Today’s Chapter is based on the book “Bernard Arnault: La passion créative” by Yves Messarovich.

Previously on Bernard Arnault:

Here’s what I have learned:

Permanently Dissatisfied

“Being very good is no good, you have to be very, very, very, very, very good.”
— David Ogilvy

While others would have been satisfied in Bernard Arnault’s position after his acquisition of Dior, Arnault was just beginning his adventure into building the largest luxury company in the world. Even today, with the success he has at LVMH, Arnault, now one of the richest person in the world, continues to be motivated in building his company.

What motivates him today? Arnault explains that he has this creative passion in him that won’t allow him to rest on his success. As he once said, a company that doesn’t grow is, in fact, in decline. Hence, in Bernard Arnault’s opinion, to build a successful company, it is important to be in a permanent state of dissatisfaction.

As a matter of fact, at LVMH, the company has five core values:

Quality of products
Creativity
Image
Company spirit
Desire to permanently question one’s reason to exist and to be the best

Bernard Arnault explain that progress comes from this constant questioning of one’s reason to exist. This state of permanent dissatisfaction is the reason why LVMH is always trying to improve even when they are the world’s leading luxury brand.

In Arnault’s opinion, there is nothing worse than being satisfied. Once we believe that we are the best or that we’ve succeeded, it is the beginning of the end. One way to keep his management team motivated in this path of constant improvement is by giving them interest in the company. In fact, he mentions that it is primordial for a company like LVMH to have the management team interested in the results of the brands they are in charge of. And, the best way to implement this entrepreneurial mindset into his employees is by having them own shares in the company.

Furthermore, to encourage innovation and risk taking in the company, Arnault mentions that it is important to allow employees to make mistakes. However, he specifies that there is a difference between mistakes and failures. While mistakes are acceptable, recurrent ones are not since they transform into failure.

This concept of permanence dissatisfaction reminds me of an important notion to succeed in business. As we have learned previously from Michael Bloomberg, constant innovation is a must when running a company, due to competition. Bloomberg mentions that “in business, growth is a necessity: you grow or you get out.” He explains that no company can afford to stay complacent, no matter how successful it is.

In Bloomberg’s case, the company grows by expanding on their basic product. This can be done by improving their product’s functionality. As customers’ needs are always in constant evolution, innovation is required. This is a never ending process. In fact, Bloomberg says that “Keeping serviceable what you’ve built is a never-ending process. Every day, something you never thought could go wrong, does. So every day plus one, you fix a problem you previously didn’t know you had.” This is based on the fact that customers are always looking for “more capabilities, better efficiency, increased reliability, fewer controls.” If a company stops innovating, it will surely be surpassed by its competitors.

“Customers come and go; their needs change with time, and the services that help them do their jobs are always in flux. Woe to the supplier without the best offering. If you’re depending on longtime personal relationships, and not the quality of what you provide, start working on your golf game: You have a friendship with the buyer—your competitor already has one with his or her successor!”
— Michael Bloomberg

“Rowing harder doesn’t help if the boat is headed in the wrong direction.”
— Kenichi Omae

As we have seen previously with Joe Montana, one of the most important things in achieving great things is to know what you are pursuing. As he mentions, “it is impossible to strive for something until we know what it is we are pursuing. You have to know what you want.”

If we do not know what our specific goals are, it is very difficult to have the drive, discipline or imagination to achieve them. As such, the first thing to do is to identify what we want to accomplish. Not only that, I believe it is primordial to choose which goals we need to focus on in order to manage our time better.

One way of doing this is by writing down the goals we want to achieve and to circle the top three we want to achieve. The rest should be eliminated.

“This first principle, knowing what we want, is the beginning of achieving performance excellence.”
— Joe Montana

Similarly, Kazuo Inamori also preached us to be persistent in our effort. Inamori explains that while working hard is important, hard work can be useless if one does not have an objective.

