Off the Catwalk, the Battle for Hermès - CK

http://www.gainesville.com/article/20110306/ZNYT01/103063012/1003/n
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LIZ ALDERMAN


Published: Sunday, March 6, 2011 at 6:01 a.m.
Last Modified: Sunday, March 6, 2011 at 5:09 a.m.
( page of 9 )


IN the rarefied realm of Bernard Arnault, the grand master of the world of
luxury, the talk is usually of beautiful things.

Of sumptuous things.

Of expensive things.

It is decidedly not of ugly things. But, last Monday, ugliness intruded into
this beau monde, in the form of Mr. Arnault’s star designer at Christian
Dior, John Galliano. That day, in his Avenue Montaigne offices here, Mr.
Arnault sat stunned as he watched the infamous video of Mr. Galliano’s
drunken “I love Hitler” tirade.

That video is 42 seconds long. And in 42 seconds, Mr. Arnault and the head of
Dior, Sidney Toledano, decided that their star had to go — immediately.

In an interview in his headquarters on Tuesday, only hours after Mr. Galliano
’s firing was announced publicly, Mr. Arnault expressed confidence that Dior
would shake off its Charlie Sheen moment. He declined to comment on Mr.
Galliano, who had helped turn Dior into a multibillion-dollar brand, and with
whom he has had a close relationship.

(According to colleagues at Dior, Mr. Galliano had been under increasing
strain since the death in 2007 of his chief assistant and confidant of 20
years, Steven Robinson, the suicide that year of the British stylist Isabella
Blow, and then the suicide last year of the British designer Alexander
McQueen, who had succeeded Mr. Galliano at Givenchy, another haute couture
house that Mr. Arnault controls.)

Mr. Arnault, France’s richest man and the force behind the vast LVMH Moët
Hennessy Louis Vuitton empire, is eager to put the Galliano affair behind
him. For as jarring as this has been for Dior, Mr. Arnault is grasping at
another lustrous pearl: Hermès International.

Since October, Mr. Arnault has been — quite publicly — circling Hermès,
the 174-year-old family fief whose silk scarves and Kelly and Birkin handbags
are coveted near and far.

Mr. Arnault says he will not interfere with Hermès’s management or
traditions. “We are a totally peaceful investor,” he said in the interview
last week. “But as a leader in the best quality products in the world, we
believe we can bring a certain savoir-faire to improve the functioning of
their business.”

To people at Hermès, LVMH — indeed, Mr. Arnault himself — represents
everything Hermès is not. He has spent the past three decades acquiring one
luxury brand after another and then hiring designers like Mr. Galliano, Mr.
McQueen and Marc Jacobs (for Louis Vuitton) to invigorate old labels. That
Mr. Galliano was given the keys to Dior only to self-destruct with an
anti-Semitic rant at a Paris bar seemed to confirm the worst fears of Hermès
executives.

“There is a part of our world that is playing on abundance, on glitz and
glamour,” Patrick Thomas, the Hermès’s chief executive, said during an
interview the week before Mr. Galliano was fired. “And there is another part
that is concentrated on refinement, and basically making beautiful objects.”

Hermès counts itself among the latter, and it wants to stay that way. “We
don’t want to be a part of this financial world which is ruining companies
and dealing with people like they are goods or raw materials,” said Mr.
Thomas, the first chief executive at Hermès who is not a member of the
family. “It’s not a financial fight, because we would lose that. It’s a
cultural fight.”

AT 62, Bernard Arnault is a trim, willowy man with piercing blue eyes and an
easy smile. He speaks only when he has something to say, a quality that can
come off as cold or supremely self-confident, depending on which side of the
table you’re on.

Although Mr. Arnault was born and raised in France, he is, to his detractors
here, something of a brassy American in finely tailored Dior. In much of the
world, his success in building a wildly profitable, global conglomerate is
viewed with envy. But in France, flash, money and wheeling and dealing are
still regarded as a bit crass, and Mr. Arnault’s style of business has often
ruffled feathers.

Few are as wary of Mr. Arnault right now as the Hermès clan, which includes
more than 70 members and now comprises three branches: Dumas, Puech and
Guerrand. Mr. Arnault says that he believes the family, now in its sixth and
seventh generations, will ultimately bend to market forces. The family says
it will not.

Mr. Arnault says Hermès has nothing to fear. LVMH burnishes the brands it
buys, he says. It does not compromise luxury through commercialization.

That thinking also applies to Hermès. “I would never diminish the quality
of Hermès,” he says. “Hermès can be an even rarer and greater quality
business, if they ever wanted to work with us.”

For instance, Mr. Arnault would like to see Hermès leave duty-free stores at
airports, eliminate all discounts and bring in younger employees. He did away
with discounts at Louis Vuitton in an effort to elevate its monogrammed
leather handbags and other accessories. In doing so, he imbued those products
with an elitist quality and made them must-have items, especially among the
rising ranks of the world’s nouveaux riches.

