Bernard Arnault is the third richest man alive. You wouldn’t know it since he shuns the spotlight. A recluse who got his start in engineering and construction but made his fortune through a collection of “high society” luxury consumer brands. A soft-spoken man with a history of brutal takeovers and scorched earth restructurings.
In this piece, we’re going to analyze and dissect exactly how Arnault made his fortune. We’ll dive into the unique perspectives that helped Arnault create the greatest collection of brands in the world. And we’ll end with the unique tips, tricks, and lessons learned that can be gleaned from studying this titan of industry.
Let’s dive in…
After graduating from a prestigious engineering school, Arnault joined his father in working for the family’s civil engineering business where he worked on the construction side.
Filled with grand business ideas at a young age, Arnault was able to convince his father to sell the engineering company and focus on real estate and hospitality. Arnault would run the real estate business, which focused on holiday accommodations. The business was called Férinel Inc and Arnault ran it quite successfully.
His fascination with Dior (and perhaps luxury brands as a whole) started with his mother. As a child, Arnault remembered his mother’s fascination with various Dior perfumes.
This is where we see Arnault’s first awareness in the power of a brand.
The story goes that Arnault came to the US and hopped in a taxi. His cabbie, upon hearing Arnault’s accent, revealed his love for French culture and politics.
Arnault asked the driver if he knew the name of the sitting French president. The cabbie’s response rocked Arnault’s world:
“I do not know the name of your President, but I do know the name, Christian Dior.”
That moment changed Arnault’s thinking, career, and passion forever.
Construction Engineer Turned Hostile Takeover Artist
Arnault obsessed over Dior and the brand recognition the company had created. Dior was a hidden asset inside a failing textile mill operation. It’s an intriguing story and a powerful testament to finding value in obscure places. Let’s go back in time, to 1946.
Marcel Boussac was a serial entrepreneur and founded Dior in 1946. He started with a single-factory shirt business. From there, he bought 60 textile mills and grew his empire, employing 30,000 people at its peak. Along with Dior, Boussac owned a stud farm, horses and two newspapers.
Then the debtors called. Boussac’s company was in serious trouble. Bankruptcy was all-but guaranteed. So, Boussac did what he had to do. He sold off assets. The court ordered the sale of the Boussac Group (which held the profitable Dior business) to another holding company, Agache Willet, Inc.
Agache Willet paid $164M for Boussac with promises to repay the substantial debt burden in 15 years.
But Agache Willet couldn’t pay the debt. They too, were on the verge of bankruptcy when our “hero”, Bernard Arnault stepped in. In 1984 Arnault bought the failing Agache-Willot-Boussac for $15M. Four years later, this snippet appears in a 1988 New York Times article (emphasis mine):
“Mr. Arnault renamed the company Financiere Agache, and nursed it back to health. He sold some ailing operations and cut costs in others. As a result, Agache earned $112 million on revenue of $1.9 billion last year.”
This single purchase catapulted Arnault from family businessman to luxury-brand kingpin. Solidifying his place amongst France’s highest-status operators. But Arnault was only getting started.
And we see this across a myriad of investor success stories. Whether it’s Buffett’s big bet on AXP or The Chandler Brothers pouring their entire net worth into four Hong Kong investment properties.
Our next story shows Arnault’s relentless desire to be the best, and to own the best. It doesn’t matter how he gets the brands, as long as he’s in full control when it’s all said and done. It’s where Arnault earns the moniker “The Wolf in Cashmere”.
The LVMH Takeover Saga
We know Arnault as the leader and head-operator of LVMH. But what many don’t know, is how Arnault got that role. The story is worthy of an academy award for best drama screenplay. The New York Times called Arnault’s LVMH takeover a “corporate duel to the death.”
It all started in the Spring of 1987. Chevalier, manager of luxury spirits company Moet-Hennessy, noticed a peculiarity in his company’s stock price. Someone was buying a lot of shares causing the stock to rise, “mysteriously.”
Chevalier feared a takeover bid was behind the silent accumulation. He needed a white knight. After consulting with his investment advisers he picked one man, Henry Racamier. Racamier, at the time, was the owner of the most luxurious leather goods brands in the world — Louis Vuitton.
The NYT article describes the union, writing, “The merger aimed to prevent a takeover by creating a more expensive, harder-to-grab target in which the four families would control 51 percent of LVMH’s stock.”
The Moet-Hennessy / Vuitton marriage didn’t last long. Let’s head back to the NYT article for the details (emphasis mine):
“Within weeks, however, the love affair turned sour. Racamier, now in the No. 2 spot, had some stationery printed on which his name appeared above Chevalier’s. Chevalier had the stationery destroyed. Racamier said he wanted to bring the former head of the Chanel fashion house to Vuitton as his potential successor; Chevalier rejected the idea, asserting that there was already enough managerial talent in-house.”