Inamori explains that “it’s meaningless to do something persistently if it’s done in a vague or aimless manner.” However, it is difficult to not achieve success if one is committed to making himself better than he was yesterday, and tomorrow better than today.

In Bernard Arnault’s case, his life objective has been clear from day one. What motivated and passionated him since a young age was to build and manage a company. Not only that, if he were going to build a company, he might as well try to make it the best. In fact, when Arnault acquired Dior, he told his management team, “We will become the number one in the world.” He still remembers the doubtful comments he received, but, at the end, he did it.

Furthermore, for a company to succeed, Bernard Arnault is also a believer that a clear strategy and vision must be in place. He likes to quote Seneca who once said, “If a man knows not to which port he sails, no wind is favorable.”

“In business, it is primordial to know where you want to go.”
— Bernard Arnault

However, once a corporate’s goal is set, it is even more important to find the talent to execute on your target objective. Arnault mentions that the real key to success is to find and to motivate people with great talent.

As we have seen previously with David Ogilvy, you need to hire people who are strong in the areas you are lacking. Ogilvy once said, “Don’t compound your own weaknesses by employing people in key positions who have the same weakness.”

As a matter of fact, Ogilvy explains that if you find an an individual who is smarter than you are, you should hire him at all cost. If need be, pay him more than you pay yourself. Once they are hired, keep them at all cost! Ogilvy explains that“the loss of an exceptional man can be as damaging as the loss of an account.”

David Ogilvy once gave Matryoshka dolls to his senior executives to teach them the lesson of always hiring people smarter than you are:

“I said: “That’s you. Open it.” So they opened the doll, and inside was a smaller one. And they opened it up and each doll got smaller and smaller. And finally, when they got to the very inside, in the smallest doll they found a tiny piece of paper on which I had written a motto. When they unfolded it, it said: “If you always hire people who are smaller than you are, we shall become a company of dwarfs. If, on the other hand, you always hire people who are bigger than you are, we shall become a company of giants.””
— David Ogilvy

“My relationship to luxury goods is really very rational. It is the only area which it is possible to make luxury profit margins.”
— Bernard Arnault

As we have learned previously from Bernard Arnault, luxury brands can be a powerful moat. In fact, the reason why he first purchased Boussac was due to that the failing company owned Christian Dior. Arnault understood that with a brand name like Dior, even with a huge amount of investment of time and money, it would be difficult to replicate a brand name as strong as Dior. This is a sign of a strong moat.

This is eerily similar to what Warren Buffett once said about Wrigley’s and Coca-Cola, “You give me a billion dollars and tell me to go into the chewing gum business and try to make a real dent in Wrigley’s. I can’t do it. That is how I think about businesses. I say to myself, give me a billion dollars and how much can I hurt the guy? Give me $10 billion dollars and how much can I hurt Coca-Cola around the world? I can’t do it.”

To explain how powerful the name Christian Dior was, Arnault provides an anecdote of the first time he went to New York. When asked by the taxi driver where he came from, he mentioned he was French and asked if the driver knew about France and who was the president. The taxi driver replied that he did not know who was the president but he knows about Christian Dior. This certainly made an impression on Bernard Arnault.

Arnault explains that there aren’t many brands that can be considered “real economic luxury stars”. He mentions that “real economic luxury stars” have three characteristics:

Timelessness
Exceptional Free Cash Flow
Solid Growth over a long period of time

He cites Cartier, Louis Vuitton and Dom Perignon as examples of “real economic luxury stars”. In Dom Perignon’s case, he reiterates that he is certain that even in century, people will still drink Dom Perignon which cannot be said about other brands.

As we have mentioned in our previous chapter on Bernard Arnault, luxury brands are great because their brand name allows them to high profit margins, what Arnault calls “luxury profit margins”. As in the case of Louis Vuitton, the company is able to achieve an operating income margin of over 45% which is exceptional compared to other businesses in the industry.

