LVMH shakes up watches and jewellery product-mix and strategy

When it comes to managing its brands, France’s LVMH Moët Hennessy Louis Vuitton likes to take a laisser-faire approach. Autonomy and independence rank highly on its list of priorities. So when in January the group, controlled by Bernard Arnault, the French billionaire, announced a reshuffle of top management overseeing its watches and jewellery division, the luxury industry took note.

Starting this month, Antonio Belloni, the group’s managing director, took on responsibility for the division with an eye to bolstering the jewellery business centred on Bulgari, Chaumet, Fred and De Beers.

As part of the change, Jean-Claude Biver, current chief executive at Hublot, has taken charge of watches, dominated by TAG Heuer but also including Zenith and Hublot.

The changes have taken place at a critical moment. LVMH’s acquisition of Bulgari in 2011 for €3.7bn significantly boosted the luxury group’s watches and jewellery division and accounted for more than a quarter of its roughly €2.8bn annual revenue last year.

But some analysts say the Paris-based group has yet to make the most of the purchase, arguing that the product mix is too thin – and too expensive – while the retail strategy needs a serious overhaul.

Luca Solca, a luxury analyst at Exane BNP Paribas, says, “The Bulgari stores are too big and the sales per square foot are disappointing.”

As for brand positioning, John Guy, an analyst at Berenberg Bank, says that Bulgari was missing its target. “For a long time, there was a sense that the advertising strategy was not aligned with the brand’s heritage,” he says.

LVMH’s watch brands also face challenging times. With about 10 per cent of the Swiss watch market in value terms, the group’s main brands have the scale necessary to compete effectively.

But competitors such as Swatch Group, the market leader with brands including Longines, Breguet and Omega, have more muscle and influence over independent retailers in Asia because they can offer a wider choice of brands, making LVMH’s expansion in Asia more difficult. Meanwhile, manufacturers are investing heavily in their own abilities to produce watch movements following changes in Switzerland’s competition laws, under which the Swatch Group is phasing out supplying rivals.

That poses obvious challenges, says Jon Cox, head of Swiss equities at Kepler Cheuvreux.

“If you want to set up a factory that builds movements, it is very expensive and it puts your margins under pressure,” he says. It is, he adds, also complicated.

“There are 150 or 200 different components, all small and difficult to put together. It is not like Meccano.”

Overall, LVMH’s watches and jewellery division accounts for almost 10 per cent of group revenue but only 6 per cent of operating profit. Most analysts agree that the division has the potential to account for closer to 15 per cent of operating profit.

So what do Mr Belloni and Mr Biver have in mind? Mr Solca says that the plan is to bring Mr Belloni’s organisational skills to bear on Bulgari’s retail operations. Operating profit margins have already improved at the Italian jewellery maker from about 7 per cent of sales in 2007 to about 12 per cent today.

Much of that has come from the obvious synergies of centralising advertising and promotion, as well as LVMH’s muscle when it comes to securing prime retail real estate. But the group has said that it wants to take margins at Bulgari to 20 per cent.

Its revamped store on New York’s Fifth Avenue could be the way forward. Unlike the past when there was a confusing mix of products there is now a clear delineation between watches and jewellery.

Moreover, people with knowledge of the store’s performance say that it had already achieved its full-year 2013 target by mid-November – before the traditionally higher sales during the Christmas period. In an interview with the Financial Times, Mr Biver says that his goal at LVMH’s watches is to outperform the market: “If the industry does three, then I want us to do four or more. If we beat the market, we are successful.”

To achieve that, divisions must develop their presence with single-brand stores using LVMH’s experience in getting real estate. “In multi-brand stores, you can only show the product,” he says. “In our stores, we can show the history, the emotion and the dreams of the brand.”

He insists that investing in watch-movement facilities is critical given the changing industry – to acquire independence from suppliers and rivals and to “give a deeper industrial substance to our brands . . . I believe in the DNA of every brand”. Hublot, for example, is now only 35 per cent dependent on movement suppliers compared with almost 100 per cent a few years ago. “That trend is not going to stop,” he says.

