Deluxe: How Luxury Lost Its Luster (6 page)

Arnault was just as cold-blooded when reorganizing the executive offices. In
1996
, he replaced Parfums Givenchy’s longtime head Jean Courtière with former Procter & Gamble executive Alain Lorenzo, and Parfums Christian Dior head Maurice Roger, known as the “Philosopher-King” for his disavowal of marketing studies, with Patrick Choel, a no-nonsense executive who had worked for Unilever for thirty years, most recently as CEO of Chesebrough-Pond’s in the United States. Not surprisingly, the press dubbed Arnault the “Terminator.” “For a European, I have a U.S. approach,” Arnault explained. “That is, I face reality as it is and not as I would like it to be. I build for the long term.” A longtime colleague put it more succinctly: “[Arnault] is
100
percent capitalist in a country that has never accepted capitalism. And he has rubbed everybody the wrong way.”

The new designers fulfilled their mandate—they grabbed headlines with crazy stunts like the Dior collection of newsprint dresses inspired by the homeless—and the new marketing executives made the most of the hoopla. Not surprisingly, many longtime old couture clients fled to more traditional houses such as Yves Saint Laurent and Chanel.

“There I was sitting in a row of the Dior show with French first lady Bernadette Chirac and former first lady Claude Pompidou, and they looked like they had been hit in the face with a cold dead fish,” New York socialite and lifelong Dior client Nan Kempner told me after a Dior couture presentation of Edwardian-style getups in
1997
. “They couldn’t believe what they were looking at: this conservative house where they’ve all bought their clothes for years. How much was there that Madame Chirac or Madame Pompidou could wear?”

Arnault didn’t care; couture lost money, heaps of it. A new generation of Dior customers flooded the LVMH brand stores to buy something linked to the newly hip brands. Perfume and handbag sales doubled, tripled, and that’s where the big profits were. “Selling to the right clients isn’t an issue anymore,” couture client and American socialite Susan Gutfreund conceded. “When it’s all filtered down, it sells to the masses. You walk through the airport and buy a pair of Dior sunglasses that you can afford and you feel like you have a bit of the magic.”

F
OR MUCH OF THE 1990S
,
Arnault’s only real competitor on the group level was a conglomerate now known as Richemont, the Swiss-based firm that owns Cartier, Van Cleef & Arpels, Dunhill, Montblanc, and Chloé, and is controlled by Johann Rupert, an Afrikaner businessman from Johannesburg, South Africa.

Richemont began modestly: during World War II, Rupert’s father, Anton, took over a small tobacco factory in Johannesburg with two friends. But after the war, Anton’s entrepreneurial skills took over: he licensed cigarette brands from Rothmans, a well-known London tobacconist and, in the
1950
s, went global. In the
1970
s, Anton bought stakes in Cartier and Alfred Dunhill, which owned Montblanc writing instruments. Like Vuitton at LVMH, Cartier became the cornerstone and cash cow for what would become a luxury group. Cartier added a moderately priced contemporary line called Les Must de Cartier, which fueled growth and expansion.

In
1985
, Johann Rupert, a banker who had worked for Chase Manhattan and Lazard Frères in New York and had run his own merchant bank in South Africa, joined the family-run firm. At the time the group was growing rapidly: it acquired Chloé, a fashion house known for its hippie-chic clothes, and Piaget and Baume & Mercier watches. In
1988
, partly in response to trade sanctions against South Africa’s apartheid rule, Rupert reorganized the business. He separated the luxury brands from the family’s tobacco and mining assets, moved them to Luxembourg and Switzerland, and became CEO of the new group. He became chairman of Richemont in
2002
.

Johann Rupert is as elusive as Bernard Arnault is known. He rarely appears in public and grants few interviews. The one time he made headlines in the British papers was for telling Margaret Thatcher to “stop interrupting me while I’m interrupting you.” He travels incessantly, logging seven hundred hours a year on his two company jets. “In order to judge the mood and judge the future, you’ve got to go to the East,” he once said. “You’ve got to go to South America. You’ve got to walk the streets of New York.” He never attends fashion shows. “You are the star,” he explained to Chloé’s chairman Ralph Toledano, “not I.”

