LVMH Moët Hennessy - Louis Vuitton Société Européenne's $16.2 billion purchase of Tiffany & Co. will make it a significantly larger purveyor of high-end watches and jewelry and potentially threaten the dominance of Switzerland's Compagnie Financière Richemont SA, owner of some of the world's most famous jewelry brands, including Cartier, Piaget and Van Cleef & Arpels.

With a market cap of more than $200 billion, LVMH may be the biggest luxury company in the world, but when it comes to "hard luxury" — jewelry and watches — it has long lagged behind Richemont. In 2018, Richemont's revenue from the hard luxury segment totaled €9.16 billion, compared to €4.2 billion for LVMH.

Given that Tiffany reported revenue of €4 billion in 2018, owning the American jeweler will boost LVMH's hard luxury sales to about €8.2 billion — within striking range of Richemont's sales. The percentage of sales that LVMH generates from jewelry and watches will then jump to 14.8% from about 8.5% today, according to a recent analysis by S&P Global Market Intelligence.

"The merger of LVMH and Tiffany further steps up the competitive pressure in jewelry," said Luca Solca, an analyst at Bernstein, in an emailed response to Market Intelligence. Solca noted that other companies, including Gucci-owner Kering SA, Hermès International Société en commandite par actions and Chanel SA, also made recent forays into the jewelry sector, attracted by its higher growth compared to the average of the luxury sector. "This means that incumbents such as Cartier will have to work harder."

The hard luxury market reported overall sales of nearly $80 billion in 2018 and is expected to grow at a compound annual growth rate of more than 10% between 2019 and 2026 to reach sales of about $175 billion seven years from now, according to a June report published by New York-based firm Zion Market Research. Zion said the increase would be driven by the rise in the number of high-net-worth individuals, the flourishing fashion industry and the growing popularity of online purchases. Luxury companies are also vying to attract big-spending Chinese shoppers and younger consumers.

An analysis published earlier in 2019 by consulting firm Bain & Co. said shoes and jewelry were the top luxury growth categories in 2018, gaining 7% each, followed by handbags and beauty. Watches remained flat, the analysis said, while "apparel suffered, mainly due to lackluster sales in the menswear segment."

LVMH already owns jewelry brands such as Fred, Bulgari and Chaumet and watchmakers TAG Heuer, Hublot and Zenith. Analysts say that to make the acquisition of Tiffany work, LVMH will need to harness its vast scale to boost sales at Tiffany, especially in the crucial Asia market.

The French company also needs to push lower-priced Tiffany products further upmarket to take on elite European brands such as Cartier, they add. For this, LVMH can lean on its experience in running Bulgari, which it acquired in 2011. Tiffany CEO Alessandro Bogliolo was previously COO of Bulgari and spent 16 years at the Italian jeweler.

Richemont, meanwhile, has stumbled lately. Its sales and profit numbers for the first half of fiscal 2020 missed analysts' estimates as it was buffeted by anti-government protests in Hong Kong that reduced spending.

"Hong Kong is a market for us which is very strongly exposed to jewelry and watches," said Richemont CFO Burkhart Grund, on a Nov. 8 earnings call with analysts. "And that obviously hit us in the second quarter much stronger than in the first quarter. I think in Q1 we flagged that the market was down by about 10% ... and then in Q2, the drop was quite severe in a very short period of time."

Some analysts have warned that Richemont's Cartier brand was showing broader signs of weakness. "We think the current stock price is not discounting the emerging signs of slowing Cartier brand momentum with Chinese consumers and the short-term industry headwinds," wrote Zuzanna Pusz, an analyst at UBS, in a note published on Sept 17. The UBS note also said it had assigned a 12-month "sell" rating on the company’s stock, from a previous rating of "neutral."

In response to an analyst's question about competing against the LVMH-Tiffany tie-up, Grund on the call said Richemont had "three of the best assets" in the jewelry business, including Cartier and Van Cleef & Arpels.

In September, Richemont made an acquisition of its own: luxury Italian jewelry house Buccellati Holding Italia SpA for €230 million. "It's something that, with its distinctive style and heritage, is very complementary to the portfolio we have," Grund said.