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PARIS (Reuters) - From crocodile farms to rose fields, suppliers of luxury material have become top acquisition targets for names like LVMH (LVMH.PA) and Gucci owner Kering (PRTP.PA) as they race to lock in rare skills and ingredients vital to their brands' survival.
Having invested heavily in recent years to open shops around the world, notably in emerging markets, luxury leaders are now competing to control the supply lines behind their sales.
"We are ready to make the necessary investments when the know-how or raw materials associated with the quality of our objects are threatened," said Guillaume de Seynes, head of manufacturing and equity investments at Hermes (HRMS.PA).
Illustrating that thinking is LVMH's deal last month to pay 2 billion euros ($2.7 billion) for 80 percent of Italy's Loro Piana, one of the world's top cashmere makers, which herds its own Andean llama-like vicunas, prized for their fine, tawny hair.
Analysts expect Loro Piana will, over time, focus solely on supplying LVMH's stable of fashion brands such as Fendi and Celine, and stop supplying rivals. With one Loro Piana overcoat requiring the fleeces of 25-30 animals and retailing for around 14,000 euros in Milan, that's a precious resource to own.
Meanwhile, in the watch industry, Cartier owner Richemont CFR.VX and Kering, among others, have been stepping up their investments in parts providers as a response to a move by Swatch Group UHR.VX to cut back on third-party deals and focus instead on its own brands.
The latest acquisitions add to luxury's trend towards vertical integration - controlling everything from the cutting room up to the shop rail. This, says Bernstein luxury goods analyst Mario Ortelli, "gives you a competitive advantage, raises barriers to entry and underscores the image of your high-quality products."
Most supply chain investments so far hover around 20-50 million euros. In 2011, LVMH spent 60 million euros to buy watch dial maker ArteCad and another 47 million euros for 51 percent of Singapore-based Heng Long, a crocodile leather tannery.
Analysts and bankers expect big brands to keep up the pace of these size of acquisitions; the 1.9 billion in cash on LVMH's balance sheet at end-June shows ample funds for continued spending.
In the cosmetics world, Dior, Chanel and Hermes have been forging exclusive partnerships with plant growers to guarantee raw material supplies.
Dior has struck deals with farmers in Switzerland and Africa to ensure supplies of ingredients vital to new perfumes and creams it plans to launch in 2014. It has also bought land near Grasse, France's perfume capital with thousands of acres of flower farming, to grow its own jasmine and roses.
"Our concern is ensuring continuity in the quality of the products we use and being able to trace them," said Edouard Mauvais-Jarvis, scientific communications director at Parfums Christian Dior.
Chanel, which also grows jasmine and roses near Grasse for its No.5 perfume, is so concerned with preserving the quality of its materials that it has built extraction machines in the middle of the fields to avoid the flowers being bruised in transport.
The privately-owned company recently re-introduced Florentine Iris, which yields an expensive and rare extract after several years, to Grasse for its No. 19 perfume and has set up a partnership with a sandalwood grower in New Caledonia.
The trend to secure materials stretches to clothing too: Chanel bought Scottish cashmere maker Barrie Knitwear last year and also owns embroiderer Lesage and feather specialist Lemarié. Christian Dior bought Paris-based embroiderer Vermont last year.
Handbag makers Hermes and LVMH have bought up live supplies - the former now owns an alligator farm in Louisiana and two crocodile farms in Australia while the latter purchased the Johnstone River crocodile farm in Australia early this year to compliment its 2012 purchase of France's Roux tannery.
A high-grade crocodile skin can cost several thousand euros and it takes belly skin from three porosus crocodiles - the most sought-after because of their regular scales - to make one Hermes Kelly bag, originally designed for 50s actress Grace Kelly and still loved by celebrities. The bags fetch around 30,000 euros each at Hermes' Paris shops.
Industry sources say Kering, formerly known as PPR, may invest in python farms after acquiring exotic skin tannery France Croco earlier this year. Kering declined to comment.
There are, however, limits to the kinds of businesses luxury goods companies can bring in-house, which has forced them to find alternative ways of securing supplies.
Hermes is faced with a dwindling supply of calf leather - its No.1 raw material - because supply is driven by meat traders who are responding to a drop in consumer demand for veal and thus rearing and slaughtering fewer animals. Meanwhile, demand for luxury leather goods is still growing and forcing the price of quality hides up by 20-30 percent a year.
But raising its own calves makes little sense for Hermes as 80 percent of the animal's value lies in its meat and only one or two skins out of 10 are good enough for its handbags.
With fewer skins available, the company is hoping to protect its supply chain by financing vaccines against ringworm, which can cause scars - thus ensuring more hides that do come to market are flawless.
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Additional reporting by Isla Binnie in Milan; Editing by Sophie Walker