LVMH

We tell the full history of LVMH, and how Bernard Arnault turned a $15m investment in a bankrupt French textile company into the world’s largest individual fortune. It’s a story that’s equal parts Berkshire Hathaway, Steve Jobs and Barbarians at the Gate… and wholly under-appreciated for the genius business model innovations that enabled it. Whatever industry you operate or invest in, there’s so much to be learned from Bernard and LVMH’s complete reshaping of the luxury sector over the past three and a half decades. And oh yeah, it also involves Nazi spies, Italian family murders, Rupert Murdoch, Rihanna becoming a billionaire, Jay-Z’s champagne feuds and Beyoncé wearing a 128 carat diamond. Tune in! :) Links: Bryan Burrough in Vanity Fair: Gucci and Goliath https://archive.vanityfair.com/article/1999/7/gucci-and-goliathEpisode sources https://docs.google.com/document/d/1wiw3EIhex1Os_xcwrtPK_y3JSwQX245fJ5wQm-IKBJw/edit?usp=sharingCarve Outs: The Gamecraft Podcast https://www.gamecraftpod.comDoug DeMuro buys a Carrera GT https://youtu.be/ZDXWUGsFkKUThe Peloton Tread https://www.onepeloton.com/referral/2be7cb6ed4cc4fffa3d02ad4cd352e91?source=app-nav&utm_source=ios_app&utm_medium=in_app&locale=en-USThe Eureka Theory of History Is Wrong https://www.theatlantic.com/magazine/archive/2023/01/science-technology-vaccine-invention-history/672227/ Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  All right, David, you ready?

• 0:01David Rosenthal?

  All right, ready?

• 0:02Ben Gilbert?

  Did you bring a cloth for popping your bottle?

• 0:04David Rosenthal?

  Of course I did. The only way to do it. I could have brought a saber.

• 0:08Ben Gilbert?

  You are far too classy. You did live in France, didn't you?

• 0:14David Rosenthal?

  Cloth is getting in the way.

• 0:16Ben Gilbert?

  Listeners, this is the best. We had planned to open bottles of Moet to start the episode, and David is struggling to open his.

• 0:24David Rosenthal?

  I'm weak. All right, here we go.

• 0:27Ben Gilbert?

  Hey!

• 0:29David Rosenthal?

  That was good.

• 0:29Ben Gilbert?

  Happy LVMH day, David.

• 0:31David Rosenthal?

  Happy LVMH day.

• 0:37Ben Gilbert?

  Cheers.

• 0:38David Rosenthal?

  Cheers, my friend. Santé.

• 0:41Ben Gilbert?

  Ooh, that is good.

• 0:48Ben Gilbert?

  Welcome to season 12, episode two of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 1:07David Rosenthal?

  I'm David Rosenthal.

• 1:09Ben Gilbert?

  And we are your hosts. David and I have talked about the power of brand on dozens, if not hundreds, of acquired episodes at this point. Brand is that unique attribute that will cause people to pay more for a product because it has a certain name or logo on it. But why do people do this? And how can one quantify the impact that a brand has on a business? Well, to study this, we decided to dive into the empire that has done this better than anyone in history: LVMH, the conglomerate of Moet Hennessy Louis Vuitton.

• 1:42David Rosenthal?

  Ben, it's not Moet, it's Moet.

• 1:44Ben Gilbert?

  Yeah, what is the deal with that?

• 1:45David Rosenthal?

  The Moet family, even though they are French, it is a Dutch name, so you don't pronounce it like in French. You pronounce it as in Dutch with a hard T, Moet.

• 1:54Ben Gilbert?

  All right, so it is actually Moet.

• 1:56David Rosenthal?

  Brand is so famously squishy in the discussion in all these tech companies that we wanted to dive into a company where it is definitely not squishy, very quantifiable. Here it is.

• 2:07Ben Gilbert?

  LVMH is the 15th largest company in the world today by market cap. It is the only company in that top 15 that is not technology or oil, besides Berkshire Hathaway. And Berkshire Hathaway being 25-plus percent Apple at this point, you could argue their market cap comes from being a tech company. Another crazy thing on LVMH, their market cap has grown 20x in 20 years, which I'll take that any day of the week. Some of you love their products and some of you think they are stupid and frivolous. They have brands across fashion, handbags, perfume, watches, jewelry, wine, spirits, you name it.

• 2:47David Rosenthal?

  Travel.

• 2:47Ben Gilbert?

  They own just an insane number of brands with 75 houses today that include Dior, Louis Vuitton, Moet, Hennessy, Veuve Clicquot, Dom Perignon, Tiffany. And it's not just the brands. They've expanded into distribution with retail like Sephora and all the duty-free shops that you see at airports. And they have even recently expanded into travel with Cheval Blanc Resorts and other travel companies. And for those of you who have been sort of reading the headlines, this wide sweeping empire is owned and controlled by the now wealthiest man in the world, more than Bezos, Gates, or Elon Musk, Bernard Arnault. And fascinatingly, this richest man in the

• 3:31Ben Gilbert?

  world wasn't the founder of any of these brands. This story has a dash of Buffett, a little bit of Steve Jobs, and some unbelievable deal making stories about how Mr. Arnault turned $15 million of capital in 1985 into the over $200 billion fortune that it is today. I'm also super excited to do the analysis on this one, David, because the luxury industry is like business strategy bizarro world. You need scarcity, so there are constraints on your growth. You can't lower your cost structure too much without devaluing your brand. You can't really outsource activities, even if they're not your core competencies. So like all the lessons that we've learned on previous episodes, it's kind of like the exact opposite of what will show up today.

• 4:15David Rosenthal?

  Yeah, everything that makes your beer taste better is ephemeral. So you need everything in-house.

• 4:21Ben Gilbert?

  Totally. And listeners, this one's for you. One little detail that I found out before diving into the research, there is literally no one better in the world to cover this than our own David Rosenthal. So David, thank you for agreeing to do this episode. Can you share with us what your college thesis was on?

• 4:38David Rosenthal?

  Oh, my goodness. I wrote my senior thesis in college on the champagne industry and specifically on the history of Moet. And we'll talk about it a little bit later in the episode. It was a very, very bad piece of writing. I was a very lazy student in college, but I have since reformed.

• 4:57Ben Gilbert?

  I love it. And longtime acquired listeners will remember, David actually lived in France for like the first six months of-

• 5:04David Rosenthal?

  2017.

• 5:05Ben Gilbert?

  Yeah. So many an acquired episode recorded with you sitting in Paris. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 5:29David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote, "shadow AI" running with no security review at all.

• 5:50Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes and cuts the time that you'd spend on vendor assessments in half.

• 6:11David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 6:30Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. Well, after you finish this episode, come discuss it with the 14,000 other smart, kind, curious members of the acquired community at acquired.fm/Slack. And without further ado, this is not investment advice. David and I may have investments or may want to

• 7:12Ben Gilbert?

  make investments in the companies that we discuss and this show is for informational and entertainment purposes only.

• 7:19David Rosenthal?

  Indeed. First, we owe a big thank you to Adam Pritzker over at Assembled Brands and the luxury startup Kate. Adam was one of the co-founders of General Assembly back in the day and has just become a wealth of knowledge about the luxury industry. And we had some great conversations with him. We also owe a big thank you to Frederick Gishen over at Necker Value, who I think was the first piece of content that got you really interested in doing this episode, right?

• 7:44Ben Gilbert?

  Yeah, I read it in Hawaii over the holidays and that is one of the few Substacks that I now pay for.

• 7:49David Rosenthal?

  Frederick is awesome. And quasi, thank you to eBay where I was able to buy this book that I'm holding in my hand, The Taste of Luxury, which is an out of print book from the 90s, originally written in French. We had to spend about $400 to buy this thing. It is very rare and it chronicles kind of in real time, the story of Bernard Arnault taking over LVMH.

• 8:15Ben Gilbert?

  So David, I've been wondering, where are we starting the story? Is it with Dior?

• 8:19David Rosenthal?

  Yes. Let's dive in. We start not in 1949 in a small city in the north of France named Roubaix with the birth of Bernard Arnault, but actually three very short years earlier in a very different part of France in Paris. In 1946, immediately after the end of World War II. It's gonna be fun. This episode has, especially here at the beginning, some Sony similarities. Oh, yeah. And indeed, just like Sony, LVMH and Bernard was a big influence on Steve Jobs and Apple. Yep.

• 8:58David Rosenthal?

  So Paris in 1946, it's not quite as bad as Tokyo in 1946, but this is not a happy place. France and Paris, of course, had been occupied during most of the war by the Nazis. And although the economy wasn't totally destroyed, like in Japan, it was pretty much entirely shifted during the war to supporting the Nazi war effort. So, yeah, let's just say there's a lot of emotional reckoning that needs to happen here in France and all over the world in 1946. So into that time and place, steps one, Christian Dior. And Dior, before the war, had been a designer at various Parisian fashion houses, which were, of course, one of France's most important cultural and economic institutions,

• 9:44David Rosenthal?

  with heritage going back to folks like Coco Chanel, who famously created Chanel in 1910, thrived during the roaring twenties, were like a huge part of culture all across the world. I didn't realize this till we did the research. The Chanel perfume, Chanel number five, the most famous fragrance in the world, introduced in 1921. Today, Chanel is a private company, so nobody really knows, but it's estimated that that one fragrance does about $3 or $4 billion in revenue a year. Crazy. The war, of course, changes all of this. France is occupied. It's actually really sad. It doesn't come out till just about 10 years ago, but Coco Chanel herself becomes a Nazi agent. Yep.

• 10:28David Rosenthal?

  There's a lot of really bad stuff that happens, and particularly to the fashion industry. So there's a great piece in See Our Fashion Book about the rise of Dior and this time coming out of the war in France. It says, "Nazi ideology abhorred Parisian styles and the slender feminine bodies it idealized, arguing that they were both..."

• 10:49David Rosenthal?

  Corruptive to natural, strong Aryan women. Instead Adolf Hitler advocated for the practicality and nationalist quality of German dress, which saw women in drab and boxy uniforms. He then took direct aim at the haute couture industry of Paris, demanding that it operate within Nazi regulations and that all of its exports cease. So Dior had been a successful designer before the war. And then during the war, he kind of gets co-opted into this. He works at the Maison Lucienne Lelong, where he's mostly designing these boxy, uniform-like dresses for the wives of Nazi officers.

• 11:31David Rosenthal?

  So after the war, he's one of the few really talented designers out there that are on the market and aren't totally tainted by the Nazis. And the wealthy textile industrialist Marcel Boussek approaches him in 1946 to come and lead and renovate his old flagship Parisian fashion house Philippe et Gaston. It's like a Beauty and the Beast episode here.

• 11:58David Rosenthal?

  Dior, though, says, I want to make a fresh start after the war. I think I'd rather do something under my own name than reviving this old brand. And Boussek says, oh, okay, that's fine. Like, we don't need to do that. I agree with you. I'll just finance you, starting this new fashion luxury maison here and revitalizing the industry in Paris and we'll start fresh. So they get to work. He finances Dior.

• 12:19Ben Gilbert?

  It's kind of like the story of Fairchild Semiconductor, but if Fairchild Cameron Instrument had let the Trader S8 actually name it themselves, but still basically owned by the parent.

• 12:29David Rosenthal?

  Yes.

• 12:30Ben Gilbert?

  Okay, so you've got the brand Dior getting started by the actual designer Christian Dior and totally owned by Boussek?

• 12:39David Rosenthal?

  Yes, totally owned by Boussek. So Dior gets to work. In February 1947, he shows his first collection, and it's just incredible. This fashion collection from Christian Dior in 1947 literally changes the world. It is a complete repudiation of not just the Nazi wartime aesthetic, but wartime period. It is the opening of a new chapter for France, for Europe, for the world. It's feminine, it's soft, it has exaggerated silhouettes. Most importantly, his pieces use tons of fabric, luxury fabrics. This was a radical statement. You look at this stuff today and you're like,

• 13:23David Rosenthal?

  whatever, that's like clothes from the 40s and 50s. But this is after the war where there's rationing on fabrics. And so these new pieces that are embracing life, embracing luxury in 1947, the war had just ended. This is a radical, radical statement.

• 13:38Ben Gilbert?

  And to illustrate a thing that would become incredibly important over time, it is all about the creativity of the designer that is the necessary precondition for any other value to be created. You have to have the most hyper creative, talented people in the world to come up with such a radical collection like this. And then, of course, not to mention they're producing extremely fine goods. So these things end up going for extremely high prices because they use really rare materials and all that. But it does take this super divergent mind to create the collection.

• 14:11David Rosenthal?

  Yes, and the radicalism is super important. This continues to this day in the luxury and fashion industries. This was very controversial at the time. There are actually protests. So this look from Dior comes to be called the new look because at the show introducing it, the editor in chief of Harper's Bazaar famously exclaims to Christian, "It is quite a revolution, dear Christian. Your dresses have such a new look."

• 14:35Ben Gilbert?

  Well, it's super wasteful, right? Taking all the best materials and overusing them to create products for a very small set of people.

• 14:41David Rosenthal?

  Yes, it's wasteful, it's expensive. The funniest protest is a group called the League of Broke Husbands.

• 14:50David Rosenthal?

  Is protesting the extreme cost of these materials and of these fashions. But yeah, we can't overstate the cultural importance of this. See, our fashion book continues in this article. Beyond fashion, the new look reflected broader cultural sentiments and themes in the post-war era, specifically by creating a look that was so unabashedly opulent, exaggerated and exciting. Dior spoke to the universal desire to celebrate life again. And it's not just culturally around the world. This is a financial smash hit, home run as well. So two years later, by 1949, Dior fashions were literally 75% of Paris's fashion exports

• 15:33David Rosenthal?

  and 5% of the entire nation's export revenue.

• 15:38Ben Gilbert?

  How very French.

• 15:40David Rosenthal?

  And I believe to this day, the luxury industry is the largest export of France.

• 15:45Ben Gilbert?

  Huh.

• 15:45David Rosenthal?

  So later in 1947, they launch Christian Dior perfumes with the fragrance Mist Dior, very famous fragrance. And then in 1950, the GM within Boussek, who's running kind of like Dior as a business, Jacques Rouet, comes up with a new business model idea. He wants to capitalize on the incredible international success of Dior fashion, about the haute couture, the custom-made, incredibly expensive pieces, but also the ready-to-wear lines that they were producing out of this in standard sizes that women all over the world could buy, and the budding success of the perfume line. He thinks, this name, this brand has so much value.

• 16:28David Rosenthal?

  What if we licensed the use of the brand out to other goods producers?

• 16:35Ben Gilbert?

  Ba na na.

• 16:36David Rosenthal?

  Da na na. We can just basically invent money. And they do.

• 16:41Ben Gilbert?

  As long as we don't put our foot on that pedal too hard and devalue the whole thing, then this is basically 100% gross margin money fountain that points at our company.

• 16:51David Rosenthal?

  Yes, and it works really well for a long time. I mean, ultimately, the Dior label would get licensed to hundreds of third parties. I believe neckties were the first, but women's hosiery, hats, gloves, handbags.

• 17:06David Rosenthal?

  You name it, there was a Dior license label out there.

• 17:10Ben Gilbert?

  Thousands of products manufactured everywhere in the world at every different level of quality, very few of which were actually created by Christian Dior or the Bousac Company themselves.

• 17:21David Rosenthal?

  Yes, and this is super controversial even at the time. The French Chamber of Culture denounces this as devaluing the heritage of the French luxury and fashion industry, but it's an incredible financial success. And for good or bad, Dior is now everywhere, so much so that by the spring of 1957, Christian Dior is on the cover of Time Magazine in the US, which was way more important than it is now, of course. And then suddenly, right after that, later in 1957, at the height of his international cultural popularity, he dies suddenly of a heart attack, very unexpectedly.

• 18:03David Rosenthal?

  And this is a huge, I mean, it would be a huge deal today if the creative leader of a major fashion house died unexpectedly, as happens sadly often.

• 18:13Ben Gilbert?

  Especially the eponymous creative leader, it was literally named after him and founded by him.

• 18:17David Rosenthal?

  Yes, there was no concept of fashion labels as existing beyond the person and the artistic director. This was much more like an artist than it was like a business. These labels and houses did not survive the death of their founders. So Bousac and Ruiz, they don't know what to do. They're considering just shutting this whole thing down. But there's an option that emerges within the workshop, within the atelier in Paris. There's this one kid who's got a lot of talent. He's really young, he's 21 years old, but he's already become one of Dior's top assistants by the time of his death.

• 19:01David Rosenthal?

  His name is Yves Saint Laurent. And so they make the incredibly bold decision to keep the Dior brand, business, label, and promote this kid, Saint Laurent, to artistic director at age 21.

• 19:19David Rosenthal?

  And almost as much as Christian Dior revolutionized the world with the new look 10 years earlier, Saint Laurent does the same thing again. And he really modernizes fashion. Like, if you go and you look at the new look clothes now, like, they're incredible, they're beautiful, but they don't look like anything that people would wear today. If you look at Yves Saint Laurent's early designs, that's like, modern fashion and clothing. He popularizes the pantsuit for women. Oh, I didn't realize. He's probably Hillary Clinton's number one fan. And then later, not within Dior, but within a few years, he designs famously the Mondrian dress, you know, the color block

• 20:01David Rosenthal?

  dress that was like so famous and emblematic of the 60s, that's Yves Saint Laurent. And to this radicalism, to pushing fashion and the world and culture forward, Yves totally takes up the mantle. Unfortunately for Boussek, it's a little too extreme for him. This old industrialist guy from the textile business, he doesn't like what Yves is doing. Which probably means he shouldn't own a fashion house. Exactly. He's from a different generation. Yeah. So after three years of Yves Saint Laurent running Dior, Boussek forces him out in 1960. And Yves, after a short period of time, teams up with his life partner and business partner,

• 20:42David Rosenthal?

  Pierre Berger, and of course, starts their own house, Yves Saint Laurent, which, we need to put a pin in that to come back much later in the episode, because Yves Saint Laurent today is owned by the luxury conglomerate, Caring, that we're going to talk a lot more about, and is arguably primarily the number one competitor to LVMH. It all comes full circle. So, back to Dior and Boussek.

• 21:09David Rosenthal?

  They basically never recover from this. Boussek installs the conservative and older Mark Bohan as artistic director. The innovation is gone. They basically just keep pumping out variations of the new look for the next 10, 20 years.

• 21:24Ben Gilbert?

  And there's a bunch of cash coming in from the franchise licenses, at least for a while, as long as people believe that those still have the magic of Christian Dior himself, which fades over time.

• 21:33David Rosenthal?

  Fades very slowly over time. It's 1960 when they push Yves out. And for basically the next 15, 20 years, this is just a cash cow that they're milking. Meanwhile, though, unfortunately, the rest of the Boussek empire is basically going down the tubes. So it's mostly a textile manufacturing business. They're like 20,000 employees. It's all unionized. France is basically becoming a socialist country. It gets to a point where by the late 60s, they're losing like $20 million a year across the whole company.

• 22:06Ben Gilbert?

  By the way, how great is it that the Boussek empire is a textile manufacturer, just like Berkshire Hathaway, before Warren Buffett sees the attractive opportunity to come in and buy it?

• 22:17David Rosenthal?

  It's amazing. Like, all the parallels to so many other great business stories we've told on Acquired, they're all here in the LVMH story. It's amazing. So as Boussek is going down the tubes, they start trying to sell off pieces of the empire, monetize, do anything they can. I don't know that Boussek really cares about saving the company. Maybe he does, but he kind of cares about saving his fortune.

• 22:42Ben Gilbert?

  Right. Get as much value out as possible.

• 22:44David Rosenthal?

  He owns a lot of racehorses and breeds thoroughbreds. He needs money to do that. And so one of the activities that they do to raise cash is they sell off the perfume business within Dior in 1968 to

• 23:02David Rosenthal?

  Moet et Chandon, which we haven't talked about yet in the episode, but oh, boy, are we going to.

• 23:09Ben Gilbert?

  The perfume thing actually does make sense because a major component of manufacturing perfumes is alcohol.

• 23:15David Rosenthal?

  So things continue on the downward trajectory despite that. And in 1978, the whole Bousac Group finally files for bankruptcy in what up until this point was the largest bankruptcy in French national history. This is a big deal.

• 23:30Ben Gilbert?

