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Group seeks to trim exposure to Thyssenkrupp deal struck just as pandemic began

Cinven has told investors in its latest private equity fund that it may be stuck with an outsized stake in Thyssenkrupp’s lifts business for longer than is allowed under its agreement with them, according to a document shown to the Financial Times. 

The UK private equity group has been trying to cut its exposure to the €17.2bn acquisition, one of the largest ever European buyouts. The deal was agreed in February just as the coronavirus pandemic hit the global economy.

Cinven and Advent, the private equity group it teamed up with to buy the business, have been trying to recruit more equity investors to avoid being left holding too big a stake, which could weigh on their funds’ performance and leave them with less money for future deals. 

Cinven usually holds a maximum of 15 per cent of its fund in any one company but the Thyssenkrupp deal would drive it above that. Any investment above that threshold usually has to be sold down within a year.

Now it is asking investors to allow a rule change so it can invest more than 15 per cent of its €10bn fund in the company for more than a year, to give it more time to sell some of the equity.

The groups plan to fund the acquisition with about €7bn in equity and the remainder in debt. 

Executives at the buyout groups have also considered selling the lifts business’s Access Solutions unit, two people familiar with the matter said.

A sale of the division, which makes stairlifts and platform lifts that are installed in wheelchair users’ homes, would reduce the groups’ exposure to the elevator deal. 

However, in recent weeks some would-be buyers have been told that the private equity groups — which have not yet completed the acquisition — are not planning at present to sell.

“They’re working on every piece of the puzzle to take down the risk,” one private equity executive said.

Advent and Cinven declined to comment. 

“There’s always one deal done at the very peak — this is the worst possible timing,” another person familiar with the deal said. “Nobody knew what was going to happen . . . [there’s] a huge equity cheque, a huge multiple.” 

One pension fund manager, who was offered equity in the deal by Advent and Cinven after it was struck in February, said it was too risky. “There was hardly any appetite,” the person said. “It was such an expensive [deal]. It was agreed upon prior to Covid.” 

While the buyout groups see the business as relatively recession-proof because of its long-term contracts to service and maintain lifts, the pension fund manager said that may not hold true in a serious downturn. “If the owner of a building is bankrupt, what’s the value of the [servicing] agreement?”

The debt used to fund the deal will be about eight times the business’ earnings, one of the highest levels recorded on a large European private equity buyout in recent years. 

Advent’s investment committee assessed the possible impact of the virus shortly before committing to the deal, people present said at the time. They were reassured by the fact that lifts were still being serviced in downtown Wuhan during its lockdown, a sign of the business’s resilience, those people said.

The battle to offload risk does not necessarily imperil the deal, which is due to complete later this year.

“We still don't see any risk” that the deal will not go through, said Martina Merz, Thyssenkrupp’s chief executive, on a call with journalists in May.

Advent and Cinven have raised more than €2bn in equity from investors including the Abu Dhabi Investment Authority and Singapore’s sovereign wealth fund GIC, people familiar with the matter said. Those groups agreed to be involved before the deal was struck.

The family-controlled French giants are well positioned to further dominate the luxury fashion sector. But neither can afford to ignore the threat of disruption.

PARIS, France —As the coronavirus pandemic’s long-term toll began to reveal itself, the fashion industry showed a rare semblance of solidarity. During one week in May, two groups of designers, executives and retailers published proposals to fix a broken system that relies on antiquated rules in order to buy, sell and market goods.

One, led by Belgian designer Dries Van Noten, urged the industry to say no to early-season discounting and move the delivery schedule back a few months, making warm-weather clothes available in warm-weather months, and cold-weather clothes in cold-weather months. Another, dubbed #rewiringfashion and facilitated by BoF’s Imran Amed and Tim Blanks, took things further, calling for a shift of the entire fashion calendar, starting when clothes are presented to buyers, press and consumers and ending when they are put on discount.

The efforts gained widespread support, with more than 1,500 industry figures, from Proenza Schouler designers Jack McCollough and Lazaro Hernandez to Bergdorf Goodman’s Linda Fargo, signing the #rewiringfashion petition. But missing from the conversation were many of the most powerful brands in the world, including Prada, Hermès and Chanel, as well as those owned by multinational conglomerates LVMH and Kering.

When they first assembled, these independent groups did not invite the heavy hitters to join in their conversations, mostly because they're facing two very different realities. Many of luxury’s top players don’t need things to change so quickly. The current system, with all its faults, has worked well for them. They sell most of their goods directly to the consumer, which means they don’t have to go on discount if they don’t want to. They increasingly own — or at least control — their manufacturing, which means they can choose when to ramp up production or when to slow it down. They can stage a runway show any time of the year they’d like, and are able to put enough marketing dollars behind it to make it worthwhile. Their finances give them the freedom to do as they please.

However, as conversations advance, the megalabels are announcing plans that so far align with the independents. Kering-owned Gucci recently said it would go "seasonless," scaling back to two fashion shows per year, while Saint Laurent — also owned by Kering — said that it would skip fashion week this fall, planning instead to show at a yet-to-be-determined time when it makes the most sense for both the brand and its customers. No LVMH brands have made announcements, but the group has recently joined in the discussions already underway.

The independent players know that if they really want things to change, especially when it comes to the fashion week calendar, they won't be able to do without the support of the strategic groups. In an industry in the midst of major consolidation, that's who holds the cards.

LVMH and Kering’s primary battleground is the market for personal luxury goods, worth €281 billion (about $311 billion at current exchange rates) in 2019, according to Bain & Company. A back-of-the-envelope calculation finds that about 40 percent of the market last year was controlled by five companies — LVMH, Kering, Richemont, Hermès and Chanel. To come to this number, BoF took the direct-to-consumer sales of each company and added them to an estimate of retail revenue from wholesale partnerships. The market share, in reality, is probably larger.

The two conglomerates came to dominate the category over the last three decades by snapping up dusty, family-run fashion and leather goods houses and transforming them into global brands backed by corporate infrastructure and large sums of capital. This allows them to control their own supply chains, recruit top talent, develop the most sophisticated marketing and advertising strategies and spend handsomely on prime release estate.

For instance, in the early days of 2020, LVMH made headlines for offering to pay record rents for new Dior and Fendi stores in Milan’s historic Galleria Vittorio Emanuele II shopping arcade. After winning a public auction, Dior will pay €5 million (about $5.5 million) a year for its space, while Fendi will pay €2.4 million (about $2.6 million). The current tenants, smaller Italian rivals Versace and Armani — two global fashion brands with roots in the city — simply could not compete with these bids.

