Chapter 35 - The Taste of Luxury: Bernard Arnault and the Moet-Hennessy Louis Vuitton Story
Today’s Chapter is based on the book “The Taste of Luxury: Bernard Arnault and the Moet-Hennessy Louis Vuitton Story”, a biography by Nadege Forestier and Nazanine Ravai.
Buy it on Amazon here:
https://www.amazon.com/Taste-Luxury-Bernard-Arnault-Moet-Hennessy/dp/0747512027
Here’s what I have learned today:
Hard Work, Frugrality & Decisiveness
"I do not know anyone who has got to the top without hard work. That is the recipe. It will not always get you to the top, but should get you pretty near."
— Margaret Thatcher
Bernard Arnault’s story is another example of how hard work is the secret ingredient for success. As a matter of fact, Arnault once said that “you have to be specially gifted or you have to work hard. I was not gifted enough, I had to work, so I worked.” However, it is worth nothing that Arnault was exceptionally talented; he was quicker to grasp things and he went at a faster pace than others. This combination of hard work and talent led him to great success in his career as a businessman.
Arnault started working from the time he was little and has never stopped working ever since. As a matter of fact, it didn’t matter if it was for studies, for hobbies or for business, he worked hard to excel at anything he did.
“That was all he had ever done, and when he took over Boussac, he asked his father to buy all the textile reference works so that he could swot up on the business just like at school. Even the sports he excelled in—he had for example won a number of trophies at the Roubaix riding club—and music, his favourite hobby, were a kind of victory over himself.” — Nadege Forestier & Nazanine Ravai
This work ethic reminds me of the concept of “Persistence pays off” that we have learned from Kazuo Inamori. Inamori explains that “the most important thing in life is persistence, which means a continuous devotion to a single activity. To young people who are about to enter the work force and build their lives, I want to convey this: make continuous efforts, one step at a time.”
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day - if you live long enough - most people get what they deserve.”
— Charlie Munger
Another important characteristic of Bernard Arnault was his frugality. He did not enjoy eating out and thought fancy social events were a waste of time. However, due to the field of industry he was working in, he understood that having contact with the Parisian elite was a necessary. As such, he would throw parties such as to celebrate Dior’s 40th anniversary or for the launch of Parfums Lacroix. However, for him, all of this was just for work. And more importantly, he lived a frugal life and made sure his children were not spoiled while growing up.
“He drove a Peugeot 205, his house in the 16th arrondissement of Paris was warm and comfortable rather than eye-catching; the rooms were decorated in various shades of white, there was an enormous library, a few good pieces of furniture, and contemporary art on the walls. His children were not excessively spoiled. When his fifteen-year-old daughter Delphine asked for a Dior dress, he refused, telling her she was too young.”
— Nadege Forestier & Nazanine Ravai
This is eerily similar to Daniel Ludwig’s story who enjoyed living anonymously and was against living a luxurious life. His house was comfortable but did not look like a place an exceedingly rich man would live in. As Jerry Shields mentions, Ludwig “was concerned with the wealth itself, not its trappings. Making money, not spending it, was his passion, and he could do that much better if most people didn’t give him a passing glance.”
In fact, the only concession Ludwig made to his principle of not spending excessively was to build a luxurious yacht, the Danginn, a 190-foot, 381-ton ship that cost him over $2 million. And yet, in truth, he only built this boat to impress celebrities and people with whom he did business with, rather than for his own pleasure. He was so focused on finding ways to make more money that he was rarely on his own yacht.
Finally, the biggest strength of Bernard Arnault was his decisiveness. In fact, his success can be described as a Napoleonic strategy: “select the right target, attack the enemy at the right time and in his weakest spot, and leave nothing to chance in the ensuing battle.”
In fact, during his career, he showed poise and decisiveness when he took full advantage of the expansion of construction of second homes by turning his father’s company Ferret-Savinel into a real estate developer. Another of his Arnault’s feat was when he was able to earn great profit by purchasing a failing company in Boussac and transforming the company into a cash generating machine, due to a hidden gem in the company, Christian Dior. And more importantly, during a stock market crash, he quickly identified and acquired shares in LVMH.
“Speed had long been his ally. Férinel, Boussac and LVMH had all been quick victories following his usual pattern: identification, decision, action, result.”
— Nadege Forestier & Nazanine Ravai
It is not hard to imagine how Napoleon’s tactic inspired Bernard Arnault as an entrepreneur. In fact, John D Rockefeller once admired Napoleon because of his wit and leadership ability during his war campaigns. John D often compared himself to Napoleon and he wanted to imitate Napoleon's organisation and leadership tactics in the running of his business.
