Storytelling In The News: #88

The inside story of the Louis Vuitton money machine

March 14, 2004

While Paris was agonizing last week over "the end of the Tom Ford epic" at Gucci and Yves Saint-Laurent, BusinessWeek magazine was telling the story of the right way to run a fashion house at Louis Vuitton. Here there are no antics of high-strung designers or managers who don't know how to run a luxury brand. Instead, we are told the inside story of "the Louis Vuitton money machine" and "the world's most profitable luxury brand" that is also "fashion's classiest act".

The Louis Vuitton money machine

Above all, Louis Vuitton makes money. With $3.8bn in annual sales, it's about twice the size of runners-up Prada and Gucci group's Gucci division. Vuitton has maintained double-digit sales growth and the industry's fattest operating margins as rivals have staggered through a global downturn in the past two years. In March 2004, parent LVMH (Moët Hennessy Louis Vuitton) announced a 30 per cent earnings increase for 2003, helped by a whopping 45 per cent operating margin at Vuitton (compared to the average margin in the luxury accessories business -- 25 per cent). The brand has quintupled sales and raised margins sixfold since Arnault bought the company in 1989:

BusinessWeek estimates that sales for Vuitton grew at least 16 per cent worldwide last year. Thanks to Vuitton, LVMH's Paris-traded shares have almost doubled in the past 12 months to more than €60 (£41).

LVMH draws an estimated 80 per cent of its profits from Vuitton, thus propping up less-successful units, from the DFS Duty Free retail chain to couturiers Christian Lacroix and Givenchy. "If LVMH didn't have Louis Vuitton, it would be a disaster," says Armando Branchini of InterCorporate, a Milan luxury consulting group. The touchiness of this issue was underscored recently when LVMH won a ruling in France that a Morgan Stanley analyst, who had cited Vuitton's "maturity", had downgraded LVMH's shares unfairly. Morgan Stanley is appealing the decision, which awarded LVMH $39m in damages.

Attention to quality

Behind the glittery facade is a relentless focus on quality and testing to back up the Vuitton lifetime repair guarantee. The fact that zippers, buckles, studs, everything are constantly tested is a foundation of the brand, but hardly the main cause of Vuitton's profitability.

A focus on efficiency

Even more important is a focus on efficiency. "Their operating metrics are second to none," says Lew Frankfort, the chief executive of US handbag maker Coach.. Vuitton has moved from an overgrown cottage industry into a 21st-century business. Vuitton's manufacturing is still labour-intensive, with a team of 24 workers producing about 120 handbags a day. But, says Andrew Gowen, a London-based analyst in BusinessWeek Vuitton and its competitor Hermès, are "worlds apart. At Hermès, it looks like you stepped into the 14th century, just rows and rows of people stitching." Hermès bags cost more, but its operating margins are only about 25 per cent.

Distribution discipline

Then there's the rigidly controlled distribution network. No Vuitton bag is ever marked down, ever. Vuitton still needs to wean itself from Japanese customers, who account for an estimated 55 per cent of sales. Vuitton must build sales in the US while tapping into rising affluence in China and India. It also needs to fight sophisticated global counterfeiting rings.

Brand management

Vuitton trades brilliantly in the stuff of desire and ego, but here it's not alone. Yet creating a buzz is the stock in trade of every fashion and luxury house. Flip through Vogue, Vanity Fair or Elle, and you'll find pages and pages of half-naked models, legs splayed, dangling handbags from Vuitton and rivals Gucci, Prada and Hermès. Vuitton is not the only brand to have sleek new retail temples, from New York to Tokyo where shoppers plunk down $1,000 and up for a handbag in the new Murakami line. In the glamour department, Vuitton is great in these areas but not alone.

Nurturing an addiction to luxury

One of Vuitton's serious strengths is the loyalty of its clients These are shoppers who think one Vuitton bag in the closet just looks too lonely. BusinessWeek introduces us for instance to Elizabeth Hanny, an Indonesian civil servant leaving Vuitton's boutique on Paris's Avenue Montaigne with a cylinder-shaped, Papillon-monogrammed toile bag that she just bought for $665. "I save up for a while, and then I spend a lot on one item," says Hanny.

What, one might wonder, is an Indonesian civil servant is doing, shopping in Paris and paying $665 for a handbag? Well, she's been at it for a while: Hanny, 35, has shopped at Vuitton since she was 20. Moreover, Vuitton has even more expensive plans for the rest of her life: Vuitton's strategy is to move her up from the classic tan-and-brown monogrammed bags to newer lines such as Murakami, which starts at around $1,000, and Suhali, a line of goatskin bags that average more than $2,000.

BusinessWeek also introduces us to Ariella Cohen, 24, a Manhattan legal assistant who already owns a Vuitton messenger bag and several Vuitton accessories, and now covets high-heeled Vuitton sandals - even though she'll have to put her name on a waiting list. "Louis Vuitton never goes out of style," she says as she leaves Vuitton's Fifth Avenue store.

