Luxury’s Chess Masters prepare for a New Game

By guest authors Elizabeth Paton and Vanessa Friedman. Elizabeth Paton is a reporter for the Styles section, covering the fashion and luxury sectors in Europe. Before joining The  New York Times in 2015, she was a reporter at the Financial Times both in London and New York. Vanessa Friedman is The Times’s fashion director and chief fashion critic. She was previously the fashion editor of the Financial Times.

Gucci Store in Paris

“A series of strategic shifts in the boardrooms and back rooms of the world’s biggest luxury groups — LVMH, Kering and Richemont — has been underway in recent months.

On a sunny day earlier this month, scores of suited men and women found themselves in a  low-rise building on the outskirts of Florence, Italy, walking by bright hand-painted murals of birds of paradise, wildflowers and dreamy-eyed women wearing turbans, T-shirts and rhinestone-encrusted sunglasses.

The location? The new Gucci ArtLab. The occasion? An investor day for Kering, Gucci’s parent company, with Marco Bizzarri, the chief executive of Gucci, taking on a starring role in front of the assembled crowd. His topic: A master plan to make Gucci the largest luxury brand in the world.

“It’s not a question of if,” he said, “but when.”

The brand had just posted record annual sales of EUR 6.2 billion, or about USD 7.1 billion, in 2017, a 45 % increase from the prior year. Now it planned to reach EUR 10 billion in annual sales and a 40 % operating margin by 2019.

To do so, Kering, which has holdings in fine jewellery and watches as well as fashion, confirmed a wider strategy already underway to narrow its focus to five of its premium houses: Gucci, Saint Laurent, Balenciaga, Alexander McQueen and Bottega Veneta.

The implications of such a shift are becoming increasingly clear. They reflect not only a strategic housecleaning at Kering, but also the quiet reorganizations that have been taking place at LVMH Moët Hennessy Louis Vuitton and Richemont, as the world’s three biggest luxury groups prepare for what may be a new stage of acquisitions and consolidation.

“This moment signals the end of an important chapter for Kering,” said Thomas Chauvet, head of European luxury goods equity research for Citibank. “After almost 30 years of asset rotations and churning through their portfolio, they have reinvented themselves as a pure luxury player.”

This change in focus has expressed itself in a flurry of hirings, firings and asset disposals  over the first part of this year, as Kering reorients its  focus away from small and midlevel brand acquisitions — “they have realized these brands need a lot of help and do not move the profit needle at all,” said Mr. Chauvet — and toward their Big Five.

Dior Men Spring 2019

First, in January, came the long-anticipated spinoff of the German sports brand Puma, a clear step toward a long-term commitment to luxury  that was welcomed by shareholders. Next, in March, it was announced that after a 17-year partnership the British designer Stella McCartney would buy back the 50 percent stake that Kering owned in her namesake fashion business. And earlier this month, days after Bottega Veneta said that it had parted ways with its longtime creative director Tomas Maier in favour of a 32-year-old unknown, Daniel Lee, Kering confirmed that it was in talks to sell its 51 % stake in Christopher Kane back to the British designer and that Mr. Maier’s namesake business would cease operations.

These moves followed the divestiture of Sergio Rossi in 2015, and, analysts said, suggest that Brioni, the Italian men’s wear brand, and Altuzarra, the American women’s wear brand in which Kering has a minority stake, might well be next.

“I see it likely that these moves may be a preamble to more meaningful luxury-focused M&A down the road,” Luca Solca, head of luxury goods research at Exane BNP Paribas, wrote in an email, referring to the Kane, Maier and McCartney news.

The designer Stella McCartney at her men’s spring 2019 show in Milan

Not all of Kering’s smaller brands face an uncertain future: Boucheron and Qeelin are still in the pack (fine jewellery, like top-tier fashion and leather goods, can offer higher margins and faster organic growth potential than more accessibly priced brands). Still, the shift in mind-set at Kering has come at a time where other major luxury groups are also rethinking their hands.

Earlier in June 2018, after a 108-year silence, Chanel published its first financial earnings report (widely considered a shot across the bow to any potential bidders, like Bernard Arnault at LVMH).

Recently Richemont, the Swiss luxury group that now owns 17 upscale brands such as Cartier, Van Cleef & Arpels and Montblanc, has disposed of smaller, underperforming labels like Shanghai Tang and Lancel and made a series of key strategic purchases to ramp up its digital retail network. Earlier this month it announced the completion of its takeover of the luxury e-commerce site Yoox Net-a-Porter after an offer of €2.8 billion, along with a deal to buy Watchfinder, a pre-owned premium watch specialist that sells online and through boutiques.

Thomas Maier at Bottega Veneto

And LVMH — by far the most dominant of the conglomerates with around 60 brands encompassing not only fashion, jewelry, and cosmetics but also wines and spirits and a market capitalization of EUR 140.4 billion, more than twice the size of either Kering and Richemont — completed the equivalent of a cabinet reshuffle of the men’s wear lines in its major fashion houses, moving Kim Jones from Vuitton to Dior Men, hiring the streetwear star Virgil Abloh as artistic director of Louis Vuitton men’s wear, and shifting Kris Van Assche from Dior Homme to Berluti.

Then, in June, Antoine Arnault, 41, Mr. Arnault’s eldest son and Berluti’s chief executive, was given the added responsibility of LVMH head of communications and image, reflecting an increased level of external scrutiny on the market leader. And earlier this week, the group also confirmed that LVMH was divesting itself of a minority stake in Edun, the eco-friendly fashion label started by the singer Bono and his wife Ali Hewson.

The moves have increased speculation about avenues for growth.

“As an investor, if you buy Kering right now, you are basically buying Gucci and a fundamentally fashion-focused stock which is more prone to cyclical ups and downs: It remains a risk for investors worried about putting all their eggs in one basket,” said Erwan Rambourg, global co-head of consumer and retail research at HSBC. “If you buy LVMH, you get a buy into a much more balanced and diversified portfolio with a greater spread across product categories.”

Hence the belief in the market that, although the Kering group share price has grown by more than 35 % this year, its chief executive, François-Henri Pinault, could now be looking for bigger luxury assets with which to capture investor interest, bolstered by recent changes to the French tax code that have improved flexibility around corporate deal making.

Kering declined to comment on its plans, but Mr. Chauvet of Citibank said: “Gucci will account for over 70 % of group operating profit in 2018, and there will be some desire to rebalance the portfolio away from Gucci” — whether that is  by bolstering performance and investment in other brands, or by “deliberately bringing another brand that is more sizable than in the past to the platform.”

In March, Exane BNP Paribas published a report looking at the possibility of a merger between Richemont and Kering, asking, “Why separate Puma just now? Why push Gucci so hard?  Why secure control of YNAP (Yoox Net-a-Porter)?” and noting “Richemont and Kering are complementary: Kering is strong in soft luxury, Richemont is a champion in hard luxury. The combination would create significant scale advantage.”

The suggestion has been firmly rebuffed by both groups.

Still, after a rocky few years, the global luxury market has regained its luster. Buoyant results, bolstered by strong demand in China, have not only boosted bottom lines but contributed to a cash buildup waiting to be deployed. Kering appears to be readying itself to lead  that charge.