The Logic Behind LVMH’s Phoebe Philo Deal
LVMH’s bet on Phoebe Philo’s new label keeps the star designer in the group’s orbit and gives it a new opportunity to experiment with a digital-first business model.
This week, news of Phoebe Philo’s return to fashion with her own label after a more than three-year hiatus thrilled the industry. But the chic minimalism she brought to former employer Celine — where she delivered a successful reboot for owners LVMH, growing annual revenue from €200 million to more than €700 million by the time she stepped down at the end of 2017 — has earned her a loyal fanbase of “Philophiles” that extends well beyond fashion insiders.
LVMH is backing Philo’s new venture in return for a minority stake in the brand, named simply Phoebe Philo. But the group that skilfully manages giants like Louis Vuitton and Dior has a poor track record with start-ups. Earlier this year, LVMH announced the shuttering of the Fenty fashion label it developed with pop star Rihanna less than two years after launch.
Can Philo’s new brand grow into a business that will move the needle for the world’s largest luxury group with a market capitalisation of almost $400 billion?
Smaller labels often struggle within conglomerates like LVMH for a few reasons. For a start, they are slapped with heavy corporate charges without really benefiting from many of the synergies that can come from being part of a group as their founders struggle to navigate internal politics and bureaucracy. But most of all, smaller labels are starved for attention from senior management, who are naturally focused on the big brands that dominate their portfolios.
For LVMH chief Bernard Arnault, successfully integrating Tiffany, the American jeweller the group recently acquired for $15.8 billion, is rightly top of mind and he is unlikely to have much headspace for the Phoebe Philo label.
At the same time, launching a new fashion brand with a star designer can be a very expensive and risky proposition. There is inherent risk in building a brand around a single individual. Plus, designers like Phoebe Philo come with big expectations, multi-million-dollar salaries, large creative teams and associated sampling and development costs.
Then, there’s the massive marketing expenditure required to generate awareness for a new brand. Even a superstar designer like Hedi Slimane, who has attracted a global following of “Slimaniacs,” is relatively unknown to mainstream consumers. Ditto Philo.
Factor in the high capital expenditure associated with high-gloss physical stores — still critical to the luxury business model — and the scarcity of appropriate retail real estate on the world’s most prestigious shopping streets and, all told, the investment required to launch a new luxury brand in the first few years alone can easily add up to $50 million or more.
Without an existing platform like Celine, which had 120 stores and €200 million in sales when Philo joined in 2008, realising a return on that investment can take a very long time.
Could this time be different?
The rise of digital distribution is a key variable. It’s far more possible to quickly scale a young brand online than in the physical world. The digital-first Fenty misadventure suggests that it’s not easy. But what ultimately sunk the Rihanna venture was a misalignment between the pop star’s fan base and Fenty’s prices. Poorly executed product only deepened the problem.
By contrast, the Phoebe Philo brand, positioned at the luxury end of the market, is a better fit for LVMH’s playbook and may be a safer place for the group to experiment with a digital-first business model. Philo’s famously anti-technology stance may prove a stumbling block, but time away from the industry may also have provided the designer with some new perspective and her strategy for the label could bypass the traditional fashion system and focus on digital channels.
Of course, LVMH may also have other motives for re-aligning itself with Philo. Whether or not the new brand scales, the investment is a smart defensive play. LVMH was surely eager to keep such a talented designer close and out of the hands of rivals. Backing her label may ultimately be a small price to pay for keeping her away from the likes of Chanel, Kering and Richemont, where she could one day prove a threat.
Keeping Philo close also leaves open the possibility that she could help LVMH with a bigger project in the future, energising ultra-luxury cashmere house Lora Piana, which recently launched its first major handbag, for example, or even bringing fresh ideas to one of LVMH’s biggest brands when a creative director vacancy opens up down the road.
Philo has thus far resisted taking on another job as big as Celine — and not for lack of offers. Plus, designing a major brand while simultaneously growing a new label demands almost superhuman, Karl Lagerfeld-like energy and pace that very few in the business have come close to matching. But keeping Phoebe Philo in its orbit offers LVMH unmistakable optionality.
“Keeping her within LVMH is a great move in itself,” said Bernstein analyst Luca Solca. “Having her to contribute to one of the major brands down the road would be a home run.”