Of course, those bids were placed before the outbreak of a novel coronavirus became a pandemic, killing hundreds of thousands of people, leaving millions others unemployed and forcing the global economy into a severe recession. Today, in the age of Covid-19, the LVMH and Kering empires are being put to a great test. The luxury sector is forecasted to contract by up to 39 percent this year, according to BoF and McKinsey & Company’s Coronavirus Update to The State of Fashion 2020. Retail stores across the world were shut down by government-enforced lockdowns and, while consumers in most places were able to shop online, many simply didn’t want to — or could no longer afford non-discretionary purchases.

That lack of consumption has already hit the industry hard. Fashion brands and retailers encumbered by debt are closing. Factories are panicking, waiting on payments while sitting on goods that were produced pre-crisis. While China’s re-opening in early April has provided a glimmer of hope, the outlook remains uncertain, with consumer spending in the country down 7.5 percent from a year earlier. Chinese consumers are by far the biggest driver of growth for luxury, but much of their money is spent during overseas travel, which has effectively stopped. The tourism industry is projecting a recovery timeline of three to five years, and shopping habits — including Chinese spending money abroad while travelling — may never return to normal. Morgan Stanley projects that LVMH’s organic sales will decrease by 49 percent in the second quarter of this year, versus 17 percent in the first quarter, with annual sales down 18 percent and EBIT (earnings before interest and taxes) down 22 percent.

As a result, stock prices have taken a hit. As of May 25, LVMH’s share price was down 13 percent from the beginning of the year, while Kering’s was down 26 percent. The CAC-40 Index, which includes 40 of the most important stocks traded on the Euronext Paris, was down about 24 percent year-to-date.

The strategic groups' relative resilience has made analysts confident in the long-term health of both businesses. In luxury, like other industries, only the strong — those with the tightest production lines, the biggest networks and the most cash — will endure. And if any companies are going to emerge from the coronavirus pandemic more powerful, it’s LVMH and Kering.

Just as the FAANG companies (Facebook, Amazon, Apple, Netflix and Google) have come to dominate not only their own industry — technology — but also culture and commerce, LVMH and Kering have done something similar in luxury. “Luxury is Europe’s big tech,” said Scott Galloway, a professor of marketing at New York University’s Stern School of Business. “Consolidation like that is very hard to reverse.”

Before any of this happened, the luxury fashion industry was already consolidating around a handful of key players, including independent operators Hermès and Chanel, as well as strategic groups including Switzerland’s Richemont — which owns Cartier and Chloé — Italy’s OTB Group, owner of Diesel, Maison Margiela and Marni, and newer US-based firm Capri Holdings, which controls Jimmy Choo, Versace and Michael Kors. But none is as mighty as the two dominant groups.

“LVMH and Kering have built a competitive advantage that will just increase over time,” said Mario Ortelli, managing partner at Ortelli & Co., a strategic advisory. “It’s very difficult for anyone else to catch up.”

The Genesis of Modern Luxury

The rise of LVMH and Kering tells a fairly neat-and-compact story of the formation of the modern luxury industry. Owning and displaying luxury goods has long been a way to communicate social status, but 20 years ago, it just wasn’t as common to possess a Louis Vuitton bag or a Gucci watch if you were middle class. The concept of masstige — or shiny, luxury-branded products that a large constituency of consumers can afford, or at least feel comfortable charging to their credit card — was only in its infancy.

With the revival of old houses, that began to change. While the Chanel flap bag was invented in 1929, it didn’t go mass until Creative Director Karl Lagerfeld embedded an interlocking CC into the closure in the 1980s. In 1994, the house of Dior introduced a quilted, top-handled rival to Chanel’s flap, and called it the Lady. But it was the introduction of Fendi’s baguette in 1997 that marked a turning point. Created by Silvia Venturini Fendi, who was inspired by a skinny bread loaf, the clutch became a status symbol in popular culture, imortalised in the HBO television series “Sex and the City.”

In the early days of these house revivals, companies relied on new interest from European and American consumers, as well as the Japanese market, which became important to luxury from the 1970s when the country’s economy experienced tremendous growth.

The Arnault family, which controls LVMH and its 70-strong brand portfolio, didn’t start in luxury, but in real estate. Its construction business shifted into the buying and selling of property in 1976. But by 1984, patriarch Bernard Arnault, the current Chairman and Chief Executive of LVMH, had bought the company that owned both Christian Dior and Le Bon Marché. Arnault didn’t create LVMH — Alain Chevalier, chief executive of Moët Hennessy, and Henry Racamier, president of Louis Vuitton did — but he gained control of the business in 1989 after buying up shares over the course of two years. It would take another decade for Arnault’s playbook for reviving brands to coalesce, but he certainly took more than a few cues from Chanel, which was already on its way to building a global powerhouse.

Under Lagerfeld, Chanel devised a product pyramid still used by luxury brands today, one that takes brand heritage — which helps to earn the consumer’s trust — and melds it with relevance, which helps create desirability. At the top of the pyramid is couture, followed by ready-to-wear, then shoes and handbags, then sunglasses and other entry-price accessories, then finally fragrance and makeup. (In more recent years, streetwear — sneakers and t-shirts — has also been layered in.)

Couture sold the dream, as French fashion executives like to say, while the accessories, fragrance and makeup generated the cash.

In the mid-1990s, Arnault began pairing his heritage brands with young, lauded talents, fueling a cult around his creators: John Galliano at Givenchy (1995) and then Dior (1996), Alexander McQueen at Givenchy (1996), and Marc Jacobs at Louis Vuitton (1997). He did away with the cheap licensing deals done in the 1970s when the bottom fell out of the couture business and started building up these labels again from scratch, working to create a myth and product hierarchy as strong as Chanel’s. (In the early 2000s, he would also buy Italian furrier Fendi, where Karl Lagerfeld had been creative director for more than 50 years.)

At the same time, a rival was forming in Italy. The Gucci Group, brainchild of business executive Domenico De Sole and his creative partner, Tom Ford, took a slightly different approach, starting with Gucci and adding a mix of heritage and emerging houses, including Yves Saint Laurent — called “fashion’s biggest prize” by journalist Suzy Menkes — in 1999, Alexander McQueen in 2000 (who by that time had exited LVMH) and Stella McCartney in 2001.

Two Rival Groups

In the late 1990s and early 2000s, LVMH and Kering — then known as PPR — tussled for several years over the acquisition of the Gucci Group. PPR was founded by François Pinault, a French businessman who started in the lumber trade but moved into retail by the late 1980s, buying up French department store Printemps, electronics retailer FNAC and others. The company increased its stake in Gucci Group to 42 percent in 1999, with the intention of fending off a “creeping takeover” by LVMH. (Over the years, Arnault has tried similar tactics with Hermès — to no avail — and won LVMH this way in the first place.) At one point, De Sole wanted to make a deal with LVMH, but Arnault rejected his proposal.

