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Families, feuds, France - and luxury

In the smartest arrondissement in Paris, the eighth, there is an area referred to by the locals as the triangle d'or. It's formed by three of the most exclusive shopping Avenues - Montaigne, George V and Champs-Elysees - and contains a number of fashionable Rues in between.
A woman carrying an iconic Hérmes Birkin bag walks past a huge Louis Vuitton suitcase ad in Shanghai

In the smartest arrondissement in Paris, the eighth, there is an area referred to by the locals as the triangle d’or. It’s formed by three of the most exclusive shopping Avenues – Montaigne, George V and Champs-Élysées – and contains a number of fashionable Rues in between. It is also the home of some of the best-known family businesses in the luxury sector.

Names like Hermès, LVMH, Chanel and PPR, all family controlled and selling some of the most sought-after luxury products anywhere, either have their headquarters or their flagship stores in and around the triangle d’or. And those who run these and other luxury family-controlled empires – the likes of Bernard Arnault, chief executive of LVMH, Francois-Henri Pinault, head of PPR, and L’Oréal heiress Liliane Bettencourt – are likely to be spotted there, travelling to an important meeting, or dining at one of the numerous Michelin-starred restaurants that dot the neighbourhood. Nowhere else is there such a symbolic relationship between extremely wealthy families and the luxury brands they control.

Just how important these brands are to the French economy, and indeed the world economy, is illustrated by the fact that around a third of all luxury brands bought and sold around the world emanate from France. These companies employ, directly or indirectly, more than half a million people and underpin the French export sector. No other country is so dependent on its luxury companies.

But not all is well in the triangle d’or. Feuds between competing businesses and within them threaten to blow up into full-scale conflicts, and the outcomes could threaten the very existence of firms and families. The talk is of consolidation, business efficiencies, economics of scale and pressures from abroad.

This is being played out in its most acute form between the world’s biggest luxury conglomerate LVMH and one of the most instantly recognised luxury brands, Hermès – both family run, but both on different trajectories in terms of corporate ambitions.

For LVMH, controlled by Bernard Arnault, the world’s fourth-richest individual, that ambition is clear – to continue buying luxury companies to add to the already huge number of brands that are controlled by LVMH, such as Gucci, Christian Dior perfume and Krug champagne. And, after it was revealed that LVMH had built a 17% stake last October, it was clear who was next on the shopping list – Hermès. That stake has since been increased to 20%, which led Hermès a few months later to controversially change its corporate structure so as to block advances from Arnault and ensure continuing family control.

Arnault appears to be playing a game of cat and mouse with Hermès, saying that his intentions of buying a stake in the company famous for its luxury handbags were “peaceful”. But after LVMH bought the Italian family-controlled luxury jeweler Bulgari earlier this year, Arnault said: “Families that have over several generations built up an emblematic brand of the highest quality craftsmanship can appreciate the interest in joining LVMH.”

Some analysts say that this comment is directed at Hermès, whose executive chairman and family member Bertrand Puech responded by saying in an interview in Le Figaro in late May that LVMH wants to destabilise family shareholders, staff and suppliers at Hermès – tough words, underlining the tension between the two groups.

Alain-Dominique Perrin, executive director at the luxury holding company Richemont and president of the Cartier Foundation, is in no doubt about Arnault’s intentions. “The big groups like LVMH have an interest in making offers on the smaller family businesses in order to be able to afford them while there is still time,” he says.

LVMH, more than any other luxury group, would appear to have the wherewithal to afford Hermès. LVMH made net profits of more than €3 billion last year on revenues of €20.3 billion. It’s sitting on a huge cash pile and there is no shortage of investment banks that would provide finance for such a deal – after all, Arnault is the consummate deal maker.

But such a deal wouldn’t come cheap. Since LVMH revealed its stake, Hermès’ share price has rocketed, giving the luxury handbag maker a market capitalisation of €20 billion in mid-June, and incredibly making it more valuable than huge French businesses like the tire maker Michelin and EADS, parent of the world’s biggest commercial aircraft maker Airbus. Incidentally, LVMH’s market capitalisation is an absolutely massive €50 billion.

Perrin wouldn’t be pressed on whether Hermès would eventually succumb to Arnault’s deal-making acumen, but he knows a thing or two about the benefits a larger group like LVMH or Richemont can bring to a smaller family-run luxury business like Hermès. “The big groups have enormous means and can finance development, which couldn’t be achieved under their current leadership.” Perrin knows this from first-hand experience; as head of Richemont in the late 1990s he bought Van Cleef & Arpels, the legendary Parisian jeweller.

