Battle Deluxe

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To ensure that he brings in the buzz that drives the biz, Arnault hires edgy, critically acclaimed young designers who never made a centime of profit when they ran their own houses but who excel at engaging, exciting and infuriating the fashion press. Arnault points to John Galliano's spring collections for Dior this year as typical of what he wants from his designers. "His ideas are not meant to be worn," Arnault says of the avant-gardish collection of bag-lady-style ball gowns, "but the ideas descend down to pret-a-porter and to everything in the line. And that's what we sell." So far, Arnault hasn't missed. The hype Dior generated on the runways facilitated the relaunch of the immensely successful and profitable Dior handbag line.

Off the runways, though, LVMH behaves like a cost-conscious maker of discount goods. Arnault has reined in expenses and, wherever possible, combined the production of his swank brands to create manufacturing efficiencies. Guerlain and Dior perfumes share plants, for example, as do Loewe and Louis Vuitton leather goods.

Among high-fashion potentates, Arnault has taken an early lead on the Internet. Individually and through Europe@web, a holding company and incubator of new firms, Arnault has made lucrative early investments in eBay, LibertySurf (a European Internet-service provider) and Nomade (France's top Net portal). Coming soon: eLuxury, LVMH's luxury-goods portal, set to launch this month. "With our brands, we should be able to dominate on the Web as well," Arnault says, adding that he plans to take Europe@web public this year, possibly as early as next month.

Arnault hates to admit it, but he still desperately wants to make Gucci the jewel in the LVMH crown. The leather- goods maker is exactly the type of company Arnault knows how to maximize: a hot name with tightly held licensing and underexploited accessories markets. During the '80s Gucci became an overextended brand synonymous with suburban housewives. Starting in 1994, Gucci's De Sole and Ford began cutting back on licensing while focusing on building up the core fashion and leather-goods businesses. Ford persuaded celebrities like Tom Hanks and Madonna to don Gucci suits, and in just four years, he and De Sole took the company from $250 million to more than $1 billion in revenue.

Both men take great pride in their remaking of the company and were horrified when it looked like Arnault--of whom Ford has said, "We could teach [him] a few things about this business"--would capture Gucci. To fend off the raider, the partners brought in self-made French billionaire Francois Pinault, the owner of Christie's auction house and part owner of Converse shoes, who used a controversial clause in Gucci's bylaws to purchase a 42% stake in the firm for $2.9 billion. Arnault insists Gucci's white-knight strategy was illegal, and the battle for the company is still wending through Dutch courts. (Gucci is incorporated in the Netherlands.)

With that battle raging, Arnault and De Sole clashed last November in a bidding war for Fendi, the maker of last year's to-die-for handbag, the baguette. Gucci's interest in the company probably forced Arnault to pay $200 million more than he would have otherwise before bagging Fendi for $950 million, a steep price for a firm whose net income last year was $20 million. De Sole insists Arnault overpaid for the company. Arnault, of course, vows to work his magic on Fendi. "It's a hot product with limited exposure," he says. "Perfect for what we can do in introducing it to a wider audience."

The immediate challenge for LVMH will be to squeeze more revenue out of its new, high-priced brands while retaining the luxe quality for which those brands are renowned. The specter of overlicensing haunts the fashion industry today, just as it did in the 1970s, when designers Pierre Cardin and Yves Saint Laurent weren't paying attention to where their names appeared and let their logos turn up everywhere, from discount pharmacies to five-and-tens.

Arnault swears that no matter how much he pays for his toniest brands, he will resist the impulse to recoup his investment by degrading them in that way. "If I'm patient, I can make it work at the high end," he vows. Just now there are more brands to buy, more couture houses to take over and more designers to hire. And don't forget, Arnault will remind you, he still has some unfinished business with a little company called Gucci.