The accusation that LVMH is interested only in the mass market clearly
rankles Mr. Arnault. “Vuitton and Dior have a culture and a history,” he
says. “It’s on that basis that I fought to have the LVMH group. It’s not
about making brands commercial or trying to make cheaper products. And Hermè
s has absolutely nothing to fear from me in that regard.”

Those vows have not placated Mr. Thomas: At a press briefing Friday
announcing Hermès results, he likened Mr. Arnault's incursion to the rape of
a beautiful woman, and called on him to reduce his stake to 10 percent to
prove he is peaceful. Mr. Arnault said in the interview that he would not
reduce his stake.

In the meantime, the Hermès family is rallying to keep its company out of
Mr. Arnault’s hands, although the French news media have speculated that
some of the younger members might eventually look to sell.

Axel Dumas, 40, is a passionate member of the sixth generation at Hermès. He
says that, if anything, Mr. Arnault’s uninvited presence has brought even
the youngest generations into solidarity with the old.

“In a way, this brought all of us closer together,” said Mr. Dumas, who
will soon take over as chief operating officer. “There’s always arguments
within a family, but the fact is that after the announcement, everybody
joined ranks without even discussing it. They want to protect Hermès.”

IT was 35 years ago that Bernard Arnault first stormed the French fashion
establishment. After a brief stint in the United States, where he tried
unsuccessfully to expand his family’s real estate interests, Mr. Arnault
returned to France in 1984, at a time when President François Mitterrand was
looking to put state companies into private hands.

Mr. Arnault’s eye landed on Boussac, a flailing textile company with a
hidden gem inside: Christian Dior.

What happened next set Mr. Arnault on his course toward LVMH: After buying
Boussac, he surprised the government by winding down the textile businesses
and eliminating thousands of jobs — to focus on Dior.

Not long afterward, Mr. Arnault, still relatively unknown at the time, was
invited to buy into LVMH Moët Hennessy Louis Vuitton by its patriarch, Henry
Racamier. Mr. Arnault soon outflanked both Mr. Racamier and Alain Chevalier,
the chief of Moët Hennessy, to take control of LVMH in 1990.

That bitter battle angered Mr. Racamier and his family and sealed Mr. Arnault
’s reputation as a brilliant, American-style corporate raider who ignored
the unwritten codes of French business.

Over the years, the first families of European luxury fell to LVMH one by
one: Céline, whose Étoile blouse was inspired by the star-shaped roads
radiating from the Place de l’Étoile in Paris; Guerlain, the maker of
Shalimar perfume; Fendi, the Rome fashion house where Karl Lagerfeld is
creative director; Château d’Yquem, which produces premier Sauternes wine —
the list goes on. Today LVMH has more than 60 brands under its control.

Critics say that Mr. Arnault did not just buy out families — but that he
broke them, and compromised the artisanal essence of their companies. He has
tended to swoop in when a family business is most vulnerable, when it is
changing shareholders or when a younger generation is taking over.

“It is this capitalistic moment that permits LVMH to take participation,”
Mr. Arnault said. “But that has nothing to do with the way afterward that
we manage the brand.” He says he has revitalized the souls of tired brands,
even if he swept out managers who refused to change with the times.

The financial results speak for themselves: Sales at LVMH rose 19 percent
last year and, for the first time, exceeded 20 billion euros. Profits soared
73 percent, to 3 billion euros. Revenue from fashion and leather goods, like
Louis Vuitton purses, was up 20 percent.

“Mr. Arnault is an absolutely wonderful performer when the game is tough,”
said Armando Branchini, whose consulting firm, InterCorporate of Milan,
advises luxury companies on strategy. “On top of that, he has got this
special psychological ability to detect where the vulnerabilities lie,
particularly among families and shareholders.”

INSIDE Hermès’s soaring, light-filled atelier in the Pantin suburb of
Paris, workers take fine cuts of leather, alligator and python skins and
transform them with meticulous detail, waxing threads and buffing hides with
an agate stone into subtle matte finishes or high, lustrous shines. Many of
the employees have worked here for decades.

A single Birkin bag, named after the actress Jane Birkin, can take 15 to 23
hours to make, and cost 3,500 to more than 40,000 euros.

These traditions stretch back to 1837, when Thierry Hermès began making
leather harnesses in his workshop near Le Madeleine in Paris. A century
later, Hermès was making high-end leather products for car travel. The first
Hermès scarf appeared in 1937. In the 1950s, Hermès christened its Kelly
bag, after Grace Kelly, who was photographed carrying one everywhere. Last
year, Hermès turned a profit of 421.7 million euros on sales of 2.4 billion
euros.

One February morning in Pantin, Mr. Dumas pointed to a large Birkin bag that
required four Australian marine crocodile skins, instead of the usual three,
to obtain a perfectly symmetrical pattern. Such extravagances cost money, but
no matter: Hermès artisans never skimp to achieve a lower price point,
something they fear that LVMH would press them to do.

“We never discuss price,” Mr. Dumas says. “We are never thinking that we
can sell X number of bags if we lowered the cost. We don’t need to create a
halo effect to sell a purse.”