  And the way bankruptcy works, at least at this point in France, is that they basically nationalize the assets of the company, right? Like, the government takes over the administration of what was previously the Bousac Empire.

• 23:45David Rosenthal?

  Yes. Like we said, France is basically becoming a socialist country at this point. In this case, the first bankruptcy of Bousac, the government doesn't run it for very long because a buyer emerges and they end up selling the company out of bankruptcy to a ragtag group called the Willow Brothers. They, I believe, made their money manufacturing ace bandages. These are not luxury dudes. It's a total mess. One of the brothers ends up getting arrested for misappropriating funds within the company. Within a couple of years, in 1981, the whole group is back in bankruptcy.

• 24:18Ben Gilbert?

  Right back where we started.

• 24:19David Rosenthal?

  And at this point, there are no real buyers for this thing. Like, it's an albatross. So the government takes over running it for multiple years.

• 24:27Ben Gilbert?

  And interestingly, even though Dior is still somewhat financially performing in the belly of the beast, from all these licenses to all these other companies.

• 24:34David Rosenthal?

  Yep. Not due to innovation, but the licensing business.

• 24:37Ben Gilbert?

  Right. It's not that crazy that there's not a lot of suitors for this thing because even if Dior was independent, without the right person running it, it's not that attractive of an asset.

• 24:48David Rosenthal?

  Right. And it's buried under all of this awfulness. There's 20,000 textile employees, right? They're unionized. The company is losing tons and tons of money. Like, this is a bad situation. It may be a diamond buried in there, but it's buried way deep. So, enter one Bernard Jean Etienne Arnaud. As we said, Bernard was born in 1949 in Roubaix. Remember, 1949, this is what, two years after Dior had launched the new look? Supposedly, his mother, Marie, had a total fascination for Dior. This is the legend that Bernard tells and it always stuck with him.

• 25:31David Rosenthal?

  And I assume his mom owned pieces of Dior. How did she afford that? Well, his dad and Bernard's family on his dad's side, they're entrepreneurs. They're not just entrepreneurs, they're engineers and entrepreneurs. So, his dad, Jean, ran a company called Feray Sevigny, which was a quite successful civil engineering and public works construction firm in the north of France. They employed about 1,000 people. It was started by Bernard's grandfather after World War I to rebuild a lot of the infrastructure in the north of France. And the family all lives close together. So, his grandparents live right across the street in Roubaix.

• 26:13David Rosenthal?

  And Bernard is totally taken under the wing of his grandfather and grandmother, absorbs tons of lessons. When his grandfather passes away, I think Bernard's like 10 or so at this point in time, he actually goes and lives with his grandmother across the street. So Bernard's growing up, steeped in running this engineering family business. He ends up going for college to the very prestigious École Polytechnique. The French educational system is unique. It's one of the Grande Cole. It's probably the most selective and famous Grande Cole within France. It's kind of like the MIT or the Caltech of France.

• 26:48Ben Gilbert?

  But with the prestige of Harvard, right?

• 26:50David Rosenthal?

  Yes.

• 26:51Ben Gilbert?

  Engineering is the most difficult and prestigious thing to study at any of these schools.

• 26:56David Rosenthal?

  Yes, so especially after World War II in France, engineering is seen as the highest form of education. I actually, because I was a French major. I interned one summer in France in another of the Grande Coles, the, I should say, the Equidées Ostatique Commercielle, which is the main business Grande Cole in France. And so I got to like, see and learn about this system. Yeah, it's wild. If you want to enter the Grande Cole system in France, you actually, after high school, take another one to two years where you just study for the entrance exams. And then the entrance exams are all evaluated blindly. So it doesn't matter what family you're from, what your background is.

• 27:41David Rosenthal?

  It's literally just your test scores and your performance on this exam that is your entry into these institutions. And then, yeah, once you're there, they're not partying and having fun. They are working their butts off in these schools. And so that's what Bernard goes through. Like, this is a very, very different education and background that he's coming from than, shall we say, these traditional family-owned businesses, or even like the Willows. He is a modern engineer businessman bred from birth to be so. So in 1971, he graduates and he goes to work back in the family business. I think this one actually is apocryphal. After he graduates, but before he goes to work, he visits America for the first time. He goes on a trip to US.

• 28:26Ben Gilbert?

  He's told this story so many times, every interview.

• 28:29David Rosenthal?

  And on this first trip to America, he goes to New York.

• 28:33Ben Gilbert?

  1971.

• 28:35David Rosenthal?

  He's talking with the cab driver. He says he's from France and the taxi driver's like, oh, I love France. And Bernard's like, oh, you do. What do you know about France? What do you think of it? Do you know who the president of France is? And the taxi driver says, no, I actually don't know who the president of France is, but I know Christian Dior. Again, I think this story is apocryphal, but the kernel of it is true that even all this time later, the brand value and the impact of Dior, even far away in New York, you really can't screw it up. Even though they've been screwing it up, you can't kill it.

• 29:10Ben Gilbert?

  In other words, the proper noun Dior might be the most recognizable French asset. I mean, maybe like the Eiffel Tower or like the Louvre. It's a pretty short list before you get to Dior.

• 29:24David Rosenthal?

  So Bernard goes to work in the family business back in France. And five years later, he's doing so well that his father's like, all right, you're groomed to take over. I'm ready to retire.

• 29:36Ben Gilbert?

  You're an engineer. This is a civil engineering and construction business. You're fully trained.

• 29:40David Rosenthal?

  The keys are yours. Jointly with this, as part of the next generation taking over, he decides and he convinces his father that actually the civil engineering business is not a great growth business to be in, and that they should start to transition away from it and into real estate development, and that that's a bigger opportunity for the family. So, under Bernard's new leadership, they sell off the old industrial construction division. They find a successful niche, building vacation homes. Second houses in Nice, French Riviera and throughout Europe. And they do pretty well. They get to a point where they're doing about 15 million a year in revenue.

• 30:24David Rosenthal?

  And I would assume much higher margin than the old industrial construction business. So the family is doing great. They're like one of the wealthy, successful family entrepreneurs in the north of France at this point. And then the 1980s come along. The 1980s in France were, shall we say, very different than the 1980s in the US. That is when the socialists really come to power in the country.

• 30:45Ben Gilbert?

  Right. It's like the opposite of the pinstripe suits in Wall Street in the go-go years of American finance.

• 30:51David Rosenthal?

  So everything we were talking about, the complications with Boussek and the textile workers, that's because François Mitterand in France comes to power and it becomes much more of a socialist country. So much so that they enact a wealth tax in France. And there's all sorts of opinions about whether something like that is good or bad. Certainly, what is inarguable happens is there is an amazing drain of wealth and business talent out of France at this point in time.

• 31:21Ben Gilbert?

  All right. So America, here we come.

• 31:24David Rosenthal?

  So Bernard moves his family to America.

• 31:27Ben Gilbert?

  And this is like my favorite weird twist in the story where Bernard Arnault, who goes on to become this unbelievably wealthy, high taste, high class, high fashion. Everyone looks up to him in every walk of life because whatever you're doing, whether you're a rap artist or a champagne maker or a president, he has something that you want. He moves to America and develops Palm Beach condos.

• 31:53David Rosenthal?

  Yes. He's just looking for an excuse to get out of France. Developing vacation homes is the family business. Yeah. He's like, I think there's an opportunity in the Palm Beach market.

• 32:02Ben Gilbert?

  And not like fancy high rises, like a 20 unit Palm Beach kinda crappy condo building.

• 32:10David Rosenthal?

  Yeah. I don't know if it was a retiree home, but I imagine this is for like snowbirds from the Northeast.

• 32:15Ben Gilbert?

  I think so. And maybe I'm exaggerating with the kinda crappy, but like, he did not move to America with this idea of getting into luxury. He moved to America and found what was available. And he says in interviews, it was actually quite hard to break into the business community here. He sort of had all of his connections in France. He had his family lawyer and he had the business confidants and people that trusted him. But he moved here and he really had a hard time breaking in.

• 32:40David Rosenthal?

  This is a far cry from the Bernard Arnault that we all know and either love or hate today.

• 32:46Ben Gilbert?

  Yep.

• 32:46David Rosenthal?

  But you're right, he does not break into the elite business community in America. But despite most of the business activities being in Florida, he and his family moved to Westchester County in New York. Specifically, they moved to New Rochelle and they buy a house. And his next door neighbor there happens to be a guy named John Clug, which almost nobody, I think, listening now will know that name. But at the time, Kluge was the wealthiest person in America.

• 33:20Ben Gilbert?

  Which is crazy, right?

• 33:21David Rosenthal?

  It's wild.

• 33:23Ben Gilbert?

  And this is what, in the 80s? 99% of people listening to this show won't know the name of the wealthiest man in America in the 80s.

• 33:29David Rosenthal?

  You're right. He literally moves next door. He's like the poor relation next door to America's wealthiest person. And now he is the wealthiest person in the world. Amazing. So what did Kluge do? This is the 80s in America. What do you think he did? He was an LBO guy.

• 33:43Ben Gilbert?

  And an LBO guy in the TV industry.

• 33:47David Rosenthal?

  Yes. So at this time, Kluge was in the middle of doing the largest LBO ever at that point in time. He was taking Metro Media private, which he did successfully. And then, of course, like all the corporate raiders at the time, they carved it up and they sold off all the assets and literally made billions. I think he made about $5 billion from this. The TV stations that they sell out of this, do you know what they become?

• 34:09Ben Gilbert?

  I do, and I knew this before researching because I desperately want to do an episode on this at some point.

• 34:18David Rosenthal?

  Ah, I thought I was gonna get you here.

• 34:20Ben Gilbert?

  The TV stations that Metro Media sells off become the backbone of Fox.

• 34:27David Rosenthal?

  Yep, of the Fox network.

• 34:29Ben Gilbert?

  So this is so interesting. We didn't talk about this on the NFL episode, but in the 80s, Rupert Murdoch wanted to expand and had this pretty aggressive dream of creating a fourth major TV network in the United States. He wanted to basically create an upstart rival to ABC, NBC and CBS and starts Fox out of nothing by buying the assets of Metro Media and all those local affiliates for all the news stations become the Fox stations.

• 34:55David Rosenthal?

  Yep, from Kluge, which is amazing for so many reasons, especially because it's the best thing that ever happens to the NFL.

• 35:03Ben Gilbert?

  Totally.

• 35:04David Rosenthal?

  So, our knowing Kluge, they're never actually close, but Bernard is fascinated by him.

• 35:11Ben Gilbert?

  He's like, tell me of these leveraged buyouts. They seem to be working very well for you.

• 35:15David Rosenthal?

  Very, very well. He starts reading all that he can.

• 35:18Ben Gilbert?

  What is this American concept?

• 35:20David Rosenthal?

  Yeah, like, wow, he's just blown away. He's like, whoa, this is awesome. I want to do that.

• 35:26Ben Gilbert?

  The French would never do this American corporate raider thing that you're doing where you're conducting business in this very uncongenial way. And if you're able to do something, you're just going in and doing it and taking what's yours. I've never seen anything like this in France. This is not how anyone behaves.

• 35:41David Rosenthal?

  Right. Well, and one of the reasons that Boussek became such an albatross was all these workers within the textile industry that the government's like, you can't lay these people off. You can't fire them. These LBO guys in America are just firing people left and right, selling off divisions, making billions. It could not be more different.

• 35:59Ben Gilbert?

  All right. So Arnaud now knows of the leveraged buyout, knows of this cutthroat 80s American business culture. He's not doing such a good job breaking in in the US. He's built these condos, but like, whatever. He wants to take the nest egg from his family business and sort of turn that into something bigger. He wants to buy something of importance and really blow that up.

• 36:22David Rosenthal?

  And I think he wants to take this concept that he just learned from his neighbor in America and bring it back to France.

• 36:28Ben Gilbert?

  Yeah. And so he basically puts the word out. He tells his lawyer, he tells his folks he trusts back in France, I'm looking to buy something.

• 36:35David Rosenthal?

  So he hears through the grapevine, there's actually the biggest of all opportunities, the troubled Boussek empire, of which literally Christian Dior is sitting buried within.

• 36:48Ben Gilbert?

  Way deep.

• 36:50David Rosenthal?

  The government at this point has been operating Boussek for a couple of years. It's a disaster. They're finally looking for somebody, anybody to come take this thing off their hands. So Bernard, through his connections back in France, he hooks up with Lazard Frere, the investment bank, specifically the legendary banker within Lazard, Antoine Bernheim, to put together a bid. Now, Lazard in France is kind of like Goldman plus Morgan Stanley plus JP Morgan. They are the bulge bracket all unto themselves. They have immense political connections, sort of referred to, especially at the time, as the French Underministry of Finance. Kind of like Goldman is sort of like the treasury here. It's just crazy.

• 37:35Ben Gilbert?

  And so it's fair to say that Bernard has this relationship with high ups at Lazard because of his family business. He doesn't come from extreme wealth or royalty or anything like that, but coming from a successful, wealthy family, he was able to get to know the people that matter in the finance community.

• 37:52David Rosenthal?

  Yes, I think that's part of it. There's no way we could really prove or research this, but his first wife came from a kind of even more successful, multi-generational industrialist family in the north of France. And I think it's sort of implied and written that connections from her family helped get him into Lazard as well and into the government to lobby them to let him take over Boussek. Either way, no matter how it happens, he does. He gets in good with Lazard and Bernheim specifically, Antoine, is impressed with this young gun and decides to take a chance on him. So they put together a $60 million bid to take over Boussek from the government.

• 38:31Ben Gilbert?

  And this thing's hemorrhaging cash. So the government's like, all right, $60 million to take a loss-making thing off our hands. Okay.

• 38:36David Rosenthal?

  Right. Hemorrhaging cash, but doing well over $1 billion in revenue. This is a large asset. The Arnault family puts up 15 million and Lazard goes out and rounds up investors and I think invests some of their own balance sheet into this for the other 45 million. So amazingly, this 35-year-old, I don't want to say kid. If you're 35, you're not a kid. But in France at the time, like the successful business people, the industrialists of France, they were not 35. Maybe by the time you were in your 60s, you could run a business like this. Here's this relative kid coming back from America, going to take over one of the largest companies in the world.

• 39:17Ben Gilbert?

  Crazy. And the thing he recognizes here is, again, very Buffet-esque. Even though the financials of this business show one thing, doing over a billion in revenue, but doing even more than that in costs, there exists something in here that doesn't really show up on the balance sheet, which is the asset of the Dior brand. And if I can do the right things to skinny the business down just to that and then lean into that, how successful could I make Dior once I have it?

• 39:48David Rosenthal?

  Yes. And this is the big difference between Bernard and his old neighbor. And the reason that you know Bernard Arnault's name today and you don't know John Clujes, he takes the tactics of the corporate raiders and the LBOs.

• 40:03Ben Gilbert?

  To get in.

• 40:04David Rosenthal?

  To get in. And we're going to tell this whole story and it's amazing. But his goal isn't to carve up these assets and sell them off and make a lot of cash and ride into the sunset. He wants to operate Dior and build this into the gem he thinks it can be.

• 40:17Ben Gilbert?

  Right. He's not looking for the second transaction. He's not doing a trade. He's making an investment. He's not trying to get out. It's all about how can I take frankly, something very little, $15 million, buy something very, very, very large and then continue to do stuff like that, you know, trading the paperclip for the house over and over and over again, but eventually just keeping it all.

• 40:40David Rosenthal?

  Yeah. The Buffett analogy is a good one. I think also he's like Cluj, but he's also like Murdoch. He wants to build Fox too. He wants to take these assets and build it into something.

• 40:49Ben Gilbert?

  For $15 million of capital he's put up, he not only has the losses from Busek to figure out how to handle, but also the debt service on the company.

• 40:58David Rosenthal?

  Yep. So, pretty much as soon as he takes over, he calls Lazard back in and they immediately start restructuring Busek. So, Arnaud, over the next couple of years, does what nobody else was willing to do. He lays off about 9,000 of the 20,000-ish workers.

• 41:19Ben Gilbert?

  And he gets reamed for this.

• 41:21David Rosenthal?

  The French press dubs him the Terminator. This is such a not French, not socialist thing to do. He may be French, but he's like an ugly American coming in and doing this. He goes from being a nobody to a somebody very fast, but not a beloved somebody. But it works. Within a couple of years, the Busek businesses as a whole, the empire, is doing about $2 billion in revenue and it's back to profitability. It's doing over $100 million in profit and he turns it around.

• 41:49Ben Gilbert?

  That's so fast, by the way. He went from taking his 15 plus Lazard's 45, so $60 million to buy something that was losing money. And just a couple of years later, he's spitting off over $100 million per year of free cash flow. It's crazy.

• 42:05David Rosenthal?

  Yeah, that's crazy. And then, part two of the plan. Arnaud and Lazard start selling off all the old textile assets and industrialist assets. Like, he doesn't want to run these. He wants Dior. So altogether, the biggest win here is they sell literally the disposable diaper division of Busac, which is called Podeuse, which is soft skin in English. They sell that for 400 million alone. And then the rest of the textile operations, they offload. They ultimately sell everything except Christian Dior and the famous Bon Marche department store in Paris that was within the group. In total, they make over $500 million selling off these assets.

• 42:47Ben Gilbert?

  Wow.

• 42:48David Rosenthal?

  If Arnaud were an LBO guy, if he were John Clug, he would be like, oh, hell yeah. Mission accomplished. They took 15 million of his own equity, turned that into multiple hundreds of millions of dollars and a cash flow stream from Dior. This is a win. He would go start KKR or whatever, French equivalent in Europe and build that.

• 43:09Ben Gilbert?

  Yep.

• 43:10David Rosenthal?

  But that's not what he wants to do.

• 43:11Ben Gilbert?

  No. And do you know how much of Dior he owned at this point? I think at this point, he's formed Group A Arnaud, which is his sort of family office. So you can think of Group A Arnaud as Bernard's personal wealth. And they owned some percentage, but not all of the Busac Dior holdings at this point.

• 43:29David Rosenthal?

  Yeah. So the Busac entity itself, I think had been renamed Agash after the Willow initial bankruptcy. So yeah, Group Arnaud owns a majority stake in Agash, which owns a majority stake in Dior. Dior and Bon Marche are the only assets left. So there's like, what's that? One, two, three, four levels of Russian doll of legal structure here?

• 43:53Ben Gilbert?

  Right. But he's got majority economics and majority control in Le Bon Marche and Dior by this point.

• 44:00David Rosenthal?

  Yes.

• 44:01Ben Gilbert?

  It's an interesting thing to observe here. It's a sort of a playbook theme that I want to pull early, that the efficient market hypothesis is not exactly correct.

• 44:10David Rosenthal?

  No, I'm shocked, shocked to hear you say that.

• 44:13Ben Gilbert?

  There existed an asset here where it took some work and it took doing some ugly things, but it was incredibly valuable and there were not other bidders, or at least there were not other bidders that the government was selling to.

• 44:26David Rosenthal?

  Yeah, I think there was one other bidder and certainly the political influence and lobbying from both Arno and Lazar really helped him get this. This wasn't just like he walked off the street, but yeah, nobody was clamoring for this asset.

• 44:40Ben Gilbert?

  Yeah, there were market inefficiencies and then Arno created even more market inefficiencies to make it so that the perfect price discovery of this Busac empire was not found. But he figures out how to do this over and over again, where he finds things that are much more valuable than the price they will end up selling for because of weird idiosyncratic things in that market and the people that own those assets at that particular time. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 45:19David Rosenthal?

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• 46:34Ben Gilbert?

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• 46:43David Rosenthal?

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• 46:54Ben Gilbert?

  All right. Before we get to LVMH, there's two quick things that I think are worth pointing out about the transaction to end up with Dior. Bernard says less than he used to, which I think is kind of a thing that happens to billionaires, where they learn that all the stuff that got them here and that they used to be able to say to be controversial really doesn't serve them anymore.

• 47:16David Rosenthal?

  Oh, it's so fun. Now he's known as this almost reclusive wealthiest man in the world. He doesn't do interviews very often. He used to do a lot of interviews.

• 47:22Ben Gilbert?