This was no quiet battle. (“One of the most bitter fights in corporate history,” wrote Suzanne Kapner in the New York Times.”) PPR played the white knight by sweeping in and making a deal that was much better for the Gucci Group than what LVMH was offering. De Sole and Ford would be given the opportunity to operate somewhat independently from the rest of the group, while a partnership with LVMH could mean the dissolution of their current operational structure.

PPR won Gucci Group for a little under $9 billion, though Ford and De Sole exited in 2004 after it fully acquired the business. But there’s no denying that Arnault’s decision to reject De Sole’s offer was a turning point for the luxury industry, paving the way for two rival groups, even if one was 20 years ahead of the other.

“Rather than putting an end to the feud between Mr. Pinault and Mr. Arnault, the deal that was signed at 3 a.m. today in Paris is merely the closing of one chapter in what analysts predict will be a long and juicy tale,” the Times wrote. “In addition to competing for acquisitions and design talent in the world of high fashion, the two men will still face each other in other industries, including telecommunications, publishing, art and wine.”

What LVMH and PPR now had were a stable of luxury brands, constructed around cash cows Louis Vuitton and Gucci, respectively. They were best positioned to take advantage of the opportunity ahead.

Big Luxury Takes Flight

In the aftermath of the 2008 financial crisis, the fashion industry underwent its biggest transformation yet. As the gap between the rich and poor increased — in 2020, 70 percent of the global population lives in countries where the wealth divide is widening — fashion brands at the high end (luxury) and low (discount and fast fashion) continuously won out over the once-dominant middle market.

Suddenly, it wasn’t just older, wealthier people buying luxury goods, but young consumers, too, whose post-recession spending habits were focused more on personal extravagances than ever before. While Generation X scoffed at the transformation of counter-culture Baby Boomers from hippies to money-driven conservatives in the 1980s, deeming it deeply uncool, Millennials and Generation Z embraced consumerism without irony. They often prioritised shopping for material goods over investing in items that were once considered the building blocks of an optimal life. Rent the house instead of taking out a mortgage, call the Uber instead of owning a car, buy the Gucci loafers.

That shift in priorities in the West, combined with the rapid acceleration of new wealth in China, has afforded luxury brands the ability to grow at lightning speed. Last year, Chinese consumers accounted for 35 percent of the market overall and 90 percent of global market growth, according to Bain. (By 2025, Chinese consumers will account for half of spending in the category.) Other growth markets — in particular, the Middle East, Korea, Russia, Brazil and India — have also played an integral role.

In 2019, Kering-owned Gucci generated €9.6 billion (about $10.5 billion) in sales, up 317 percent from €2.3 billion (about $2.5 billion) in 2009, when the group was still called PPR. While Kering has pruned its portfolio over the past decade to focus solely on personal luxury goods — fashion, accessories and jewellery — its share price increased to more than €561.60 (about $621) at the end of 2019, up 836 percent from €59.99 (about $66) in December 2009.

LVMH, which is more than three times the size of Kering, has broadened its areas of interest, buying up companies that deal in hospitality and hard luxury, including Belmond hotels and Italian jeweller Bulgari, among others. In 2019, it generated €53.7 billion (about $58.9 billion) in sales, up 214 percent from €17.1 billion (about $18.8 billion) a decade earlier. With several major acquisitions, including the integration of Dior into the main business in 2017, its share value has also increased dramatically to €404.50 (about $447) at the end of 2019, up 540 percent from 63.13 (about $70) in 2009.

Much like their customers, luxury’s rich have only gotten richer, while it’s harder than ever for less-well-off competitors to succeed. In 2019, 97 percent of economic profits for public fashion companies were earned by just 20 corporations — including LVMH, Kering, Hermès and Richemont — according to McKinsey and BoF’s State of Fashion 2020 report.

The Little Victims

Consolidation is natural. It makes industries more efficient. The luxury industry, with its handful of major players, is in the third stage — or the “focus” segment — of the process, according to a 2002 Harvard Business Review article on the theory of the “consolidation curve,” written by three executives from consulting firm A.T. Kearney. “This is a period of megadeals and large-scale consolidation plays,” they said. “The goal is to emerge as one of a small number of global industry powerhouses.”

Kering and LVMH, first movers in personal luxury goods, have used their profits to strengthen their positions.

As they’ve grown in scale, LVMH, Kering and Richemont — along with fiercely independent, family-controlled players Chanel and Hermès — have worked to gain as much control as possible over their businesses, building vertically integrated operations by buying up factories and opening new ones, but also taking more of their sales direct to customers, controlling the best real estate in high-end malls and on major retail streets. Through partnerships with top fashion and business universities, as well as competitions like the LVMH Prize, they have also built pipelines that allow them to recruit and retain top creative and executive talent.

Chanel and Hermès have managed to maintain their position versus LVMH and Kering because of the strength of their brands and their robust operations. Most importantly, they began scaling long before the two strategic groups were even formed and remain large enough to fend off unwanted interest from potential acquirers. They also both started buying suppliers and factories years ago, and Chanel — the largest luxury brand in terms of volume, with more than $11 billion in annual sales — has always directly owned its beauty and fragrance business, the biggest driver of topline revenue. Additionally, they have the backing of families that seem, for now, wholeheartedly dedicated to remaining independent.

But for most other brands, LVMH and Kering have made operating solo incredibly difficult.

Consider the case of Stella McCartney, who learned the hard way how difficult it is to be independent when she separated from Kering, her longtime financial partner, in 2018. The decision was hers, but with sales under €300 million (about $329 million), the designer’s nearly 20-year-old brand was never a significant source of revenue for the group.

Less than a year after the split, she found herself in the arms of LVMH. Arnault certainly didn’t need McCartney to grow his business. But he could benefit from her knowhow and authority when it came to the sustainability conversation, a burgeoning battleground in which Kering was seen to be ahead of the curve. McCartney’s motivations were pragmatic. She needed the support that comes with being in a group — managing global distribution, IT, human resources and other functions — to seriously compete, and would also have the ears of the most powerful man in fashion when it comes to driving the sustainability conversation.

Antoine Arnault, the second of Bernard Arnault’s children from his first marriage, insists that there is room for independent players, and that LVMH fosters their development by recruiting young designers — who sometimes go on to launch their own brands — or by sponsoring young upstarts through the LVMH Prize. Or, as with the case of Jonathan Anderson and, before him, Marc Jacobs, funding a small brand so that its designer can front one of the company’s marquee brands.

“When we look at the industry as a whole, we need those younger, smaller brands to exist, to create interest into the market,” Antoine Arnault said. “If you only have three big TV channels, isn’t it going to be a little boring?”

“We buy smaller brands, we don’t only acquire brands such as Tiffany or Belmond,” he added, mentioning the McCartney partnership. “Everyone can play his part in this big game… clearly we are playing our part well.”