Indeed, one of the family’s biggest worries is that Mr. Arnault seems so
comfortable discussing money, a subject that is almost taboo at Hermès.
Family members recoil as they recall an LVMH official’s suggestion that Herm
ès bolster sales by creating a line of lower-priced bags.

“It’s exactly what you shouldn’t do,” Mr. Dumas says. “Because you will
make a cheap Hermès bag which will sell like hotcakes for three years, and
after three years people will say, ‘Hermès is not what it used to be.’ ”

Mr. Thomas says: “If you tell me I have to double the profit of Hermès, I
will do it tomorrow. But then you’d have no Hermès left in five years.”

ONE Saturday last October, Mr. Thomas was riding his bicycle in rural
Auvergne, in south-central France, whose rocky peaks form the backbone of the
Massif Central.

His cellphone buzzed. It was Mr. Arnault, and he had unsettling news: In two
hours, LVMH would announce to the world that it had acquired 17 percent of
Hermès. And, Mr. Arnault added, LVMH would probably buy more.

Mr. Thomas was taken aback by the size of Mr. Arnault’s stake. This was not
the way business was done, he thought — not in France, and certainly not
among gentlemen. Mr. Arnault had not even had the courtesy to seek an
audience with Hermès first.

But Mr. Arnault was not asking. He was telling. “We immediately understood
that it was a hostile move,” Mr. Thomas said. “We got a stab in the back.”

Mr. Arnault had quietly amassed his stake in Hermès not by buying its stock
in the open market but by wielding one of the most potent weapons in finance:
derivatives. He used instruments called equity swaps that essentially gave
him the option to buy a big chunk of Hermès over a certain time.

LVMH executives say they had been concerned that another player — perhaps
from China, or a private-equity firm, or maybe even Richemont, another French
luxury conglomerate — was moving in on Hermès. So, last October, LVMH
exercised its option.

Mr. Arnault later said he was “surprised” to find himself a large
shareholder in Hermès.

The Hermès family promptly united against Mr. Arnault. Already protected by
a limited partnership, the family is now seeking to create a special company
to hold more than 50 percent of its shares in the business, in an effort to
prevent another incursion. Mr. Arnault has said he will not try to buy more.
But his stake is now so large that Hermès is at risk of being delisted from
the Paris stock exchange, Mr. Thomas says.

Industry insiders say the family was naïve to think that Hermès could
remain independent as a publicly traded company, or that anyone would play by
the old rules. Hermès sold stock on the Paris bourse in 1993, a move that
greatly enriched family members.

“If you don’t want to be taken over, don’t put your business in the public
market,” Karl Lagerfeld said of Hermès soon after Mr. Arnault announced his
investment.

That point is not lost on Mr. Thomas. “Yes, we are naïve, but between
utopia and naïveté there is a very thin margin,” he said. “I don’t think
that the fate of this world is to choose between eating and being eaten.”

Both LVMH and Hermès are now hunkering down for a cold war.

CROWDS gathered on Friday at the Rodin Museum on the Left Bank for a showing
of Dior’s spring ready-to-wear collection. Paris Fashion Week for
ready-to-wear runs through Wednesday, but whatever buzz that Dior’s line
generates is bound to be drowned out by the fashion world’s collective gasp
over John Galliano.

Mr. Galliano was supposed to attend Friday’s show for another triumphant
trip down the catwalk. He didn’t. After issuing an apology on Wednesday for
his anti-Semitic remarks, he reportedly left France and entered a rehab
center, at the urging of colleagues and friends like Naomi Campbell and Kate
Moss. Last week, the Paris prosecutor announced that Mr. Galliano would stand
trial for racial insults. Instead of Mr. Galliano at fashion week, there was
Mr. Toledano of Dior, surrounded by paparazzi and taking center stage because
Mr. Arnault did not attend. Mr. Toledano read the following statement:

“What has happened over the last week has been a terrible and wrenching
ordeal for all of us. It has been deeply painful to see the Dior name
associated with the disgraceful statements attributed to its designer,
however brilliant he may be.”

He continued: “So now, more than ever, we must publicly recommit ourselves
to the values of the House of Dior.”

Coco Chanel once said, “Fashion fades; only style remains the same.” That
is a sentiment the Hermès family seems to share. Whatever the trend,
whatever the market, Hermès remains Hermès. But in the 21st-century
business of luxury, time and money are on Mr. Arnault’s side.

Even as it works through its problems with Dior, LVMH will wait for Hermès —
“one century, or even two centuries,” says Pierre Gode, who has been Mr.
Arnault’s right-hand man for 30 years. “If the family ever wants to leave,
we believe we’re capable of soothing away all these fears that we’re mass
market.”

Mr. Dumas at Hermès says his family will never sell. But neither does he
expect Mr. Arnault to go away quietly. All the family can do, Mr. Dumas says,
is stand firm in what its members see as a battle for the very soul of Hermè
s.

“If it doesn’t destroy us,” Mr. Dumas says, “it will make us stronger.”


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