After taking part in a week-long intensive commercial awareness scheme, I'm going to try a different approach to this post and do a SWOT analysis with a further focus on how to mitigate risk.
A SWOT analysis is a strategic planning technique used to identify Strengths, Weaknesses, Opportunities and Threats related to an event. It is a common tool used when analysing an event or proposed event and takes into account internal strengths and weaknesses, as well as external opportunities and threats to the parties or the event.
Headline: LVMH retaliates against Tiffany by preparing lawsuit.
Main sources: https://www.ft.com/content/a3dcc777-ab12-4ee9-a147-54de1ac0f7e7 (paywall) (dated 9th September 2020); https://www.ft.com/content/d9e6349f-cca8-4245-8b49-cdd55e9ba903 (paywall) (dated 10th September 2020); https://medium.com/swlh/lvmh-and-tiffany-co-s-messy-breakup-332c3af8d6c9 (dated 13th September 2020)
The facts:
In November 2019, Louis Vuitton Moet Hennessey (LVMH) announced it would be acquiring US-based jeweller Tiffany & Co for $16.2b, the largest ever deal in the luxury sector! The deal would pull Tiffanys up from its recent slump, and would add to LVMH's portfolio of brands which is around 75-strong.
But 9 months later, its trouble in paradise!
Earlier in September, LVMH backed out of the acquisition deal because of a "succession of events" that undermined the deal. A major event here was an intervention by the French government which asked LMVH to "take part" in defending the country's interests to counter the tariffs threatened by the US, and to delay the deal until 6th January 2021 [1]. LMVH consulted lawyers and concluded that the request from the French government was valid and one that it could not ignore [2]. As a result of this intervention, LVMH is not able to meet the original deadline of 24th November, but is not going to entertain Tiffany's request for an extension.
The French government announced that it will be introducing a digital business tax of 3% on big tech companies including Apple, Google, Amazon and Facebook - notice how these are all American companies? Perhaps unsurprisingly, the US took this threat personally so threatened a 25% tariff on French products such as perfume, handbags and cheese from 6th January.
In response to LVMH calling off the deal, Tiffanys is filing a lawsuit against LMVH in the Delaware Court of Chancery. They claim that:
no other French company received a similar letter from the government and that LVMH acted in bad faith,
LVMH chairman Bernard Arnault was "dragging his feet" throughout the process,
LVMH failed to secure the required approvals from the EU, Taiwan, Japan and Mexico in the run-up to the deadline date, and
LVMH has got "cold feet" and wanted to exit the deal and needed a reason to do it.
In response, LVMH is preparing a lawsuit claiming that:
Tiffany's had their lawsuit "locked and loaded" and were waiting for the right time to pull the trigger, demonstrating dishonesty from Tiffany's (note to lawyers, DON'T BE THIS!),
Tiffany's 2020 performance was underwhelming and inferior to comparable brands,
Tiffany's handling of the COVID-19 crisis in the distribution of dividends to the Board of Directors was the wrong way to behave, and
that a Material Adverse Effect (MAE) clause can justify LVMH exiting the deal.
MAE means means "any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, results of operations, financial condition, assets, liabilities, or prospects, or (b) the ability of the Seller to consummate the transactions contemplated in an agreement on a timely basis". [3]
Basically, an event that is totally outside the control of the involved parties that means a deal, like the above, can't go through. This event could be terrorism, war, natural disasters, things like that.
An MAE clause typically says that if there is a significant change in circumstances that reduces the value of the target company, the buyer may be allowed to terminate the proposed transaction. But it is a very high threshold and often subject to litigation.
The luxury goods sector is predicted to experience a 20-35% drop in sales and a very slow recovery as an economic result of the COVID-19 pandemic. Tiffany's sales fell by 29% in the 3 months ending 31st July 2020. [4]
It is a possibility that LVMH will use Tifanny's underwhelming financial performance to show that there has been a significant change in circumstances and has reduced the value of Tiffany's as their reason for walking away from the deal and relying on any MAE clause in the acquisition agreement. COVID-19 didn't exist at the time negotiations between LVMH and Tiffany's started, so it will be interesting to see this case evolve as a precedent for using a public health crisis as an MAE.
