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Can Luxury Fashion Ever Regain Its Luster?

This is usually a busy month for the luxury industry. Not long after glossy fashion magazines publish their all-important September issues, thousands of retail buyers, journalists and clients embark on a tour of New York, London, Milan and Paris.

Rolling from city to city to attend fashion weeks, they decide the trends that will power a global luxury goods market worth hundreds of billions — in 2019, 281 billion euros, or $334 billion.

Not this year. The ground beneath the industry is heaving under the weight of a pandemic that has caused a plunge in sales, shocked global supply chains and pushed American household names such as Brooks Brothers and Lord & Taylor to bankruptcy.

Those shifts have prompted big questions about the business model of luxury fashion. Should fashion weeks be dismantled and rebuilt? Are cycles of new items every six months still the best approach, at a time when garment overproduction is under scrutiny, restricted lifestyles are commonplace and runway spectacles can feel out of step in a world with different priorities?

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Credit…Jeenah Moon for The New York Times

The second quarter of 2020 was the luxury fashion industry’s worst. According to estimates by Boston Consulting Group, global luxury sales are set to contract by 25 percent to 45 percent this year, with industry growth unlikely to return to pre-pandemic levels until at least 2023 or 2024. At a time when many companies are battling for survival, many designers feel they cannot afford to skip an opportunity to show new wares.

So as the latest fashion week season began in New York last week, blockbuster catwalk shows and big crowds were out, replaced with a handful of small-scale or online-only presentations. In Italy and France, some brands have said they plan to host larger physical events, despite having only a handful of international guests, a number of high-profile designer absences and rising infection rates in Europe.

“Showing is not essential. However, sometimes you do need to show what you’re actually creating,” Antoine Arnault, head of communications at LVMH Moët Hennessy Louis Vuitton, told The New York Times on Sept. 9. “There’s a whole economy around these shows. That should not be underestimated,” he added, alluding to the thousands of freelance makeup artists, seamstresses, drivers, security guards and photographers who rely on fashion weeks for a sizable part of their incomes.

Large groups like LVMH, which owns brands including Dior, Louis Vuitton and Fendi, and its rival conglomerate Kering, which operates the likes of Gucci, Saint Laurent and Balenciaga, have been more insulated from the bitter pandemic headwinds than most smaller stand-alone businesses. (LVMH, though, has entered a court battle in an effort to extricate itself from a $16 billion commitment to buy the jeweler Tiffany & Company.)

In its latest quarterly earnings report, LVMH said it had seen a strong uptick in sales in the summer from Asian countries like mainland China, Japan and South Korea, where recent virus rates have stayed low. But sales for its fashion and leather goods unit fell by 37 percent, as international tourism ground to a halt and footfall into global stores was slow to recover. The impact has been even worse for brands in turnaround efforts like Salvatore Ferragamo and Burberry, debt-ridden department stores like Neiman Marcus, and the cash-poor independent brands with large exposure to those types of retailers (many of whom scrambled to cancel and return orders). Most companies are now struggling with a large glut of unsold inventory from the spring and summer collections this year.

“The luxury sector currently has more than double the amount of stock on its hands than it usually would at this time of year, much of which is now unlikely to be sold at full price,” said Stefano Todescan, managing director of Boston Consulting Group. Many brands have been using brick-and-mortar discount outlets or online marketplaces like the Dutch start-up Otrium to try to shift the designer clothes piling up in warehouses.

Mr. Todescan said the brands that fared better this year were generally those that relied on data to gain a granular understanding of where their stock was. This allowed them to move supply from the West to better performing regions like the Asian markets, where huge crowds unleashing pent-up demand for luxury goods inspired the phrase “revenge shopping.”

“The pandemic has further polarized luxury’s winners and losers and accelerated trends that were already underway before the crisis began,” Mr. Todescan added. “Brands like Hermes and Chanel, who never discount, are less trend-led and with product ranges that sell through multiple seasons, have emerged in particularly good shape.”

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Credit…Landon Nordeman for The New York Times

China, which was already the fastest-growing luxury market before the pandemic, will become even more vital to brands’ success as North American and European markets remain unpredictable. And everywhere, offline retail has had to go online — and fast — as consumers turned rapidly to digital shopping.