  Right. And he would say stuff that were super clarifying and illustrative of how he did all this. And so we're not just speculating that he learned this bag of tricks about leveraged buyouts from America. He actually said in an interview, when you live in a country and do business in it for some time, you try to be influenced by it, especially when you do business in the paradise of business, which is America. Which I always love that. It's just so like, okay, yep, I definitely learned this in America. The other thing that I think he sort of learned from this first transaction is he really discovers the power of what he calls star brands, where if a brand is truly luxury, you are able to generate

• 48:05Ben Gilbert?

  much higher margins from it. Not a little bit, but the whole step change different of margins, because you're serving a customer that has very little sensitivity to higher prices. Even if manufacturing costs go up a little, the price can go up a lot. And he starts to realize there's a very limited number of brands in the world that are both timeless and growing. And then on top of that, have the capability to adapt to modern life without losing the timelessness. And this is sort of where he makes it his mission. Once he realizes that power of Dior, where he's like, this is super different than other fashion businesses or any consumer business. This characteristic of luxury and of a truly international star brand. That's so special. I think I need to find more of these.

• 48:51David Rosenthal?

  Oh, that's interesting. Maybe we'll talk more about this in analysis, but I do wonder if Yves Saint Laurent hadn't done that first kind of saving of Dior, and certainly and transitioned it from a tied to a person entity to an enduring brand. This wouldn't have been the case, but also even though he was only there for three years, that brief glimpse of modernizing fashion and luxury within Dior. If Dior were just the new look, would that have been the case with Dior?

• 49:21Ben Gilbert?

  Arnaud wouldn't have had the demonstrated proof point that you can imbue new life into a brand that has durable brand value outside of its current designer.

• 49:32David Rosenthal?

  Yep. Okay. Well, let's talk LVMH.

• 49:36Ben Gilbert?

  Louis Vuitton.

• 49:37David Rosenthal?

  Talk about from strength to strength for young Bernard. So we're now in 1987 and major news in the international business community. There is a huge merger that happens in France. Two of the biggest, most important companies in the country merged together to form Moet Hennessy Louis Vuitton. Not Louis Vuitton, Moet Hennessy.

• 50:03Ben Gilbert?

  I know. Is that funny?

• 50:04David Rosenthal?

  It's so funny. Yeah. The compromise was the actual name of the company is Moet Hennessy Louis Vuitton, but the symbol that they go by is LVMH flipped.

• 50:13Ben Gilbert?

  And this is the first luxury conglomerate, or at least the first significant large one in the world.

• 50:19David Rosenthal?

  Yeah, but it was not because that was the goal. This is a marriage of convenience. This is not some grand strategy. The reason it happens is they're trying to prevent takeover attempts from corporate raiders. All these Americans and American style businesses come in to raid these old French companies. And as a result, deals like this, and this being the biggest of them, they're happening super quickly. If somebody starts buying up shares in one of these companies, which happened with Moet Hennessy and precipitated this. They'll get together with another company, in this case, another family company, Louis Vuitton. The families often don't even like each other that much or even know each other.

• 51:00Ben Gilbert?

  Right. And it's like, well, all I know is I don't trust the activist who's buying up our shares in the open market. And I don't know if I trust you or not, but at least you're also a family. And so

• 51:10David Rosenthal?

  You're also a couple of hundred year old company. So the enemy I know a little bit about is better than the enemy I know nothing about.

• 51:17Ben Gilbert?

  All right. So we ended up in this shotgun wedding defensive move where everyone thought it was their best option to combine these two family companies. Maybe let's go back to the origins of Louis Vuitton and the origins of Moet and Hennessy. How did we get to this position?

• 51:32David Rosenthal?

  Yeah. And it's super interesting because both of these companies on their own were on great trajectories. And it was actually bringing them together that killed the family. So let's start with Moet Hennessy. That itself was a merger that had happened in 1971 between Moet and Chandon. And Hennessy, Hennessy, Cognac company, Moet and Chandon, the champagne and other beverages producer. The champagne market is very fragmented. The brands are fragmented, but it was already starting to consolidate ownership. And so Moet had been consolidating that. This merger, though, between Moet and Hennessy made a ton of sense and was super successful. It happened in 1971, and it was led from the Moet side by this pioneering

• 52:16David Rosenthal?

  guy, Alain Chevalier. And he was the first non-family outside manager of Moet and Chandon. And really, like, any of these old kind of family brands. Now, what we're talking about here is different than the fashion houses. We're now talking about other more durable luxury brands, leather goods, drinks, spirits. There's not the same kind of change and turnover that there is in fashion. And so these brands are truly multi-hundred year brands.

• 52:46Ben Gilbert?

  Right. The products don't change. The benefit of drinking Dom Perignon is that you're drinking basically the same thing that the monk originally came up with, and they're making the exact same way by hand all these years later. If you look at the wine and spirits division of LVMH, it's the most predictable, durable, not fashion and trend-driven part of the business.

• 53:07David Rosenthal?

  Back to Chevalier, the other consequence of these brands and businesses not changing that much is the families ran them. Outside professional management wasn't a thing in these companies until Chevalier came into Moet as the first kind of recruited outside manager. And then he engineered the merger with Hennessy and it was brilliant. Makes so much sense. You're both in the spirits business. This is a regulated industry in most of the world with very important distribution networks. If you put these two businesses together, you now more than double effectively, two plus two equals 10, your power in the distribution networks around the world. So this was a huge business success. He also

• 53:52David Rosenthal?

  had the foresight to really invest in distribution in Asia for these companies. So Hennessy especially, it's the dominant cognac brand all around the world, but in Asia, in Japan, it is huge. So he grew Chevalier, the combined revenue of the companies from about 300 million to like well over a billion in these 10 years. Super, super successful. So that was Chevalier in the Moet side heading into this merger. Over on the Louis Vuitton side, the story's frankly even more impressive. Louis Vuitton at this point in time was headed by the legendary

• 54:30David Rosenthal?

  Henri Requiemier, who was part of the Vuitton family, but he had married in. He was a entrepreneur and professional manager businessman who had married in and taken over the reins of Louis Vuitton.

• 54:43Ben Gilbert?

  He was like Louis Vuitton's great granddaughter's husband, something like that.

• 54:47David Rosenthal?

  And what he did is frankly amazing. I don't think it's an overstatement to say that Henri Requiemier invented the modern global luxury brand.

• 54:57Ben Gilbert?

  No, that's exactly right. Louis Vuitton started way back in the 1800s, literally the guy, Louis Vuitton, making trunks for basically royalty, like Napoleon III's wife, the Empress Eugenie. The stuff that he would make, and actually not only make, but also pack, because your trunk maker was also your trunk packer, because you had, for women packing their clothes, like- Corsets and all sorts of crazy stuff you had to jam in and not destroy your clothes.

• 55:27David Rosenthal?

  I believe the position was called the royal laitier, I think. It was like a royal appointment.

• 55:33Ben Gilbert?

  But to your point, it used to literally exclusively be for royals. Who else could just travel around the countryside and have a trunk where they're loading up all of their goods? So he went from making them for Napoleon III's wife to Emperor Hirohito of Japan. Finally, this trickles down to like, not just royalty, but aristocrats.

• 55:52David Rosenthal?

  Still not like a huge market, though.

• 55:54Ben Gilbert?

  No, not at all.

• 55:55David Rosenthal?

  But there was a technical innovation that enabled what Louis was doing. Did you get this?

• 56:02Ben Gilbert?

  Let's see. I know a few of them. He got rid of metal hinges and used cloth hinges because they wouldn't stick out. He flattened the tops of the trunks so you could stack them.

• 56:14David Rosenthal?

  Do you know why that was super important?

• 56:16Ben Gilbert?

  Because they were taking trains around presumably and you need to put them in box cars.

• 56:19David Rosenthal?

  Yep. This was the 1850s. This was the beginning of train travel. And so Louis invented the flat pack trunk and that was perfect for trains. And that was why he became the royal laitier, essentially.

• 56:33Ben Gilbert?

  Even more interesting, the trunks used to have rounded tops for a reason. And that was because in the rain, in the open air, the water had to run off.

• 56:42David Rosenthal?

  You're on the back of a horse drawn carriage.

• 56:44Ben Gilbert?

  Exactly. Everyone else also wanted to do flat tops, I'm sure. But he had the innovation of, well, if I take canvas and then I do some sort of waterproof thing on top of it, then I actually can make them flat rather than rounded tops.

• 56:58David Rosenthal?

  Ah, that's awesome. It's also, oh man, there's such irony here. Very much the anti-LVMH out there and probably the most direct comp and biggest rival to Louis Vuitton is of course Hermes.

• 57:10Ben Gilbert?

  Yep.

• 57:10David Rosenthal?

  What is the logo of Hermes? And what do they embrace?

• 57:13Ben Gilbert?

  A horse and carriage.

• 57:14David Rosenthal?

  A horse and carriage.

• 57:16Ben Gilbert?

  They literally started by making saddles. It's perfect.

• 57:18David Rosenthal?

  Yep. Yep.

• 57:19Ben Gilbert?

  But to finish this trickle down from the Empress Yujini to Emperor Hirohito to capitalism taking full fold. So now you've got people making good money. You've got Charles Lindbergh. You've got Coco Chanel with her empire. You've got various Vanderbilts became Louis Vuitton customers.

• 57:37David Rosenthal?

  Yep, that was big. The Vanderbilts were really into Louis, right?

• 57:40Ben Gilbert?

  Yeah, you sort of have luxury expanding from this tiny little niche of literally making stuff for kings and queens to now they at least make stuff for rich people because there's an expanding class of a new set of royals in the world and they're royals of money. So there's this great line Dana Thomas has in her book Deluxe: How Luxury Lost Its Luster, which I'm going to quote a few times here because she just has some great perspective on this. Here's her description of this. "Let's pursue the analogy. Since the dawn of humanity, right up to the turn of the 19th century, the world of luxury has been virtually totally isolated from the rest of the economy. Its pleasures and delights reserved for a very small elite. Practically the entire population were living in a subsistence

• 58:25Ben Gilbert?

  economy firmly rooted in their rural environment, were living a life of misery in towns and cities without any access to culture." And I think that's the best framing for luxury of anything I've found, which is you really can't think of it as stuff that's expensive. It was like, there's actually a different segment of society that is completely walled off from 99.99% of people in the world. And these were the goods personally made for them until global wealth started to become a thing.

• 58:57David Rosenthal?

  Yes. And this is what Raquem Yeh recognized and was so genius that nobody else did this mega, mega, mega global trend of there are now enough people in the world that can afford this luxury. A lot of people can afford this luxury. It's not just this very small group anymore.

• 59:20Ben Gilbert?

  Oh yeah. So interestingly, if you flash forward through the rich history of Louis Vuitton, passing down the brand to his son and his son, by the time you get to the 1970s, Louis Vuitton is kind of floundering. I think they still only had two stores. This is what 100 years or more since their founding?

• 59:39David Rosenthal?

  Over 100 years. Yep. Paris and Nice, just two stores.

• 59:43Ben Gilbert?

  They did a grand total of $12 million in sales in 1977, which 12 million sounds like a lot, but when we tell you the numbers of what they're doing today, just 30, 40 years later, it's going to blow your mind. And so, RACAMYEAH is really the genius behind turning Louis Vuitton from a two-store, $12 million business to, what, seven years later in 1984? He 15xed revenue to 143 million, had taken the company public, and by the time his reign was over in 1990, he had grown from two stores to 125.

• 1:00:20David Rosenthal?

  Yep. I believe at that point in time, it had passed a billion dollars in revenue.

• 1:00:26Ben Gilbert?

  Right around there. Yep.

• 1:00:27David Rosenthal?

  Yeah. For a 125-year-old company, doing 12 million in revenue, this guy takes over, turns it into a billion-dollar business in essentially a decade. And he and Arno get into a huge fight and Arno kicks him out of the company.

• 1:00:41Ben Gilbert?

  Yeah. And he really did two things to grow from two stores to 125 and massively grow all that revenue and IPO it. The first was internationalization. He was the first person to open stores in Japan, which would really offer this glimpse at luxury's global future. We'll put a pin in that for now because I think we'll talk about it a lot later. But the other big one is vertical integration. RACAMYEAH realized that the retailers and not the producers of the goods were making the biggest profits, which made sense since most of the producers were really small operations, family-owned, that didn't have the muscle operationally to be able to get to know customers well. Especially in other countries, they would really only know the customers in the small towns where they had their tiny factories.

• 1:01:27David Rosenthal?

  Yeah, products like Louis Vuitton were getting sold in department stores.

• 1:01:31Ben Gilbert?

  Totally. And so his big insight was we really should own and operate retail stores and invest in getting to know customers for the first time and building that direct relationship. So he sort of did vertical integration from the product forward. He still didn't vertically integrate the back of the house, but he figured out that we shouldn't be outsourcing our distribution to department stores.

• 1:01:54David Rosenthal?

  Let's talk about what the Louis Vuitton business is. This isn't Dior, this isn't drinks. This is 10, 20,000 dollar pieces of luggage in the 1980s. The margins on these things are insane.

• 1:02:09Ben Gilbert?

  Yes, absolutely. So his competitors were all around sort of 15 to 25% operating margins. With this strategy of just going direct to the customers, he was sort of the original D to C. He was earning 40% profit margins, dramatically better than the other trunk and suitcase makers.

• 1:02:25David Rosenthal?

  Louis Vuitton, Hermes, these may be better businesses than software. They are so good.

• 1:02:31Ben Gilbert?

  Right? That's the craziest insight from this whole thing. Rakhim Yeh really discovers what would become the key insight of LVMH today, which is if we do our jobs right, we can soak up all the profit from the whole value chain, from designer to manufacturer to distribution to marketing. Like, there's all these players that it used to sort of be outsourced to. And Rakhim Yeh really starts the ball rolling down the hill of we can be the people that own all the profit pools for the industry.

• 1:03:01David Rosenthal?

  Yep, that's on the profit side of the equation. But he also is the first person to realize, hey, the global market for consumers for this is way bigger than anybody realizes. He has this great quote that you may have read too. He says, "We understood that the world of luxury products had changed. The clientele that could buy luxury products grew immensely in the 1960s and 1970s. And we saw this sleeping potential," which obviously that's translated from French and it's like a very French thing to say, but it was an incredible insight.

• 1:03:33Ben Gilbert?

  Yep.

• 1:03:34David Rosenthal?

  All right, so. Back to this ill-fated marriage here. When they come together, though, unfortunately for Raquemye, the compounding journey that he set in motion at Louis Vuitton wasn't far enough along yet. And Moet Hennessy was still the bigger company.

• 1:03:52Ben Gilbert?

  And they were both publicly traded, right? Which is why they were worried about the activist investors.

• 1:03:57David Rosenthal?

  Yeah, the families had IPO'd minority stakes in these companies to monetize their ownership.

• 1:04:02Ben Gilbert?

  Yeah, and so I mentioned in 1984, when Raquemye IPO'd Louis Vuitton, they were doing 143 million. That had grown to close to a billion by 1987, when the merger talks started. And yeah, to your point, they were catching up, but Moet Hennessy was still the bigger business.

• 1:04:22David Rosenthal?

  Yes. So when the merger happens and this new LVMH uber corporate entity is created, it's Chevalier who takes the chairman position there. And Raquemye is the number two. So he's still running the Louis Vuitton business. Chevalier is running the Moet Hennessy business. There was never any plans to integrate these assets. The operating companies were going to stay the same. And indeed, the entities themselves are still separate. There's just a new parent holding company designed to prevent external corporate takeovers. All the families combined owned over 50% of that company and the voting rights, and they can prevent corporate takeovers.

• 1:05:04Ben Gilbert?

  Which is funny, because even though both of them detected that there might be activist investors, there's a bunch of their shares being bought up. It's kind of a red herring, because in combining, they actually assured their own destruction versus if they had stayed separate. We don't know the counterfactual, but they might have been fine.

• 1:05:22David Rosenthal?

  Yeah, right, they might have been. And they certainly would have been if they hadn't IPO'd the minority stakes for the families to monetize. So there's a lesson there. But pretty much right away, I mean, you can see the writing on the wall here. These are two French dudes with some pretty big egos. The trouble starts. So Raquemye, this is so petty, but it's what actually happens. He has some stationery printed for the new LVMH company. In which his name appears above Chevalier's on the stationery. Chevalier rounds up all the stationery and has it destroyed. I feel like we're talking about like, you know, the American Revolution or something here. This is ridiculous. They start fighting in the press like they just merged these companies and Rakimia gets quoted.

• 1:06:04David Rosenthal?

  Ah, champagne can be found on the shelves of every corner supermarket. I mean, I literally bought mine at Whole Foods last night. But our leather goods require exclusive distribution. Now, he's totally right, but you can imagine how that lands with Chevalier. It's not good. And then early the next year in 1988, there's another potential crisis out there. For some reason, the trading volume in LVMH stock starts rising sharply again, which is a sign that maybe there's a takeover waiting in the wings. Now, the families control 51% of the company, the combined families at this point. But remember, they're these families, they don't really like each other. There's so many family members.

• 1:06:50David Rosenthal?

  If one group of families gets persuaded by a takeover attempt to join forces with an external party, LVMH could be back in play. This is not good.

• 1:07:01Ben Gilbert?

  As long as their arms are linked, they'll be fine. Just trust the process. This structure can bear the load that is coming into it.

• 1:07:08David Rosenthal?

  But nobody really thinks that the structure is going to stay together, even internally within LVMH. So Chevalier and the Moet side, he's good buds with the CEO of Guinness over in the UK. Huge also drinks company, a guy named Anthony Tennant. He comes to Rakimia and he says, look, we've got this problem. What if we bring in Guinness to buy a small stake in the company? I'm thinking three and a half percent. That should be enough just to give us a little margin of safety here. Shore things up against whatever's going on in the markets.

• 1:07:44Ben Gilbert?

  But now three people have to link arms.

• 1:07:46David Rosenthal?

  Yeah, right now three people have to link arms. But Guinness is at this point professionally managed, not a family owned company. They're very large, Rakimia is like three and a half percent. Sure, whatever. What he doesn't know, though, is that Chevalier is also working on a big distribution partnership with Guinness, just like what led to the original success of combining Moet and Hennessy was merging the distribution networks. And as part of these discussions, as they go on, Guinness decides it wants to own more of LVMH than just 3.5%. What about a lot of margin of safety? What about a lot? Safety? Maybe safety. Depends on your perspective. So Chevalier comes back to Recamier pretty shortly thereafter and says,

• 1:08:31David Rosenthal?

  "Hey, you know how I said 3.5%? Well, I've been talking with Anthony. We're now thinking like 20%. What do you think about that?" And Recamier goes ballistic. From his point of view, and I totally think this is valid, he's like, "This is a declaration of war. You're trying to shift the whole balance of this group to the drinks side and away from my leather goods business. My leather goods business is the jewel here. You're trying to steamroll us and this is the future. I've got the winning strategy." So he goes out and starts looking for his own ally to bring in to kind of counterbalance Guinness on the drinks side. And he's looking around and he's

• 1:09:14David Rosenthal?

  like, ah, he lands on the perfect person. Somebody who really gets luxury, luxury brands. He can explain the leather goods business to him, why it's so powerful. Maybe someone from the fashion world, furthest from possible from drinks. And this guy that he finds is perfect. He's young. He's ambitious. Both he and Chevalier are older at this point. He could someday be their protege and take over running the company and he would understand the Louis Vuitton business. The perfect candidate, the head of Christian Dior.

• 1:09:50David Rosenthal?

  The young Bernard Arnault. Well, that was kind of a mistake on

• 1:09:56David Rosenthal?

  Raquemier's part.

• 1:09:57Ben Gilbert?

  Let's just set this fox loose in our nice little hen house here. The hen house is already a little bit in distress, but maybe the fox can somehow make it better.

• 1:10:05David Rosenthal?

  Really? Raquemier should have known better here because he approaches our no and he suggests to him, "Hey, how about we work together here? I'm looking for somebody to come in on my side. I think you should make a bid for 25%, 25% of LVMH's stock. Remember Guinness only wants 20% at this point. And the Vuitton family will support you. And together, we're now going to have majority control over this company. And we're going to run it together and kind of marginalize the drinks side of the business.

• 1:10:39Ben Gilbert?

  And where does Raquemier expect Bernard to come up with the cash to make that bid?

• 1:10:45David Rosenthal?

