LVMH moves towards smaller scale investments

By Carol Ryan | LONDON LONDON (Reuters Breakingviews) - LVMH is coming round to a “small is beautiful” mindset. The luxury group attained its 94 billion euro market capitalisation via an M&A spree a decade ago, but is now changing tack. Investing in small, promising startups is worth a go – but French peers Danone and L’Oreal already tried something similar.

Louis Vuitton Moet Hennessy’s boss Bernard Arnault spent up to 10 billion euros during an acquisitive streak between 2000 and 2015, according to Bernstein estimates, which took in a 3.7 billion euros punt on jeweler Bulgari in 2011 and a 2 billion euro purchase of cashmere manufacturer Loro Piana two years later. But there’s been nothing big since – possibly because of high valuations and fewer tempting targets.

Instead, the group is setting up LVMH Luxury Ventures, which will invest anything between 2 million euros and 10 million euros on stakes in fast-growing companies. The group was already showing a taste for smaller acquisitions, buying German high-end luggage group Rimowa for 640 million euros late last year.

Buying small and cool brands before they eat your lunch has some logic, but it’s not new. Danone and L’Oreal increasingly buy fast-growing, niche companies before they become formidable competitors, because younger shoppers are less interested in mainstream brands. Unilever’s purchases of “green” detergent company Seventh Generation and Dollar Shave Club last year are a case in point.

Still, the new approach at Louis Vuitton’s owner may also signal the growing influence of Silicon Valley hire Ian Rogers, who joined the group from Apple in September 2015 as digital chief. He says trends in the beauty industry are a harbinger of the challenges that all businesses will soon face. Technology and social media are helping niche, internet-based make-up brands win inordinate market share from industry goliaths like Estee Lauder. That threat is now registering on luxury’s horizon.

The good news for LVMH is that it has loads of resources: with store expansions largely over, European luxury brands’ free cashflow should grow by 10 percent this year, according to Bernstein. It generated almost 4 billion euros of free cashflow in 2016, an 8 percent year-on-year increase. The less good news for such a trendsetter is that its strategy is hardly homegrown.