Kering Chief Financial Officer Jean-Marc Duplaix echoed that sentiment. “There is still room for small brands or emerging brands, but these brands have to accept that they need to grow and develop quite slowly,” he said. “They should be focused on certain categories, as the cost to expand is very high.” However, he also noted smaller brands can be a distraction for a group: “I’m not sure that the recipe can really work.”

Kering has backed away from these sorts of investments, selling its majority stake in Christopher Kane back to the designer in 2018 and instead using Artemis, the family’s personal investment arm, to make smaller bets on rising labels like Giambattista Valli. (However, Kering still owns a significant minority interest in American brand Joseph Altuzarra.)

As McCartney learned, if you do want to build a global luxury fashion business, doing so without the help of one of these groups is now practically impossible. Even other groups are struggling to compete against such colossal operations.

The Big Victims

It’s not just independently operated firms that are threatened by LVMH and Kering. Richemont SA, best known as the market leader in hard luxury as the owner of Cartier and Van Cleef & Arpels, is the third member of luxury’s Big Three. But the cash-rich group has had difficulty keeping up with its rivals. For one, it has never been able to crack the fashion category, lacking the necessary knowledge on how to make, market and distribute soft goods. Now, its collection of fashion brands — including trend-sensitive Chloé and connoisseur-favourite Alaïa — are often pushed aside on retail floors by their stronger, more aggressive competitors despite their tremendous potential. (It’s telling that Chloé was the first major label to join Van Noten’s recent efforts to fight discounting.) Other major brands, including Prada, Ralph Lauren and Burberry, face similar challenges. As does Mayhoola, the Qatari-backed investment fund that owns Balmain and Valentino.

More recently, Richemont has struggled to maintain its position as the leading seller of fine jewellery, as both LVMH and Kering have made significant inroads in the category. LVMH’s expected $16.2 billion acquisition of Tiffany, combined with its $5.2 billion majority stake in Bulgari in 2011, has positioned it as a real competitor in the space.

To maintain a competitive advantage, Richemont has invested in multi-brand e-commerce — where neither of its competitors have a foothold — buying Yoox Net-a-Porter Group (YNAP) in 2018 for about $3.3 billion, although that bet has yet to pay off. In the first half of its most recent fiscal year, net profit was down 61 percent in the period to €869 million (about $953 million). LMVH’s own attempts at developing multi-brand e-commerce — eLuxury in 2000 and 24 Sèvres (24s) in 2017 — were unsuccessful. eLuxury shuttered in 2009, while Arnault has downplayed the group’s efforts around 24s, the digital version of its famous Left Bank department store Le Bon Marché.

“We haven’t found a way to make it profitable...it is almost insignificant to us,” he said in January 2020, adding that he is “somewhat sceptical of the category overall.”

“All of them are losing money,” he said, regarding existing players including YNAP and Farfetch. “The bigger they are, the more money they lose.”

Kering, which exited a strategic partnership with YNAP in 2018, is focused on further developing its individual brand sites, which still make up a small percentage of overall sales. (Gucci’s e-commerce has operated independently since 2002.)

Post-pandemic, it seems that it will be even more challenging for the likes of Richemont to maintain their positioning within the luxury fashion ecosystem. “In the aftermath of a crisis, resilient players can outperform rivals,” according to BoF’s recent update to The State of Fashion 2020 report. “Power can be consolidated as previously held market share is freed up once competitors fall away.”

So, then there were two.

A Winning Playbook

There are many reasons that the industry has consolidated around LVMH and Kering. One of the most important is that they are both vigilant brand stewards and believe in strong creative leadership alongside strong executive leadership. Over the years, LVMH’s approach to brand building has remained virtually the same. Take a name — one with a history — and build on it with exciting fashion, fresh cosmetics and trendy accessories until it has achieved fashion legitimacy. Sometimes that happens more quickly than with others.

“From the beginning, Mr. Arnault was more focused,” Ortelli said.

Antoine Arnault said that while there is no exact recipe to his father’s success, there are certain fundamentals. “The first one is to respect and worship the history and core values of a brand,” he said. “Once you really understand, once you’ve dug into the heritage and archives and know it inside out, you must assemble the best teams to combine performance and creativity.”

Kering’s approach is slightly different, especially with the transition of power in 2005 from founder François Pinault to his son, current Chairman and Chief Executive François-Henri Pinault, who has spent the last 15 years recalibrating the company’s portfolio to focus solely on fashion and hard luxury, with a tight group of labels that almost all have the potential to become megabrands generating well above $1 billion a year.

“At the beginning, PPR was more like private equity: it was about finding opportunities in different sectors and investing in it,” Ortelli said. “Then, luxury became its expertise.”

While LVMH has a heritage-first approach —its most popular brand, Louis Vuitton, was originally a luggage maker — Kering is more exposed to fashion labels like Yves Saint Laurent and Balenciaga. Some argue this is a riskier prospect that’s more susceptible to the ebb and flow of trends.

“LVMH is overweight on heritage brands; Kering is overweight on fashion brands,” Ortelli said. “Heritage is constant, with less volatility. In fashion, you’ve got a more volatile road.”

There are exceptions to this rule: LVMH-owned Celine is not obviously trading on any fixed core heritage; just look at the stark difference between the collections designed by former creative director Phoebe Philo and current creative, artistic and image director Hedi Slimane. Neither has Givenchy in its multiple reinventions, despite its long history. Conversely, while Gucci may be under the spell of Alessandro Michele, its bestsellers — loafers, logo belts — are classics that have been available to purchase for decades in one iteration or another.

Kering does not agree with the assessment that its houses are more trend-driven.

“The brand is symbols, icons — it’s never a style,” Pinault told BoF in a 2018 interview. “The style is the interpretation of something and if you think that the style of the brand has to be respected, you never move forward.”

Duplaix said Kering’s formula requires the creative director to evolve the brand’s style without losing sight of its heritage.

“As a corporation, we ensure there is a framework, but it’s not a science,” he said. “We start with product and creativity, to make sure there is a clear definition of the brand.

One approach isn’t necessarily better than the other. They are fundamentally grounded in the same thing: selling expensive, fashionable handbags and accessories to Chinese consumers through smart storytelling. But they each have their strengths and weaknesses. LVMH has a diverse portfolio of brands — in several categories, including travel and beauty — which means it does not need to pressure any one brand to outperform — while Kering’s ability to identify and amplify creative talent has been unmatched in recent years.

From the elevation of Michele at Gucci and, more recently, the matchups of Demna Gvasalia at Balenciaga and Daniel Lee at Bottega Veneta, Kering has made genuine cultural waves. While LVMH has done well to market its leading brands by installing Virgil Abloh at Louis Vuitton and Kim Jones at Dior, the critical and commercial success of their collections, while important, is not the dominant factor in the success of those houses.