  So this is critical. Bernard, I don't know if he had his eyes on LVMH. I mean, LVMH had only just been formed a few months before, but he certainly wanted to grow. And he had already in his mind this idea of his unique strategy of, "Hey, there's actually economies of scale in bringing multiple brands together. And I think I want to do this within my group. And Dior can be the kernel that is going to grow into something bigger." So he had started, remember we talked about because of the legacy of Busac and how Arnault came into the business. There's this Russian doll legal structure of multiple entities before you get to the actual operating businesses of Dior.

• 1:11:31David Rosenthal?

  What Arnault and Lazard start doing, they realize they can IPO minority stakes in each of these levels of business and raise capital by doing that, while still being very careful about making sure they maintain ironclad voting and economic control over each of them.

• 1:11:49Ben Gilbert?

  You've got the operating businesses of Dior and Le Bon Marche department store. And then above that, you've got Agash, that former Busac holding company. Then you've got Bernard's personal entity, Group A Arnault, where he could sell some shares of that on a public exchange, which by the way, this is still publicly listed today. You can buy this instead of LVMH. So yeah, you totally can free up cash by just selling off minority pieces of each Russian doll.

• 1:12:16David Rosenthal?

  And this generates huge leverage for Bernard. He gets access to all of this capital, but because his successive chain of entities have majority control every step in the chain, he owns and runs these things while getting access to capital at every single level. It's amazing. Again, back to your story of how he turns $15 million into this incredible $200 billion plus fortune. This is a key step of it.

• 1:12:48Ben Gilbert?

  And the reason that this is not Enron is because there's both financial engineering and a crap ton of value creative businesses that are spitting off cash. Hundreds of millions of dollars are being generated in profits by the underlying entities. So you can do this financial engineering and still be able to sort of justify all of it, why people should pay you for pieces of your shell corporation because the underlying businesses are sound.

• 1:13:17David Rosenthal?

  So Bernard's been doing this, building up this war chest. He actually does have the firepower to do what Raquemier is suggesting here. Now, when Raquemier approaches him, of course, he's thrilled. He's like, yes, this is my chance. And what does he do? Naturally, he goes straight away to his friend and mentor and banker, Antoine Bernheim, over at Lazard Frere to talk about it. Well, that was really the obvious thing that Raquemier should have thought about before he approached Bernard, because guess who the investment bank for the Moet Hennessy side of the business was?

• 1:13:57Ben Gilbert?

  Oh, Lazard was working with Moet Hennessy?

• 1:14:00David Rosenthal?

  Lazard, yep. So in the merger, Lazard had always been the bankers of Moet Hennessy. And during the LVMH merger, Lazard was on Moet's side. So as soon as Arnault, who again, he's super, super loyal to Lazard as well. As soon as he goes to Lazard, Lazard is like, well, you might want to think about your alliances here.

• 1:14:23Ben Gilbert?

  You should buy this company, but maybe you should ally with the person I'm allied with.

• 1:14:28David Rosenthal?

  Yes. Now, this is very, very self-interested on Lazard's part, but it's actually also, I think, pretty good advice because Guinness is a much larger company and has much bigger financial resources. So Lazard is like, look, if you're going to be fighting Guinness, you guys are going to lose. This is not going to work.

• 1:14:49Ben Gilbert?

  So clearly what's happening here is Bernard is switching sides from the LV side to the MH side. Why does it matter who he's allied with? At the end of the day, he's just buying shares in the same company.

• 1:15:01David Rosenthal?

  Well, we're about to see just that. So Lazard sets up a secret late night meeting at their office between the three parties.

• 1:15:10Ben Gilbert?

  So everyone's in the room except for Louis Vuitton.

• 1:15:13David Rosenthal?

  Except for Louis Vuitton and Arnault and Anthony Tenon at Guinness really hit it off. Now, remember Guinness, much larger company, much bigger financial resources. So out of that, Arnault ends up really aligning with Guinness. And very shortly thereafter, in July of 1988, they announced that they're creating a new JV together between Bernard Arnault and Guinness. It's a 6040 JV, controlled 60% by Arnault. They call it Jacques Robert, this new entity. And that that entity is going to be financed with $1.5 billion. That is

• 1:15:56David Rosenthal?

  going to buy 24% of LVMH.

• 1:16:00Ben Gilbert?

  So enter Bernard Arnault's majority ownership of an entity that owns a minority stake of LVMH. The market cap around this time of LVMH is around $6 billion. So that's 60% of 24% of something that's worth $6 billion, which is about 800. In $60 million is the value of his new stake in LVMH.

• 1:16:26David Rosenthal?

  So yeah, you said that, you know, $800 million ish. That's the capital that he had come up with through this war chest that he was doing. But the strategy that Arnaud and Lazard designed here is so brilliant because he retains majority control in each of these entities. So it doesn't matter that he only owns 60% of this new Jacques Robert JV and Guinness owns 40%. Arnaud controls it. Once it's inked, once the capital's in, Guinness's capital is now just leverage for Arnaud.

• 1:16:56Ben Gilbert?

  Sure. So it's leverage on a 24% stake of LVMH. Why does that matter? Why is that spell doom and gloom for RACAMY?

• 1:17:05David Rosenthal?

  Well, this is freaking terrible for RACAMY. Remember, he was terrified at Guinness owning a 20% stake. He thought he had gone and found his ally to bolster his side of the business versus Chevalier and Guinness owning a 20% stake. Now his ally has defected and a 24% stake has showed up seemingly on the other side of the company here. So he literally feels like he just got stabbed in the back by this young guy that he was going to make his protege and probably his successor. You know, he's not just some like dumb family member here. Not to say that family members are dumb, but he's a legend.

• 1:17:45Ben Gilbert?

  Yeah, he's the most enterprising French businessman.

• 1:17:47David Rosenthal?

  So RACAMY, he's like, what are you guys doing to me? Like, I built this thing. I built the jewel here and you all are stabbing me in the back like Caesar. He can't believe it.

• 1:17:57Ben Gilbert?

  And RACAMY is the one who created this modern global luxury strategy of owning your distribution and creating prestige in all these global markets.

• 1:18:08David Rosenthal?

  Totally. So what does he do? The sad thing is he's basically out of options, but he starts casting about trying to do anything. He goes into the market personally with his money that he had made from his previous ventures and from the Louis Vuitton family money, starts buying up as much LVMH stock as he can and is Goal is to try and somehow amass a 33% stake in the company. Because by, I think, French corporate law, if you have at least a 33% stake in the company.

• 1:18:43Ben Gilbert?

  It's a blocking minority.

• 1:18:44David Rosenthal?

  Yep, a blocking minority. You can block any decisions at the board level. So, I mean, literally at this point, he's like, F you to everybody else. Chevalier, of course, he hated him already. Guinness, Arnaud, I'm going to war against you in the market in our own company's stock.

• 1:19:03David Rosenthal?

  So, once this starts happening, Arnaud, he just has no love lost for Racemier. He and Guinness go back into the market themselves with Jacques Robert with the JV. And this is why Guinness is so important. They have way more financial firepower than Racemier can put together on his own. So, within three trading days, Jacques Robert, the entity, the JV, deploys another $600 million into the market to raise their economic holding in LVMH to 37.5%. But because of the voting structure, they don't yet have the blocking minority 33% voting structure.

• 1:19:47Ben Gilbert?

  So weird that you can publicly trade both voting and non-voting shares, or at least shares with one vote versus shares with multiple votes.

• 1:19:55David Rosenthal?

  That's totally what's happening. So Bernard now is literally on the precipice of taking over LVMH, which is not what anybody was intending.

• 1:20:04Ben Gilbert?

  No, I mean, he was brought in as a bolstering partner for either side, whichever one he sort of picked. But certainly not to be the one, the wolf, as he is known, as the wolf in Kashmir, to come in and sort of take over everything.

• 1:20:18David Rosenthal?

  Yep. So now, finally, this is what brings Chevalier and Racemier together. They hated each other before, but they're like, oh shit, what have we done? We are both about to lose our companies to this young guy.

• 1:20:35Ben Gilbert?

  The enemy of my enemy is my friend.

• 1:20:37David Rosenthal?

  Exactly. So, they come together and in December 1988, they initiate a very much like last ditch effort to try and save their companies, which, this is crazy. So, in December 1988, remember, the merger that created LVMH happened only like 18 months before.

• 1:21:00David Rosenthal?

  The two of them announce without telling Arnault, and I think without telling Guinness either, that they're going to break up LVMH. They are going to separate the two companies. They're going to essentially annul the marriage. It was doomed from the beginning. They're going to go back to being separate publicly traded companies. So literally, they are doing the corporate raider playbook of breaking up the companies to try and save their companies.

• 1:21:27Ben Gilbert?

  To save, quote unquote, to try and save their control of their companies.

• 1:21:30David Rosenthal?

  Yeah, to save their control.

• 1:21:32Ben Gilbert?

  Because of course Bernard would make them far more successful than they ever imagined.

• 1:21:36David Rosenthal?

  And this is, what are we on now? The third or fourth miscalculation that they make about Bernard Arnault?

• 1:21:43Ben Gilbert?

  Yep.

• 1:21:43David Rosenthal?

  They think, obviously, they can't do this now without his approval, or else he's going to sue them to high heaven. They think that they can appease him and get him to go along with this because they think they know what he actually wants this whole time. They can't even fathom that he wants to run LVMH. They think he wants the Dior perfume business back to reunited again with Dior. Because remember, Moet had bought the Dior perfume business in 1968.

• 1:22:16Ben Gilbert?

  And I think he'd been saying this. I think this is sort of his lip service of like, well, it makes sense for me to be involved with this transaction because Dior is missing one final piece of the puzzle and you guys own it. And also, this would make him very wealthy because this whole time, the way that you go buy up stock in the market is you bid it up. So all this ownership that he had of LVMH that he'd been sort of buying with Guinness has gone up and up and up in value. So they're like, look, he's going to get even richer and he's going to get the perfume brand back to reunited. Seems like this is what he would want.

• 1:22:47David Rosenthal?

  Yep. So Raquemier and Chevalier newly reunited in their desire to break up the company, offer Arnault a parting gift of gifting him essentially back Dior perfume so he can reunite his business and then go on on his way. And this is where Bernard reveals his true intentions, which is he's coming at the king, not because he wants to steal his scepter or something like that. He wants to be the king. He wants LVMH. So he gets this offer from the two of them and he's like, yeah, I'll get back to you on that. The next two days in the markets, he goes

• 1:23:30David Rosenthal?

  out and he blows essentially all of his capital, deploys another $500 million in the next two days in the markets, bringing it to over a billion dollars within a very short period of time in additional capital that he's put up. So he's now, what, 2 billion of his own capital, I think, into this?

• 1:23:49Ben Gilbert?

  And he's, I believe, sold some of the Dior and the former Busek entities, getting closer and closer to not being the controlling shareholder anymore. So he's basically mortgaging that business in order to free up the capital to go and make a big play to win LVMH.

• 1:24:09David Rosenthal?

  He's pushing the chips in. He's going all in. And with that purchase, he takes the Jacques Robert holdings to 43.5% economically and 35% of the voting rights, which means he gets the blocking minority and it's done. He is now, in the span of a couple of months, coming from zero outsider and taking over the largest luxury conglomerate in the world.

• 1:24:40Ben Gilbert?

  Yep. Large for the time, certainly not large for now. LVMH now is 75 houses and LVMH then was three or four or five houses, something pretty small and obviously way smaller in revenue. I mean, the concept of a luxury conglomerate was a new thing in the late 80s.

• 1:24:57David Rosenthal?

  Totally. And achieving it was Bernard's explicit goal and strategy in a way that for Recamier and Chevalier, it was just a marriage of convenience.

• 1:25:06Ben Gilbert?

  Yeah, this is where I think they misunderstood what Bernard wanted and what his core motivations were. It wasn't to become wealthier. It wasn't to polish this one little fine piece that he had. He wanted to build an empire, control that empire, and change the face of this entire industry by executing his strategy within that empire. That was none of their motivations. And so I don't think they could have seen how grand his were.

• 1:25:36David Rosenthal?

  Yep. So, once this happens and Bernard gets the blocking minority, Chevalier resigns immediately and just kind of rides off into the sunset. Rackhamye, he's so pissed. He keeps fighting. He sues Bernard. He sues everybody. The cases drag out in court for a couple of years. It gets super ugly in the press. Finally, when it becomes clear that he's not going to win his court cases in April of 1990, he privately resigns and he walks off the job without telling Bernard or anybody else at LVMH. So, that day Bernard calls Louis Vuitton and the receptionist answers the phone and says, "I'm sorry, Monsieur Rackhamye is no longer on the premises." And I think they never talk again.

• 1:26:21Ben Gilbert?

  Wow.

• 1:26:22David Rosenthal?

  But to your point that what they didn't understand, and you know, if they had, maybe they would have acted differently toward him. Bernard is not a corporate raider. He has a big vision here. There's some great quotes from him from this time, from all these interviews he was doing. He says, "I told my team at the time that we will build the first luxury group," like you're saying Ben, "in the world. Obviously, it was very ambitious, but it galvanized the team and we started to build. Some people say I'm a wolf. That is not at all true. Wolves break up companies into pieces. It was Rackhamye who wanted to cut the company into pieces. I was the only one who did not want to dismantle it." Which is sort of double speak.

• 1:27:04Ben Gilbert?

  If you choose your own definition of what a wolf is, then it is easy to not appear as one. Was he a corporate raider? I don't know. He used corporate raider-like tactics to acquire control. He didn't follow every single corporate raider playbook strategy to cut it all up afterwards. But does it make you not a corporate raider if you maintain control afterwards? I don't know. Maybe that's fair. It's nuanced. And I do think it is a misunderstanding of him to call him a corporate raider. I mean, when I tweeted the other day that he was a corporate raider and you texted me and you were like, oh, come on, he's more than that. You're right. He uses those tactics to acquire control.

• 1:27:39David Rosenthal?

  You were being intentionally provocative.

• 1:27:41Ben Gilbert?

  Yeah.

• 1:27:42David Rosenthal?

  I think the most important strategic takeaway, though, from this episode and all this drama is something that Bernard says at the time about Chevalier. He's much more conciliatory towards Chevalier than Ramey, because they didn't have the huge fight in the same way. He says, Mr. Chevalier was an excellent manager, and I agree with his strategies. His problem is that he was not the majority shareholder in his company. In the businesses I manage, I'm the principal shareholder, and that helps me control the situation. For what he's trying to achieve, to build this first global luxury conglomerate, especially in the era of corporate raiding, it's only gonna work if he has ironclad majority

• 1:28:27David Rosenthal?

  control over everything.

• 1:28:29Ben Gilbert?

  So I think this is sort of worth identifying why Louis Vuitton was such a crown jewel of this empire. I mean, we talked about the fact that it was growing much faster than the spirits division. But why? Other than some brilliant business decisions to own more of the margin by controlling distribution and opening up internationally, why is this such a magical product? Well, Louis Vuitton's business evolved from trunks into handbags. And handbags became a culturally important item as women's fashion lost a lot of other elements. And the book Deluxe really goes into this, that you lose the hat, the gloves, sometimes shoes become less important, the handbag moves up from this tiny Little handbag that used to sit on the wrist to a bigger handbag that goes around

• 1:29:14Ben Gilbert?

  the shoulder as women were doing more with their hands. There's sort of this concurrent liberation of women's movement and the handbag is sort of the one remaining accessory that you can put all your stuff in and be out on the go. And by this point in history, women had stuff, even wealthy women. It's not like they were always walking around with servants in the early days of the Louis Vuitton trunks. You're just going out about your day and you don't have anyone else with you. You're liberated and you're doing it on your own. So the handbag is this kind of magical symbol of the evolution of women's role in society to this point.

• 1:29:50David Rosenthal?

  There's also some great synergies here for a luxury group in that what is the stuff that women have at this point?

• 1:29:56Ben Gilbert?

  Makeup, sunglasses, perfume.

• 1:29:59David Rosenthal?

  Well, a lot of the stuff is luxury items that go into the bag that LVMH is also now selling.

• 1:30:05Ben Gilbert?

  A hundred percent. And so on top of all this, handbags are an unbelievable business and this is out of the books deluxe. One, they're easy to sell. They don't require sizing or trying on or hemming or modifying in any way. You look at it and if you like it, you buy it. It's done. You also can justify spending a lot of money on it because they go with everything. Not all purses go with everything, but you buy one really nice leather handbag. It's going to go with a lot of outfits. So you can justify a pretty high spend on it because your, you know, cost per hour for anyone who actually thinks about it that way is actually pretty low.

• 1:30:40David Rosenthal?

  It's not like a dress that you'll wear once, frankly.

• 1:30:43Ben Gilbert?

  Right. They're easier to create and produce when you compare it to something like perfumes. The profit margins, as you mentioned, are astounding. For most luxury brands, the profit is 10 to 12 times the cost to make them. And at Louis Vuitton, it is 13x the cost of goods sold. Pretty amazing.

• 1:31:02David Rosenthal?

  Unlike the jewelry business, which is also can be a great business and LVMH has gotten into, these things are leather. There are a lot of cows out there. People eat a lot of beef.

• 1:31:12Ben Gilbert?

  Right. It's a renewable resource. Yeah. Unlike the diamonds, which the earth has only made a certain amount of, and the earth doesn't move super fast to make more diamonds. The earth moves quite fast to make more leather. So the interesting thing about the, you can justify the high price point. The opposite is also true, where because there are things that you use so often, you can justify buying more of them. And so Coach commissioned this research in 2000, I believe, that the average American woman who purchased a handbag, purchased two new handbags per year. And by 2004, that number was four new handbags per year. So it is a expensive, recurring purchase

• 1:31:56Ben Gilbert?

  that requires really low overhead to sell. It's wild and the margin structure is amazing. And one final fact on handbags. At Louis Vuitton's immense four-floor global store in Tokyo, 40% of all sales are made in the first room, which sells only monogrammed handbags, wallets, and other small leather goods. So it very quickly became the product of Louis Vuitton. But Louis Vuitton is a quarter of the entire empire, even today with the 75 other brands. So the whole thing sort of revolves around this nice, extremely branded leather handbag. And one more telling point to really illustrate this. Way back at the beginning of the whole empire,

• 1:32:41Ben Gilbert?

  there's Dior, it's a fashion house. It's about showing off the newest season's clothing. It's couture, you know, they're walking down the runway. It's custom made. And the shows that people would go to were originally to show off what customers could buy. And customers would take notice of it. And financiers would be there to get the demand signal from the customers, to be able to fund the manufacturers, to spin them up. And today, they don't really create this clothing for many people or anyone to order. They do it to show off, A, a branding event. So come to the Louis Vuitton show and you'll be immersed in a Louis Vuitton experience. And we don't really expect you to buy any of

• 1:33:24Ben Gilbert?

  the things on the models, except all the models are carrying our accessories. So no matter what crazy, cool clothes they're wearing, or a person is singing, or crazy light show is happening, I will tell you, if you have not watched a fashion show in a long time, go to Louis Vuitton's website and just watch a video of what a show is today. It is a super high production crazy event.

• 1:33:47David Rosenthal?

  It's like Monday Night Football.

• 1:33:48Ben Gilbert?

  Yep. But at the end of the day, what they cause consumers to do, love the brand more and buy more handbags.

• 1:33:56David Rosenthal?

  Yes, obviously, Louis Vuitton is the star then and now within LVMH. And Bernard totally realizes that and leans into it. But there is also this element of building a global luxury group that really is his unique counterintuitive insight, that you can achieve very powerful scale economies in the luxury industry. And you just can't do it in the way you do it in other industries. The reason it's counterintuitive, you know, you think about like Procter and Gamble or somebody like that in other consumer goods, they have scale economies because they outsource

• 1:34:38David Rosenthal?

  production, they get it cheaper, you know, and then they make more tied than anyone else. In luxury, that would defeat the whole thing.

• 1:34:45Ben Gilbert?

  Right. There's natural diseconomies of scale, where the more of something you make, the less valuable the luxury consumer will think it is.

• 1:34:52David Rosenthal?

  We saw this with Dior in the 50s and 60s, when the licenses diluted the brand. So even innovators like RACME, they never would have imagined that scale economies could exist in luxury. Like, you would never outsource production in luxury.

• 1:35:07Ben Gilbert?

  Nobody realized that these things could be large scale businesses, period. They were all these small, family owned niche businesses, serving a small group of customers. So it was almost tautological that they were small businesses.

• 1:35:20David Rosenthal?