When Rupert visits his brands’ stores, it’s informally: he drops in, unannounced and often unrecognized. He gives his CEOs complete autonomy but knows what’s going on. Though his background is in finance, when he meets with his executives, he talks marketing and strategy, not figures. He looks long-term and rarely sells off his brands or trades them like Monopoly properties when they don’t perform. He invests in them, sometimes quite heavily, and waits however long it takes for the return. Most of Richemont’s sales are in jewelry and watches. “We concentrate on style rather than fashion,” he explained. “We do not want to sell things that we have to discount two times a year.”

While Arnault and other luxury tycoons were busy snapping up brands in the late
1990
s, Rupert played the game conservatively. He made two major deals: he bought
60
percent of the legendary Paris jeweler Van Cleef & Arpels in
1999
for $
265
million from the Van Cleef family, and he paid $
1.86
billion in
2002
for three luxury watch brands—Jaeger-LeCoultre, International Watch Co., and A. Lange & Söhne—from Vodaphone. And he acquired controlling stakes in two smaller companies: Old England haberdashery and Lancel luggage. Rupert received—and turned down—offers by Tag Heuer, Ebel, Chaumet, and Zenith; each in turn was quickly picked up by LVMH. “It’s not just about what you buy,” he explained. “It’s also a question of whether you can support the brands you have when times are bad…In my view, you ultimately create shareholder value better by building goodwill, rather than buying goodwill.”

Unlike LVMH, Gucci Group, the Prada group, and other luxury conglomerates that clump their brands together to get better prices for retail leasing and advertising and produce their different brands at the same factories with the same workers, Rupert keeps his companies independent of one another. “Product integrity has to be more important than synergies,” he said. “David Ogilvy [the advertising executive] used to say, ‘The consumer’s not a bloody fool; she’s your wife.’ The consumer wants to know that Piaget watches are made in the Piaget factory. [That’s] what makes it special. Otherwise it’s just another brand.”

The Ruperts own
9.1
percent of Richemont—the rest is traded on the Swiss exchange—and control the company with
50
percent of the voting rights. As a result, Rupert says he does not feel pressure to deliver substantial profit increases each quarter. “We are not in a hurry,” he has said. Indeed, when analysts said he paid too much for Van Cleef, he shrugged. “In five to ten years’ time, it will turn out to be a good acquisition,” he said shortly after the purchase. He is so cautious that banking analysts have nicknamed him “Rupert the Bear.”

The strategy has worked well. In
2005
, Richemont did $
5.25
billion (€
4.31
billion) in sales. Cartier accounts for about half of Richemont’s revenues, and a staggering
85
percent of its operating profits, according to analysts. About
60
percent of Cartier’s earnings reportedly are from sales of watches.

W
ITH ITS BRANDS
growing exponentially, and the money rolling in from the sales of perfume and accessories, LVMH was flush and Arnault was feeling omnipotent. In
1998
, he quietly began to buy up large chunks of stock of Gucci, one of the hottest brands at that moment.

Gucci has had a roller-coaster ride of a history. The company started in
1923
as a small shop in Florence selling imported luggage. As the business grew, owner Guccio Gucci added a workshop to produce his own designs. During supply shortages in the
1930
s, caused by economic sanctions imposed by the League of Nations on Mussolini’s Italy, Gucci started experimenting with new materials like canvas and bamboo, and making smaller items such as belts and wallets. In the
1950
s and
60
s, under the guidance of Guccio’s sons Rodolfo and Aldo, the company flourished; its floral scarves, bamboo-handled handbags, and horse-bit loafers were favored by such icons as Jacqueline Kennedy and Grace Kelly.

The
1970
s brought family infighting and overlicensing of the brand. By the late
1980
s, more than twenty-two thousand products, from cigarette holders to scotch, carried the Gucci name. “It was pretty much trading on its past reputation,” said Brian Blake, who joined the company in
1987
and a decade later became its president. “A very large proportion of business at that time was driven by the ‘interlocking G’ canvas material, which was very inexpensive to produce and had very low price points. No truly discerning luxury goods client would shop at Gucci.” Famed marketing strategist Faith Popcorn put it more bluntly: “When you see [Gucci’s signature red and green] stripe, you want to throw up.”