The group’s other recent attempt at tapping the zeitgeist, a fashion venture with pop star Rihanna, has yet to take off. Neither has Slimane’s Celine reboot. In fact, neither group has much ability to create new brands from scratch, in part due to the inherently high capital requirements and risk involved. Instead, they’ve both achieved a dominant position by snapping up properties that are already well known and ensuring the right management and creative teams are in place.

There’s also a difference in attitude at the groups. Kering has built a more casual corporate culture that avows transparency and a start-up mindset — with near-continual press releases about the inner workings of the company, from environmental policies to employee wellbeing — that is, ultimately, driven by the personality of François-Henri Pinault.

LVMH, by contrast, is almost monarchical. However, that’s changing as the new generation of Arnaults take on leadership roles: Antoine Arnault, chief executive of Berluti and chairman of Loro Piana, is also the group’s head of image, communication and environment, as well as a member of the LVMH board of directors. Then there’s Delphine Arnault, director and executive vice president of Louis Vuitton, who is also a board director, Alexandre Arnault, chief executive of Rimowa and Frédéric Arnault, strategy and digital director for Tag Heuer. (The youngest heir, Jean, is still studying.)

The Black Swan

By the end of 2019, the industry’s two superpowers seemed, in many ways, invincible, making it harder and harder for others to succeed alone, or even within a less well-positioned group.

The coronavirus outbreak, in some ways, has underscored their enviable positions. Despite the crisis, both groups have the ability to continue to pay employees, to control inventory and to provide support by producing, or at least paying for, medical supplies and new hospital wards.

The main focus is not how they will survive the crisis, but which companies may make for opportunistic acquisitions, as once-independent businesses determined to go it on their own grow tired of the fight.

Several Italian firms, including Moncler and Salvatore Ferregamo, are often surfaced by analysts and bankers as potential targets.

In recent months, speculation that Prada, which has been around longer than Louis Vuitton or Chanel, would be acquired by Kering, has continued to mount. And yet Prada — which recruited Raf Simons to be mastermind Miuccia Prada’s co-creative director this year — has denied it’s for sale. (Lorenzo Bertelli, the son of Prada and her husband, Co-Chief Executive Patrizio Bertelli, is being groomed to take over.) Kering declined to comment on Prada. But the possibility remains, and would be a smart deal for both companies, said Elsa Berry, managing director and founder of Vendôme Global Partners, a New York-based strategic mergers and acquisitions advisory firm.

“I think many, many independent brands will realise after this global crisis that it is more and more challenging to remain so,” she said. “Unlike Moncler, where the valuation is high and future growth may be less significant and certainly where Kering’s knowhow will be less needed and less relevant, Prada would be an ideal fit for both sides. Kering can patiently grow and add value, and for Prada shareholders, they get, with Kering, a solid track record.”

However unlikely, a Prada acquisition would be a boon. Over the years, Kering has made deals in other categories with varying success — including the acquisition of Puma and the purchase of Bocheron — but not in the group’s core category, fashion. Pinault has said he is looking for a globally recognised, sizable brand that will not directly compete with any of the brands currently in the portfolio. (Versace, once a hot prospect, was acquired by Capri in 2018 for more than $2 billion, a price Kering believed to be too high.)

LVMH, too, is focused on making big acquisitions, like the Tiffany deal, which was decades in the making and is expected to take place even with pandemic-related setbacks. While LVMH seems dedicated to continue to develop smaller brands and new brands — its relaunch of Patou, and the FENTY by Rihanna fashion brand — its track record in that department remains unproven. Gone are the days of scooping up a $200-million-revenue business in the hopes of scaling it quickly to $1 billion. Now, they’re looking for $1 billion companies they can scale to $10 billion.

The Future

The pandemic may very well bring new challenges to the luxury sector at large, but particularly to those who dominate it, and who might be reluctant to change when the rest of the industry seems to be hungry for a reset. For every Woolworth, there’s a Walmart, and for every Walmart, there’s an Amazon.

LVMH and Kering are both extremely reliant on Chinese customers — and that dependency is likely to increase as China’s economy continues to grow, albeit much more slowly, with many analysts estimating that it will be the least affected region in the ensuing economic crisis.

While that’s not necessarily a bad thing — even as spending slows in the region — it may become harder to win over those consumers as their consumption habits change, the market rapidly matures and shoppers start to care less about certain old-fashioned status symbols that have been adopted by the masses. They will begin to obsess less over failsafe blockbuster brands and more over new prospects. China may even begin to create its own global luxury labels, something it has failed at in the past.

The luxury industry is also far too reliant on driving up prices of individual items to increase profits. (Today, handbags often cost well over $3,000 a piece. Shoes, $1,000 a pair.) Rising prices of goods were fine when the economy was minting new millionaires, and billionaires, at a steady pace. (China added 182 billionaires over the year ending January 2020, according to the Hurun Global Rich List.)

But now, as the coronavirus has wiped out trillions of dollars in wealth, priorities — and consumer behaviour — may change in the medium term. What makes a handbag, or a pair of sneakers, worth it? As top brands including Chanel and Louis Vuitton begin instituting price increases in order to make up for lagging lockdown-era sales — inspiring consumers to queue up to buy the products before the hikes were put in place — the limit is going to be tested.

One looming threat is luxury’s lack of agency over its own secondary market. Consumers are already buying luxury products secondhand from the likes of The RealReal and Vestiaire Collective, and even renting them from US-based service Rent the Runway, showing that ownership is less important to the current generation of would-be luxury shoppers. There is an argument that LVMH and Kering, which tend to take a wait-and-see approach to new models before trying them out themselves, should already own this stage of the product lifecycle.

And while consumers will always find ways to express themselves through fashion, the specifics will change. They may prefer customised, made-to-order products. Or new categories: streetwear instead of gowns and protective face masks instead of shoes. Or they may simply choose to buy fewer things. High fashion is already fairly homogenised, and many argue it will only become more boring if just a few companies are producing just about everything.

In order for these giants to continue to dominate this next wave of consolidation, they will need to react quickly to the changes brought on by the pandemic, or risk the disruption they’ve managed to stave off thus far. For instance, LVMH is only now putting proper focus on e-commerce, a channel that will account for 30 percent of sales of personal luxury goods by 2025, according to Bain. (And that’s not considering the amount of purchasing done in-store that begins online.)

Perhaps most importantly, both LVMH and Kering’s models are predicated on the idea that wealthy people will continue consuming at a rapid pace. “It is easy to get carried away during a tragedy,” Bernstein analyst Luca Solca wrote in a recent note. “The legitimate aspiration to social elevation, being better off and having more, will persevere.” And yet, “On the back of the sharp recession to come... we do expect consumers will become more conservative,” Solca added.

This battle is far from over.