Sounds like something straight out of a Netflix special.
Despite their public feud, Chevalier had other things to worry about — particularly the company’s stock price. It was heading higher which meant someone was still buying a large position.
Chevalier had to act quickly, again. He needed another white knight. This time, he chose Guinness PLC. Chevalier initially proposed a 3.5% stake in LVMH to Guinness. But such a small amount wouldn’t provide adequate protection against a hostile takeover.
Chevalier upped the stake to 20%.
Seeing these actions from his corporate enemy, Racamier phoned a friend — Bernard Arnault. According to the NYT article, Racamier saw a younger version of himself in Arnault:
“When Racamier invited Arnault to be his ally in the summer of 1988, he must have viewed Arnault as a potential protege, a younger version of himself. Racamier suggested that Arnault bid for 25 percent of LVMH’s stock, which, with the Vuitton family holdings, would give the two groups majority control.”
The tale of the tape: Arnault and Racamier vs. Chevalier and Guiness. Then Arnault switched sides. Like Pippen leaving the Bulls, Arnault left Racamier. Chevalier and company persuaded Arnault to join their side, with promises of a greater share in LVMH.
The new team — Arnault, Chevalier and Guinness — bought 24.5% of LVMH for $1.5B.
This infuriated Racamier. As it rightfully should! After all, it was Racamier that brought Arnault to the evening’s dance. Racamier’s frustration resulted in aggressive buying. Vuitton’s master bought more and assumed 33% control.
The Wolf retaliated. Like clockwork, Arnault bought another $600M worth of stock in three days to gain 37.5% control. This made Arnault the largest shareholder in the battle. Not Racamier. Not Chevalier and Guinness. Arnault.
Such attrition warfare continued for months on end. When it was all said and done, Arnault left the arena the victor.
The Oracle of Luxury
The Wolf in Cashmere has been on a global buying spree of top quality brands since 1984. Arnault’s added brands such as Givenchy & Fendi, Donna Karan, and Marc Jacobs. He’s also added a few retailers, including Sephora, DFS, Bulgari, and TAG Heuer.
Arnault’s acquisition strategy boils down to the following: Hard-nosed dealing and extreme aggressiveness in going after top brands.
It’s no surprise that Arnault mentions the name “Warren Buffett” on his list of mentors. Arnault is the Buffett of the luxury brand world. He buys high quality, strong brand name companies, with the aim of holding them forever.
Both got their start by buying a failing textile business.
The similarities also bleed into the management of the failing enterprises. Both Buffett and Arnault closed operations, fired hundreds of workers, and reaped personal profits. To Buffett’s credit, he at least attempted to keep the mill in operation.
Both have very long-term investment horizons. Arnault cares little about quarterly financials or short-term profits. Take this excerpt from an article about Arnault in GeniusWorks (emphasis mine):
“Indeed, [Arnault’s] motivation is much less about financial results, and much more about brand legacy, saying he is much less interested in quarterly results than he is in brand health and growth.”
This is critically important in understanding the mind of a master business leader. Arnault knows that what ultimately pays him (and in turn, his shareholders) is brand loyalty. That’s it. It’s not one segment’s margins. It’s not top-line revenue growth. Brand loyalty and having the customer still crave every new product — that’s what matters.
We see this from Jeff Bezos at Amazon. What does his first shareholder letter discuss most? Obsessing over the customer. Or watch this video where Bezos says the phrase “obsess about the customer” ad infinitum.
Warren Buffett also doesn’t care what a stock price will do in the short-term. The stock can do whatever it wants. But over the long-term, the stock should perform in-line with the quality of the business (i.e., how well the business generates returns on its cash).
Arnault travels that same wavelength — but with brand quality and durability — not stock price. Arnault judges his business by the staying power of its brands. Not whether it exceeds quarterly earnings forecasts (emphasis mine):
“Money is just a consequence. I always say to my team, don’t worry too much about profitability. If you do your job well, the profitability will come … When we discuss a brand, I always tell them my real concern is what the brand will be in five or ten years, not the profitability in the next six months. If you take a brand, like Louis Vuitton, which is the number one luxury brand in the world, what I am interested in is how we can make it as admired and successful in ten years as it is today. It’s not how much we’re going to make next year.”
That’s the point. It’s not about hitting quarterly earnings estimates or margin targets. It’s about doing what you know drives long-term value for the customers and the company. Oftentimes, this idea wages war with the what-have-you-done-lately crowd. God forbid a company loses a bit of money in the short run to reap long-term competitive advantages.
But if you want to be the best — and if you want to invest in the best — you must think like they do.