As a matter of fact, those who worked with John D said that he dominated because “he had character and ability and could see farther than anyone else, and knew how to put together a team of men that could not be matched anywhere in the world.” This is eerily similar to the qualities that Napoleon had and the reason why John D Rockefeller loved implementing ideas he learned from Napoleon.
Although it is hard to imagine Napoleon as a businessman, it is not unthinkable to think that he would have been a great businessman, partly due to his leadership ability and due to his understanding of men. As we have learned previously, Napoleon truly understood the power of incentives when leading men. As he famously once said, “men are moved by two levers only fear and self-interest.”
“It is hard to imagine Napoleon as a businessman, but I have thought that if he had applied himself to commerce and industry he would have been the greatest businessman the world has ever known. My, what a genius for organization!”
— John D Rockefeller
Turning Dirt to Luxury
“The market is a pendulum that forever swings between unsustainable optimism and unjustified pessimism. The intelligent investor is a realist who sells to optimists and buys from pessimits.”
— Benjamin Graham
As Warren Buffett once said, “the stock market is a device for transferring money from the impatient to the patient.”Buffett, inspired by his mentor Benjamin Graham, was well-known for using a cigar butt approach in his early days of investing in companies. In Buffett’s own words, the “Cigar Butt approach to investing is where you try and find a really kind of pathetic company but it sells so cheap that you think there is one good puff left in it.” Although the stub may be ugly and soggy, the bargain price makes the puff pretty much free.
Bernard Arnault also had the opportunity to purchase a cigar butt in 1978 with the collapse of the Boussac empire. Despite all the debts the company had, Arnault saw a few gems among the company’s assets. First, the company owned some valuable real estate such as the Chateau of Mivoisin. The company also held Christian Dior, which was truly the most valuable asset that Arnault wanted to acquire in Boussac. While successful company turnover are rare, Bernard Arnault took this as a challenge as it was well worth the risk:
“Since Pierre Godé’s telephone call, however, Bernard Arnault had become the most serious would-be buyer. He saw problem cases as a challenge. After all, companies that are in ruins hold the greatest surprises and bring the greatest profits if they can be pulled round. All you have to do is delve into them deeper than anyone else and work on them without leaving anything to chance.”
— Nadege Forestier & Nazanine Ravai
As a matter of fact, most people surrounding Arnault tried to convince him to not get involved into Boussac, especially considering that, previously, other entrepreneurs tried to took this challenge and failed horribily. Nonetheless, perhaps due to Arnault’s decisiveness, once he had a decision in mind, no one was going to convince him of otherwise. Actually, all this discouragements only made him push even harder to close the deal.
“Alain Clarou dissuaded him: ‘I know a lot about the whole business. For a while there was money to be made by speculating in Boussac shares, but that’s all over now. Don’t get involved.’ It was the same story at the CCF where M. Langagne said coldly: ‘Boussac files a petition for bankruptcy every three years. You will fare no better than your predecessors. You won’t last three years.’ A bet was even placed on it. Far from discouraging the two men, this consensus of opinion acted as a stimulus.” — Nadege Forestier & Nazanine Ravai
So why was Bernard Arnault so adamant in going through all this trouble to purchase Dior? For Arnault, Dior embodied “everything that is most beautiful in the world.” The first thing Arnault did upon his purchase of Boussac was to re-establish what Dior represented; a symbol of luxury and exclusivity.
Bernard Arnault’s concept of luxury was not well understood. In fact, before others, Arnault had understood that luxury was a truly profitable industry. While his friends said he was in love with the luxury goods industry, Arnault replied: “Not at all. You can’t explain love. My relationship to luxury goods is really very rational. It is the only area which it is possible to make luxury profit margins.”
In my opinion, Arnault’s tenure with Dior and at LVMH proved how brand name can be a terrific economic moat. Here’s what Arnault said concerning his objective at the helm of LVMH following his purchase of LVMH which truly highlights his understanding of the power of brand name.
“My ten-year objective is that LVMH’s leading position in the world be further strengthened in the luxury goods sector. I believe that there will be fewer and fewer brand names capable of retaining a worldwide presence and that those of our group will be among them as we will provide them with the means for growth [...] My plan for the next six months is to see all the group managers and increase their motivation by sharing my highly ambitious objectives with them.” — Bernard Arnault
Warren Buffett once explained that Berkshire Hathaway focuses on purchasing companies with an enduring competitive advantage. In fact, he mentions that when evaluating a business’ performance on a year-to-year basis, the number one question he asks himself if if the competitive advantage have been made stronger and more durable than before, and that’s even more important than the Profit & Loss for a given year.