Disruptions caused by Covid-19 have redoubled concerns about vulnerabilities in fashion’s manufacturing base, accelerating efforts to build more resilient and efficient operations.

LONDON, United Kingdom — Like so many fashion brands during the pandemic, Los Angeles-based apparel manufacturer Ari Jogiel pivoted to making face masks. They were the only thing possible to produce when non-essential factories were shut down, and there was no shortage of demand. But there was an unexpected problem: the elastic needed was in short supply.

“I feel like we bought all the elastic left in LA,” Jogiel said. “We just have to keep expanding to try to find suppliers in Mexico or overseas or on the East Coast.”

Jogiel is not alone in discovering that the pandemic had turned sourcing once-common materials into a game of whack-a-mole. Manufacturers from China to Italy to California abruptly shut down as the coronavirus spread, creating ripple effects across global supply chains. Even when supplies were available, getting them to the right place was difficult, as shippers prioritised medical equipment and ports struggled to keep cargo moving.

While a demand shock precipitated by the retail lockdowns in key western markets has overshadowed these problems in the months immediately following the start of the pandemic, not knowing when — or if — crucial supplies will arrive is making it harder for the industry to recover as lockdowns are eased in many countries. Canadian designer Hilary MacMillan said she was facing as much as a nine-week delay to import fabric for her collection from some mills in Italy.

Even as factories come back online, new problems are constantly emerging. Brands are changing how they approach their supply chains in ways that will resonate long after the crisis. In many cases, flexibility is now a top priority. So is transparency, as the ability to keep tabs on where fabric and raw materials are at any given moment can now make or break a business.

Alpargatas, the Brazilian maker of Havaianas and other brands, has added more rubber suppliers, for starters.

“The goal is to preserve the ecosystem,” said Chief Executive Roberto Funari. “We believe one of the… main competitive advantages we have going forward is this resilient supply chain.”

Supply Shock

Even today, many suppliers remain closed, or are working at reduced capacity because of new social-distancing requirements. Shipping is still slower than it was before the pandemic. Over half of respondents to a McKinsey & Co. survey of sourcing executives said their suppliers are only able to deliver part of their orders this quarter.

Manufacturers have problems of their own, including cancelled orders from brands that had to close stores and are now stuck with warehouses full of unsold spring clothes. Tal Group, which manufactures products for brands including Michael Kors and Patagonia, expects order volumes to be down between 40 and 50 percent for the rest of the year. In April, it announced it would close operations at its two factories in Malaysia.

Fashion supply chains are being reorganised and further consolidation is likely. Some are moving operations to new countries they see as better-positioned to handle the stresses of the pandemic.

“It’s accelerated our move out of higher-cost countries,” said Tal Group Chief Executive Roger Lee. The company closed operations at two Malaysian factories in April and is eying acquisition targets in less-expensive locations.

Some brands are moving their manufacturing out of China. This was a trend before the pandemic, due to rising costs and a simmering trade war with the US. In the McKinsey survey, around 60 percent of respondents said they expected manufacturing clusters to develop more quickly in markets like Eastern Europe and Central America that are closer to customers in the US and Western Europe.

“People just don’t want to be caught like last year when we had a thirty-day notice that tariffs were going to increase without being able to plan effectively,” said Yossi Nasser, chief executive at intimates manufacturer Gelmart. The company is doubling down on investments it’s made in the Philippines and looking at longer-term investments in high-tech manufacturing nearer to its core US market.

Deeper Partnerships

There are signs that the relationship between brands and their suppliers could also change, even as many crumble as a result of the financial havoc caused by the pandemic. Though many companies have cancelled orders and refused to make payments with devastating impact on garment workers, others are taking steps to protect and support key manufacturers.

Alpargatas has added new suppliers, but it’s also shortening payment terms for some manufacturers who are heavily dependent on its business. Gucci this week announced it will extend a partnership with bank Intesa Sanpaolo to make it easier for small and medium-sized Italian manufacturers in its supply chain to gain access to loans at favourable rates.

Manufacturers are also racing to adapt their offerings to meet new demands. Hong Kong-based PFGHL has shifted some of its factory capacity to focus on producing face masks and loungewear in response to shifting demand.

“We’re all going through trial periods to try and be flexible and try new things,” said PFGHL Vice President Hilmond Hui. “The flexibility of certain facilities will be key.”

Digital Transformation

For many, embracing new technology will be central to adapting to the demands of a post-Covid world. Already, the disruptions caused by the pandemic have forced brands to take on digital tools to allow for things like virtual samples that previously struggled to gain traction.

“For years, every brand found a lot of reasons why virtual samples weren’t possible,” said McKinsey Senior Partner Karl-Hendrik Magnus. “In Covid, these bottlenecks had to be wiped away because there was no other way.... There’s real change that won’t be reversed.”

Sourcing platform SupplyCompass has seen a 400 percent increase in inquiries about its services in the last month, as brands scrambled to manage sudden holes that had appeared in their supply chain or looked to find new manufacturing partners who could help them pivot to more relevant product categories.

“Trying to develop all these things using Excel and Zoom isn’t fit for purpose,” said co-founder Flora Davidson. “It’s highlighted overnight these processes everyone knew weren’t ideal.”

Manufacturers are also doubling down on investment in new technology and automation. Alpargatas is raising its spending plans to $90 million this year, from $40 million in 2019.

Resonance, an integrated fashion group based around a technology that allows for on-demand manufacturing, is looking to open up a manufacturing facility in New York and has moved up plans to break ground on a materials factory in the US. By focusing on automation and producing on demand, Resonance believes it can be competitive within the US market.

But while the crisis is driving change, for many, real transformation will be a struggle.

“It is a trend that was already there and it’s getting accelerated, but we think it will be hyper-accelerated,” said Funari. “The dividing line between winners and losers are the ones who will be able to adapt fast and in an intelligent way.”

The percentage of fund managers deeming U.S. stocks attractive is at the highest level in nearly five years, a recent survey found

U.S. stocks have staged a furious rebound since late March, leaving global markets behind.

Optimism about state and business reopenings and the potential development of a coronavirus vaccine has lifted the S&P 500 36% from its March low, cutting its losses for the year to 5.8%. The index rallied 3% last week to cap its best two-month stretch since 2009.

The Stoxx Europe 600, meanwhile, is down 16% in 2020, and Hong Kong’s Hang Seng Index is off 19%.

Investors point to a booming technology sector and an unprecedented amount of stimulus from the Federal Reserve as reasons for the outperformance. The percentage of fund managers who deem U.S. stocks attractive has risen to the highest level in nearly five years, according to a recent Bank of America Global Fund Manager Survey.

The bank said its May survey found a net 24% of respondents were overweight U.S. stocks, the most since July 2015. Meanwhile, the net share who were overweight eurozone and emerging market equities fell to the lowest levels since July 2012 and September 2018, respectively.

