I have begun studying the life of Bernard Arnault, the richest man in France who is most well-known for being the CEO of the unweildily named luxury brand company LVMH Moet Hennessy Louis Vuitton SE. It turns out, the extended name is instructive in giving us a clue as to the sheer number of luxury brands that are owned by the Louis Vuitton umbrella.
It dominates the luxury alcohol market with Dom Perignon and Moet & Chandon. It dominates watches with Tag Heuer and Zenith. It dominates fragrances with Dior and Givenchy. It dominates retailing with Sephora and DFS.
The stock is controlled by Arnault through his family holding company, appropriately named Arnault Family Group, which trades on the Euronext exchange. Because it is a French company, it has largely evaded the attention of American investors.
I believe this omission, if due to ignorance, comes at the cost of an individual’s long-term portfolio performance. There are few businesses that have reliably trounced the market quite like Louis Vuitton. Since 1992, the price of the stock alone has increased over 15-fold, giving 19-fold returns when including the dividends and 21-fold returns if you presume that the dividend has been reinvested during this time. The reinvestor got himself 13% returns over this period, which is remarkable considering that LVMH stock was an obvious, large, blue-chip caliber stock at the beginning of the measuring period and still went on to compensate its investors quite well for dedicating a portion of their capital to this stock.
I have learned so much from Bernard Arnault by studying his approach to managing LVMH, including the following:
#1. Take craftsmanship seriously and insist on being the best. When you bring a product to market, make sure it is excellent. This is the key to repeat customers. You don’t want to go near businesses that are like Yankee Candle after the private equity buyout that resulted in drastically cut costs and an inferior product. You want to know that once a customer purchases your product for the first time, they will feel a sense of having found something special and come back for me. It’s not selling the first bottle of Dom Perignon to a customer that gives the business generations of successful returns–it is selling the second, third, fourth, and fifth of bottle over a lifetime that supports the sustainability of returns.
#2. Infuse your product with a sense of history. In the field of technology, being new and unique can be the source of a branding power. In all other industries, history is a source of brand value. If a bank has been the community for 100 years, you won’t hesitate to deposit money there not only because of FDIC insurance, but because you know that a bank capable of surviving the Great Depression is more likely to be made of “sturdy stuff” capable of surviving the next recession compared to the bank that just received capital and is opening up down the street. Longevity is a source of affirmation, and tying in your product to the consumer purchase decisions of customers over the prior generations is a source of appeal for purchase because perpetual survival is a form of social proof.
#3. Pay attention to real human motivations. It is a skill to recognize the power of privilege as a source of branding. Politically, no one wants to say “I want to buy products that make me feel superior to you.” It reveals pettiness, vainglory, and often, envy. Group polling would not honestly reveal the extent to which humans seek the purchase of consumer goods that reveal privilege as a means of establishing their status to the group. Building retail stores in the best parts of town, not permitting items to go on meaningful sales, and conducting campaigns that appeal to exclusivity explain why it has such a branding success.
Bernault Arnault’s LVMH is a mental model factory. It has items that sell for 20x the cost of manufacturing. The profit margins on luxury brands are unlike anything else in the economy because, by definition, you are not competing on price or even the utility of the items being sold, but instead, the “feeling” that one acquires when associated with the product. That “feeling” can be worth hundreds, or even thousands of dollars.
If I were money manager of a global mutual fund, Louis Vuitton would be one of the top five holdings. If it were on sale, I would have no problem putting 10-15% of the fund into the stock, regulatory requirements for diversification aside. It is that good. It is that sustainable. There are so many luxury brands in the portfolio, earning profit margins almost double the industry norm for decades on end, that the wealth creation will continue. I have almost no doubt that an investor who loads up on LVMH, and holds it through thick and then, will beat the S&P 500 over most rolling ten-year periods.