Amazon, whose customers have ordered over one billion fashion items via its mobile app in the last 12 months, has long looked for a way to become partners with luxury names, which had in the past largely rebuffed its advances. Last week, Amazon launched its mobile-only Luxury Stores with one brand: Oscar de la Renta. It said that more labels would be announced in the weeks to come.

Farfetch, the digital marketplace that allows upmarket vendors to sell their goods online, reported last month that it had seen a 60 percent surge in traffic for the second quarter compared with the same period last year — and 500,000 new customers.

“E-commerce represented just 12 percent of luxury sales in 2019. Since then there has obviously been a complete paradigm shift,” José Neves, Farfetch’s chief executive, said. Luxury used to be heavily associated with an in-store experience, he added. But for many consumers in 2020, convenience and safety are now front of mind, prompting many brands to fast-track their digital strategies. “For those who aren’t able to do that, it is going to be a struggle,” Mr. Neves said.

As the industry starts to offer up new looks, TikTok is hosting its own online fashion month for a potential audience of roughly 800 million users, with shows by Saint Laurent and JW Anderson. Expect to see smaller collections with more timeless pieces that can have extended shelf lives if necessary. Demand for evening wear and suits has plummeted now that no one has a reason to dress up, though many brands say they expect people to start buying high-priced items that aren’t sweatpants, despite a severe recession and ongoing layoffs.

With no fixed timeline for a Covid-19 vaccine, it will be hard to predict what customers will want six months from now. But for luxury fashion, the shows must go on.

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Tiffany’s $16 Billion Sale to LVMH Falls Apart in Face of Pandemic, Tariffs

Last November, LVMH Moët Hennessy Louis Vuitton, the world’s largest luxury goods conglomerate, announced plans to acquire Tiffany & Company, the American jeweler founded by Charles Lewis Tiffany in 1837 and famed for its duck egg blue boxes and diamond engagement rings.

The transaction, worth more than $16 billion, was set to be the largest ever in the luxury sector. LVMH’s chief executive, Bernard Arnault, said that Tiffany would “thrive for centuries to come” as part of his portfolio of premium brands, which includes Louis Vuitton, Dior and Givenchy.

Nine months later, the agreement is in tatters. On Wednesday, LVMH said that it was pulling out of the deal, citing a highly unusual request by the French government to delay the closing as well as the damage caused to the luxury industry by the pandemic. In turn, Tiffany sued the luxury giant in an effort to force the deal through.

Tiffany is now facing several uncomfortable prospects beyond its expensive looming legal battle with LVMH: The deal may eventually be completed, potentially at a discounted price, or Tiffany could remain a stand-alone company looking for a buyer once more, in a much less certain world.

The battle brewing between two of the biggest names in global luxury is one the most prominent examples of the fracturing of deals agreed to before the pandemic devastated retailers. In May, the sale of the lingerie brand Victoria’s Secret to the private equity firm Sycamore Partners fell apart.

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Credit…Stephen Speranza for The New York Times

On Wednesday, LVMH said in a statement that it could not complete the deal with Tiffany “as it stands,” citing a request from the French government on Aug. 31 to delay the deal beyond Jan. 6 because of the threat of U.S. tariffs on French goods.

Tiffany, in a lawsuit filed Wednesday in the Delaware Court of Chancery, said that LVMH had breached its merger obligations by excluding the retailer from its discussions about the transaction with the French government. In a securities filing, Tiffany said that although LVMH had informed the jeweler that it had received a letter from the French government, the jeweler had not yet seen an original draft of that letter.

In a call with reporters, LVMH’s chief financial officer, Jean Jacques Guiony, balked at a question about whether LVMH had solicited help from the French government to exit the deal.

“Are you seriously suggesting that we procure the letter?” he asked. But he later added: “It was fully unsolicited. It doesn’t mean that we didn’t do anything after we received” the letter.

The United States has been threatening tariffs on luxury French products in retaliation for France’s taxes on technology companies that have hit U.S. giants like Amazon, Facebook and Google. Uncertainty over the tariffs has complicated the deal market, but it remains unclear what the exact impact to LVMH would be — and whether the tariffs in question would even go into effect.