  Right. Here's what Bernard realized, though. Yes, those dynamics are true for any given brand. But if you have a whole portfolio of brands, both the raw inputs, materials and talent and people and craftsmen that go into making these things, that you can scale across a portfolio of brands. And even more importantly, the distribution that comes out of it, the retail shops, the real estate, the experiences, the customer relationships, that you can also scale across brands. And so his vision is like, whoa, if we can put together a whole bunch of brands in one

• 1:36:03David Rosenthal?

  group, then we can centralize distribution. We can centralize our relationships with retailers and we can really squeeze them and have a lot of power over them. We'll get into that in a minute. We can own our own real estate.

• 1:36:16Ben Gilbert?

  Bulk by advertising.

• 1:36:17David Rosenthal?

  Bulk by advertising. The economies of scale in advertising, you bet, are immense for these things.

• 1:36:25Ben Gilbert?

  Yeah, this decision of where synergies could be realized in a luxury group and where to stay away from synergies is probably the biggest value unlock that Bernard has figured out on how this conglomerate needs to work. Because his son, Alexander, describes it as light synergies. You only have synergy around negotiating advertising deals, negotiating real estate and distribution deals, and giving people the ability to make career moves within your company where they jump from brand to brand. But you do not have any synergies and you'd be very careful not to mess this up with the creatives.

• 1:37:08Ben Gilbert?

  The person who owns design for a given fashion house owns design, period. There is no management meddling and no trying to say, well, the designers for this shop also work for these three other shops. None of that. That has to stay walled off.

• 1:37:24David Rosenthal?

  There's this really important point here that you're bringing up with the people. So Bernard will say, and he'll say to this day, that the greatest advantage that LVMH has is its people and its talent. And I heard him say this a bunch of times in research and I was like, okay, that's like Bernard being a public figure now and like everybody says that and blah, blah, blah. But he's actually right. It's really important, especially here in luxury. What they realized by building this group is that they can get economies of scale on attracting the top, both creative talent and business management talent within the luxury industry. And the economies of scale are that, one, it's like a money thing because they're so

• 1:38:07David Rosenthal?

  much bigger as a group, they can pay more than anybody else. But two, it's a career thing for these people that go work there. If you come and you work within the LVMH family, they're always talking about it as a family. Even the kids talk about it as a family and they say like, I don't mean family like us. We mean this whole corporation is a family. They're constantly rotating people around, both on the business and creative side, learning from and working in and getting opportunities to work across all these brands and all these different verticals. That's a much more compelling pitch for somebody than like, go work in this family controlled, single brand business.

• 1:38:42Ben Gilbert?

  Most companies, the only way to advance is your boss retiring. I mean, we're all very fortunate to have worked in, especially in the tech industry or the finance industry and businesses where there's sort of lateral moves to be made all over the place or switching divisions. That's a fairly modern concept. And that's what Bernard applied here where you can sort of move up by changing houses without your boss retiring.

• 1:39:01David Rosenthal?

  And even look at the kids, they are no children now. Like, they've all done this. They've all gone around through so many different brands and roles within the group and they're learning the business. And they're not the only ones. There are outside executives that are doing the same thing, too.

• 1:39:15Ben Gilbert?

  Yep. We should give credit to Arno also for pushing the vertical integration much further than Henri Recamier did. So Recamier figured out the vertical integration with distribution to stores, but Bernard gets credit for vertically integrating the upstream side of the business. I think he really gets where the power of a luxury brand stems from in sort of the design and manufacturing, having a sense of place and origin and story. And so Louis Vuitton had started doing a little bit down the path of what Dior did and diluting its brand. They had outsourced 70% of their production.

• 1:39:59Ben Gilbert?

  So while they didn't do the licensing that Dior did, they were having it manufactured in a bunch of different countries with varying levels of quality.

• 1:40:07David Rosenthal?

  Yeah. And if you're trying to sell $20,000 handbags, that ain't gonna work.

• 1:40:11Ben Gilbert?

  Right. So after he realized control, he bought that all back in-house and tripled the number of Louis Vuitton owned factories from five to 14 over the next decade. And he has this wonderful quote that describes both sides of the house really well, which is, if you control your factories, you control your quality. If you control your distribution, you control your image.

• 1:40:33David Rosenthal?

  Okay, let's double click on that too, because you're so right. Rackham Yee had innovated and started this controlling your distribution, but it stopped at, we're going to do our own retail outlets. What Arno and LVMH does, and this really just hollows out the global retailing industry, and especially department stores. I believe they learned this from Japan, where this was an accepted model in the Japanese department stores. They realized now that they have so much scale by having all these brands. By the way, we should say, over the next 10 years, LVMH under Bernard goes out and they acquire Celine, they acquire Bruluti, they acquire Kenzo, they acquire Ghirland, they acquire Loewe, they acquire Marc Jacobs, they're getting all these brands.

• 1:41:18Ben Gilbert?

  Fendi and Bulgari are big ones.

• 1:41:20David Rosenthal?

  Yep, totally. They acquire watch brands, they acquire luggage brands, et cetera.

• 1:41:24Ben Gilbert?

  Tag Heuer.

• 1:41:25David Rosenthal?

  Yep. At a certain point, they're like 50, 60, 70% of the products that are going into department stores, take here in the US, like a Nordstrom or a Neiman Marcus and the like. They go to the department stores, to the retailers, and they're like, look, the old model where we sold you our goods wholesale and you bought it from us and then you retailed them, we're not going to do that anymore. We are going to retail our own products within your stores. And this is the store within a store concept. We're going to pay you rent, we're going to lease space from you for a boutique within your department store, we're going to own the inventory, we're going to have the employees, we're going to control the selling experience.

• 1:42:07David Rosenthal?

  And we're going to make a lot higher margins and you're going to be reduced to essentially like a third rate landlord.

• 1:42:14Ben Gilbert?

  Yeah. And the really interesting thing is this all started happening in the early 90s before LVMH really went on their shopping spree. And so the department store folks were like, what do you mean? You're just going to do this to us with Louis Vuitton and Dior, which even though it was owned separately, Bernard sort of treated it all like one empire and sort of operated as if it were rolled into LVMH, which it would later become, but not for many years, but would sort of act this way. And over time, he sort of won the battle where department stores said, okay, well, we need your stuff in the stores to bring people in because you're starting to spend all this money on advertising, you're the products that people want, you're the brands they want to associate with. So we kind of have

• 1:42:53Ben Gilbert?

  to capitulate. I don't think it was economics first. I don't think it was, hey, these department stores are controlling all the margin. So we want to go in and just have a fixed cost with them rather than a rev share with them. I think it was more around, we want to start controlling the customer experience and almost an admission that the department stores had sort of figured out how to be the best at that. And that was a thing that if Bernard wanted to really create multi-generational brands and this multi-generational holding company, they would have to have the direct relationship with the customers too.

• 1:43:33David Rosenthal?

  Well, and it all works into the strategy. If you think about what you're doing, when you're selling luxury, you are selling the experience. You're not selling a piece of leather. You're selling a dream. The idea that you would outsource the selling process of that to somebody else is kind of like anathema to what it is you're doing.

• 1:43:54Ben Gilbert?

  Right. To your exact point, they can buy a leather handbag that fulfills the same job to be done. From somebody faster, cheaper, they're buying into the Louis Vuitton dream and incorporating a little bit of that dream into their life and identifying themselves with this token. And so you need to provide the best possible way for them to do that.

• 1:44:21David Rosenthal?

  Yep. To put a finer point on it, they can go buy the same physical product that says Louis Vuitton, that is a knockoff, way easier and for a way less money. Taught a lot of the only reason you would go buy an official Louis Vuitton bag is the dream, the experience.

• 1:44:40Ben Gilbert?

  Yeah.

• 1:44:41David Rosenthal?

  Two quick other things while we're in the mid 90s. One on this new leased retail business model. Part of the reason I think this hadn't been done before, even though it's obvious, was it requires a lot of capital scale. You're going to go to all of the Nordstroms in America and you're going to be like, I'm going to lease space in all of your locations. So if you're an individual brand, you don't have the scale to do that. But now LVMH, they have the scale and the scale advantages to be able to do this. That's one. The other thing on the retail side, they also during the 90s go out and acquire some retailers. They acquire Sephora, they acquire duty-free shoppers.

• 1:45:26David Rosenthal?

  These are incredibly strategic things that they're doing. They don't want to really get into the retail business, but this is all part of the same strategy. So much of what's going into those retailers are their products in their key geographies. Now they can fully own the whole chain. The duty-free shoppers story is where it's just a real quick sidebar. For folks who don't know, this company was started by Chuck Feeney, who probably is like one of the most interesting and amazing humans that have ever lived. He took the capital that he made from that, started General Atlantic, the private equity firm, the whole goal of which was to increase that capital to then give it away through Atlantic philanthropies.

• 1:46:11David Rosenthal?

  He's still alive, but he gave away like all of the money in his lifetime. It's an unreal story.

• 1:46:17Ben Gilbert?

  Yeah, it's also so funny that the whole thing is they're exploiting this weird tax loophole. And that was enough to build this huge business around to the point where like, whenever you travel internationally right now, the concourse is a duty free shop. You have to walk past all of this. And so it's such an odd experience where like, whenever you're traveling internationally, you have to walk by perfume and handbags. Okay, but that's become an enormous part of the business.

• 1:46:43David Rosenthal?

  And now owned in-house by LVMH. The duty free shopper's story and the Chuck Feeney story is so cool. He did it all anonymously until very recently. One last fun little thing on this that we gotta say. Do you know who designed the duty free shopper's logo?

• 1:46:58Ben Gilbert?

  No.

• 1:46:59David Rosenthal?

  This is like even better than the Enron story.

• 1:47:01Ben Gilbert?

  No, I don't.

• 1:47:02David Rosenthal?

  Andy Warhol designed the duty free shopper's logo.

• 1:47:07Ben Gilbert?

  That's crazy.

• 1:47:07David Rosenthal?

  Isn't that crazy?

• 1:47:09Ben Gilbert?

  I didn't know he ever did any logos.

• 1:47:10David Rosenthal?

  Right? Literally Andy Warhol designed it.

• 1:47:13Ben Gilbert?

  That's wild.

• 1:47:15David Rosenthal?

  Amazing company.

• 1:47:16Ben Gilbert?

  You know, we've been throwing around this word luxury, but we haven't really defined it. And I think before we sort of move into the 2000s, it's probably worth reflecting on what luxury goods are because there's a lot of different definitions of it. And I think depending which one you choose to use, it changes whether you think about all of these different brands as luxury brands anymore or not.

• 1:47:40David Rosenthal?

  Yep.

• 1:47:41Ben Gilbert?

  So in another great book that we read to prepare for this called The Luxury Strategy, there's this great quote, which is, "Premium means pay more, get more in functional benefits. Luxury is elsewhere. It signals the capacity of the buyer to transcend needs, functions, or objective benefits. This is how luxury brands are different from premium or super premium brands, beyond the experience they bring, creative power, heritage, and social distinction." I think this is a really good place to start because this is probably the most classic definition of luxury, where there are premium goods, which means you pay more and you get more utility, like objective value. And it's not necessarily a linear curve, like Apple iPhones are the best at this.

• 1:48:26Ben Gilbert?

  I pay an absurd amount more to get a Pro with slightly more storage, and I get some utility that's a little bit better.

• 1:48:34David Rosenthal?

  Yep, but it is a premium product.

• 1:48:36Ben Gilbert?

  Right, it's premium. It's not luxury by this definition.

• 1:48:39David Rosenthal?

  Yep, exactly. This nuance is so illuminating to be able to understand this. You start seeing it everywhere. Once you think about things this way.

• 1:48:48Ben Gilbert?

  Right. Premium is pay for value. It might be paying a lot for value, but you're paying for value. Luxury is literally paying because something offers no more value. And other people will know that. So they know that, one, you have the wealth to spend on things, even though they are no more utilitarian to you. And two, that you have taste and you have chosen this item as the item that you want to throw your wealth at because it says something about you, not what you need it to do productively.

• 1:49:22David Rosenthal?

  And those two things, I think, get distilled down into this concept of the dream that you're buying. And this is all a little like abstract, but you can make this so concrete by using actual examples. The car industry, this is the most clear cut. BMW and Lexus are premium brands.

• 1:49:40Ben Gilbert?

  Yes.

• 1:49:40David Rosenthal?

  Ferrari is a luxury brand. When you think about that, you're like, oh, I totally get it.

• 1:49:46Ben Gilbert?

  There are many things about Ferraris that are worse than even like my Mazda CX5. Way, way worse, far less practical, far less utility. But it says something about what I have chosen to do with my money, how much money I have and the level of taste that I have.

• 1:50:06David Rosenthal?

  Totally. And if you wanted to upgrade the product that you have, you could buy a Lexus SUV. And that would be a premium SUV and you would pay more for it. And it would be better than your Mazda.

• 1:50:19Ben Gilbert?

  Right.

• 1:50:20David Rosenthal?

  But you buy a Ferrari, you're going to pay 20 times, 30 times what you paid for that Mazda, and it's going to be worse.

• 1:50:26Ben Gilbert?

  Right. And handbags are such a good example, too, because what do you need a handbag to do? You need it to like zip and unzip. You need all the functions of it to work. You need to put your stuff in it and you need it to not look too bad. And when you go to Target and you buy something that's $35 or when you buy something from Louis Vuitton for $20,000, it's actually quite difficult to find a $20,000 Louis Vuitton bag, but maybe an Hermes Birkin bag or something. The function is actually identical. So all the value above the cost of the materials at least sort of qualify for luxury. Coco Chanel puts this really well, too, which is luxury is a necessity that begins where necessity ends.

• 1:51:05David Rosenthal?

  Oh, I love that.

• 1:51:07Ben Gilbert?

  I always like that.

• 1:51:08David Rosenthal?

  I hadn't heard that quote before. That's great.

• 1:51:11Ben Gilbert?

  Marc Jacobs has a different quote on it, which is, "Luxury is about pleasing yourself, not dressing for other people." This gets to the idea of luxury to fulfill your own goal intrinsically, instead of social signaling, so you feel a certain way about yourself. I buy that, but I buy it less. I literally think the purpose of luxury is signaling and social stratification, which has always been a need of humanity. I think the most compelling argument around why luxury needs to exist is it is a deeply human thing to signal your standing in the world. And everybody signals it in different ways. And now this is one of the infinite ways that someone could choose to signal to the world.

• 1:51:56Ben Gilbert?

  This is not only what I choose to identify with taste-wise, but if you know, you know, especially with something like the Hermes Birkin bag, where like, it's not marked. You'll notice Louis Vuitton has LVs everywhere, but there are other brands that choose not to brand something so that only people in the tribe can understand why it's so valuable and luxurious. I don't know, I totally buy the argument that it's an essential part of humanity.

• 1:52:23David Rosenthal?

  And I think especially if you think about luxury and fashion as being two different dimensions. We talked about this a little earlier in the episode. There is luxury fashion for sure. Dior is a great example of that. Chanel is a great example of that. But that's only a small part of what luxury is, and it's kind of harder to understand, and frankly, harder to monetize versus durable leather goods or cars. Those are very clear-cut examples. You can really understand intuitively, at least for me, Grok better, the difference between a luxury product and a premium product. And then there's also the durability of it.

• 1:53:02David Rosenthal?

  Like, a key aspect, I think, of luxury products is that their value and status is durable over time, whereas so much of fashion is the opposite of that. If you buy a Ferrari, for example, there's a very good chance that that Ferrari is going to be worth more in the future than it is the day you buy it.

• 1:53:22Ben Gilbert?

  And not for its utility.

• 1:53:24David Rosenthal?

  Right.

• 1:53:25Ben Gilbert?

  It's because other people have bought into the dream that this is a valuable thing.

• 1:53:30David Rosenthal?

  Totally. If you buy a Birkin bag, there's a very good chance that that is going to be a good investment. Whereas if you buy a purse from Target, that is going to depreciate 90% the minute you walk out of the store.

• 1:53:42Ben Gilbert?

  And it's so interesting because it is both about the durability of the materials. Like, that's a story that is sort of often sold to justify the price of luxury goods. But actually, that makes it a premium product. That is about the utility. That's about justifying why it's actually a good value to be paying more. What the durability really refers to is the durability of its status, that it's Lindy. It has been worth something for a long time, so it will be worth something for a long time. And I think that that is the most important thing for luxury brands, which is why when you look at all this stuff that Bernard Arnault has gone out and bought, they're from anywhere from the 1300s to the 1800s with some stuff

• 1:54:24Ben Gilbert?

  recently. But it's all about selling that this stuff, this brand, this way you're choosing to identify yourself, is part of something much bigger and longer than you and will stay valuable for a long time in the future.

• 1:54:39David Rosenthal?

  Yep, totally.

• 1:54:40Ben Gilbert?

  So here's the interesting thing about that. Bernard's definition of luxury, and I saved this one for last intentionally, is the combination of quality and creativity. And Bernard actually doesn't like to use the word luxury outside of financial communications. His son Alexander is the same way. He in particular thinks about these not as luxury brands, but just brands built by incredible craftsmen at every price point. And he hates this idea that luxury means things for rich people. He also hates the idea that people are buying these finely crafted goods just for status. But I think that represents the shift of the business that LVMH is in. Some of the things they make are luxury. I mean,

• 1:55:22Ben Gilbert?

  if you're buying a $20,000 Louis Vuitton bag or trunk, that's a luxury good. But there's lots of things that they sell that are actually expensive premium, where it's a About the craftsmanship. The craftsmanship is so good, this durable thing will last forever. The creativity that went into this sets it apart from anything else in its category in a way that literally provides value to you. And I do think as they address more and more people with more and more brands at more and more price points, there's a lot more about these products that is actually ultra-premium. And I think the way that the leadership of the company talks about them, the durability, the craftsmanship, those are signs of premium objects, not luxury objects.

• 1:56:07David Rosenthal?

  Ooh, that idea that LVMH is both luxury and ultra-premium within the same conglomerate is a great point to make as we transition to the next big chapter of our LVMH drama here, which is just so delicious. They made a whole movie out of this. Books, movies, so great.

• 1:56:29Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:56:42David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:56:59Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:57:14David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:57:38Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:57:57David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:58:27Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. All right. So before we get to Gucci in the 2000s, it's probably helpful to know about the massive globalization that went on to get us there in the 70s to the 2000s.

• 1:59:02David Rosenthal?

  Ben, are you saying that the Chinese consumer market became a thing?

• 1:59:06Ben Gilbert?

  Yes, but actually, the Japanese consumer market became a thing first. So in the 70s and 80s, there had finally been enough infrastructure built after World War II and Japan's economy was soaring. Japan also had this characteristic where they have, for thousands of years, had this reverence for fine craftsmanship. So as their economy developed, the middle class emerged. They're sort of primed to receive luxury. It was this incredible hotbed, especially when Louis Vuitton first entered the market, to sell handbags. I think 2006 marked where 40% of all Japanese people owned a Vuitton product.

• 1:59:43David Rosenthal?

  Wow.

• 1:59:44Ben Gilbert?

  And extremely branded, monograms everywhere. By 2008, all luxury goods, period, were sold in Japan and another 30% were sold to Japanese traveling abroad, especially in Hawaii. So that meant that Japanese people bought half of all luxury goods.

• 2:00:03David Rosenthal?

  Wow.

• 2:00:04Ben Gilbert?

  It is wild. The global... Story around what happened to luxury from the 70s to the 2000s. And then the next chapter after that, which is like a whole order of magnitude more is China, which I think I'll put a pin in for now because I think we can talk about it more as it relates to modern day LVMH.

• 2:00:23David Rosenthal?

  Yeah, but just to give folks a sense of scale, I think before the pandemic, China was the largest luxury market in the world, right?

• 2:00:32Ben Gilbert?

  Yes, definitely was the number one revenue driver for LVMH.

• 2:00:37David Rosenthal?

  All right. Well, like you said, let's close out the 90s in style with Gucci. This is so amazing and this is really like the one big, big fail. And it truly was a fail for Bernard and LVMH. Everything we were just talking about with luxury, with leather goods, with handbags, with Louis Vuitton, and then with the strategy of building a portfolio of brands. There are a couple, not many, you could count on maybe the fingers of one hand, the very natural other brands you would want to go acquire to add to this. And Gucci, of course, is very, very top of the list.

• 2:01:18Ben Gilbert?

