The rivalry between Gucci Group and LVMH is well-known, well-documented and, well, complicated. The two firms sit astride the luxury goods industry like Montagues and Capulets, proud and powerful houses forever trying to one-up each other, constantly vying for the talents of some comely new prince or princess. Their mutual hostility sprang from what most in the industry consider to be a thwarted takeover attempt of Gucci by LVMH. (Arnault maintains he was never interested in acquiring Gucci.) In 1994, Arnault was offered the opportunity to buy Gucci, a rather down-on-its-luck brand, for $400 million. He turned it down. But five years later he spent $1.4 billion building up a 34% stake in the firm and proposed an offer for the rest of the shares that would have valued Gucci at more than $8 billion. How a $400 million reject became a highly desirable $8 billion company is one of the greatest comeback stories in the fashion business. De Sole and Tom Ford, Gucci's creative director, pulled off a brand revival so remarkable that any luxury goods firm attempting a turnaround is said to be trying to "do a Gucci."
There's a downside to their success: unwanted advances from Arnault. That's where Pinault came in. As head of Pinault-Printemps-Redoute (PPR), he bought $3 billion of newly issued Gucci stock in 1999, acquiring a 42% share in the company. Pinault saved Gucci from a possible takeover; then he acquired Sanofi Beauté, which owned the Yves Saint Laurent brand, and sold it to Gucci two days later — turning Gucci instantly into a multibrand company with ample resources to grow. LVMH sued, claiming the deal was unfair to minority shareholders. The case is still ongoing. On March 8, a Netherlands court ordered an investigation into Gucci's management practices at the time of the deal with PPR. Last week both Gucci and PPR said they would appeal. Nevertheless, Gucci now stands as LVMH's No. 1 competitor. "It was Bernard Arnault's worst nightmare," says De Sole. "Before us, he was the only game in town. He got any manager, any designer he wanted. He wanted to squash the competition, and instead of dying we got stronger."
That rivalry is fierce. "We compete for everything," De Sole says. "We compete for stores, for talent, for brands." They also compete for publicity. Here, anyway, Arnault's LVMH team has had the upper hand. Last month, for instance, as the fashion élite were gathering in a purple-lit tent in the garden of Paris' Musée Rodin to see the Yves Saint Laurent fall collection, the publicity office at LVMH was faxing journalists to announce that a little-known Welshman named Julien Macdonald would be the new designer at Givenchy. Rumor has it that the talks to sign Macdonald were completed at 2 a.m. that morning. Why the rush? To steal the YSL show — and it worked. Givenchy was the lead story on key fashion pages the following day.
And in January, the day after Ford showed his first men's collection for Gucci's Yves Saint Laurent, the reclusive Saint Laurent himself appeared at the Christian Dior show, sitting next to Dior's owner, none other than Monsieur Arnault. Another headline lost. But De Sole is philosophical. "I thought it was sort of silly," he says. "In the French press it looked like a war, but the fact is, outside of fashion nobody cares."
What the outside world does care about is results. Gucci is sitting on $3 billion in cash, has next to no debt and its shares are worth $9 billion. In addition to Yves Saint Laurent and its cosmetics offshoot YSL Beauté, it has acquired French jeweler Boucheron. It also has controlling stakes in Sergio Rossi, Bottega Veneta, Swiss watchmaker Bédat & Co. and, in one of its latest moves, Alexander McQueen, the talented designer who for the last five years had been designing Givenchy for — guess who? Arnault.
More coups are in the works. According to well-placed sources, Gucci Group will soon announce that Stella McCartney, Paul and Linda McCartney's talented daughter, is launching her own label under the group's auspices. What's more, the red-hot designer Nicolas Ghesquière will also join Gucci, bringing along with him Balenciaga, the legendary haute couture house where he made his name.
Not bad, considering that less than two years ago the Gucci Group was pretty much only Gucci. Of course, the firm's line of shoes, handbags and ready-to-wear is still far and away its dominant business, with $1.5 billion in sales and $404 million in operating profits last year. The No. 2 earner, YSL Beauté, contributed just $43 million to the bottom line.
Arnault is even more acquisitive. Since he took control in 1990, LVMH has bought dozens of brands. For instance fashion labels Kenzo, Celine, Loewe, Pucci and Donna Karan; the cosmetic company Fresh; Guerlain, Dior and Givenchy perfumes; French department stores (like La Samaritaine); a duty-free service provider for cruise ships (Miami Cruiseline Services); and expensive watches (Ebel and TAG Heuer). And he can wash them all down with his Dom Perignon, Moët & Chandon and Krug champagnes. Overall, LVMH controls 19% of the luxury leather goods and accessories market, making it No. 1 in the field. And more than half its operating earnings, $1.2 billion in 2000, come from just one brand: Louis Vuitton. If anything has been neglected in this frenetic buying spree, it is profits from the new labels. When Arnault presented his 2000 results — $2 billion in earnings on sales of $10 billion — in Paris' George V Hotel, he said the company would be focusing on internal growth — not acquisitions — in 2001. It was the message many were waiting to hear.
"Louis Vuitton is a fantastic cash developer," says Anne-Catherine Galetic, a luxury goods analyst at Schroder Salomon Smith Barney, "but LVMH needs to decide what the next big one will be." Arnault has been frequently criticized for buying brands and failing to manage their development. Despite the talented designers he has hired — Michael Kors at Celine, Narciso Rodriguez at Loewe — none is contributing significantly to the group's bottom line. As one disgruntled LVMH manager says, "Why buy brands and put them in the fridge?"
Not surprisingly, that manager has just jumped ship to join Gucci Group. He'll be in good company. Last year, De Sole hired key executives away from Prada, Bulgari and Celine. The appeal, he says, is the free-wheeling, performance-focused American management style in place at Gucci. "I get all the best people," De Sole brags. "People like to work at Gucci. And we pay them better too."