What impact can be expected from LVMH's record purchase of Tiffany?
Nov 26, 2019
With its acquisition of Tiffany & Co., LVMH looks to have executed a master stroke. The world number one in luxury forked out $16.2 billion to snap up the brand, which is a major player on the U.S. luxury market, but also, and above all, an iconic jewelry label. The deal is the biggest in the French group's history, making it an unprecedented operation, the strong promise of which was already acknowledged by the markets on Monday.
As one of the last large independent companies with no reference shareholders, Tiffany & Co. was the ideal prey for LVMH. The acquisition was made even more attractive by the fact that, following a difficult spell, the brand, which has been busy turning itself around since 2017, now has strong growth potential. In other words, it was an operation with limited risks for LVMH, and one which looks set to bring the company a wide range of advantages. Nonetheless, one might be forgiven for thinking that the price paid was a little high, not least because it's equivalent to 16.6 times the jeweler's EBITDA, according to information published by the luxury group, which valued the company at $16.9 billion.
"Not counting Cartier watches, Tiffany & Co. is still the top jeweler in the world," explained an industry expert. In the fiscal year ended 31 January 2019, the company achieved $4.44 billion in revenues, up 7% compared to the previous year, while its net earnings were $586.4 million, corresponding to 13.2% of total sales. The brand's operating income came to $790 million, with its EBITDA totaling $1.02 billion, their respective margins being 17.8% and 22.9%.
With the color of its famous blue box having entered common parlance as "Tiffany blue," the jewelry brand, which employs some 14,200 people, gives LVMH the chance to work with a historied luxury house boasting a rich heritage and a strong public image perfected over almost two centuries – just the kind of label the French conglomerate thrives on. Tiffany & Co. was founded with the opening of its first store in central Manhattan by Charles Lewis Tiffany in 1837, the same year as French luxury house Hermès, another brand that has attracted LVMH's attention in the past.
"Tiffany & Co.'s structure is healthy, presenting an entirely vertical process from design to production. The company is very advanced for the sector. Since 1982, it has complete control over its supply chain and sources all of its diamonds, in particular the rough diamonds that it cuts itself. The process is completely regulated. In this respect, the company is irreproachable. It is also miles ahead with its approach to customers," continued the expert.
This is an undeniable bonus at a time when sustainable development has become an unavoidable question for the luxury industry, a fact highlighted by LVMH CFO Jean-Jacques Guiony. "We want to capitalize on the company's entirely vertical production structure and establish some synergies at the group level. For example, we could benefit from its diamond sourcing, but it's too early to talk about that now," he commented.
Another interesting factor is the enormous development seen in the jeweler's global expansion, a feat achieved almost entirely through the retail channel, apart from in Asia, where the brand's products are also distributed via wholesale. Of its 321 stores, which are spread over 20 countries and are often set up at prestigious addresses, 124 are in the U.S. The company is also well established in Asia, where it has 90 stores to its name, boasting a particularly strong presence in China. On top of this, this figure doesn't even include the Japanese market, whose results the company presents separately, and which alone has 55 Tiffany stores. Along with its physical locations, the company also operates an e-commerce platform, which represents around 7% of its total sales.
"LVMH's business model for its brands is already developed around distribution through company-owned boutiques. With Tiffany, the French group will be able to continue strengthening its own distribution network and boost its negotiating power," noted jewelry designer Loretta Baiocchi, who has worked with some of the biggest jewelry and luxury labels.
Could Tiffany follow in the footsteps of Louis Vuitton?
"The brand looks as though it could be set up for easier expansion in oriental markets. In terms of its offering, the company is very interesting because it covers all of the segments. Notably, it's particularly strong with low-end products. The Tiffany model is already well defined. With its brute force, LVMH will be able to extend this concept, which is already ready to some extent," she observed.
"Tiffany & Co. is a universal label, which can be adapted to any price. Its product range is as relevant for its low-end products as it is for its fine jewelry. It could become the Louis Vuitton of jewelry," added an analyst.
The jeweler did go through a difficult period after 2015, changing CEO twice in the space of four years and suffering from a certain strategic inconsistency. However, having reported declining sales and lost market share between 2015 and 2017, the company began to recover lost terrain under the direction of its new CEO, Alessandro Bogliolo, who arrived with a fresh creative director, Reed Krakoff, and managed to breathe new life into Tiffany & Co.
"The brand has always maintained a very high value, which has never been put into question, not even when the company was losing significant sales volumes and market share in the U.S.," said the analyst, explaining that, in his opinion, LVMH has acquired "a little-exploited brand with enormous growth potential."
With its solid financial structure, the group led by Bernard Arnault would seem to be one of the best placed companies to take on the challenge, not least because the French colossus is known for its skill in driving profits with its investments, as can be seen in the rise of Bulgari, which has doubled its revenues since being purchased by LVMH in 2011.
With Tiffany, the luxury giant will strengthen its presence in the jewelry segment, a task for which it will be able to rely on the expertise of the American brand. Furthermore, according to LVMH's estimates, the group's "Watches and Jewelry" division, which currently represents only 9% of its total sales, will grow to account for 16% of revenues, contributing 13% of the company's operating income, compared to its current contribution of 7%.
During a conference call with analysts, the group's executives highlighted that the acquisition would serve to "further balance the LVMH portfolio, both in terms of products and regions," while also being "a perfect complement" to its existing brands, that is "ideally aligned with the group's objective to bring together tradition and modernity."
"We have great respect for Tiffany & Co., its management and its strategy, and we have no intention of turning everything upside down," said Guiony, who went on to explain that the best way to "do better" was to support the company in its efforts to execute its strategy. There is therefore no "specific priority," the group's objective being to drive progress in all aspects of the brand, in "its product, distribution network and branding."
Nonetheless, a particular focus will be engagement rings, one of Tiffany's strengths. The fact that the American brand is also known for its low-end silver products is no problem for its new owner, as the line is an important part of the American jeweler's brand image. "In line with what we learned through our experience with Bulgari, we are going to emphasize the development of the brand's collections, because the collection is the heart of the business," added the CFO.
Tiffany's distribution in Europe, which is still relatively modest, accounting for only 11% of the jeweler's total sales – compared to 44% in the U.S., 28% in Asia-Pacific and 15% in Japan – will certainly be developed, especially among local consumers and in the travel retail channel.
When asked if he considered Tiffany & Co. to be more of a New York brand than an American one, Guiony replied, "Neither an American, nor a New York brand. It's a real luxury brand, with an American heritage that makes it unique." And so begins the Tiffany's integration into the world of LVMH.
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