SWOT ANALYSIS
LVMH STRENGTHS
Brand strength - LVMH is a strong brand with more than 160 years of history. It is easily recognisable because of the logo and monogram canvas on its products. Its following includes celebrities such as J-Lo, Madonna, Sean Connery (RIP), Gisele Bündchen and David Bowie. LVMH has 4,915 stores around the world in 2019, up from 2,314 in 2008.
Strong financial position - LMVH recorded $53.7b revenue in 2019, up 15% from 2018, and saw organic revenue growth of 10% [5]. LVMH consistently posts strong financial performances including good levels of growth. Considering that we are predicted to see a drop in sales of 20-35% in the luxury sector, LVMH appears to be in a good financial position to weather that storm.
Product quality - LVMH can boasts superior craftsmanship in that the materials used are custom-tailored for its elite customers. Their policies of "no discounts or promotions" and "immediate disposal of defective products" give it an edge over competitors in that consumers can be assured that the products will be sold at the high value that is expected of the luxury products and that defective products with LVMH's name attached to them have no right to be in the system and drag the name down.
Style on point - All the products on LVMH's brand and product portfolio showcase the latest fashion and style. Some of the brands include Louis Vuitton, Moët & Chandon, Hennessey, Bvlgari, TAG Heuer, Marc Jacobs, Christian Dior, Belvedere Vodka, Givenchy and Kenzo. These are huge names in the world of luxury clothing, wines and spirits, jewellery, perfume, watches and shoes. The priority of the LVMH Group is to work with the best designers in the industry that give each brand its unique identity.
LVMH WEAKNESSES
The luxury goods sector is vulnerable to economic fluctuations - a good economy can boost sales, but a recession (like this one!) will hinder sales. UK economic output shrank in Q2 2020 by more than 20%, pushing the country into the deepest recession of any major economy [6]. So consumers will be buying fewer non-essential goods and spending more on essentials such as groceries. This means the luxury sector will see a slump in sales, which may continue if more countries announce further lockdowns or restrictions.
Acquisition strategy - Broad acquisition will increase market share, but also lead it to market dominance. Remember Standard Oil? It got so big that it was ordered to split into 34 different companies because it hindered competition in the sector. Broad acquisition means a greater burden should some acquired brands fall into difficulty. Does it mean other brands may need to use some of their own profits to prop up a lagger?
Elite products - Luxury goods will be out of reach for shoppers who can't afford the products. They will likely turn to the knock-off products to give the illusion that they are able to buy luxury goods. But these imitation products hurt the brand image of all brands in the group, and they will also hurt sales. If consumers who shop only based on money can see they can get "near enough" LV handbags from a vendor on the street, then they'll go there instead of the pukka stores!
TIFFANY'S STRENGTHS
Strength of brand and proprietary items - Tiffany's has more than 180 years of history and legacy and consumers liken it to high-quality jewellery with top-notch customer service. Also its proprietary symbol, the robin's egg coloured blue box, is universally recognised by luxury consumers. Tiffany's is also, like Louis Vuitton, associated with elite clients past and present like Lady Gaga, Audrey Hepburn, Jackie Kennedy and Elizabeth Taylor.
Partnerships with designers - Tiffany's regularly collaborates in the designing of its jewllery with named designers such as Elsa Peretti and Paloma Picasso. Tiffany's has been the sole licensee for products designed by Peretti since 1974 and these products have consistently contributed to Tiffany's worldwide sales.
Strong financial position - prior to COVID-19 hitting, Tiffany's financial performance was respectable. Whilst minor losses were reported in 2019 over 2018, net profit margin is higher than the industry average, and debt to equity ratio is lower than the industry average [7]. Though it is likely that sales during the 2020 COVID-19 pandemic will decline due to the spending habits of consumers moving away from non-essential purchases.
Global reach - In 2019, Tiffany's had 326 stores based all over the world, with 94 of those stores being in the US. The company operates through different channels like the internet, retail, business-to-business and wholesale distribution. Telephone orders and catalogues also help sales in several other markets [8].
TIFFANY'S WEAKNESSES
Elite products - Tiffany's products are expensive. likely more than what they are worth! But customers buy the products because of the goodwill and the brand that the company has developed over the years.
Stuck in the same mindset - The designs are iconic traditional American, but the company has stagnated with the brand and designs and so newer luxury brands are getting an upper hand.