“Van Cleef & Arpels was a well-known business, very famous, but modest in its ambitions and struggling to develop its brand. It took us a number of years after the acquisition to sort out, but it has since been revitalised by Richemont with its future assured,” he says.

What is for sure is that the number of takeover targets in the luxury sector in France is dwindling. Among the 75 members of the Comité Colbert, a group set up in the 1950s to promote and protect the interests of French luxury companies, only 30 are still in the hands of the founding families.

Élisabeth Ponsolle des Portes, chief executive of the Comite Colbert, says the family business side of many of her members is extremely important. “They combine the marriage of tradition and modernity, savoir-faire and creation, history and innovation,” she says.

From one point of view Hermès, one of the bigger members of the Comité Colbert, might not be vulnerable: it is making a lot of money for its shareholders, having posted a 44% rise in full-year profits for 2010, with total sales rising to €2.6 billion. Its vulnerability stems more from a lack of strong management from the family that control it.

There are 53 descendants of Thierry Hermès, the company’s founder, who jointly own 73.4% of the shares. But none of them looks to be stepping up and offering strong leadership at Hermès, at least not since the death of long-term executive chairman Jean-Louis Dumas.

Dumas was the great-great-grandson of the founder and was credited with fighting off pressure to sell to rivals as well as reviving the business’s fortunes. He retired in 2006, passing leadership over to Patrick Thomas – the first non-Hermès family member to lead the company.

Although Thomas successfully navigated Hermès through the difficult years of 2008/2009, some observers reckon he lacks the charisma of Dumas. Nor, some say, does he have the complete support of the family. “His age is against him,” says a Paris-based banker. “He hasn’t shown the flare of Dumas. There are already whispers among the family whether he’s the right man to fend off a hostile takeover bid from LVMH.” Hermès wasn’t prepared to comment on this speculation.

Whatever the case, Hermès could look to family-controlled Chanel for some inspiration. Alain and Gerard Wertheimer – grandsons of the co-founder Pierre – currently control the business. Chanel, which is completely privately owned and guards its finances from the public gaze, is reckoned to have revenues of around €2.6 billion, around the same as Hermès.

The Wertheimer brothers have been successful at controlling Chanel, but at the same time realising the need to pass over the day-to-day leadership to a non-family professional. In Chanel’s case that has been Françoise Montenay – considered by many as one of the best in the luxury business. “No one talks about Chanel when it comes to a takeover target,” says a luxury sector analyst. “It has a not-for-sale sign on it – which is underpinned by strong leadership.”

Some years back there was widespread speculation that Chanel and Hermès would merge to fend off advances from the likes of LVMH. Depending on the eventual outcome of LVMH’s advances on Hermès, it might yet regret that talks with Chanel didn’t go a stage further. Strong leadership – or more precisely the lack of it – might be behind the problems at another French luxury family-controlled business, the cosmetic and perfume giant L’Oréal.

A drawn-out dispute between Liliane Bettencourt, L’Oréal’s main family shareholder and only child of founder Eugène Schueller, and her daughter Francoise Bettencourt-Meyers, rumbles on. And their protracted dispute has done little for the company’s reputation, leading to wider concerns among the French business elite and politicians that the owners of Lancôme might fall into foreign ownership, given that the Swiss food giant Nestlé has a 30% stake in L’Oréal.

“The situations at L’Oréal and Hermès illustrate just how family governance and the state of relations between family members can affect their future success or failure,” says Joachim Schwass, a professor of business at IMD in Lausanne. “Strong leadership, whether that is from a family member or non-family professional, is essential if these businesses are to survive.”

That said, feuds between luxury family-run businesses are a regular part of the corporate scene in France. More than ten years ago, Arnault was blocked in his attempt to takeover Italian fashion house Gucci after the then-boss of the famous brand decided to seek sanctuary from a hostile bid from LVMH by striking a deal with Arnault’s rival PPR.

The acquisition was also an audacious move by the then head of PPR, François Pinault, who had built a luxury brands holding group from what was initially a construction materials company. PPR is now controlled by his son Francois-Henri Pinault – Arnault’s biggest rival.

And as much as the big luxury holding companies might say that a family- run business would benefit from being owned by a bigger group that can take advantages of its economies of scale to take the business to a new level, not all family businesses owned by the likes of LVMH or Richemont would agree. Indeed, some of them are thought to be unhappy with the way things have gone since their acquisitions.

Schwass agrees that family businesses acquired by bigger conglomerates often run into to problems. “My experience with these types of business relationships is they rarely work,” he says. “The family member staying on often gets frustrated and ends up leaving.”
 

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