  Oh yeah. If you're thinking about the star leather goods brands, it's basically like by 2000, the ones Bernard owns, Gucci and Hermès. That's kind of the landscape.

• 2:01:29David Rosenthal?

  So at the end of the 2000s, LVMH had the perfect, perfect opportunity to buy Gucci. And they totally let it slip through their grasp. There is this unbelievable Vanity Fair article written by Brian Burrow, who was one of the co-authors of Barbarians at the Gate, that comes out concurrently as this is all happening. He literally gets access and talks to everybody, Bernard, the Gucci folks. It's called Gucci and Goliath. We'll link to it in the show notes. It is so great. So.

• 2:02:06David Rosenthal?

  In the early 90s, Gucci, despite being a fabled brand, best Italian leather, blah, blah, blah, blah, kinda had become this incredible disaster.

• 2:02:18Ben Gilbert?

  I happened to watch the House of Gucci movie this week.

• 2:02:22David Rosenthal?

  I mean, there's beatings that happen in the boardroom. There's murder. Like, it's a disaster.

• 2:02:28Ben Gilbert?

  I love how you casually throw that in. I don't want to spoil the movie for anyone, but the protagonist does get murdered and it is the guy leading Gucci and his last name is Gucci. So I guess there are spoilers here, but unbelievable story. And oh my God, this is all unfolding as Bernard is growing LVMH's revenue from $4 billion to $8 billion, nearing $12 billion in 2000. And now suddenly he's got this opportunity for the very best thing he could possibly buy to add to the empire is literally killing each other in the streets.

• 2:03:01David Rosenthal?

  Literally murdering each other.

• 2:03:03Ben Gilbert?

  Somehow he fails to actually take them over.

• 2:03:06David Rosenthal?

  Oh my God, unbelievable. So as the family is falling apart, Investcorp, the private equity firm, comes in and buys first a 50% stake in the business and then ultimately ends up buying the whole thing. So they own 100% of the business. So by the mid 90s, they've sunk about $200 million into this thing. It's totally falling apart. We talked about the brand dilution at Dior with the licenses. Gucci, at this point, had, I kid you not, 22,000 different licenses, like toilet paper.

• 2:03:41Ben Gilbert?

  You could see Gucci like on the street and you'd have no idea if that was a counterfeit or if something of that quality was actually Gucci.

• 2:03:48David Rosenthal?

  Yeah, totally. It was so bad. But these brand names have such value and this was an obvious target for LVMH to scoop up. And in fact, Bernard goes and talks to Investcorp and reaches a verbal agreement in the mid 90s to buy Gucci from them for $400 million. Investcorp gets a 2X return on their money. They get rid of this problem. LVMH gets this great brand.

• 2:04:15Ben Gilbert?

  It would have essentially been like stealing Gucci. I mean, 400 million for what Gucci became.

• 2:04:20David Rosenthal?

  I mean, LVMH wasn't the size it is today, but 400 million, for God's sakes, take a flyer on this thing.

• 2:04:26Ben Gilbert?

  The parent company of Gucci today, Kering, does 13 billion in revenue.

• 2:04:30David Rosenthal?

  Yeah. Oh my gosh. Why Bernard didn't pull the trigger on this is like unfathomable. But as he gets into diligence, after agreeing on the deal, he backs out and he tells Invest Corp, very famously, that Gucci is actually worth nothing.

• 2:04:52David Rosenthal?

  Oh, boy, does he regret that one. So Invest Corp here now, they're like up a creek without a paddle. They've got this company, this brand, the family has destroyed each other. Who's going to run it? They tap the guy who had been lawyer to the family and then became CEO of Gucci America.

• 2:05:13Ben Gilbert?

  Domenico De Sole.

• 2:05:15David Rosenthal?

  Domenico De Sole, total legend. He was familiar with the business. He'd been a lawyer, but kind of operating.

• 2:05:23Ben Gilbert?

  Harvard Law School guy.

• 2:05:24David Rosenthal?

  Totally. Maybe he can save something here. So they make him CEO of the whole company. And he promotes the last real designer that Gucci has left on the payroll. A 32-year-old junior designer named Tom Ford, the creative director of Gucci.

• 2:05:45Ben Gilbert?

  You keep saying all these people's names, like young people getting promoted in a house, but I actually know them from their own eponymous house that they had later.

• 2:05:52David Rosenthal?

  Oh, yes, yes, yes, yes, yes. Man, and this team, Dom and Tom, as they come to be known in the industry, they are like a phoenix rising from the ashes. So Ford takes a huge risk. Google Tom Ford, Gucci in the 1990s. Porno chic is the term that becomes used for it. Like, the way you win in fashion is you take crazy risks and shock value. And people go nuts for it. Like overnight, after Tom Ford's first collections, Gucci revenue doubles. They get back to profitability. So it was the end of 1994 when Bernard walked away from the deal.

• 2:06:33David Rosenthal?

  By the end of 1995, the brand is so hot that Invest Corp IPOs the company on the New York Stock Exchange. And it trades up to like a $3 billion market cap.

• 2:06:44Ben Gilbert?

  Oh, my God.

• 2:06:45David Rosenthal?

  Insane. Bernard has just got to be totally, totally pissed at this point.

• 2:06:49Ben Gilbert?

  Swing and a miss.

• 2:06:51David Rosenthal?

  But he gets another bite at the apple because just like we've seen with all these businesses and the families, like Bernard said, if you're not the primary principal shareholder in your business, you're vulnerable. And here's Dom and Tom. They were outsiders. They're not the family. They don't own this company, you know, and Investcorp owned it. They just IPO'd it. The whole equity of the company is free float public stake on the New York Stock Exchange. So this is the perfect setup for Bernard and LVMH to run their playbook, come in and take over the company. There's a great quote from Ford in the Vanity Fair article. We were just sitting here waiting for someone to take us over. It really bothered

• 2:07:32David Rosenthal?

  me. It was just so frustrating. And then in June, a nine and a half percent outside shareholding stake gets disclosed by a large European luxury company. Everybody's thinking like Dom and Tom, they're like, for sure Bernard is going to come make a run at this company. It's not LVMH, it's Prada, the fellow Italian leather goods company. De Sole and Ford, they're like, this has got to just be a front for LVMH. Like something weird is going on here. Couple of months later, January 1989, LVMH finally does show up. They take a 5% stake in the company that they buy on the market. Burrow interviewing Arno

• 2:08:15David Rosenthal?

  here writes that Arno was adamant that the plan was not to attempt an immediate takeover of Gucci. He was worried about whether the Gucci turnaround can last. And so instead, he wanted to build a stake and get on the board for a few years and then quote from Arno, then maybe we make a bid. And this is kind of rational, like Gucci was worth nothing a few years ago. Dom and Tom have totally turned it around, but they haven't proven that this can be lasting here. Right. So Gucci retains Morgan Stanley to help them here. And they advise Domenico that probably what's going to happen next is Bernard is

• 2:08:56David Rosenthal?

  going to go to Prada and buy the Gucci shares that they own from them. So they should go back to Prada and like, get them to be an ally. But De Sole doesn't do it. He thinks it would be a sign of weakness to go to Prada because he thinks word's going to go back to Bernard anyway. So he doesn't do it. And of course, what happens? Within 24 hours, the news comes out, LVMH has acquired Prada's share in Gucci. They now own 15% of the company.

• 2:09:23Ben Gilbert?

  One might call this a creeping takeover.

• 2:09:25David Rosenthal?

  A creeping takeover is DiSole calls it in the press. And then, oh, this quote is so great. He says, to be embarrassingly candid, we didn't think through our initial strategy very well. We were caught completely by surprise. They were takeover professionals. We spend our time figuring out how to sell more handbags.

• 2:09:43David Rosenthal?

  Oh, you could tell like he really doesn't want to sell to Bernard.

• 2:09:47Ben Gilbert?

  Yeah.

• 2:09:48David Rosenthal?

  So meanwhile, Morgan Stanley is like pulling their hair out. They're like, dude, you gotta do something or you're gonna get steamrolled. So they're like, you know, we've been talking to LVMH. I think if you go to Bernard and you say, let's work out a deal. I'll let you on the board in exchange for you keeping your ownership below 20%. And Domenico is like, 20%? He's at 15. I don't want him owning more of the company. Like, what kind of deal is that?

• 2:10:12Ben Gilbert?

  Right.

• 2:10:12David Rosenthal?

  So he's like, no, no, no, we're not gonna do it. And then Morgan Stanley is like, you gotta find a white knight then, somebody else to come and invest in the company and keep LVMH away. They start calling every other luxury and fashion CEOs in the industry. Nobody's interested. And this is weird, like Gucci's on the rise. Why would these other industry CEOs, why would nobody be interested in investing in Gucci?

• 2:10:39Ben Gilbert?

  Did someone poison the well? Did someone put the word out? What's happening here?

• 2:10:42David Rosenthal?

  And then like more weird stuff starts happening a couple of times, like twice. He doesn't say with who, but Domenico gets close in negotiations. The company's interested. And then all of a sudden, LVMH comes in and buys some more stock right at that very moment. And then the negotiations end. Burrow interviews Arno as this is going on. And he says, Arno grins when asked about this. Through our bankers, we knew exactly what was going on. He says of DiSole's aborted moves, the people who refused him called us.

• 2:11:12Ben Gilbert?

  I mean, it just goes to show like he has people's loyalties in a way that makes it really hard to compete against him. Cause every time you feel like you might be making an ally, you realize they're actually in Bernard's pocket. Or if Bernard shows up, they're gonna be loyal to him because they either are scared of him or want something from him in the future.

• 2:11:32David Rosenthal?

  So at this point, DiSole and Ford and Gucci are desperate. And one of their lawyers at Scaten comes up with what sounds like a pretty crazy idea.

• 2:11:45David Rosenthal?

  He's like, well, if nobody outside is gonna buy a huge block of Gucci stock and save you from LVMH, what if we do it on the inside? We can create an employee stock ownership plan, an ESOP. And what if we just give the ESOP something like 25% of the company? This is like a very much a kind of crazy last ditch attempt. Even Morgan Stanley is like, I don't know about this one. But Dom is like, all right, let's do it. So he decides like, okay, if we're gonna do this, we need a paper trail that we're not

• 2:12:28David Rosenthal?

  totally acting against all shareholder interests in defending ourselves against LVMH. So he gets in touch with Bernard and says, hey, we'll sell you the whole company. Buy it now price of $85 a share. It had been trading at about $35 a share before this whole like kerfuffle started. 85 is a high price. Yes. That he's asking for, but he needs Arno's rejection to show that he's acting in shareholder interest here. Arno, of course, rejects it. So Gucci hits the nuclear button and they create the ESOP and they issue it 25.5% of the company.

• 2:13:10David Rosenthal?

  Now, LVMH is shocked because their understanding from having studied the files on this is that if you're traded on the New York Stock Exchange, you can't do a transaction for 20% or more of the company without A, alerting all shareholders and B, getting a special exemption. It's like a shareholder vote, basically. Yeah, shareholder vote. And I think from the stock exchange itself, what they didn't know is that there's a loophole. Foreign companies are not subject to this rule. They're subject to the local laws of whatever country they're incorporated in. And this particular in, you know, previously Invest Corp owned version of Gucci

• 2:13:51David Rosenthal?

  happens to be incorporated in the Netherlands where they can do this. So they do this and kind of all hell breaks loose.

• 2:14:00Ben Gilbert?

  Oh, everyone's pissed. Everyone's in a terrible position because now LVMH owns a lot of a company that is trying to hurt itself. So they have a lot of capital on the line. They mechanically can't take it over. And so they're like, okay, let's, let's call a truce. Can we just figure out how to get out of this?

• 2:14:18David Rosenthal?

  They sue Gucci in Dutch courts, but there's still a big problem. There's no money here in this ESOP. So it's not like Gucci is getting a bunch of capital that it can then go use to like bolster the company. This is like a one time shot they can fire. So somebody else could still come in or LVMH could come back and start buying on the market and say like, okay, we don't care that you deluded us. We're going to make another run. So they still need a new investor to come in. And at this point, Morgan Stanley has been calling around to everybody. They finally call up another wealthy French business person who they wouldn't have necessarily thought to call at first because he's not in the luxury business.

• 2:15:03David Rosenthal?

  They call up Francois Pinault. And this is the birth of LVMH's biggest rival, Carrick. So Pinault started his career as a timber trader of all things. And then he got into retailing. He's kind of more like a closer to Sam Walton than Bernard Arnault here in France. Definitely, definitely not a luxury guy, but he's also a Morgan Stanley client. So the bankers put the two of them together. De Sole and Pinault and Ford all kind of hit it off. They're talking after and Ford says in the Vanity Fair article that he and De Sole are talking after they meet. And he says, Pinault was perfect.

• 2:15:43David Rosenthal?

  A nice man, obviously good to his people, but his greatest asset, as he saw it, was his ignorance. That was the key. He knew nothing. We didn't need his fashion expertise. We needed his money. And the last thing I need is somebody coming into my office, giving me advice on what to do. That was the number one positive point to Pinault. Obviously not what Bernard was going to do. So. They hammer out a deal and in the next few days, they agree that Pino is going to invest $3 billion at $75 a share for 42% of Gucci.

• 2:16:18Ben Gilbert?

  And that's $10 cheaper than what they offered Bernard.

• 2:16:20David Rosenthal?

  Yeah, but Di Sole and Ford are going to continue to control the board. And as part of it, they're going to cancel this ESOP thing. And then they're like all agreed in principle on the deal. And Pino's like, I got one more thing I think you're going to like. I was thinking anyway about buying Sanofi's beauty division, which has a couple of assets that I want. But buried within it is sort of the remnants of a label you might be interested in called Yves Saint Laurent. That is now owned by Sanofi and I'm thinking about buying it. And if I do that and we do this deal, I'll give you guys Yves Saint Laurent and you can run it.

• 2:17:06David Rosenthal?

  Ford says, he asked, did I want it? And I said, F yes. Yves Saint Laurent is the number one brand in all the world. They're so bitter at Bernard and LVMH, all of them together now. They're like, we're going to go crush these guys. So they announced the deal and Bernard goes nuts. This could not have backfired more spectacularly. He had the option to buy it on the table for $400 million to buy Gucci. He missed that. Then he thought he was going to be cute and do this. And instead he just created an incredibly well capitalized, direct competitor with its own legendary fashion brand within it.

• 2:17:48Ben Gilbert?

  Yep, brutal. And caring to this day is the number one rival. I mean, when you look at luxury groups, you've got LVMH, which is a monster doing 80 billion in revenue. But then you look around, you've got Caring, which is much smaller, but the closest at 13 billion in revenue. And Richemont, which is, we haven't talked about it yet, but is a Swiss company. They own Cartier and some other things, doing 14 billion in revenue. So everyone else is sort of down around that range. There are some other family owned players, not in this category, but in jewelry. So Rolex does 13 billion. You've got Chanel, which does 16 billion, but that's privately owned by the family. You've got Prada, much smaller, 4 billion in revenue.

• 2:18:33David Rosenthal?

  You've got, of course, Hermes, which we'll talk about in a minute. I think they're about 10 billion.

• 2:18:36Ben Gilbert?

  Yep, they're right around 10. But creating formidable luxury group competitors, yeah. Caring is that, smaller, but that.

• 2:18:44David Rosenthal?

  Yeah, they are the clear number two. But when it's all over, LVMH still owns 19% of the company, even though Pino just came in and bought it and is going to transform it into Caring. The three parties, Pino, LVMH, Gucci, they all negotiate for like two years, until finally, crazily enough, on September 11th, 2001, they announce a deal in the morning Paris time before September 11th happens. LVMH will sell its Gucci stake in two tranches. And because of the appreciation in Gucci stock through all of this, they will end up making a profit of about 760 million euros.

• 2:19:23Ben Gilbert?

  Which led Domenico de Sole to remark, even when he loses, he wins.

• 2:19:28David Rosenthal?

  Totally, which, you know, it upsets as a hallmark of Bernard. Although I think if you were to ask him today and he were to be honest, he lost here, even if he made 760 million euros, he lost on this one.

• 2:19:40Ben Gilbert?

  Yep.

• 2:19:41David Rosenthal?

  De Sole and Ford eventually do clash with Pino. So the kind of number one thing that they wanted from him to stay out of the business doesn't happen, maybe predictably. In 2004, they leave and they start Tom Ford International. That itself becomes a huge success. It just got acquired last fall by Estee Lauder for 2.8 billion dollars. And that 2.8 billion dollars, that doesn't sound like a lot compared to the other numbers we're throwing around, but from a startup brand to acquisition in, you know, was that 15 ish years? That's pretty awesome.

• 2:20:14Ben Gilbert?

  So this Gucci thing, we've talked a lot about the rise of Bernard Arnault and LVMH. And this is pretty much the only time so far that they weren't successful. Even then, they made $700 million and this whole time had been generating more and more and more revenue. I think in 2000, they did 12 billion in revenue. That would continue to grow to close to 20 by 2010 and up to 40 in 2017. And more recently, right before COVID hit, they were right around 55. And then I mentioned, of course, closer to 80 today. So on the one hand, it's a miss. On the other hand, they were plenty productive during the whiff.

• 2:20:56David Rosenthal?

  It's kind of like the NFL missing social media. It was a miss, but they're just fine.

• 2:21:01Ben Gilbert?

  Right, right. That's a great comparison. All right. So David, Gucci was in some ways the white whale, but there was another white whale. And we're not going to tell it in full detail because I really do want to just do a full Hermès episode at some point, but we gotta talk about Hermès a little bit here.

• 2:21:17David Rosenthal?

  Gucci became the core of Caring, which is the little brother to LVMH. Hermès is the anti-LVMH.

• 2:21:26Ben Gilbert?

  Right. Stayed in the family ever since it was founded. It's on its sixth generation of super distributed family ownership. It never like changed hands to some investor and came back.

• 2:21:36David Rosenthal?

  Yep. There's one brand. It's not a family of brands. There's no economies of scale. Weren't you telling me over text that they like, don't even use computers in the business?

• 2:21:45Ben Gilbert?

  Correct. Gucci uses computers to model new designs. Hermès definitely doesn't, or at least didn't as of the writing of the book Deluxe about 10 years ago. The other thing that they don't do is use any assembly lines. You'll get a batch at Louis Vuitton of a stack of 20 sides of a handbag to sew a certain piece of stitching on and you'll do all those and then someone will deliver you another batch of 20. Hermès, the very same person, takes it from raw material to completely finished without any economies of scale of the assembly line. Hermès is craftsmanship. And of course Bernard wants it.

• 2:22:20David Rosenthal?

  Of course he does.

• 2:22:23David Rosenthal?

  So right as the Gucci drama is ending, Bernard starts very quietly buying little, little stakes of Hermes on the public market. So owned and controlled by the family, but they had floated, just like all these other families, a small 20% stake on the public markets. But whenever he gets an opportunity, he buys a little bit and he doesn't want to disclose that attempt because he's just had this disaster with Gucci.

• 2:22:46Ben Gilbert?

  Right. So he keeps it sub 5%. He's at like 4.9%.

• 2:22:50David Rosenthal?

  And he uses other entities and equity derivative swaps with other entities to like, have the rights to stock that they buy, but not have it be LVMH's name or anything associated with him. This goes on for like a decade. He ends up buying most of the public float of Hermes, which is crazy.

• 2:23:10Ben Gilbert?

  Yeah, he had 14.2% by October of 2010, literally a 10 year period of slowly taking little bites through subsidiaries and through equity swaps.

• 2:23:20David Rosenthal?

  Finally, then, like you say, in October 2010, it gets announced the CEO at that point in time of Hermes makes a very famous comment that you can go look up about Bernard Arnault's intentions that we won't say here on the podcast.

• 2:23:32Ben Gilbert?

  Oof, not on a family friendly show.

• 2:23:34David Rosenthal?

  Not a family friendly comment. Let's say it's a extreme voicing of his displeasure with what is going on. But the net of it is LVMH doesn't win again, and they never really were going to here. This is the difference between the Hermes situation and the Gucci situation. Gucci was like a fail. They should have won. They were never going to buy Hermes.

• 2:23:56Ben Gilbert?

  Although Hermes, they did get up to 23.1% in 2013.

• 2:24:00David Rosenthal?

  They did, but I think, like I said, that was pretty much 100% of the public float.

• 2:24:05Ben Gilbert?

  Right. There was no path to getting to the 33% necessary.

