Its Closets Full LVMH decides to return to basics

LVMH’s (the French luxury-good giant) strategy of turning the company into a potpourri of 60 profitable fashion, cosmetics and liquor brands has faltered. A recession has plummeted sales with consumers shying away from the newly acquired lines. Four-fifth of the company’s profit is coming from one brand, the luggage and hand-bag maker Louis Vuitton.

This has called for a strategic about face for LVMH: a back-to-basic focus on top brands, which are driving fashion’s rebound today. It’s the latest restyling for the $100 billion industry, which went on a dramatic spending spree in the 1990s. Back then fashion group icons like Gucci and Prada reasoned that diversification would protect them from the fickle forces of fashion: when one brand lost buzz, another would sparkle. They eyed economies of scale in advertising, shop leases and department-store space. Ultimately, they tried to outbid each other in a brutal race to become the biggest in the industry.

The acquired brands have generally disappointed, however, partly due to a three-year slump and because many were in worse shape than thought. Potential synergies can’t necessarily be realized because brands are wary of sharing factories and stores lest they cannibalize one another’s image. Economies of scale in areas such as advertising don’t compensate for unappealing collections or slow deliveries. Synergies are great, but they don't make a product or a brand," says Gianluca Brozzetti, a former Vuitton CEO who now heads British luxury-goods firm Asprey & Garrard.

The giants haven't abandoned the conglomerate approach. LVMH is trying a tough juggling act -- maximizing profit at Vuitton, while buying time to nurture the fashion brands it considers most promising, such as Fendi and Celine -- all while keeping open the possibility of selling others. This leaves several well-known but struggling brands on the sidelines, including Givenchy, Thomas Pink and Donna Karan.

But, Vuitton faces big challenges. Sustaining growth in the all-important Japanese market -- where Vuitton makes more than half of its $3.7 billion in yearly revenue and where one out of every three women owns a Vuitton bag -- could grow tougher. Also, LVMH executives say that when they bought Fendi, 80% of the brand's stores were not directly owned, and the decision to close many of them - and to reduce the amount of products sold in wholesale outlets - has meant sacrificing short-term revenue for longer-term profitability.

Currently, LVMH is setting out to extend the Vuitton franchise, which had been bolstered further by successful products such as the multicolored Murakami bag. The firm is opening 27 new Vuitton shops this year, double the pace of 2001, and quickening the label's entry into markets such as Russia, India and China.