“It’s not so much U.S. versus Europe versus Asia-Pac. It’s really new economy versus old economy,” said Olivier Sarfati, head of equities at GenTrust, adding that the dominance of a handful of big technology stocks in the U.S. is partly responsible for the divide.

Investors this week will parse the May jobs report for further clues about the state of the labor market. They will also review the quarterly reports of companies including Campbell Soup Co. and J.M. Smucker Co. for insights into consumer behavior during the pandemic.

U.S. market dominance isn’t a recent phenomenon. The S&P 500 has outpaced most other stock indexes around the world since the financial crisis. The index has climbed 350% since March 9, 2009, while the MSCI All Country World Index, excluding U.S. stocks, has gained 89%.

Some investors question whether such a sustained stretch of outperformance can continue indefinitely. Markets have a tendency over extended periods to swing back toward long-term trends, a phenomenon known as mean reversion.

The recent U.S. rally, in conjunction with projections for a sharp drop in corporate earnings this year, has made stocks more expensive than they have been in almost two decades. That makes a case for investing overseas, some fund managers say.

The S&P 500 traded Wednesday at 21.85 times its expected earnings over the next 12 months, the highest level since June 2001, according to FactSet and Dow Jones Market Data. That compares with 18.24 times for the Stoxx Europe 600 and 10.70 times for the Hang Seng.

“Unless you think the entire market and the entire economy is going to grow much faster, it’s harder to justify starting from a higher multiple,” said Danton Goei, portfolio manager at Davis Advisors. “Starting from a more expensive point just means that there’s a likelihood that the international stocks outperform.”

Investors fled stock funds during the market rout of February and March-—and have bailed on some regions at a faster pace than others. As of Wednesday, U.S. equity funds had cumulative outflows since the beginning of 2020 of 0.4% of assets under management, compared with outflows of 3% for emerging markets equity funds and 2.4% for Western European equity funds, according to EPFR.

Part of the allure of U.S. stocks is tied to the hunt for yield, as government-bond yields hover near record lows. The S&P 500’s dividend yield is 1.9%, well above the 0.650% of the 10-year Treasury note. Yields in much of Europe and Japan are negative.

The recent U.S. rally has been largely driven by a surge in big tech stocks. The sector is the best-performing group in the S&P 500 this year, up 6.7%. Microsoft Corp. MSFT 1.02% and Apple Inc., AAPL -0.10% the two biggest U.S. companies by market value, have advanced 16% and 8.3%, respectively.

Tech makes up about 25% of the index, compared with 10% of the MSCI all-country index. Financial shares, by contrast, make up only about 10% of the U.S. benchmark, while accounting for 20% of the global index. Those shares, pressured by central banks’ cuts to already low interest rates, have lost 24% in the S&P 500 in 2020.

Some investors say the recent stay-at-home orders during the pandemic will only accelerate the dominance of the tech and other fast-growing companies that are heavily weighted in the U.S. market.

“It’s done more to accelerate the digital trend that we’ve seen over the last 10 years than anything else could have done,” Mr. Sarfati of GenTrust said of the pandemic.

GenTrust, which has about $3 billion under management, had limited its investment in stocks because of their hefty price tag but bought again in late March. The firm has focused on tech shares in emerging markets as well as U.S. shares that are part of the “new economy”—companies that can grow very fast with relatively fixed costs, Mr. Sarfati said.

“When we increased risk, we focused on what we thought were going to be the net long term beneficiaries of the tech acceleration,” he said.

At the end of April, investment manager T. Rowe Price Group trimmed its position in overseas stockholdings in its multiasset portfolios, said Tim Murray, capital markets strategist in the multiasset division. He said the move was prompted both by the cyclical nature of overseas markets—which makes them more exposed to an economic retreat—and by stronger stimulus measures in the U.S. than in other countries.

“We’ve had a sharp slowdown globally,” he said. “We don’t expect the recovery to be as fast as the slowdown. So we expect economic growth to be impaired for quite a while.”

Companies fear fight could disrupt their operations after tough year as it also casts doubt over their long-term future in city

HONG KONG—Rising tensions between the U.S. and China over Hong Kong have American businesses caught in the crossfire.

Companies in the global financial and trading hub, already battered by a year of violent protests and the coronavirus pandemic, face a long period of further uncertainty amid a fight that they fear could disrupt their operations and that casts doubt over their long-term future here.

After China last week approved a plan to impose new national-security laws on Hong Kong, President Trump on Friday said the U.S. would no longer treat Hong Kong as a separate entity from China and would roll back policy exemptions for the city. They could include measures such as export controls, tariffs and visa restrictions, according to analysts, but businesses will have to wait for details and the timing of any moves.

“It’s going to be a challenging week ahead as there are no firm details on how this special economic relationship will be untangled,” said Tara Joseph, president of the American Chamber of Commerce in Hong Kong. More clarity is “essential because our business here is large and important,” she said.

About 85,000 U.S. citizens work in the city, with more than 1,300 U.S. companies operating here, some with regional headquarters. American companies with offices in Hong Kong range from Apple Inc. to Procter & Gamble Co. and FedEx Corp.

The U.S. is Hong Kong’s second-largest trading partner, after China, accounting for 6.2% of trade last year, compared with 50.8% for trade with China. Hong Kong officials point to the U.S. trade surplus with the city, which they said amounted to $297 billion between 2009 to 2018, to show how U.S. interests are also at risk.

“We do not believe that sanctions or trade restrictions against Hong Kong are justified,” a Hong Kong government spokesman said Saturday. “They will lead to a breakdown of the mutually beneficial Hong Kong-U.S. relationship built up over the years and only hurt local and U.S. businesses in Hong Kong and the people working for them.”

Both sides will lose if the Trump administration follows through with the threat to eliminate all special treatment for Hong Kong, Daniel Russel, vice president of the U.S.-based Asia Society Policy Institute, said. “The impact would fall heavily on Hong Kong, with negative effects on U.S. companies operating there as well,” he said.

When China’s legislature on Thursday approved a plan to impose a new law on Hong Kong, saying the city was a loophole in its national security, it also was light on details and how the law will be enforced. The law will be drafted in the coming weeks. Officials have already said Chinese security agencies would be allowed to operate in the city for the first time.

Officials in Beijing and Hong Kong said only a small minority of people will be affected by the law, as it targets activities deemed subversive, or promoting independence or terrorism. The law also targets what Beijing considers foreign interference in the city’s affairs. China has repeatedly accused the U.S. and foreign forces of stoking last year’s social unrest.

Opposition groups in the city contend that the law is just the start of Hong Kong being assimilated as just another Chinese city and reject government statements that people will retain freedom of speech and assembly. China promised to guarantee those rights under a 1984 agreement with the U.K. that returned sovereignty of its colony in 1997.