"So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn’t necessarily mean the profit will be more this year than it was last year because it won’t be sometimes. However, if the moat is widened every year, the business will do very well. When we see a moat that’s tenuous in any way - it’s just too risky. We don’t know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses-or virtually all of our businesses-have pretty darned good moats.”
— Warren Buffett
As such, it is fair to say that a luxury brand name is a strong enduring moat. In fact, customers are more willing to pay more for the products due to the brand name’s recognition and exclusivity. As a matter of fact, LVMH is known to destroy unsold bags to increase the scarcity.
Here’s how Pat Dorsey explains the power of brand name:
“But the key thing to look at is — and this gets back to your initial point about mindshare — does the brand change customer behavior? Does it make the customer act differently? It can do that in one or two ways. It can either increase the customer’s willingness to pay. You pay more for Coke than you do for President’s Choice Cola. You pay more for Hershey’s [HSY] than you do for lower-end chocolate. Or does it reduce search costs? You become familiar with a product. You don’t want to compare prices all the time on a stick of gum; so you just buy Wrigley [owned by privately held Mars]. You buy Wrigley because it’s what you want, and it’s a $0.50 pack of gum. I’m not going to sit here comparing 50 cents. You’ve reduced my search costs.”
— Pat Dorsey
Cascades
“How do you make money? Spinoffs, split-ups, liquidations, mergers and acquisitions.”
— Mario Gabelli
Bernard Arnault shocked the world by acquiring Dior and LVMH in such a short time. He truly showed his class as one of the best financiers of his time. As a matter of fact, Arnault was confident in his ability to buy companies, restructure them and buying again in order to restructure again.
In fact, he learned the basic concept of techniques called cascades, where “instead of having the majority, that is 51 per cent of the capital in company A, it is better to have 51 per cent in a purely financial company B, which itself holds 51 per cent of company A. One therefore also has control of company A by dividing the initial capital outlay. This reasoning can be continued infinitely.“
Arnault was a master of raising capital through the stock exchange. Rather than having to rely on bankers to support his companies’ takeovers, he would obtain the capital through the stock market.
“This technique, although complex, was a technique he had perfected. This was the fourth time he had used it: a year before he had introduced Conforama onto the secondary market, then the holding company Arnault et Associés in which the family only retained a 60 per cent interest. He had just hived off 42 per cent of the capital of Dior by way of private investors to find 3.3 billion francs to allow him to pursue his purchases of LVMH shares. The principle was simple: 1) he bought the companies, 2) he boosted their fortunes, 3) he could then raise capital in order to move on to new acquisitions.”
— Nadege Forestier & Nazanine Ravai
By doing so, Arnault would put one of his subsidiaries on the stock market in return of much needed money. But yet, not only did this maneuver allowed him to not lose overall control of the company, but would in fact, it would reinforce his company’s fortune. This was due to the fact that he did not just make any type of acquisitions. Arnault made sure to reinforce a concept when making acquisition: he wanted to build a federation of complementary companies with a central strategic unit rather than a confederation of separate companies under the umbrella of a purely financial holding company.
Furthermore, this technique allowed Arnault to build a tremendous conglomerate of companies in a quick amount of time. In fact, this allowed him to acquire much larger companies with minimum capital required. A tailored-made method for Arnault who was hungry for acquiring more luxury fashion brands.
“The best way of orchestrating takeovers was with other people’s money. The small shareholders would thus replace the bankers of his earlier operations.”
— Nadege Forestier & Nazanine Ravai
The concept of only purchasing complementary companies with a central strategic unit reminds me of the concept of “1+1=3” that we have learned from Sam Zell. Zell learned the benefit of scale which became a big influence on how he would assess his future investment opportunities in and outside of real estate upon reading Zeckendorf’s book, “The Autobiography of the Man who Played a Real-Life Game of Monopoly and Won the Largest Real Estate Empire in History”.
“Zeckendorf viewed assets as a sum of parts, so he could increase the value of the whole. Various parts were more valuable to different buyers, so Zeckendorf could maximize the value of his holding overall, in effect making 1 + 1 = 3.”
— Sam Zell
Beyond the Book
Read "Exclusive Interview with Pat Dorsey on moats" by The Manual of Ideas
Read "Moats" by Investment Masters Class
Read "Frugality: Paying the Price" by Ben Franklin Circles Team