LVMH Sees Value in Tiffany's Diamond Sourcing

RAPAPORT... A storied past and popularity as a brand might bethe first things that would attract a potential suitor to Tiffany & Co. ButLVMH has identified another key attribute that made the US jeweler a valuabletarget: its ability to source its own diamonds and track its supply chain."Tiffany is [advanced], due to its very high level ofvertical integration, compared to our own brands," said Jean-Jacques Guiony, LVMH'schief financial officer, in a conference call with analysts Tuesday. "We intendto capitalize on that and create synergies, and we are sure value can beextracted from combining the two business models in the group."Tiffany buys between 80% and 90% of its polished diamonds above0.18 carats from mines as rough, and cuts them in-house, its CEO, Alessandro Bogliolo, said in a video interview with Bloomberg earlier this month. Laurelton Diamonds, Tiffany's wholly owned manufacturing subsidiary, has long-term rough supply agreements with De Beers, Alrosa, Dominion Diamond Mines and Rio Tinto. "It's opposite to the industry and other jewelers, which buy diamonds from the wholesale market," Bogliolo added. "This...is veryrelevant for a millennial consumer. First of all, [a consumer will] go to Tiffanybecause they have the expertise.... The second point is that as we buy from the source, we can tell you where your diamond comes from."Tiffany sources more of its own goods thanLVMH's jewelry businesses do, Guiony noted on a call it held following itsannouncement that it was acquiring the New York retailer for $16.2 billion. Sucha sourcing and manufacturing strategy is a "unique asset" that could work tothe benefit of LVMH's existing brands, and the French luxury group has nointention of changing the model, he added."Tiffany is a very big player in all sortsof diamonds, and it's something where the sourcing is not easy to do, and weexpect to benefit from that," he told listeners, without expanding on how it would achieve this.Room to grow The acquisition will increaseLVMH's jewelry-and-watch sales to 16% of total revenue from 9%. While Tiffany has seen mixed results in recent years, LVMH has consistently reported strong growth in its jewelry and watch sales, with revenue for the category increasing 8% to EUR 1.13 billion ($1.24 billion) in the three months ending September 30.The constant attention that comes from being anindependently listed company with regular reporting obligations can makeprogress difficult for Tiffany, Guiony said. LVMH is also publicly traded, but doesn't publishindividual brands' results."We will bring Tiffany time and capital, which is noteasy to achieve as a company that has to report on a quarterly basis," Guiony added.One of the jeweler's most costly projects, the renovationof its flagship Fifth Avenue store, received a strong endorsement from LVMH,though the buyer also indicated it should have happened a while ago. Tiffanyhas allocated up to 2% of its global sales on overhauling the crucial retaillocation, expecting to complete it in 2021."Despite thefact the flagship on Fifth Avenue was iconic, mostly due to the [1961] BlakeEdwards movie [Breakfast at Tiffany's], it's also something the brandneeds to invest in, and I think the plan they have is the right thing to do,not to mention that it was probably overdue," Guiony explained. "I sympathize with the difficultyof taking the decision to refurbish a store of that size and importance, but atsome point you have to go for it."Carry the brandLVMH hopes to increase Tiffany's revenue per squaremeter, or sales density, which is currently lower inside the US than outside.But this will come primarily from strengthening the brand, Guiony noted. Tiffany is also underrepresented in Europe, where it could do a better job of attracting both locals and tourists, Guiony observed.The executive was content with Tiffany's unusual mix ofexpensive engagement rings and lower-priced silver jewelry, both of which aremajor categories for the company."The question is not the price at which we sell [the]items, but whether such items carry the value of the brand," he asserted."Silver for Tiffany...is entry price and allows people to enter the brand with afew hundred dollars, and we have no problem whatsoever with this line."Meanwhile, the importance of collections was a key lessonLVMH learned from its $5.2 billion acquisition of Bulgari in 2011, and one ithoped to apply with Tiffany, Guiony noted. The significant expansion ofBulgari's share of sales from collections has boosted revenue and profit inrecent years, he explained."In this respect, Tiffany is well positioned, but we'llinsist in the future on the importance of capitalizing on existing collectionsand developing new ones," he predicted. Image: Tiffany & Co. jewelry. (Shutterstock)