Thomas, Dana, Newsweek
Byline: Dana Thomas
LVMH's Bernard Arnault has an insatiable appetite for luxury brands. Now the 'wolf in cashmere' is licking his chops over one of the last family-controlled companies in the business: Hermes. Will he win, and turn class to mass?
The plush, cut-throat world of luxury fashion, French tycoon Bernard Arnault is known as the "wolf in cashmere." That's because he has guzzled down one high-end brand after another like so much Dom Perignon champagne (which, by the way, he also happens to own). Louis Vuitton. Givenchy. Marc Jacobs. Fendi. All these and more are part of LVMH Moet Hennessy-Louis Vuitton, the French conglomerate that Arnault assembled on his way to becoming the seventh-richest man on the planet (net worth: $27.5 billion and counting). Now he's poised to consume one of the last family-controlled brands in the business: Hermes, whose Kelly handbags and colorful silk scarves are required wear for the wealthy and those who aspire to be.
Like any good predator, the 61-year-old Arnault crept up on Hermes International unawares. Late last month LVMH revealed it had quietly accumulated a 17.1 percent stake in Hermes for just over $2 billion. As is often the case when one company is about to devour another, LVMH insisted it had no intention of launching a tender offer or taking control of Hermes. And lest Arnault's motives be misinterpreted, the company pledged that "the objective of LVMH is to be a long-term shareholder of Hermes and to contribute to the preservation of the family and French attributes which are at the heart of the global success of this iconic brand."
What makes Hermes such a coveted prize is its devotion to quality. In the last two decades the luxury industry has been refashioned from a collection of small, family-run businesses serving a niche clientele to publicly traded megabrands that do billions of dollars a year in sales. Arnault has been the primary driver of this trend, marketing once exclusive labels like Louis Vuitton to the aspirational class--especially in developing markets like China, Russia, and India. That strategy has made LVMH the industry's unrivaled giant, with $23.5 billion in sales in 2009, compared with $2.6 billion for Hermes.
Yet many criticize Arnault for trading class for mass, especially as Vuitton bags have found their way into outlet malls and Dom Perignon is sold next to the Korbel at Costco. In May Britain's Advertising Standards Agency banned two Louis Vuitton ads for allegedly misleading customers about how its wares are made. One ad showed a seamstress sewing a handbag along with text that read: "A needle, linen thread, beeswax and infinite patience --?" Today the majority of Louis Vuitton leather goods are made by machine on an assembly line.
The thought of mass-produced Hermes shoes and shawls has purists in a dither. Each of the company's Kelly and Birkin bags is made to order by a single craftsperson, with one piece of thread, from beginning to end. The demand for these bags--which start at $6,000 apiece--so surpasses the production capability that there is a yearlong waiting list. Even in the down economy, Hermes has been booming: CEO Patrick Thomas announced last week that the house's third-quarter sales were up a staggering 30 percent. No wonder Arnault is salivating, especially since LVMH's own profits slipped in the last year.
If Arnault's record is any indication, Hermes is going to need a lot more than a Birkin handbag to beat him away. "Arnault is a shrewd man," says one luxury-brand CEO who would speak frankly about his competitor only on the condition of anonymity. "He has reviewed his portfolio and sees what he is missing--a company that still produces true luxury--and he is going after it." Arnault declined NEWSWEEK's request for comment.
Arnault earned his predatory reputation in the late 1980s, when he wrested control of LVMH from the Vuitton family in a vitriolic boardroom fight that grew so personal and vengeful the French daily Liberation called him "the Machiavelli of finance. …