Running A Company The Arnault Way
There’s little luck involved in Arnault’s success. It’s built upon these three pillars
- Always Act Like A Start-Up Company
- Let Creators Run Wild
- Create Products That Create Customers
Act Like A Start-Up
One of the secrets to LVMH’s success lies in its decentralized operations. Arnault explains this concept in an interview with HBS (emphasis mine):
“LVMH is, as a company, [is] so decentralized. Each brand very much runs itself, headed by its own artistic director. Central headquarters in Paris is very small, especially for a company with 54,000 employees and 1,300 stores around the world. There are only 250 of us, and I assure you, we do not lurk around every corner, questioning every creative decision.”
Decentralized leadership explains how LVMH — a multi-billion dollar company with thousands of employees — retains its creative flow and small-business feel. That’s on purpose.
Arnault hammers home the importance of thinking small. In Arnault’s eyes, LVMH isn’t this massive conglomerate machine with miles of red tape. But a nimble, flexible speed boat. One that can succeed and fail quickly.
Here’s his take on the importance of staying small (emphasis mine):
“I often say to my team we should behave as if we’re still a startup. Don’t go to the offices too much. Stay on the ground with the customer or with the designers as they work. I visit stores every week. I always look for the store managers. I want to see them on the ground, not in their offices doing paperwork.”
Think small. Move quickly. Small boats can turn faster than large tankers. This brings us to LVMH’s second success factor: decentralized command.
Total Creative Control
Arnault doesn’t believe in micro-managing. He lets them do what they do best: create.
From Arnault: “You don’t “manage” John Galliano, the wildly iconoclastic head of the House of Dior, just as no one could have “managed” Leonardo da Vinci or Frank Lloyd Wright.”
By surrendering control, Arnault unlocked the true creative power of his designers. Designers weren’t worried about budget cuts, red tape, or management oversight. In the Dior example, Arnault remembers (emphasis mine):
“Indeed, unlike many executives who oversee the work of creative types—be they engineers, writers, or designers—Arnault does not believe in managerial limit setting. Artists must be completely unfettered by financial and commercial concerns, he insists, to do their best work.”
In other words, Arnault’s designers are the “Dreamers” branch in Walt Disney’s classic thinking tool: Dreamers, Realists, Critics. Let your designers be dreamers. Restrict them in any way and you risk placing a tourniquet around their minds.
Again we see similarities between Arnault and Buffett. When asked about management, Buffett often says he lets them “do their job”. After all, if he’s right in his investment, he won’t need to interfere with management.
Arnault explains his management process after he adds a company to his portfolio (emphasis mine):
“We try to keep the people at the brands, especially the artisans—the seam-stresses and other people who make the products—because they have the brand in their bones—its history, its meaning. At the stores, too, many of the salespeople have the brand in their bones. Most companies clean house when they acquire a new brand. We don’t do that because we have found it hurts quality terribly.”
Another aspect of Arnault’s creative genius lies in portfolio management.
How does one manage a portfolio of fashion designers? The same way great investors manage their portfolios: position sizing.
Arnault explains (emphasis mine):
Well, we don’t like failures. We try to avoid them. That is why, with many of our new products, we make a limited number. We do not put the entire company at risk by introducing all new products all the time.
Arnault spreads his bets. In doing so, he minimizes his risk of total ruin while maximizing the potential for new sales.
This is (in a nutshell) textbook portfolio management. Don’t let one company (or product) ruin your entire portfolio (or company).
Create Products That Create Customers
Marketing analyzes what the customer wants. Follow what they’re doing. Create a product and then test to see if the customer likes the product.
Arnault does things differently. LVMH creates products that create customers. He admits this strategy fails at times. But to Arnault, it’s not about sales. It’s never about sales. It’s about creating desire.
The way to put products in contact with consumers is to create a desire within the customer to buy.
In other words, it’s leading from the front. Arnault wants his brands to embody the “first mover” advantage. Remember, Arnault isn’t creating essential or necessary goods. Consumers could live without buying the latest Louis Vuitton handbag. But that’s what makes Arnault’s success all the more impressive.
He creates a sense of essentiality — a fever for fashion.
It’s at this point where we pivot into Arnault’s thoughts on star brands. This is the most powerful section for investors in public and private companies. Arnault’s ideas on what makes a business great, and what you should look for in business are timeless.
Arnault cuts to the heart of a business’ purpose with surgeon-like precision.
How To Invest in Star Brands
Arnault invests in “star brands”. These brands have the following traits:
- Highly profitable
That’s the beauty of Arnault’s approach to business and brands. You don’t have to operate in the luxury goods industry to create star brands.
A star brand has no set industry.