In the
1980
s, Rodolfo’s son Maurizio took over the company, and brought in Domenico De Sole, an Italian-born, Harvard-educated lawyer at a top Washington law firm, as president and managing director of Gucci America to right its course. Over the next few years, De Sole fired
150
of Gucci’s
900
employees, hired managers with serious retail experience, brought distribution in-house, reined in licensing, and bought back franchises—in effect, applying Henry Racamier’s model of vertical integration. In
1989
, Maurizio convinced legendary retailer Dawn Mello to quit her job as president of Bergdorf Goodman in New York and become Gucci’s creative director in Milan. Mello discarded most of the existing products and hired a new design team, including Tom Ford, a twenty-nine-year-old former model/actor who studied interior architecture and had a few years experience in the Seventh Avenue rag trade, to revive and update great old classics as well as create a sleeker image for the house. “The bamboo-handled knapsack was the first thing I did when I came to Gucci,” Ford told me. “The first
day.
”

Gucci had a new staff, a new look, and a new business plan. But it wasn’t enough. Maurizio’s astronomical spending combined with an economic downturn caused by a war in the Middle East and a recession in the United States—both big Gucci markets—nearly did the company in. Losses were reportedly $
102
million between
1991
and
1993
, and the company was on the verge of bankruptcy. Investcorp, a Bahrain-based investment group that had bought out a number of family members in the late
1980
s, paid $
170
million for Maurizio’s remaining
50
percent share in
1993
. A year and a half later Maurizio was shot dead in Milan by a hitman hired by his ex-wife. Mello left, Tom Ford became creative director, and De Sole was named chief operating officer of the company.

One of De Sole’s first moves was to drop the price on all Gucci products by
30
percent, putting them lower than Chanel and Hermès and on par with Louis Vuitton and Prada. Then Ford worked his creative magic to draw the public to Gucci. When he presented the first Gucci collection under his complete control in March
1995
, he shattered Gucci’s staid aristocratic image and established a more modern and blatantly sexy voice. “Before I sent that first women’s show down the runway with the hip-hugger pants and the metallic shirt, I remember being so terrified because it was a dramatic change,” Ford told me in
1996
. “I really had to rethink Gucci, and what Gucci should be. And a lot of [editors and retailers] said, ‘Oh, it’s great, but it’s not Gucci.’” It didn’t matter. The public loved it. Gucci sales shot up from $
264
million in
1994
to $
880
million in
1996
. Smaller houses and mass-retail chains like Gap and Zara followed Ford’s design lead. Investcorp floated Gucci on the stock market, making it one of the most successful initial public offerings in fashion ever.

Back in
1991
, Arnault had taken a good long look at Gucci with the idea of buying it. But after reportedly doing a great deal of due diligence, he backed off, telling associates that the brand wouldn’t go anywhere. Instead Arnault watched it blossom into a star brand, and now he wanted it, badly. In early
1999
, after quietly spending $
1.4
billion to buy
34.4
percent of Gucci stock—
10
percent of which he purchased from Prada—Arnault launched a takeover bid. Tom & Dom, as Ford and De Sole were known in the fashion press, fought back. Arnault was called “the wolf in cashmere” and “a snake.”
Women’s Wear Daily
dubbed the confrontation “The War of the Handbags.” Ford threatened to quit if Arnault succeeded in his takeover; the clause in his contract that allowed this quick exit was called the Tom Bomb. De Sole declared, “Arnault is trying to steal this company.”

On Friday, March
19, 1999
, it all came to a head. At
8:30
a.m., Arnault held a meeting of his top executives at the Disneyland outside of Paris. After that, he was to meet with De Sole again. But De Sole had other ideas. He and Ford called a press conference in Paris to announce the formation of Gucci Group with the help of their white knight—and Arnault rival—François Pinault, a French financier who controlled a group called Pinault-Printemps-Redoute (PPR), which included the auction house Christie’s, the Printemps department store chain, and La Redoute catalog. Pinault bought
40
percent of Gucci, for $
2.9
billion—or $
75
a share, $
10
less than Arnault was willing to pay. Pinault also bought the Yves Saint Laurent Rive Gauche ready-to-wear and cosmetics companies for $
1
billion. Arnault said he found the move “stupefying.” “[Pinault] came to my home with his wife, and my wife was seated next to him at the wedding of his son,” Arnault whined to
Women’s Wear Daily
. He was particularly bent out of shape that Pinault didn’t have the good grace to consult him first on the deal.