Battle Deluxe

By Karl Taro Greenfeld

Surrounded by hundreds of decanters of Dior's latest fragrance, J'adore, Bernard Arnault, 50, swivels in an ergonomic chair at the head of a metallic gray conference table on the 16th floor of midtown Manhattan's new LVMH tower. Forget Calvin, Ralph and even Giorgio or Miuccia--this narrow-faced, thin-lipped, dimpled Frenchman is the most powerful person in fashion today.

As founder and president of luxury-goods conglomerate LVMH Moet Hennessy Louis Vuitton, Arnault controls, in addition to the eponymous leather goods and spirits brands, Christian Dior, Givenchy, Celine, Kenzo, Christian Lacroix, Tag Heuer, Dom Perignon, Ebel, two Paris department stores, the DFS duty-free chain and the Sephora perfumery-shops, among other brands. Lately, he has been acquiring new companies at the rate of one a week: Bliss, Hard Candy, Fendi, Pucci, Urban Decay. "We look for hot companies, still small," says Arnault in his accented English, his voice a clipped tenor. "No one can do as much with a hot brand as we can."

Few people can do more with any brand than Arnault, who has built LVMH into a $40 billion company and amassed a personal fortune estimated at more than $6 billion. In the process, he has turned an industry that once consisted of hundreds of small, family-run companies into one dominated by a few luxury conglomerates, of which LVMH is pre-eminent. No other fashion brand is big enough to bid against him. Except one: Gucci.

Ironically, Arnault may have inadvertently midwifed the creation of his chief competitor. When Arnault launched a takeover of Gucci last year, quietly acquiring more than 20% of its outstanding shares--which he still holds--and then making an $8.7 billion bid for the whole firm, Gucci struck back by emulating the very business that was trying to acquire it. Gucci CEO Domenico De Sole and creative director Tom Ford started purchasing premium fashion brands in a bid to become a luxury superpower to rival LVMH.

So far it has worked. Gucci is arguably a hotter brand than any in the LVMH stable. And Gucci is seeking to bestow its panache on shoemaker Sergio Rossi and fallen couture house Yves Saint Laurent, in a series of deals valued at more than $1 billion. "We are going to apply our own business model to YSL," De Sole promises, "going from a licensed-type situation to a controlled situation." Last week YSL announced it would be cutting its licensing agreements from 160 to about 50 to protect the value of its brand. It doesn't hurt that Ford, arguably the premier designer in fashion, will be the creative director of the sleeker, sexier Yves Saint Laurent. And De Sole hints he is not done yet. "There are good opportunities," he says. "There are companies out there that can be bought. But I do have a limit. I have $2.5 billion." Unlike LVMH, De Sole indicates, he's not going to pay bust-out retail. For his part, Arnault sneers that Gucci and LVMH "are not comparable. Their sales are lower than our profits. That's like Microsoft's worrying about a start-up company."

Both Gucci and LVMH have been in fashion with investors, in part because Asia's recovery is viewed as a boon for sellers of swank. Gucci's stock, at $84.81, is off 33% from its 52-week high but still well above the $60 it was trading at a year ago, while LVMH, which trades in Paris, is up to $411 a share after reporting $8.4 billion in 1999 revenue, a 23% jump from last year.

American firms like Ralph Lauren, Donna Karan and Calvin Klein are finding it increasingly difficult to compete against these global luxury superpowers. Tommy Hilfiger's stock has also lost luster (see box). So has Kiehl's, a 149-year-old posh beauty brand that was acquired last week by French global giant L'Oreal. In February, Klein, noting the sums Arnault has been paying and the increasingly treacherous fashion market, also put his company up for sale. Potential suitors--LVMH and Gucci among them--have shied away from Klein's privately held company because its licensing agreements would deny a buyer dominant control of its product lines.

And Arnault craves control above all else. Dubbed the "Wolf in Cashmere" by the European press, he is much more than a corporate raider of the runways. He is also the first reality-based fashionista, who pays as much attention to manufacturing costs as to designer trends. It is fitting: Arnault conducts business amid a backdrop of gallons of perfume rather than racks of couture outfits, because fashion is a sinkhole. You don't make profits from the glitzy couture collections, no matter how many lunching ladies and OPEC princesses visit your atelier.