• 2:24:09David Rosenthal?

  Yeah, I think at one point Hermes almost got delisted from the stock markets because there was no longer any trading in the stock.

• 2:24:15Ben Gilbert?

  Whoa, crazy.

• 2:24:16David Rosenthal?

  It was that extreme.

• 2:24:17Ben Gilbert?

  Yeah. The interesting thing about this one is that it actually gets shaken out in the French courts. So in 2014, a French court ruled that LVMH had to sell down its stake from 23%.

• 2:24:27David Rosenthal?

  Because it was illegal how they masked their identity in acquiring the stake.

• 2:24:31Ben Gilbert?

  But the net of it is, they had done some of it through Group Arnaud and some of it through LVMH. And so Group Arnaud had ended up with about 8% and the rest was owned by LVMH. So the court orders LVMH to distribute that out to shareholders. So awesome little dividend for all the LVMH shareholders. And what Group Arnaud does with their 8% is they use that to pay for the 25% of Dior that it does not already own.

• 2:25:00David Rosenthal?

  Yeah, this is the Menardi steak way back in the day that they had IPO'd of Dior to help finance buying into LVMH.

• 2:25:08Ben Gilbert?

  Yes. And so, of course, just like Dom De Soleil says, Group Arnaud ended up with about $5 billion in profit from this whole thing. Even when he loses, he wins. And so they end up with more control over Dior, which then ends up just getting rolled into LVMH finally in 2017. The holding company, Group Arnaud, gets to go from 37% to about 48% economics, and I think somewhere like 63% of the control of LVMH by basically doing stock swaps. So now there's a problem solved where neither LVMH nor Dior nor Group Arnaud

• 2:25:52Ben Gilbert?

  own any more Hermès. And because all of this has appreciated since 2001 when he started, Bernard Arnault has now solidified control over Dior and LVMH for the foreseeable future.

• 2:26:06David Rosenthal?

  Yeah, well, he had control. I mean, the big thing he makes through all of this, besides simplifying the structure, is about $5 billion in profit. And they kicker because of the way this all happened with the stock swaps.

• 2:26:19Ben Gilbert?

  Tax-free.

• 2:26:20David Rosenthal?

  It was all tax-free. Unbelievable. Dom De Soleil had it right. Even when he loses, he wins.

• 2:26:28Ben Gilbert?

  Yeah.

• 2:26:29David Rosenthal?

  Hermes, though, incredible company. It's like $180 billion market cap company today.

• 2:26:34Ben Gilbert?

  Crazy. And it trades at a crazy multiple, too. All of its multiples are like double the rest of the industry. I think LVMH's PE actually trades pretty close to like a tech company, like big tech. It's something like four and a half times sales and 24 times earnings. Hermes trades at 48 times earnings and 13x sales.

• 2:26:58David Rosenthal?

  Yeah, it's a market cap is way higher than Carrying or Richemont or any of these other companies.

• 2:27:04Ben Gilbert?

  Yeah.

• 2:27:06David Rosenthal?

  All right, let's bring this one home.

• 2:27:08Ben Gilbert?

  All right. One big thing that happened right before COVID. LVMH says, you know what? I think we're going to make the biggest luxury acquisition of all time. We are going to pay $16.2 billion and we're going to buy Tiffany.

• 2:27:24David Rosenthal?

  Third time's the charm with these big deals, right?

• 2:27:27Ben Gilbert?

  Yes. And this one is particularly important because Tiffany is American luxury. There's not a lot of luxury brands in America because there's not a lot of history in America relative to Europe. And frankly, every time the Americans try to start something, there's some kind of fast corporate transaction. I mean, Tom Ford is actually a great example. Lots of value creation. Company sells pretty quickly. Maybe it was fashion more than luxury. Maybe, you know, there's just a lot of like, it turns out Tom Ford is not going to be a 500 year brand.

• 2:28:00David Rosenthal?

  You know, it's kind of against the American business culture, right? Like you're an entrepreneur, you start something. And especially in this industry where it's going to take 50, 100 years to make it a $100 billion brand and you can sell it for a few billion dollars, why wouldn't you do that?

• 2:28:16Ben Gilbert?

  Exactly. Get the cash into the family coffers and you can compound it in other ways. So Tiffany is a big deal because it is kind of the only American luxury company. Started by Charles Tiffany, he's worked with the US government, he's worked with major sports leagues.

• 2:28:35David Rosenthal?

  He's worked with the NFL.

• 2:28:37Ben Gilbert?

  Yes. Tiffany makes the Vince Lombardi Trophy. In fact, a vice president at Tiffany sat down with Pete Rozell himself and sketched out over lunch the design of the trophy. And of course, they still make it today. They make the NBA's championship trophy, Major League Baseball. Tiffany is American luxury and the French conglomerate is coming in to buy it up. The guy who we, America, trained in the art of leveraged buyouts is coming and buying our crown jewel.

• 2:29:10David Rosenthal?

  Hey, we're a big tent country here. He can be an American anytime he wants.

• 2:29:13Ben Gilbert?

  That's right. He posed with Trump in Texas to open a new Louis Vuitton factory there over the pandemic.

• 2:29:19David Rosenthal?

  That's right.

• 2:29:20Ben Gilbert?

  So they're starting to do the Tiffany deal and of course, it's LVMH, so they're going to exercise some tactics. One of which the pandemic has hit by this point in mid 2020, they basically retrade. LVMH says, you know what, instead of 16.2 billion, we'd like to pay 15.8 billion. And Tiffany's pissed. They're like, why are you doing this? And they're like, oh, Tiffany is mismanaging the company. And so it's losing all this money now that it should have made. So we think it's worthless. And you're like, well, you signed a term sheet. And so the whole thing kind of devolves. Tiffany starts issuing dividends out to its shareholders before the change of control happens.

• 2:30:00Ben Gilbert?

  So now LVMH is even more pissed. Bernard involves the French government to try to put the deal on pause and get an exemption from the deal because the government says it needs to go on pause.

• 2:30:11David Rosenthal?

  It's like he can't help himself. You think he would have learned his lesson from Gucci and from Hermès of just do the damn deal.

• 2:30:16Ben Gilbert?

  It's $420 million or something that they're talking about here. And you know, it's for the only company he's interested in buying in America. So 10 months go by, they finally do the deal. It is at Bernard's renegotiated price of 15.8 billion instead of 16.2. But the Arnault family now owns Tiffany and my God, has the business transformed under their ownership.

• 2:30:40David Rosenthal?

  Totally. I mean, the biggest and splashiest symbol being the huge marketing campaign and new faces of Tiffany, Jay-Z and Beyonce.

• 2:30:52Ben Gilbert?

  Yep. And that campaign with the Basquiat painting in Tiffany blue.

• 2:30:56David Rosenthal?

  Yeah. Oh, my gosh. So perfectly executed. I mean, there's so much controversy for all sorts of reasons around that. But, you know, hey, what better press to generate for Tiffany?

• 2:31:06Ben Gilbert?

  And the campaign around not your mother's Tiffany, they're insulting the entire existing customer base in order to try to get Gen Z adoption. They're showing models wearing things you'd never imagine seeing in a Tiffany ad. They took this behemoth and they turned it into something kind of rugged and in your face. And Alexander Arno talks about this in an interview. He's like, yeah, I mean, and I'm not quoting him here, I'm paraphrasing. It's not really insulting to the existing customer base because like, the mothers don't want to be mothers either. They want to be cool like the daughters. So no one wants to be your mother's Tiffany, it turns out.

• 2:31:43David Rosenthal?

  There's actually some deeper stuff to all this that I think is worth going into here. You know, one thing we fast forwarded over to get to the end here is in the late 2000s and early 2010s, there was a huge amount of controversy in the luxury industry about what to do about black culture embracing these old luxury brands.

• 2:32:07Ben Gilbert?

  Oh, right. The whole Cristal thing, which by the way, Cristal was originally created to be the champagne specifically for the Russian czars. So like, luxury for royals happened in every country.

• 2:32:22David Rosenthal?

  Yes, totally. For folks that don't know, there's some great articles that are in our sources that we'll link to about this. But this was actually part of my old thesis back in Princeton when I was writing about the champagne industry.

• 2:32:32Ben Gilbert?

  I was wondering if you were going to reference it.

• 2:32:34David Rosenthal?

  Yeah. Oh, man. Jay-Z led this boycott of Cristal because the then managing director of Louis Rodre, which owned Cristal, put this statement out. He was interviewed in The Economist about what he thinks about rappers drinking Cristal. And he was like, I'm sure Dom Perignon would love to have their business. They can have it, or something like that. I'm paraphrasing. This is amazing. What happens next? So Jay-Z leads a boycott in the rap industry of Cristal. He goes out and he acquires another small champagne label called Armand de Brignac, rebrands it as Ace of Spades, launches the Ace of Spades champagne brand in his Show Me

• 2:33:13David Rosenthal?

  What You Got music video directed by F. Gary Gary. Fast forward to 2021.

• 2:33:21Ben Gilbert?

  Right as Beyonce and Jay-Z are becoming the global face of Tiffany.

• 2:33:25David Rosenthal?

  Who comes in and acquires 50% of Ace of Spades for unannounced, but probably hundreds of millions of dollars.

• 2:33:31Ben Gilbert?

  LVMH.

• 2:33:32David Rosenthal?

  LVMH. Meanwhile, one of the very few brands that they have built internally within LVMH over the past couple of years is Fenty with Rihanna. Rihanna is on Jay-Z's Roc Nation label. That's how the relationship gets started. Fenty is this unbelievable success. They originally started it with the concept that it was going to be like all the traditional maison. It was going to have a fashion line and a beauty line. The fashion line doesn't work, but Fenty Beauty is likely doing close to $2 billion in revenue, I think, at this point.

• 2:34:06Ben Gilbert?

  Oh, yeah. Fenty Beauty is definitely one of the recent success stories.

• 2:34:10David Rosenthal?

  Yeah, it's amazing. So all this comes together in this Tiffany deal.

• 2:34:15Ben Gilbert?

  Right. It is interesting. Is LVMH, are they intentionally being more inclusive? Or does Bernard just always know where to find money? He definitely always knows where to find money and I would say he also knows where to find artists. That's been an interesting shift toward celebrities in luxury where of course celebrities have distribution, but I think LVMH and a lot of the other companies now are recognizing the sort of dual benefit of working with a celebrity music or film artist because they are a creative person. They do actually know how to design product that will appeal to the masses. So they can sort of be the Christian Dior and they can

• 2:34:58Ben Gilbert?

  be the Natalie Portman.

• 2:35:01David Rosenthal?

  Yeah, I mean, I think the Kylie cosmetics and Kylie Jenner kind of paved the way here. And then Fenty has been even more successful than that.

• 2:35:09Ben Gilbert?

  Has it really?

• 2:35:11David Rosenthal?

  Yeah, based on everything I could find in the research, I think Fenty Beauty is significantly larger than Kylie cosmetics at this point.

• 2:35:17Ben Gilbert?

  Wow, wild.

• 2:35:19David Rosenthal?

  Rihanna is now a billionaire and is the wealthiest female music artist of all time, significantly wealthier than Taylor Swift, and it's all because of Fenty Beauty.

• 2:35:31Ben Gilbert?

  Wow. And just to wrap on Tiffany here, the financial performance is exceptional as well. It's very quickly going to become a great financial deal. Tiffany was acquired a little over two years ago for the $15.8 billion that we mentioned. And Tiffany just announced at earnings that they will surpass a billion euros of profit, which we're going to equate with dollars since they've been close over the last couple of years, which is double what the business was earning at acquisition.

• 2:35:58David Rosenthal?

  Wow, just two years ago.

• 2:36:00Ben Gilbert?

  Yes. So this now means that LVMH paid just 13x earnings for Tiffany is pretty impressive.

• 2:36:09David Rosenthal?

  Man, what a deal. And so Ben, like you said a minute ago, in 2019, right before the pandemic, LVMH as a group did about 50 billion in revenue.

• 2:36:19David Rosenthal?

  In 2022, they just reported earnings. They did almost 80 billion in revenue and margins have expanded. They did over $20 billion in operating profits. That's like close to a 30% EBIT margin across the whole group. That's wild. This is not a software business.

• 2:36:40Ben Gilbert?

  It's crazy. Their ability to generate this much free cash flow at the scale that they're at. I can't believe operating margins have continued to expand while they've grown from, I think they've doubled revenue in the last five years and they've doubled the profits in the last four years. And this is a company at $80 billion revenue scale. I mean, granted, some of that's been through acquisitions. So it's not all organic growth, but they clearly have a machine that they're putting these brands into when they acquire them.

• 2:37:12David Rosenthal?

  It's such a validation of the strategies that started back with Recamier and Chevalier and then Bernard Arnault added and like the transformation of the industry. It's doing all this and there's carrying out there and there's Richemont out there and there's Hermes out there. It's not like they own the whole industry. There's still so much room to run, whether through if they can pull off some of these acquisitions or take share or whatever. Like people don't realize how big the luxury industry is.

• 2:37:42Ben Gilbert?

  And especially if they expand into luxury travel. Like right now, they only have the small acquisitions that they've made, but luxury travel is huge.

• 2:37:52David Rosenthal?

  Huge. Oh, let's talk about that a little bit in analysis in just a sec, because I have some, I have some thoughts on that.

• 2:37:58Ben Gilbert?

  So here's some more numbers, just to contextualize the business today. It's 200,000 employees across all the businesses. There's 75 houses. There is nearly 6,000 stores around the world. And David, you mentioned the 80 billion in revenue and 20 billion in profit. I think that profit margin, that 25% operating income is actually depressed because of how forward looking they are. Arnault is reinvesting more into like fixed costs of stores and landing the best talent and signing long-term deals, especially doing long-term ad deals. They're investing in building all the brand equity across all 75 of these brands. They could be cash flowing much more than they are.

• 2:38:43David Rosenthal?

  100% great point. All that has, of course, very famously recently made Bernard the newly re-crowned wealthiest person in the world.

• 2:38:56Ben Gilbert?

  $218 billion, up from, I think, 76 billion before the pandemic, so quite a spike.

• 2:39:05David Rosenthal?

  As Elon and Bezos have been going down, he's been going up.

• 2:39:08Ben Gilbert?

  And if you flashback 10 years ago, he was worth $30 billion. So that's quite the transformation from 30 billion. There are many 30 billionaires. There are no other 200 billionaires.

• 2:39:20David Rosenthal?

  Yeah. Wow. Man, that's compounding.

• 2:39:23Ben Gilbert?

  Seriously.

• 2:39:24David Rosenthal?

  Of course, there's now tons and tons of discussion about him, about his family, about all five of his children who work in the business. They all are like, seem to be incredibly accomplished executives that have come up within the business in their own right.

• 2:39:39Ben Gilbert?

  Like strikingly, strikingly competent and very, very smart. And it's worth knowing each of the kids, it's reported that they each have a 20% stake in the holding company, but there's a mechanic where they can't sell their shares for 30 years. So there's sort of an interesting longevity thing built into that, regardless of their operating position within LVMH itself.

• 2:40:01David Rosenthal?

  Interesting. Well, I mean, I'm sure, given that Bernard has masterfully exploited family splintering in other brands in the past, with a notable exception of Gucci. But yeah, he's not going to let that happen to his own family anytime soon.

• 2:40:15Ben Gilbert?

  It appears to be pretty genuine, too, that they're close. They seem to spend lots of time together. They've all mentioned family dinners, often growing up. Alexander often mentions how he sort of got an MBA from birth, always talking about the business. But that does imply like dad was always at dinner, wasn't just raised by mom. You know, well, I do think there's actually like a very close family dynamic here. And unlike other succession battles, which are highly reported, and you know, I think the Murdoch family is a great one, people leaking things about each other, this seems ridiculously amicable. And I don't know if it's just very French and proper, but they all seem to. Have great working relationships with each other.

• 2:40:55David Rosenthal?

  Yeah. A striking thing about the kids in the family is that at least most, if not all of them, doesn't seem like they were gifted these positions. They came up through the business and quote unquote, earned it, but earned their positions in much the same way that Bernard did in his own family company. Like Alexander is a great example. He went to polytechnique, right? Those are blind admissions tests.

• 2:41:21Ben Gilbert?

  I also think it's funny, a lot of the background of a lot of the people that we've talked about on this episode, people won't really be familiar with. If you look at Alexander's resume, it looks like a lot of yours, listeners. I think that's a really interesting thing to point out. He went to college for computer science. He worked at McKinsey. He worked at KKR before going into the family business. I mean, it is interesting how much he has sort of weaved into the American tech and business world.

• 2:41:46David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:41:52Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:42:03David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:42:23Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:42:36David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:42:47Ben Gilbert?

  All right. Enough about the succession stuff for now and Alexander. And I actually think this place of leaving it with Tiffany and starting to speculate on the future is the right place to catch us up to now for the history and facts. And let's go into the analysis section. And there's a lot of analysis to do on this company, so I'm pumped about it.

• 2:43:04David Rosenthal?

  This is going to be so fun.

• 2:43:06Ben Gilbert?

  We, of course, have our playbook section, but before we do that, let's do power. And for folks who are new to the show, this is the section based on the book Hamilton Helmer wrote called Seven Powers, where it really asks the question, what is it that enables a business to achieve persistent differential returns? Or put another way, to be more profitable than their closest competitor and do so sustainably? And there are seven of these.

• 2:43:32David Rosenthal?

  Hence, seven powers.

• 2:43:34Ben Gilbert?

  Yes. The seven are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And David, one thing that I would propose doing for this episode is actually doing this exercise twice. One, for LVMH itself as a business versus its nearest competitors, which really are the other holding companies, but then doing it for a brand in LVMH.

• 2:44:03David Rosenthal?

  Ooh, let's do Louis.

• 2:44:05Ben Gilbert?

  Yeah, so I think that's the appropriate one to do. And the reason I want to do that is because I think the reason we're doing this episode at all was our fascination with brand power. And I think let's take one of the most spectacular luxury brands in the world and examine its power.

• 2:44:20David Rosenthal?

  And I think these are going to be really different for the holding company level versus the brand.

• 2:44:24Ben Gilbert?

  Super different. To your observation earlier that Bernard realized that luxury groups could be much better businesses than luxury brands and have completely different methods of profitability and sustainability, I think that was super astute. And I think this is where we'll sort of tease it apart.

• 2:44:42David Rosenthal?

  Yeah, totally. Well, I think that, as we talked about a lot earlier in the episode, at the holding company level. There is now no doubt in my mind that LVMH has extreme scale economy power.

• 2:44:54Ben Gilbert?

  I'm glad you bring that up. Bernard has a great quote. "We have been seeing for the past 25 years, a growing desire for high-quality products and an acceleration of buying power. Nowadays, the internet makes this planet much smaller. Product launches now need to be global in order to be successful. When you start something today, you usually have to start it all over the world at the same time to be successful. And you need to be able to see what's going on everywhere instantly. This requires higher investment, which gives us an advantage."

• 2:45:26David Rosenthal?

  There's so many dimensions to this. And again, we talked about a lot of them earlier in the episode, but there's obviously capital. Having financial firepower that is way above what any individual brand can have is hugely important. When you're talking about real estate, when you're talking about buying advertising, when you're talking about raw materials.

• 2:45:46Ben Gilbert?

  Right. Do you want the LVMH rate for this billboard? Or do you want to pay the rack rate for this billboard?

• 2:45:51David Rosenthal?

  I think the people element is huge. Are you going to attract the best creative and management talent to XYZ family brand versus LVMH? Good luck with that.

• 2:46:02Ben Gilbert?

  Yep. You are super right. I think it's in negotiating contracts, in capital, everything about this industry takes way more money to get something off the ground than it used to, and frankly, to compete. It's the exact same thing that Bob Iger realized when he took over Disney, and actually why he did the Fox deal, is he sort of realized there's going to be very few players left standing in this reorganization of content and distribution. And why he wanted to make Disney one of the few scale players is because you need scale to be successful. And I think he realized that it was worth diluting shareholders to go and make a bunch of acquisitions in order to accomplish that scale. I think Bernard realized the exact same thing about luxury.

• 2:46:40David Rosenthal?

