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American firms like Ralph Lauren, Donna Karan and Calvin Klein are finding it increasingly difficult to compete against these global luxury superpowers. Tommy Hilfiger's stock has also lost luster (see box). So has Kiehl's, a 149-year-old posh beauty brand that was acquired last week by French global giant L'Oreal. In February, Klein, noting the sums Arnault has been paying and the increasingly treacherous fashion market, also put his company up for sale. Potential suitors--LVMH and Gucci among them--have shied away from Klein's privately held company because its licensing agreements would deny a buyer dominant control of its product lines.
And Arnault craves control above all else. Dubbed the "Wolf in Cashmere" by the European press, he is much more than a corporate raider of the runways. He is also the first reality-based fashionista, who pays as much attention to manufacturing costs as to designer trends. It is fitting: Arnault conducts business amid a backdrop of gallons of perfume rather than racks of couture outfits, because fashion is a sinkhole. You don't make profits from the glitzy couture collections, no matter how many lunching ladies and OPEC princesses visit your atelier.
Arnault has built an empire on the premise that high fashion is a marketing tool for selling handbags, shoes, makeup and bottles of J'adore. He views the gaudy, celebrity-driven Paris collections as spendy advertisements for his handbags and scents. No other design house has harnessed its collections so firmly to the task of moving mountains of leather and tubs of cosmetics.
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.