LVMH sees value in Tiffany’s diamond sourcing

Joshua Freedman

A storied past and popularity as a brand might be the first things that would attract a potential suitor to Tiffany & Co. But LVMH has identified another key attribute that made the US jeweler a valuable target: its ability to source its own diamonds and track its supply chain. 
Tiffany is [advanced], due to its very high level of vertical integration, compared to our own brands,” said Jean-Jacques Guiony, LVMH’s chief financial officer, in a conference call with analysts Tuesday. “We intend to capitalize on that and create synergies, and we are sure value can be extracted from combining the two business models in the group.”

Tiffany buys between 80% and 90% of its polished diamonds above 0.18 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 very relevant for a millennial consumer. First of all, [a consumer will] go to Tiffany because 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 than LVMH’s jewelry businesses do, Guiony noted on a call it held following its announcement that it was acquiring the New York retailer for $16.2 billion. Such a sourcing and manufacturing strategy is a “unique asset” that could work to the benefit of LVMH’s existing brands, and the French luxury group has no intention of changing the model, he added.

Tiffany is a very big player in all sorts of diamonds, and it’s something where the sourcing is not easy to do, and we expect to benefit from that,” he told listeners, without expanding on how it would achieve this.

Room to grow 

The acquisition will increase LVMH’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 an independently listed company with regular reporting obligations can make progress difficult for Tiffany, Guiony said. LVMH is also publicly traded, but doesn’t publish individual brands’ results.

We will bring Tiffany time and capital, which is not easy to achieve as a company that has to report on a quarterly basis,” Guiony added.

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Source Rapaport