Lack of appeal for millennials - Whilst Tiffany's is an established name in luxury items, it hasn't been able to capture the interest of the younger generation who prefer to shop with newer generation brands which have more modern styles suited to their tastes.
OPPORTUNITIES FOR THE ACQUISITION
LVMH acquiring Tiffany's will strengthen its position in jewellery and further increase LVMH's presence in the US. It will also complement the existing brands and products in LVMH's watches and jewellery departments [9].
Further to the above, Tiffany's can increase its presence in Europe if it becomes one of LVMH's distinguished "Houses". The company currently only has stores in London and Paris. LVMH has stores all over the world so this network allows for greater distribution of Tiffany's products.
LVMH has previously demonstrated its ability to turn around Bvlgari and its executives believe that they can do the same with Tiffany's. Tiffany's missed out on the luxury jewellery market surge in 2018, but LVMH believes the brand can be revived.
Reportedly, LVMH is going to leave Tiffany's creative functions to Tiffany's. Instead, LVMH would integrate Tiffany's finance and logistics functions and supply the services of its "digital strategy group" that advises dozens of its brands. The lack of change to Tiffany's creative means the products will still be authentically Tiffany's, thereby continuing with the positive brand image and goodwill it has earned over the years [10].
LVMH has a presence in the hotel industry, so Tiffany's can use that opportunity to get involved there, whether it is having the Tiffany's name on a hotel or having the products on show or on sale in the LVMH-branded hotels.
LVMH can have 1 less competitor in the highly competitive luxury goods sector.
Instead of renting out space to showcase its products, Tiffany's can showcase its products in the stores of LVMH Houses, which can save the brand money that can be reinvested into, say, development of new products.
THREATS TO THE ACQUISITION
The back and forth between the French government and the proposed "tech tax" on the big tech companies, and the US and threats of 25% tariffs on French products, have without a doubt affected the acquisition. Arguably it was the reason behind the intervention from the French government to ask LVMH to delay the deal. We will have to see the outcome of the new tax laws for Big Tech once they have all been agreed upon.
Consumers may not be willing or able to purchase luxury products right now. The COVID-19 pandemic has seen a significant change in the spending habits of consumers. We are predicted to see a drop in sales of 20-35% in the luxury sector, and there are announcements of new restrictions in the UK meaning restrictions on going out and shopping for leisure, and seeing other people whom we can show off our luxury purchases to, and the furlough scheme has been seen as "delaying the inevitable" so we could see more and more workers face redundancies.
The continued sales of counterfeit goods will still cause damage to the brands and their images. Though this is true for any luxury brand.
Increased competition from the more modern and trendy brands that are being bought by millennial consumers. These brands are positioning themselves to be more sustainable in their production methods and materials used, which appeals more to younger shoppers.
HOW TO MITIGATE THE RISKS
Spending habits - since consumers aren't spending on luxury items as much now, brands could introduce discounts on the products to make them more appealing to shoppers, despite LVMH's policy to never offer discounts. They may have to bite the bullet here!
Introduce more affordable products - Another option could be for brands to introduce more affordable products at more affordable prices to appeal to consumers who still want to buy luxury products with a strong brand name but are not spending on luxury products anymore.
Rebrand for the younger generation - LVMH is a strong brand name but it tends to be connected with older generation faces, like the above-mentioned names like J-Lo and Sean Connery. A campaign to make the brands more appealing to the younger audiences will be vital to bring them in. What do younger shoppers care about? Think about things like sustainability and environmental impact of the materials being sourced, embracing greater diversity (more diverse faces of the brands), and their money being spent to be used for a positive purpose such as charitable purposes or promoting equality and diversity.
Strong competition from up-and-coming brands - increasing competition in the industry can be mitigated by increasing efforts into product development and research into what the brands' audiences want right now. The combined resources of all the Houses of LVMH and Tiffany's can give a significant advantage in relation to product development and marketing and advertising.
As for the deal - this is now in the hands of lawyers and we can only speculate as to what is going to happen and prepare for all outcomes. Though I imagine it will become quite a high-profile precedent on the interpretation of MAE and whether government intervention is a legitimate reason to delay a proposed transaction.
Be safe and be well! :)
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Credit - Cover image photo by Korie Cull on Unsplash