He adds that having your own manufacturing facility is an essential part of the creative process. “How can you create a new alloy if you don’t have a metallurgy department?” he asks. “How can you develop a new screw if you don’t have a screw department?”

Put all of the changes together, and Thomas Chauvet, an analyst at Citigroup, is optimistic about the coming years. “The performance of LVMH’s watch and jewellery brands has not been as consistent as some of its peers, but things are starting to go in the right direction,” he says.

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Turnround specialists: Jean-Claude Biver and Antonio Belloni

When the proliferation of cheap quartz movements in the 1970s and 1980s began to threaten the Swiss watch industry, Jean-Claude Biver took a stand.

“Since 1735 there has never been a quartz Blancpain watch,” read the advertising campaign he launched, while head of the Swiss company that he revived. “And there never will be,” it concluded.

The slogan caught on, not only reviving Blancpain’s fortunes – he bought the name in 1981 for SFr22,000 after the manufacturer had gone out of business and sold it 10 years later for SFr60m – but also marking a turning point for the entire industry.

Little wonder that LVMH, the French luxury goods group, this month appointed him head of its watches division where he will be responsible for developing the group’s Hublot, Zenith and Tag Heuer brands.

Mr Biver, who was born in Luxembourg but moved to Switzerland with his family when he was 10, fell in love with Swiss watches in 1975. That was the year he caught sight of a skeleton watch belonging to Jacques Piguet of the Frederic Piguet movement factory.

“It looked like a steam engine to me. I was totally amazed,” he says. “Then I said to myself, ‘if you loved steam engines as a boy, why wouldn’t you love watches as an adult?’.”

Within a few days, he had found a job at Audemars Piguet where he learnt all aspects of the business – from how to design and make watches to how to distribute and sell them.

The 64-year-old Mr Biver, who has his own cheese label that only supplies friends and restaurants he likes, has spent most of his career as a turnround specialist. His successful revival of the Blancpain brand opened doors at the Swatch Group, which offered him a seat on the board and the mission to rescue the group’s Omega brand.

Thanks to uncanny marketing skills, including celebrity sponsorship and product placement in the James Bond films, profits at the division grew almost 300 per cent.

At Hublot, his next project, profits grew so fast after he joined in 2004 that LVMH bought it in 2008.

His latest role is, therefore, something of a departure. As he says, “I have been used to turning brands into a success. Now for the first time in my life I have to manage three successful brands.”

There are few people as central to LVMH as Antonio Belloni, the group’s managing director. Known to many just as Toni, he has acquired a reputation over his career as a supreme organiser.

But that is hardly surprising – Mr Belloni cut his teeth at Procter & Gamble, joining the US consumer products company when he was just 24. During the following 22 years, he occupied a range of positions in Europe and the US and finally became chairman of P&G Europe in 1999.

At LVMH, which he joined in 2001, he has become the right-hand man of Bernard Arnault, the group’s founder and largest shareholder. Analysts say that his greatest contribution has been in perfumes, cosmetics and selective retailing. Return on net assets – which is used to measure a company’s financial performance – in selective retailing has risen from less than 4 per cent in 2004 to 14 per cent last year, for example.

“Procter & Gamble is a marketing school that teaches you how to relentlessly win market share from competitors,” says Luca Solca of Exane BNP Paribas. “Belloni learned the lesson very well.”

Analysts say that Mr Belloni’s role at the watches and jewellery division is likely to be one of the overarching strategist rather than as a day-to-day manager. LVMH has a reputation for allowing the heads of each of its 60-odd luxury brands to operate fairly independently.

Mr Belloni, who is Italian and studied economics at Pavia University, has a reputation for “ruthlessness in ensuring that the section he oversees runs well”, as one analyst put it.

Perhaps that skill helps explain why he was France’s highest-paid executive in 2009 with a salary of €5.4m, according to local media.

In spite of that, the 59 year old remains intensely private. He is married with four children, played competitive basketball in his younger days and enjoys skiing, golf and scuba diving in his spare time.

One person who knows him describes him as highly personable and always making jokes. He is also refreshingly independent: he sometimes wears suits made by Brioni, which is owned by Paris rival luxury group Kering. He is also said to wear a Rolex.