LVMH–DFS MAKES FIELD UNEASY

NEW YORK — LVMH’s proposed deal to purchase the DFS duty-free retailing group would be a boon for the French luxury goods conglomerate, but it could spell trouble for their competitors, and many of them are already sitting on the edges of their seats.
“We’ve never had a situation before where our largest customer was owned by our largest competitor,” said a leading cosmetics manufacturer, who asked that his name not be used out of fear of reprisal.
“It at best would be awkward, and it would be the most awkward for the people who run DFS. They ask us to supply them with our marketing plans. Will those marketing plans be secure?” he asked. “I would like to hear the reaction of some of the Cognac manufacturers.”
LVMH Moet Hennessy Louis Vuitton, with brands like the Christian Dior, Guerlain, Kenzo and Givenchy fragrances and Hennessy liquor, is currently the largest supplier to DFS, which operates 180 duty-free stores around the globe and has $3 billion in annual sales.
A listing of DFS’s biggest vendors, as stated in court papers, also includes beauty industry titans like Lancome, Chanel, Elizabeth Arden and Parfums Yves Saint Laurent. And these brands might find it tougher to deal with DFS if a competitor is running the show.
Marie-Laure Favre-Gilly, an analyst at NatWest Securities in London, pointed out that the deal would provide LVMH with positive “synergies” in terms of controlling the supply and retail ends.
“LVMH’s competitors have no other choice than using DFS as a retailer in Asia Pacific, due to DFS’s monopolistic position,” she said.
In all, DFS does business in Hawaii, Guam, Italy, Bermuda, Thailand, Korea, Malaysia, Saipan, Taiwan, Hong Kong, Singapore, Bali, Australia and New Zealand.
“Any manufacturer would be concerned if a competitor gets control of a distribution channel,” said Joseph M. Horowitz, president of Clarins. “Whether that concern is big or small depends on how autonomous that operation remains. DFS is an important operation because it focuses on traveling Japanese.”
Linda LoRe, president and chief executive officer of Giorgio Beverly Hills, said she was taken aback by the news, “because of how big a supplier LVMH is and how big a retailer DFS is.” She said, “The control they would have is amazing. Hopefully they will leave the two businesses autonomous.”
“Duty-free is a significant portion of the Giorgio business, but basically that’s true for all the fragrance businesses. To some extent many of us are already retailers; there are Giorgio boutiques and Dior has some boutiques. But to have a strategic alliance with a duty-free operator would be very advantageous. We have not thought about it,” she added. “But I’d love it.”
Nicholas Ratut, president of Adipar, which distributes Escada, Van Cleef & Arpels and Burberrys in the U.S., said LVMH’s competitors may have some leverage to work with.
“DFS has some major competitors in Europe,” he said, noting that the abundance of Escada’s duty-free business is done on the Continent.
If a vendor doesn’t get adequate space or a prime location in a DFS unit in Asia, he said, then that vendor might offer special concessions to one of DFS’s retail competitors in Europe. “It would be a sort of quid pro quo,”he said.
But the deal still is tempting for LVMH. Favre-Gilly noted that the proposed acquisition “perfectly fits with LVMH’s strategy.” The purchase would mean “faster expansion in fast-growing Asian countries and better control of the retailing network,” she said.
In the end, however, the deal may not go down. Robert W. Miller and Anthony M. Pilaro, who together own 41.25 percent of DFS, are seeking to block the $2.467 billion sale of the stake held by DFS’s two other partners.
Miller and Pilaro filed papers in state court in Manhattan on Oct. 25 requesting an injunction to halt the proposed sale by Charles F. Feeney and Alan M. Parker until an arbitrator can determine whether the sale would violate a 4 1/2-year-old agreement among the parties.
According to court papers, the parties executed a “wise man” agreement in February 1991 in which they established rules for “perpetuating the growth and general success” of DFS. The court papers stated that the intended purchase would “substantially undermine [DFS’s] ability…to maintain other supplier relations and to preserve the confidentiality of [DFS’s] pricing and competition strategies.”
Miller and Pilaro want to block the sale until their designated arbitrator, attorney Ira M. Millstein, can hear the dispute.

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