Andrew Lo, chief executive of Hong Kong-based immigration consultancy Anlex, said inquiries from residents in the city seeking to emigrate had risen from about 10 per day before the new security law was revealed to about 100 per day now. That could represent challenges to global companies that want to attract and retain top talent in the city.

“People are shocked in Hong Kong,” he said. “For parents, they prefer to live here in Hong Kong and earn their living, but then they think about their children and they think it’s better to go,” he said.

Felix Chung, a pro-business lawmaker who leads the city’s Liberal Party, said many in the local business community welcomed China’s new security law because they believe it will help tamp down protests that have hurt their businesses.

“Hong Kong is just sitting in the middle of two big guys and they are having a fight,” he said. “What actually worries me is not from China but from the U.S. What has Hong Kong done to the U.S.?,” he said.

The European Union Chamber of Commerce in China said before Mr. Trump spoke Friday that businesses in Europe have depended on Hong Kong’s support for principles such as individual liberties and the rule of law, and that without them, “the allure of this important city will be greatly diminished.”

“The devil’s in the details,” said Allan Zeman, a pro-Beijing businessman in Hong Kong who is also an economic adviser to the Hong Kong government, referring to the next steps that might come from the U.S. administration. Pointing to the trade surplus the U.S. enjoys with the city, he added that controls on exports may hurt the U.S. economically more than Hong Kong, which has a minimal manufacturing sector and doesn’t export.

Mr. Zeman, who has lived in Hong Kong for decades, said that over time he has seen cycles of events where some companies might exit—such as in 1989 after the Tiananmen Square massacre or in 1997 when China reclaimed sovereignty from Britain. “You’ll always have some Nervous Nellies leave.”

Mr. Zeman said he thinks many companies will choose to stay as they are in Hong Kong for gateway access to China, as well as for its low tax regime and free flow of capital.

For many Americans in Hong Kong, “it’s an emotional and fragile moment,” said Ms. Joseph, whose chamber represents hundreds of American companies. “Many of us have worked and lived here for many years and we love Hong Kong.”

Higher taxes on wealthy people and corporations won’t damp economic recovery, Democrats say

The coronavirus pandemic shook the U.S. economy. It hasn’t shaken Democrats’ fervor for trillions of dollars in tax increases, and significant income redistribution is still likely as soon as 2021 if Joe Biden wins the White House and Democrats control Congress.

Democratic lawmakers and policy aides worry little that planned tax increases on corporations and high-income households would hinder the economic recovery. If anything, they argue that economic disparities evident during the pandemic make these tax increases more necessary.

“It’s all the more important to protect the retirement and security of working [people] and make sure the wealthy pay their fair share,” said Oregon’s Ron Wyden, who would be Finance Committee chairman if Democrats retake the Senate. “We’ll be ready to go in January of 2021.”

Mr. Biden’s tax proposals are modest compared with those of his former rivals for the Democratic presidential nomination. Unlike Bernie Sanders and Elizabeth Warren, he hasn’t endorsed imposing annual wealth taxes.

Still, his proposals would undo major pieces of the 2017 tax law and raise taxes beyond what President Obama and 2016 nominee Hillary Clinton sought, generating $4 trillion over a decade. Republicans oppose those tax increases and will campaign against them, warning that they would slow growth and discourage investment.

“Joe will come in with a more progressive economic policy than we have seen from a Democrat in a long time,” said Rep. Don Beyer of Virginia, the top Democrat on the Joint Economic Committee. “This is the chance to build an economy that’s much more equitable.”

For corporations, Mr. Biden would raise the tax rate to 28% from 21% and impose additional taxes on foreign profits. High-income individuals would pay steeper tax rates on wages, business income and capital gains and face new caps on deductions.

Pressed recently about whether he would delay tax increases while the economy is weak, Mr. Biden defended his proposals. In an interview on CNBC, he emphasized that households making below $400,000 wouldn’t pay more. About 74% of his tax increases fall on the top 1% of households, according to the Tax Policy Center, a Washington group run by a former Obama administration official. Some households earning less than $400,000 would pay more because corporate tax increases affect stock owners and workers at all income levels.

The timing of tax legislation and its effective dates will depend on the state of the economy next year, a Biden adviser said.

The budgetary estimates don’t include Mr. Biden’s support for repealing the cap on the state and local tax deduction, a move that would cut taxes for high-income Americans.

Mr. Biden’s tax policies were designed before the pandemic struck the economy and sent unemployment soaring. Congress’s bipartisan response includes spending increases and tax cuts for businesses and individuals that are adding trillions of dollars to budget deficits. There is broad agreement that policy makers shouldn’t worry about widening deficits during a crisis.

Democrats say they learned a crucial lesson from the previous recession, which ended in 2009 while Mr. Biden was vice president. They say lawmakers moved too quickly to rein in budget deficits, unnecessarily slowing spending and the recovery.

“This is not the time to be focused on red ink by a long shot,” said Jared Bernstein, who served as economic adviser to Mr. Biden when he was vice president and remains an informal adviser.

Republicans say tax increases would be harmful and that reopening the economy is the best way to control the federal debt.

“Raising taxes on the heels of this economic crisis is like punching a hole in your boat at the end of a storm,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee.

But many Democrats say their primary goal isn’t to reduce deficits. Instead, they want people with high incomes to pay a greater share of taxes, which would generate money for new spending programs. And they say the combination of tax increases and spending programs—such as aid for college students, expanded health care and assistance for families hit by the recession—would encourage consumer demand and boost the long-term pace of economic growth.

“Raising taxes on the wealthy and big corporations to help support public investments in things like child care or education promotes economic growth,” said Bharat Ramamurti, who helped design Ms. Warren’s policies and is now managing director of the corporate power program at the progressive Roosevelt Institute. “It’s popular with voters across the political spectrum, too.”

“This is not the time to be focused on red ink by a long shot,” said Jared Bernstein, who served as economic adviser to Mr. Biden when he was vice president and remains an informal adviser.

Republicans say tax increases would be harmful and that reopening the economy is the best way to control the federal debt.

“Raising taxes on the heels of this economic crisis is like punching a hole in your boat at the end of a storm,” said Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee.

But many Democrats say their primary goal isn’t to reduce deficits. Instead, they want people with high incomes to pay a greater share of taxes, which would generate money for new spending programs. And they say the combination of tax increases and spending programs—such as aid for college students, expanded health care and assistance for families hit by the recession—would encourage consumer demand and boost the long-term pace of economic growth.

“Raising taxes on the wealthy and big corporations to help support public investments in things like child care or education promotes economic growth,” said Bharat Ramamurti, who helped design Ms. Warren’s policies and is now managing director of the corporate power program at the progressive Roosevelt Institute. “It’s popular with voters across the political spectrum, too.”