As such, it is clear that a brand name is a very valuable asset, in terms of image. Arnault mentions that all communications done between the brand and its customers are important whether it is through the media, advertising or even at the store. As he once said, “image is one of the secrets to success.” In the case of Louis Vuitton, the essence of the brand relies on providing an image of high quality product.

Similarly, we have learned previously how Ralph Lauren promoted his brand image by making it more desirable to his customers. He did so by doing two things:

First, Lauren promoted an image of exclusivity to his products. As a matter of fact, the company name started as Polo Fashions because polo was a rich man’s game that illustrated money, style and exclusivity, the same qualities that Ralph wanted his company to have. This could be seen with the way Ralph Lauren would advertise his products.

Ralph Lauren had amazing instinct in motivating the customer to buy his products, whether it was fragrance, cosmetics or shirts. While other clothing companies were advertising a single product, Lauren was promoting a lifestyle by communicating with images. Lauren once said, “The line is designed with a story in mind, a story we discuss. We talk about clothes and how they are worn and where they are worn and why you wear it…If I'm working with a fabric I like I will say, okay, put this in all the accessories, put it into wallpaper, put it into this or that. I know where I want to see it. There's an overall picture. Do this, this, this. That's how I work."

Lauren would often use various themes such as family, romance or elegant living in his advertising and this never changed since the inception of Ralph Lauren.

"Advertising is not supposed to be about buying. When I started, people thought they had to stand there with a suit and say, 'Here's my suit.' That's how the industry worked. I said, 'No, the clothes have to be there but it's the mood that's important. Why do you become enamored with something? It's the image and mood of these people, who they are, what they feel like, you like them, and then you like what they wear."
— Ralph Lauren

Furthermore, Lauren made sure that his store would also be a medium to tell his story to his customers. As he didn’t have much money to advertise, his store became even more important in the promotion of his brand name. As such, he made sure that it was decorated similar to the lifestyle that Ralph Lauren’s brand represented. And, to make it even more appealing, Lauren made sure that the employees hired in the store would project the Polo image.

Second, in order to make Ralph Lauren chic and exclusive, Lauren made sure to not have his products sold in stores that would kill the mystique or the exclusivity. As a matter of fact, he never wanted to do business with big department stores as it would kill the company’s exclusivity.

“Exclusivity, individuality, being special, relating to certain images. If you buy expensive products you don't want to see them all over the place. You want to know what you are getting is a rarity. I still believe that."
— Ralph Lauren

“But, at any rate, it’s an interesting model of how the scale of things and fanaticism combine to be very powerful.”
— Charlie Munger

As we have previously seen with Sol Price and his Price Club concept, economies of scale is a valuable mental model to understand in business. The idea for Price Club was conceived as a wholesale business selling merchandise to small, independent businesses. The goal was for business owners to “come to a large warehouse, select the products from steel rack displays, pay either by check or cash, and take the products back to their stores, restaurants, or offices.“

The major advantage to purchase at Price Club was obviously because the prices would be much more lower than traditional wholesalers who often offered extra services such as order taking and delivery. In Price’s mind, these extra convenient services would be offset by the fact that Price Club’s warehouse “would also serve as a storage facility for the various business owners so they would not have to buy and store large quantities of merchandise at their stores or offices.” This would be extremely helpful for small businesses to compete with the larger discount stores.

“By reducing merchandise acquisition costs for retailers and other businesses, everyone would win. Small businesses would pay less for their wholesale goods and supplies, retailers could charge lower prices—in turn improving their ability to compete against chain stores, especially the growing number of discount stores that were under-pricing small businesses.”
— Robert Price

In his famous speech at USC Business School delivered in 1994, Charlie Munger goes over the advantages of economies of scale and how combined with fanaticism it can lead to amazing results. As a matter of fact, Munger explains how Sam Walton built Walt-Mart through the powerful combination of scale and fanaticism:

“It’s quite interesting to think about Wal-Mart starting from a single store in Bentonville, Arkansas against Sears, Roebuck with its name, reputation and all of its billions. How does a guy in Bentonville, Arkansas with no money blow right by Sears, Roebuck? And he does it in his own lifetime—in fact, during his own late lifetime because he was already pretty old by the time he started out with one little store…
He played the chain store game harder and better than anyone else. Walton invented practically nothing. But he copied everything anybody else ever did that was smart—and he did it with more fanaticism and better employee manipulation. So he just blew right by them all.
He also had a very interesting competitive strategy in the early days. He was like a prizefighter who wanted a great record so he could be in the finals and make a big TV hit. So what did he do? He went out and fought 42 palookas. Right? And the result was knockout, knockout, knockout—42 times.
Walton, being as shrewd as he was, basically broke other small town merchants in the early days. With his more efficient system, he might not have been able to tackle some titan head-on at the time. But with his better system, he could destroy those small town merchants. And he went around doing it time after time after time. Then, as he got bigger, he started destroying the big boys.
Well, that was a very, very shrewd strategy.
You can say, “Is this a nice way to behave?” Well, capitalism is a pretty brutal place. But I personally think that the world is better for having Wal-Mart. I mean you can idealize small-town life. But I’ve spent a fair amount of time in small towns. And let me tell you you shouldn’t get too idealistic about all those businesses he destroyed.
Plus, a lot of people who work at Wal-Mart are very high grade, bouncy people who are raising nice children. I have no feeling that an inferior culture destroyed a superior culture. I think that is nothing more than nostalgia and delusion. But, at any rate, it’s an interesting model of how the scale of things and fanaticism combine to be very powerful.”
— Charlie Munger

In Bernard Arnault’s case, he understood that there was a great shared economies by regrouping multiple luxury brands into one large entity. Firstly, this would allow a multiples of classic operational synergies which offer significant economies of scale such as legal services, accounting services and logistics. The large size of the company also allows LVMH to purchase more advertising at a preferential rates.

Secondly, by acquiring other luxury businesses and by building a conglomerate, LVMH allows more managerial opportunities for their young talents which allows them to recruit the best of the best every year.

Finally, Arnault explains that this strategy of acquiring other companies is only possible due to how profitable LVMH is. As a matter of fact, he mentions that it is always the same logic: the big stars of the group provide a substantial and recurrent cash flow that allows to finance the growth of the smaller entities among the company or to simply acquire another brand. All of this depends on the rate of investment of each opportunities. This notion of shared benefits is the key to LVMH’s success.

For example, Arnault mentions that in order for the company to grow, it is primordial for LVMH to acquire or create companies in the “third horizon”, meaning young brands with fast growth that can eventually become “first horizon” companies:

“We must therefore build the future on the second or third horizon rather than on the first. For example, we bought very young cosmetics brands in the United States (Bliss, Hard Candy, Benefit, Urban Decay, Fresh). They are very connected, and they offer strong growth rates of around 50% to 80% per year, or even more. If some of them confirm this dizzying journey over the next ten years, then we will have made a fantastic investment.”
— Bernard Arnault

However, Arnault warns us of the danger of building a large conglomerate without promoting a decentralized management system. In fact, he mentions that CEOs that try to manage large conglomerates without delegating powers will have a lot of difficulties. He explains that in order for companies to remain successful, the management team must keep a direct and personal contact with their products, employees and customers. As such, Arnault believes that managing companies like family businesses, in an independent manner is the reason for their success in growing LVMH into such a large group of companies.

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Beyond the Book

Read "Your Response to Mistakes Defines You" by Farnam Street

Read "A Lesson on Elementary Worldly Wisdom As It Relates To Investment Management & Business" by Charlie Munger

Read "Learning from LVMH's Bernard Arnault" by Investment Masters Class

Permanently Dissatisfied

Clear Vision

Power of Luxury

Economies of Scale

Beyond the Book

Biography Nuts

Chapter 65 - Bernard Arnault: La passion…