Moreover women aren't the only members of the Vuitton cult: men are also Vuitton addicts. . BusinessWeek introduces us to Jean-François Bardonnet, 51, an independently wealthy Frenchman who stocks up on Vuitton briefcases, wallets, even eyeglass cases. "You buy into the dream of Louis Vuitton," he says. "We're part of a sect, and the more they put their prices up, the more we come back. They pull the wool over our eyes, but we love it."

A focus on cult accessories

Vuitton was already the world's biggest luxury brand when Arnault acquired it in 1989. But the previous owner, France's Racamier family, had focused mainly on building a Japanese clientele that accounted for 75 per cent of sales. Then, in the late 1990s, luxury accessories became red-hot, with long waiting lists for bags such as the Kate Spade tote and the Fendi "baguette". Vuitton's classic brown bags, still renowned for their quality, looked dumpy by comparison.

Enter Jacobs, a streetwise New York designer who seemed a risky choice for Vuitton when Arnault hired him in 1998. But Jacobs' fresh, unfussy aesthetic was a good fit, and the new ready-to-wear and shoe lines that he has introduced - though they account for less than 15 per cent of Vuitton sales - draw younger customers in the door. Last spring, Jacobs teamed up with Japanese artist Takashi Murakami on a multicoloured line of bags, incorporating images such as cherry blossoms and eyes into the traditional LV monogram and adding shiny metal trim. It became a cult item and Vuitton sold more than $300m of them last year. "Vuitton is a status symbol, always has been," Jacobs says. "But now it's sexier, bolder." While the Jacobs touch has attracted younger buyers, Vuitton continues to attract older clients with its quality and lifetime of free repairs.

Bypassing the designer

The Boulogne Multicolor, a new shoulder bag that went on sale this month in Vuitton stores worldwide for about $1,500. With the success of the Murakami line last year, Vuitton marketing executives quickly began looking for a way to capitalize on it. Canvassing store managers, they learnt that customers were asking for a Murakami shoulder bag. In a workshop attached to the marketing department, technicians took a classic bag, the Boulogne, reworked it in multicoloured toile, added metal studs and other touches, and dubbed it the Boulogne Multicolor. The prototype went directly from the marketing department to top executives, who approved the bag without any involvement by Jacobs' high-profile design team. Moving to production was easy: factories could use existing templates.

Competitive threats

Other companies are trying hard to emulate Vuitton's success. Coach has repositioned its once-utilitarian bag as a snazzy accessory, widening margins to 29 per cent. Venerable Hermès is expanding its retail network and recently hired designer Jean Paul Gaultier to freshen its image.

Vuitton will try to outpace these rivals as it carefully opens boutiques around the world. That's helping Vuitton reduce its risky dependence on Japanese customers. "Almost every grown-up Japanese woman already owns at least one Louis Vuitton item," says Akira Miura, chief editor of WWD Japan, a fashion paper.

As the experience of Gucci shows, a continuing menace for a fashion house is the risk of the departure of key personnel. Early this year, there was speculation that Jacobs might leave unless LVMH gave more backing to his clothing line. Vuitton managers point out that Jacobs' contract runs until 2008. In 2004, Vuitton is clearly less dependent on Mark Jacobs than Gucci is on Tom Ford, but Vuitton also needs to be careful in boasting to the business press that they produce new handbags without the help of their design team.

The bottom line: great vs lucky

The BusinessWeek article presents Louis Vuitton as a story of business invincibility, prompted by the trajectory of a positive stock price, fed by the tales helpfully provided by the cooperative Vuitton managers anxious to boost their image, and reinforced by quotes from rivals who are currently struggling.

Yet, in the same way that football teams are not really as good as they look when they are winning, nor as bad as they look when they are losing, Louis Vuitton's current prosperity is due not only to the undoubted brilliance of its management and design teams but also to their good fortune of being a manufacturer of fashion accessories at a moment in time when fashion accessories are hot around the globe. The trend is no doubt helped by Vuitton's clever marketing but it is also fueled by independent sources such as the television program "Sex in the City". The young women who watch this kind of show may not be able to afford an Yves Saint-Laurent dress, but maybe, just maybe, they can save and scrape together enough pennies to buy a luxury accessory - a Vuitton handbag.

Vuitton markets itself as an arbiter of style, it needs to keep convincing customers that they're members of an exclusive club, of which possession of their accessories is the membership key. But now, "Sex in the City" has ended, and there may come a time when 35 year-old civil servants from Indonesia or young New York legal assistants start to think twice before they plop down a thousand bucks for a small handbag with shiny metal trim, or even wealthy Frenchmen begin to get tired of having the wool pulled over their eyes at immense expense. If that happens, Louis Vuitton could be in considerable difficulty unless they are ready with a very different story to tell.

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