“Tariffs are political tools that can be flipped on and off with no notice,” said Scott Lincicome, a senior fellow at the Cato Institute, a think tank. “And because we don’t know who the president is going to be in January 2021, that adds fuel to the uncertainty.”

Speculation had been brewing for months over whether LVMH would try to renegotiate its multibillion-dollar deal with Tiffany as the pandemic wrought havoc across the global luxury business and slashed the jeweler’s sales.

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Credit…Gonzalo Fuentes/Reuters

The takeover agreement in November had come after months of tense talks between the two sides. LVMH, which had coveted the jeweler for years, was persuaded to raise its offer several times; approval was finally given to a $135-per-share offer, translating to an equity value of around $16.2 billion. Some analysts noted it as a top-of-the-market price.

Still, LVMH initially trumpeted the deal as a coup. The acquisition would consolidate its position as a major player in the hard luxury sector, an industry label given to watches and jewelry products. It would potentially double the size and profitability of its portfolio in that category, which includes brands like Bulgari, Chaumet, Hublot and Tag Heuer, and accounts for roughly 9 percent of total LVMH sales.

Mr. Arnault, long considered the most aggressive and acquisitive deal maker in the industry, was already expanding beyond traditional soft luxury goods like clothing and leather goods. He had overseen a buyout of the Belmond hospitality group in December 2018 for $2.6 billion, and took a majority stake in the German luggage brand Rimowa for $719 million in 2016.

With Tiffany, LVMH would also have gained its most significant beachhead in North America. Few jewelers can claim as much of a hold on American culture as the company, famously memorialized by the book and movie “Breakfast at Tiffany’s.”

Tiffany experienced a rocky road in recent years, with a series of board upheavals as it struggled to turn around falling sales. But under the current chief executive, Alessandro Bogliolo, and the artistic director Reed Krakoff, it has turned its fortunes around, fueled by revamped product offerings and savvy marketing campaigns positioned at younger shoppers. The company invested in a face-lift for its landmark Fifth Avenue flagship store in New York and in greater expansion in China.

Inside Tiffany, the hope was that the deal would leverage LVMH’s presence and expertise in China to help it grow further in that country, where consumers have long powered the growth of global luxury. By becoming a privately held company, the jeweler would also be able to focus on long-term brand building rather than short-term profits and shareholders.

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Credit…Vincent Tullo for The New York Times

That was before the pandemic caused demand for luxury goods to plummet, with lockdowns prompting widespread shutting of boutiques and department stores and a flatlining of international travel. According to estimates by Boston Consulting Group, global luxury sales are set to contract 25 percent to 45 percent in 2020, with a slow recovery that could take up to three years.

LVMH said second quarter sales fell 38 percent on a like-for-like basis to 7.8 billion euros, or $9.2 billion, after a 17 percent decline in the first quarter. Tiffany’s global net sales fell 29 percent in the quarter that ended July 31, though that was a considerable improvement from a 45 percent drop reported the previous period. Mr. Bogliolo, the chief executive, said that increased sales in mainland China and global e-commerce had accelerated a return to quarterly profitability.

Despite the better-than-expected results reported by Tiffany, the allure of clinching the jeweler after almost a year of wrangling — and in the face of a gloomy forecast for global consumer spending — appears to have lost its luster for LVMH.

“This turn of events is not totally unexpected,” Luca Solca, an analyst at Sanford C. Bernstein, wrote in a note to investors. “Covid-19 has caused second thoughts on a number of proposed deals and the prices they were agreed at. It seems that this is no exception.”

Tiffany’s lawsuit outlined the crumbling of the deal over the past six months. In mid-March, LVMH sought to renegotiate, according to the complaint. In May, LVMH’s most senior management began cutting off all informal discussions with senior Tiffany personnel, the suit claimed, while in early June, LVMH wrote to Tiffany, citing “the pandemic and the current protests and civil unrest in many cities” as among its concerns in the deal.

Tiffany decided to sue LVMH over frustration that nine months after the agreement, the conglomerate had not yet filed for antitrust approval in the European Union, a person familiar with the deal said.

If LVMH succeeds in walking away from the takeover agreement, Tiffany will probably have to chart its own path without a buyer, given the global uncertainty facing retail.

Michael J. de la Merced contributed reporting.

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