Arnault has built an empire on the premise that high fashion is a marketing tool for selling handbags, shoes, makeup and bottles of J'adore. He views the gaudy, celebrity-driven Paris collections as spendy advertisements for his handbags and scents. No other design house has harnessed its collections so firmly to the task of moving mountains of leather and tubs of cosmetics.

To ensure that he brings in the buzz that drives the biz, Arnault hires edgy, critically acclaimed young designers who never made a centime of profit when they ran their own houses but who excel at engaging, exciting and infuriating the fashion press. Arnault points to John Galliano's spring collections for Dior this year as typical of what he wants from his designers. "His ideas are not meant to be worn," Arnault says of the avant-gardish collection of bag-lady-style ball gowns, "but the ideas descend down to pret-a-porter and to everything in the line. And that's what we sell." So far, Arnault hasn't missed. The hype Dior generated on the runways facilitated the relaunch of the immensely successful and profitable Dior handbag line.

Off the runways, though, LVMH behaves like a cost-conscious maker of discount goods. Arnault has reined in expenses and, wherever possible, combined the production of his swank brands to create manufacturing efficiencies. Guerlain and Dior perfumes share plants, for example, as do Loewe and Louis Vuitton leather goods.

Among high-fashion potentates, Arnault has taken an early lead on the Internet. Individually and through Europe@web, a holding company and incubator of new firms, Arnault has made lucrative early investments in eBay, LibertySurf (a European Internet-service provider) and Nomade (France's top Net portal). Coming soon: eLuxury, LVMH's luxury-goods portal, set to launch this month. "With our brands, we should be able to dominate on the Web as well," Arnault says, adding that he plans to take Europe@web public this year, possibly as early as next month.

Arnault hates to admit it, but he still desperately wants to make Gucci the jewel in the LVMH crown. The leather-goods maker is exactly the type of company Arnault knows how to maximize: a hot name with tightly held licensing and underexploited accessories markets. During the '80s Gucci became an overextended brand synonymous with suburban housewives. Starting in 1994, Gucci's De Sole and Ford began cutting back on licensing while focusing on building up the core fashion and leather-goods businesses. Ford persuaded celebrities like Tom Hanks and Madonna to don Gucci suits, and in just four years, he and De Sole took the company from $250 million to more than $1 billion in revenue.

Both men take great pride in their remaking of the company and were horrified when it looked like Arnault--of whom Ford has said, "We could teach [him] a few things about this business"--would capture Gucci. To fend off the raider, the partners brought in self-made French billionaire Francois Pinault, the owner of Christie's auction house and part owner of Converse shoes, who used a controversial clause in Gucci's bylaws to purchase a 42% stake in the firm for $2.9 billion. Arnault insists Gucci's white-knight strategy was illegal, and the battle for the company is still wending through Dutch courts. (Gucci is incorporated in the Netherlands.)

With that battle raging, Arnault and De Sole clashed last November in a bidding war for Fendi, the maker of last year's to-die-for handbag, the baguette. Gucci's interest in the company probably forced Arnault to pay $200 million more than he would have otherwise before bagging Fendi for $950 million, a steep price for a firm whose net income last year was $20 million. De Sole insists Arnault overpaid for the company. Arnault, of course, vows to work his magic on Fendi. "It's a hot product with limited exposure," he says. "Perfect for what we can do in introducing it to a wider audience."

The immediate challenge for LVMH will be to squeeze more revenue out of its new, high-priced brands while retaining the luxe quality for which those brands are renowned. The specter of overlicensing haunts the fashion industry today, just as it did in the 1970s, when designers Pierre Cardin and Yves Saint Laurent weren't paying attention to where their names appeared and let their logos turn up everywhere, from discount pharmacies to five-and-tens.

Arnault swears that no matter how much he pays for his toniest brands, he will resist the impulse to recoup his investment by degrading them in that way. "If I'm patient, I can make it work at the high end," he vows. Just now there are more brands to buy, more couture houses to take over and more designers to hire. And don't forget, Arnault will remind you, he still has some unfinished business with a little company called Gucci.

--With reporting by Aixa M. Pascual

With reporting by Aixa M. Pascual