20 players by economic profit — a list that includes “Super Winners” like Nike and Inditex — account for more than the combined economic profit of the entire industry, the report found.
Scale benefits are by no means unique to fashion, of course. Across industries, from automobiles to technology, the bigger you are the easier it is to stay on top. “It is natural that young industries, like modern luxury goods, consolidate,” said Bernstein analyst Luca Solca.
Whether the Tiffany transaction will unlock a fresh wave of M&A within the sector remains to be seen, but it’s put LVMH’s competitors on notice. The deal is particularly bad news for rival Richemont, which owns brands including global jewellery giant Cartier and Van Cleef & Arpels.
To be sure, LVMH’s Tiffany deal is not without risks.
Acquisitions are expensive, time-consuming and can prove tricky to integrate. Tiffany will transform LVMH’s position in watches and jewellery, catapulting the division’s contribution to operating profit to 13 percent of overall earnings from 7 percent last year. But it also leaves the luxury giant on the hook to ensure efforts to turnaround fortunes at the storied, but faded jeweller are successful. In the first half of 2019, worldwide net sales at Tiffany decreased 3 percent to $2.1 billion. The company is facing weak demand at home and abroad, and will likely need heavy investment to re-energise its brand and business.
LVMH has a strong track record in re-invigorating heritage brands. After purchasing Bulgari for $5.2 billion in 2011, the company focused the product ranges and elevated the brand to focus on high-end jewellery. Over the last eight years, Bulgari has consistently gained market share. Sales have doubled and operating profit increased fivefold, according to HSBC.
“If LVMH achieves a Bulgari-like success in turning Tiffany around, this would further increase the pressure on Richemont,” Bernstein’s Solca said in a note. “This would add to competitive threats from mega-brands moving into jewellery from a couture and leather goods core: Chanel, Hermès, Louis Vuitton and Gucci to name a few.”
Perhaps the most transformative thing about the LVMH deal is the impact it will have on the wider market, ratcheting up pressure on other brands to look at mega-deals of their own in order to remain competitive. Targets big enough to move the needle remain few and far between, with the most obvious moves — like a tie up between Richemont and Kering or a deal to takeover Chanel or Hermes — hardly on the table.
“Every competitor will find it difficult to counter LVMH now but obviously Richemont will feel the most pressure,” said HSBC’s Rambourg.
LVMH will need time to digest this week’s megamerger, making another M&A-driven leap unlikely in the near term, but in a sector where size matters, the world’s largest luxury conglomerate seems set to only get larger.