Successors of Luxury Tycoons Face a Difficult Challenge

Bill Gates and Jeff Bezos have both handed over the running of their companies to skilled industry executives. The billionaire founders of the world’s top luxury groups are more clannish, so investors need to be aware of the potential for family conflict.
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The CEOs of several large luxury companies are now in their 80s, including the world's richest man, LVMH Moët Hennessy Louis Vuitton.
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The founders of some of the world's most iconic fashion brands are getting up there in age. Bernard Arnault, the founder of luxury conglomerate LVMH, is in his 70s, as are Cartier owner Johann Rupert and the husband-and-wife team at the top of Prada, Miuccia Prada and Patrizio Bertelli. The brothers behind privately held Chanel, Alain and Gerard Wertheimer, are also in their 70s. While these fashion titans may be getting older, their brands are still going strong.
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As the founding families of listed luxury companies tend to control voting rights, minority shareholders will have little say over how succession is handled. Even at Richemont, Mr. Rupert uses a dual-class share structure to dominate decision making with a slender economic ownership of 10%. This means that minority shareholders will have very little influence over how the company is run, even though they may own a significant portion of the company's shares.
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The issue of succession planning is becoming more important as several luxury companies appear to be ramping up their handover plans. Prada recently hired a well-respected industry executive as the brand’s chief executive officer until 34-year-old family heir Lorenzo Bertelli is ready to take over. This month, Mr. Arnault appointed his daughter Delphine as CEO of Christian Dior.
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LVMH's most important brand is Louis Vuitton. The situation is less clear at Richemont. Mr. Rupert's son is on the board of directors, but he is not expected to take over the company.
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Some of the original founders have done well by investors. LVMH, which went public in the 1980s, has generated average total returns of 17% per year, and is now Europe's most valuable listed company. Richemont's long-term record is also strong, with 14% returns. Prada is the exception: Its almost 12-year run as a public company has been poor, returning only 3% annually.
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The question is whether the second generation of family-owned businesses can keep the brands growing while delivering good returns. According to an analysis by French fund manager Carmignac, this may get harder to do over time. Between January 2004 and October 2022, the stocks of companies managed by the first generation gained almost twice as much as those run by the fifth.
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There is an example of a successful handover at Gucci's owner Kering that is reassuring. Since taking over from his CEO father in 2005, François-Henri Pinault has matched the shareholder returns the founder managed.
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The recent hires of talented executives to work alongside family members at Prada and LVMH are a good sign for investors. LVMH promoted Christian Dior boss Pietro Beccari to run Louis Vuitton. The combination of a fully committed anchor shareholder and outside managers can prevent the inwardness that has weighed on the stocks of some family-owned brands such as Tod’s and Salvatore Ferragamo.

There is healthy competition between the founder's five heirs and nonfamily managers at LVMH. This month's reshuffle is the first time Mr. Arnault has entrusted the running of the company's most valuable brands to anyone within the family. His daughter landed the Dior job after more than 20 years of proving herself in the business.

If a company does not have a clear succession plan in place, it could eventually be taken over. This has been the case for the founders of privately owned Tom Ford and shoemaker Christian Louboutin, who have sold all or part of their brands in recent years. Eighty-eight-year-old Giorgio Armani has kept the industry guessing about his plans for his namesake brand. Although Richemont insists that the business is not for sale, a sale could make sense if there is no one in the founder's family who wants to take over.
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As the global economy slows, luxury investors are increasingly focused on understanding the behavior of wealthy consumers. However, it is also important to monitor the families who control the major luxury brands.