A plumber with exceptional craftsmanship, deep industry knowledge, and a high margin service business is a star brand. A landscaping company that takes pride in the way each client’s yard looks can be a star brand.
It’s a mindset.
And it’s these four qualities that make up great investments. Nobody would disagree with Berkshire, Apple, or Disney being star brands.
Possessing all four of these qualities at the same time is challenging. Even Arnault admits that. In his words, companies that desire star brands should “be sure you have mastered a paradox.”
Let’s break these attributes down in Arnault’s words.
Question: “What do you mean by timeless”
Arnault: It means the brand is built, if you wish, for eternity. It has been around for a long time; it has become an institution. Dom Pérignon is a perfect example. I can guarantee that people will be drinking it in the next century. It was created 250 years ago, but it will be relevant and desired for another century and beyond that.
Investor Application: While most of us won’t have the capacity to buy Dior or Dom Perignon — we can apply this idea of “timeless” to our own investment process. For example, if you’re focused on the timeless quality, look at companies with long operating histories. Think late 1800s into early 1900s. These are the timeless companies. It’s no small feat being in business for over 100 years.
Question: Why should you focus on such old companies?
Because companies take years honing their brand. Arnault expands on this idea (emphasis mine):
“The problem is that the quality of timelessness takes years to develop, even decades. You cannot just decree it. A brand has to pay its dues—it has to come to stand for something in the eyes of the world.”
But for the investor, it goes beyond time. As Arnault suggests, this company’s product or service needs to be in demand for the next century and beyond. Remember Brent Beshore’s take on swimming pool companies:
“As long as people dip their bodies in water for pleasure, we think the pool building business will do well.”
It’s not enough for a company to be timeless. If they want star brand status — they must grow. Fast.
Arnault: “Without growth, it is not a star brand, as far as I’m concerned.”
It’s crazy to think but in 2000, Arnault’s superstar Louis Vuitton grew sales 40%. Louis Vuitton is the largest luxury brand in the world. They grew 40%.
There’s a reason Arnault stresses high growth for his brands: balance. Here’s what he means:
“Growth shows the shareholders that you have struck the right balance between timelessness and fashion and that you have been able to charge a premium price because of that correct balance.”
Investor Application: Growth matters. In fact, I’m writing this for myself more than anyone. I hate paying for growth if I don’t have to. But the problem with that mindset is I might miss out on amazing, star brand companies. Why? Because growth is a sign that you’re doing something right by your customers. As Arnault says, “growth is a function of high desire. Customers must want the product.”
One way of incorporating high growth into your process is to simply screen for higher growth. Look at companies that have generated a long-term revenue CAGR higher than the market average.
Remember, you should add this high growth filter on top of your existing “timeless” filter.
One of the benefits of luxury brands is their high-profit margins. Louis Vuitton gushes cash because their brand commands an exorbitant price. But price is only one part of the profit margin function. The other side — cost of goods sold — has Arnault’s un-devoted attention.
Arnault: “High profitability comes at the back end of the process and behind the scenes. It comes in the atelier—the factory.”
The factory is where high-profit margins are made. And nobody scrutinizes the intricacies of a factory-like Arnault.
Don’t believe me? Listen to how he thinks about each individual factory process (emphasis mine):
“Every single motion, every step of every process, is carefully planned with the most modern and complete engineering technology. It’s not unlike how cars are made in the most modern factories. We analyze how to make each part of the product, where to buy each component, where to find the best leather at the best price, what treatment it should receive. A single purse can have up to 1,000 manufacturing tasks, and we plan each and every one.”
Arnault lives in the paradox better than anyone in his industry. Creative, free-flowing and laissez-faire with his creators. Dogmatic and authoritarian with his manufacturing process. It’s this blend that creates true cash-gushing margins.
Investor Application: Profit margin health is industry dependent. Costco, for example, would be a star brand in many investors’ eyes. Yet they have razor-thin net margins. A good filter for profitability is cash flow margins or EBIT margins. Companies with above industry-average EBIT margins are stronger businesses. They generate more cash than their competitors.
There’s so much we can learn from Arnault. We learn how to run a business, sure. But we also learn how to spot businesses that have star brand potential.
Arnault shows us how to run a business by:
- Always acting like a small company
- Letting creators run wild
- Creating products that create customers
We learn what to look for in star brand companies:
- Highly profitable
The solution is simple in theory and difficult in practice. Our job as investors is to find companies that are run by Arnault-like CEOs that possess star brand qualities. And then we hold them and let management do their thing.
Like Arnault, if you find one of these companies, one of these star brands run by exceptional management — buy big. Be a Wolf in Cashmere.
Student of value investing for over 13 years spending his time in small to micro-cap companies, spin-offs, SPACs and deep value liquidation situations.