  Yep. There's also another dimension to this, which maybe you could lump into the advertising economies of scale, but that I think is maybe something a little different, which I would call cultural economies of scale that have come out in, especially in the social media era. Think about the Jay-Z Beyonce relationship and the Rihanna relationship. These are relationships that extend across multiple LVMH brands that I'm sure are incredibly expensive and require a lot of capital. But it's not just the capital, right? Why did Jay-Z and Beyonce choose to work with Tiffany? Would they have worked with Tiffany for this campaign if Tiffany were still under its previous ownership?

• 2:47:25David Rosenthal?

  Like, I don't know.

• 2:47:27Ben Gilbert?

  Hmm.

• 2:47:28David Rosenthal?

  Maybe not.

• 2:47:29Ben Gilbert?

  Maybe, but you're right. It makes it more attractive.

• 2:47:32David Rosenthal?

  Right? They're business partners with Ace of Spades with LVMH. They're business partners indirectly with Fenty with LVMH.

• 2:47:39Ben Gilbert?

  And LVMH has now also built a corporate brand around reinvention. So like, would Jay and Rihanna trust the old stodgy old Tiffany's? When they said, hey, we want you to be the global face and we're gonna totally blow everything up and sort of appeal to a completely new set of people? I don't know if you do that deal, but if it's Bernard and Alexander Arno and the rest of the family and proven success.

• 2:48:02David Rosenthal?

  Well, I think the calculation for Jay-Z, Beyonce, Rihanna, you know, and anybody of that stature is not a purely financial one in these things. I don't think anywhere close. Their brand value is the most important thing to them. And so they can be very certain now partnering with an LVMH group brand or group of brands within LVMH that it's not going to hurt their brand value and probably will enhance their brand value. You can't say that about any other luxury group out there.

• 2:48:38Ben Gilbert?

  Yeah, this is an interesting point from the luxury strategy also about using celebrities in luxury advertising. One can't outshine the other. You need to pick celebrities that elevate the brand a little bit or brands that elevate the celebrity a little bit. But you can never have too much of a mismatch or else someone goes, ugh, someone got paid. Like, if you have a really high-end actor come and advertise your new startup jewelry brand, people go, wait, what? And they don't trust your brand.

• 2:49:06David Rosenthal?

  Or let's not say a startup. I think this illustrates also maybe some of the difference between the power at the holding company level versus a brand level. Let's say Hermès wanted to do a campaign like that. I don't know. I think that's a big risk for a celebrity of the stature of a Beyonce to do that. Even something, a brand as great as Hermes, they've never done anything like this before. That would be such a radical change for the whole organization. Whereas LVMH, even though that was a radical change for Tiffany to do this, that's just another day in the office for group LVMH.

• 2:49:40Ben Gilbert?

  Hmm. That's an interesting point.

• 2:49:42David Rosenthal?

  Like, they know how to manage that.

• 2:49:44Ben Gilbert?

  Right. Okay. What besides scale economies exist at the group level? There's no counter positioning, I don't think.

• 2:49:52David Rosenthal?

  Only to the extent that the whole idea of a group of brands was different, but the rationale behind doing so was scale economies. Other brands could have and did create their own conglomerates. See, Kering and Richemont and the like. So it wasn't unique.

• 2:50:09Ben Gilbert?

  The interesting point around branding, which we're obviously going to talk about with power for the brands themselves, I do actually think there is brand power around LVMH now. I think they're intentionally building brand equity in LVMH. There's higher production value around the LVMH brand whenever they're creating videos or anything for shareholders. So I do think they're trying to build LVMH as a corporate brand.

• 2:50:36David Rosenthal?

  Which I think is related to what I was just talking about with working with celebrities.

• 2:50:40Ben Gilbert?

  In the same way that Warren Buffett built corporate brand around Berkshire Hathaway by saying it's better to be acquired by me than someone else for the same price.

• 2:50:50David Rosenthal?

  Yep, I totally buy that. Which is ironic, given the history of LVMH and Bernard's acquisitions. But yeah, totally.

• 2:50:58Ben Gilbert?

  Right. It'll be interesting to see if LVMH shows up on more consumer facing things. It's very boring. Like, it's just a serif LVMH. And I actually have been working on the little album art thing for this episode, and I'm having a hard time figuring out what to do with it. And listeners, you'll be able to see whatever I came up with after this. But it's so, no one recognizes LVMH in the broader world yet. Should I use the Louis Vuitton logo so people will click on it? Should we use the LVMH logo to be the most intellectually honest, even though most people don't know what it is? It's sort of an interesting conundrum. And I think- LVMH is trying to solve that by building the LVMH brand in the business world.

• 2:51:38David Rosenthal?

  Which is definitely happening. Like, there have been moments in the past where Bernard was the wealthiest person in the world, and I don't remember anywhere near as much hay being made about it as there is this time.

• 2:51:50Ben Gilbert?

  Yep, I think that's right. Lastly, I do think at the group level, cornered resource power is coming into play. When you think about the idea that Bernard had around star brands, there's only so many in the world. And the more LVMH collects, the more they can sort of feed it into the rest of the flywheel. And they're basically in a battle with the other groups to go catch them all at this point.

• 2:52:12David Rosenthal?

  But it's barely even a battle. Carrington is the second biggest, and they have so many fewer star brands.

• 2:52:18Ben Gilbert?

  Right. In practice, it's about staying independent or selling to LVMH. Like, when Christian Loubetan eventually does decide that he's going to sell, or Giorgio Armani does, or we'll see if Hermès ever does, it seems like it's going to be to LVMH.

• 2:52:33David Rosenthal?

  Yeah, even just, it's related. This is an outcome of the scale economies advantage, right? But if Hermès ever does sell, which maybe won't happen for 100 years, but might happen in 100 years, who else is going to have the capital to buy them?

• 2:52:48Ben Gilbert?

  Yep. Okay, power at the brand level. And let's case study on Louis Vuitton.

• 2:52:53David Rosenthal?

  Ooh, yes, this is great, because there's the direct competitive example of Hermès right there.

• 2:52:58Ben Gilbert?

  Yep. Actually, let's put it a different way. What exists besides brand power for the brands?

• 2:53:05David Rosenthal?

  Ooh.

• 2:53:06Ben Gilbert?

  Because the brand power thing is super obvious. I can go and get something of the exact same utility at Target, or I can go to Louis Vuitton, and they serve the same utility at 10,000x price points. So I am wildly willing to pay more for something with that mark on it.

• 2:53:21David Rosenthal?

  I have two thoughts. I don't know, though, if both of them ultimately collapse under brand value, but I think there might be an element of cornered resource here in that you think about, like, what's so important for these luxury brands is heritage and provenance and the physical story of the goods. And those are

• 2:53:42David Rosenthal?

  People, materials and physical locations and those are cornered resources.

• 2:53:48Ben Gilbert?

  Champagne, yeah.

• 2:53:49David Rosenthal?

  Or like Hermes and Louis Vuitton with the ateliers that the products are made in.

• 2:53:54Ben Gilbert?

  Right. Cause to your point of what makes a luxury brand by the most traditional definition of luxury, different from premium, defensible, it is the fact that it is more desirable than its function alone and that people believe that that desirability is durable among generations. And the way, the implementation that you create that durability is often through place and story. And so if you own the place and you own the story, you own the reason why someone would believe in the longevity of that brand to opt into it at these price points.

• 2:54:37David Rosenthal?

  But at the end of the day, it gets expressed in brand value.

• 2:54:41Ben Gilbert?

  Right.

• 2:54:42David Rosenthal?

  I don't know. We'll have to have Hamilton on to debate the finer points of that one.

• 2:54:45Ben Gilbert?

  We will.

• 2:54:46David Rosenthal?

  Maybe there's a little bit of counter positioning here too. I mean, like, I do think that Hermes and Louis Vuitton are directly counter positioned.

• 2:54:56Ben Gilbert?

  I mean, Hermes is counter positioned.

• 2:54:58David Rosenthal?

  Are directly positioned against each other. Yeah.

• 2:55:00Ben Gilbert?

  No, no, no. I don't think Louis Vuitton is at all counter positioned against Hermes. I think the other way around. It definitely is. Louis Vuitton is pretty mass market.

• 2:55:10David Rosenthal?

  And let's be honest, there's some dilution risk there too. Like you can buy a lot of products that have the LVs or the Louis Vuitton name on them.

• 2:55:19Ben Gilbert?

  Totally.

• 2:55:19David Rosenthal?

  Like LV is very in your face with the monogram and the flashiness and Hermes is very deliberately not in your, like it's a, if you don't know, you don't know, you know?

• 2:55:30Ben Gilbert?

  Yeah. But man is LV good business.

• 2:55:34David Rosenthal?

  Oh, so I mean, they both are just incredible businesses. Anything else you got? Any arguments for any of the others?

• 2:55:39Ben Gilbert?

  No, but that section could annoyingly be summed up by luxury brands. Power comes from brand.

• 2:55:47David Rosenthal?

  At the brand level, yeah, but I think the holding company level is interesting and different.

• 2:55:51Ben Gilbert?

  Yeah.

• 2:55:52David Rosenthal?

  Okay, let's talk playbook.

• 2:55:55Ben Gilbert?

  Yeah, let's do it. So the way that I want to do playbook, the way that I've been sort of thinking about it is what should you walk away with this episode and have as insights or things you learned or things that could be applicable to your business? I think one of the most interesting ones is Bernard had the insight that with scale economies, there were going to be massive profit pools in the luxury industry. And we can talk about the sort of trend of why luxury became big in the 90s to today. But when he had that insight, he operated the business in such a way where he made sure those profit pools all collected with the properties that he owned.

• 2:56:38Ben Gilbert?

  So department stores have not had a great 20 years. Faceless manufacturers in China have not had a great 20 years. All the profit dollars get squeezed out of those.

• 2:56:49David Rosenthal?

  Especially in America, I'm less familiar with the rest of the world, but the straight up retailer that's been decimated.

• 2:56:57Ben Gilbert?

  Right.

• 2:56:58David Rosenthal?

  If you're not a Walmart, Target, or Amazon, you're basically dead. If you're just a pure play retailer in America, or if you are a specialty retailer in America, in which case, in certain cases, you might be doing extremely well. See, for example, Home Depot.

• 2:57:15Ben Gilbert?

  Yep. So I think that one of the biggest things for me is he just really figured out how to make sure that he owned not only the locations of the value chain, like brand that they were going to accrue to, but the brands in particular that all the profits were going to accrue to.

• 2:57:30David Rosenthal?

  Yep.

• 2:57:31Ben Gilbert?

  I think another big one is realizing where to realize synergies and where not to. As Alexandra puts it, we have light synergies and specifically around media buying, real estate, retaining talent. There's also something that we really didn't talk about that much, which I think this is a good place to bring up, which is around advertising. So before the 70s, luxury brands didn't really advertise. And if you think about why, it's who their clients were, it's that there was a benefit to their clients finding them, there were fewer of their clients, global wealth was frankly, just smaller and globalization hadn't happened as much yet. And so there weren't the stores in Japan and China.

• 2:58:15Ben Gilbert?

  The internet didn't exist, so you didn't need to like make a big splash everywhere all at once. Literally, these companies would spend $0 on advertising, whereas now LVMH spends over a third of their revenue on marketing broadly. LVMH is the largest luxury advertiser in the world, and they spend, what's a third of revenue, over $20 billion a year on marketing. It's astonishing. And this creeping trend from the 70s to today of realizing that, oh, we do need to advertise, or at least it massively benefits us if we advertise, sort of begged the question, what do they advertise? And what they're advertising is, interestingly,

• 2:58:56Ben Gilbert?

  not the products. That is differentiated in luxury. Everyone else advertises their products.

• 2:59:02David Rosenthal?

  The dream. It's always the dream.

• 2:59:04Ben Gilbert?

  Luxury advertises the dream. I actually can't tell you Louis Vuitton product names, but I know Louis Vuitton. And so if you were to ask me, oh, you have a lot of money and you'd like to go spend it on something fancy, what are you going to buy? I can tell you brands, but I cannot tell you any of their products. And I think that that's this really interesting difference about selling the dream.

• 2:59:28David Rosenthal?

  Whereas in the premium and ultra-premium industry, which as we said is very different, let's take Apple, the most successful example of that, you know all about the products.

• 2:59:39Ben Gilbert?

  Oh, you should go buy the expensive iPhone because it has a dynamic island. It's like literally the opposite.

• 2:59:45David Rosenthal?

  Right, right. They brand the features of the products. Like, a luxury brand is never going to brand a feature of a product.

• 2:59:52Ben Gilbert?

  Right.

• 2:59:53David Rosenthal?

  They're almost never even going to brand a product.

• 2:59:56Ben Gilbert?

  Luxury brands are about convincing you to opt into their lifestyle and their dream, and the products are secondary.

• 3:00:01David Rosenthal?

  Yep.

• 3:00:02Ben Gilbert?

  Another thing that we haven't talked about that I thought was worth bringing up in playbook is that at LVMH, and maybe this is some lip service, it was always lip service at Apple to some extent around not doing focus groups, the marketing department is the same way that Steve Jobs always thought about a marketing department. The designer is a creative person who has a genius idea and works with a team of implementers to make the product. And then marketing only gets involved when it is time to make that product desirable for the world. But at least in Bernard's view, you sort of create crappy products or uninspired products when you commission market research studies to ask what people want and create it for them.

• 3:00:42David Rosenthal?

  Yep. Marketing and product work together to market the product, but marketing is not involved in product creation.

• 3:00:49Ben Gilbert?

  Yes. Which again, I'm not sure that that's particularly useful outside of creating luxury goods. Luxury is the intersection of art and commerce. It is literally like creating something that is so close to art, except it has to have some function. That's what makes something a luxury good outside of being pure art, which has no function and is all about either buying to signal or buying to interpret for your own beauty, for that sort of luxury for self-concept we were talking about early. As soon as it has like some function, now it's a luxury good.

• 3:01:23David Rosenthal?

  I actually think this lesson is incredibly useful. I had in my notes to bring this up a little earlier, but now is actually the perfect time in analysis. I think after having done this now, that the luxury industry, it is a creative products industry. There are other creative product industries such as the movie industry, the music industry, the publishing industry, the video games industry. And the parallels and lessons across all of these are very transferable, I think. And in particular, I think one innovation that we probably didn't do enough justice

• 3:02:03David Rosenthal?

  in in history and facts that Bernard brought to the industry and LVMH brought to the industry is the professionalization of business management within luxury and partnering with creatives. And that there is a art to the business too. And that is so applicable in many things we've covered on this show, like in the media industry. That is the NFL. That is CAA. That is Disney. That is the video game industry for sure. I think that was like a big aha moment for me in doing this. Like, oh, the luxury industry is actually very similar.

• 3:02:41Ben Gilbert?

  Yeah, you're right. Anytime that you're in a creative industry, it really is about figuring out how to first do the necessary and not sufficient thing for success of finding the most creative, talented people to create. It is art, but it's art that then also has a function and then figure out how to market that. And if you work backwards from the customer in a very Amazonian way, like they literally call it working backwards, you end up with Amazonian products, which are unbelievably high utility and completely uninspired.

• 3:03:17David Rosenthal?

  Yes. Maybe this is speculating a little bit. Industries could comment here, but I think also it works both ways. I think if you're going to have a really successful creative products company, the creative leaders need to understand business and respect business. And the business leaders need to understand creative and respect creative.

• 3:03:39Ben Gilbert?

  You're right. There's totally an invention in that leadership structure. You look at a Tom Ford and a Dom DeSoleil, that is the right structure to lead a house. And it is interesting when you come from this small family owned heritage of it's an artisan making something that's a small, local business to turning it into a global brand. You really do need that pairing of professional manager with professional creator.

• 3:04:07David Rosenthal?

  Yep, totally. It's super telling that Tom Ford was in all the banker meetings. And I don't know, we didn't talk to him, but I bet Domenico was like, he's my partner. He's going to be there.

• 3:04:20Ben Gilbert?

  Yeah, I think that's right. The one beat that I want to hit in playbook here, I want to phrase to you as a question, which is what were the dominant factors in enabling Bernard to go from $15 million to $200 billion in equity value?

• 3:04:39David Rosenthal?

  Oh, man.

• 3:04:40Ben Gilbert?

  And what were the big leaps?

• 3:04:41David Rosenthal?

  That's such an enormous leap to go from not the founder of any of these businesses, 15 million of capital invested to 200 billion.

• 3:04:52Ben Gilbert?

  One takeaway could be leverage works when you're right. You can take on a lot of leverage. And I don't literally mean leverage. I'm not sure if it's like borrowing money and paying against the debt.

• 3:05:03David Rosenthal?

  But all the creative financial structuring he did was leverage, whether it's debt or structure or whatever.

• 3:05:09Ben Gilbert?

  Right, in different forms. When the businesses do become enormously cash flow positive, it's not a problem that you took on leverage. And in fact, it only multiplies your returns. Levering your returns is a great way to increase your IRR, which is effectively what he did. And what we don't do on Acquired is tell the stories of people who were wrong in their leverage and did a bunch of crazy stuff and then went out of business. And in fact, most of the time, nobody cares about those stories. We don't even know of them to tell them. Enron was this unusual example. There are famous, huge catastrophic blowups, but most blowups are small and insignificant.

• 3:05:48David Rosenthal?

  And I suspect most stories involving leverage end in the blow up, not in the great success.

• 3:05:53Ben Gilbert?

  Right. The most interesting thing is that a story like LVMH is the story of compounded. He was one of 10 that survived the first chapter. And then he was one of 10 that survived the second chapter. And then he was one of 10. And suddenly he's an outlierish one in seven billion case of a person who managed to turn a very small amount of money into the most money in the world. And of course, we're going to tell that story, but someone was going to accomplish that story. It was going to happen to someone. And so I think about this a lot on Acquired where we're like, wow, yet another very, very unlikely set of circumstances. It's like, should we learn from the lessons? Or was this going to happen to someone? And so you sort of make up survivorship bias,

• 3:06:38Ben Gilbert?

  make up the fact that, well, if you did all these things that they did, you too can become like that.

• 3:06:42David Rosenthal?

  Oh, for sure. There's a lot of survivorship bias here. I suspect that Bernard did have a view that almost nobody else.

• 3:06:55David Rosenthal?

  Had, which was that both that luxury brands and particularly like Louis Vuitton and Lethargy, luxury brands could get bigger than anyone imagined. And he was right on that. I think he also had a view that the Lindy effect of these brands is bigger than anyone realizes. And so even when a brand falls on hard times, if it has enough heritage and providence, you can bring it back. Like, let's do this as a thought exercise. Could you permanently destroy the Hermes brand, or the Louis Vuitton brand, or the Tiffany's brand? You could certainly temporarily destroy it. And we told a few of those stories on this episode, but could you permanently forever wipe it from the face of the earth?

• 3:07:38Ben Gilbert?

  You could. You would need it to be bad for like 60 plus years because I think you need it to be bad for an entire human lifetime adult memory.

• 3:07:46David Rosenthal?

  Yep.

• 3:07:47Ben Gilbert?

  I think some of the reasons why a Gucci survives is because even if you don't know Gucci being good in the last 10 years, there are a lot of people alive who recall it being something prestigious. But yeah, they're hard to destroy.

• 3:08:01David Rosenthal?

  Well, and I think the likelihood that that would happen is extremely low because whatever company is currently managing that brand would go bankrupt at a certain point, or would change control or whatever. There's just too much incentive now for somebody outside to come in and buy it and resuscitate it. And like the shelf life is so long, you know? Yeah, I think you're right. You would have to have a dormant period of a human lifetime to permanently kill one of these brands. And that was certainly the case with Dior that Bernard, I think, recognized more than anybody else.

• 3:08:31Ben Gilbert?

  Yeah. I think Dior, going back to the question of how did he build so much wealth in this period of time without starting as 100% equity owner of something, which is how founders get wealthy. I think the Dior transaction and him being correct in how much value there was in the Dior brand and all the assets he could sell off, I think that was a huge multiple very quickly. I think he went from a net worth of 15 million to a net worth of, actually, we can do this calculation, because when was he worth 800 million from his share in LVMH?

• 3:09:07David Rosenthal?

  Oh, when he put the 800 million into the JV with Guinness, that was 1988 and he bought Busac and Dior in 1984, four years.

• 3:09:18Ben Gilbert?

  Right. So in four years, he turned 15 million into 800. So a lot of the compounding happened right there.

• 3:09:24David Rosenthal?

  Yeah, that was the key point, that four years of that jump and then the compounding since.

• 3:09:29Ben Gilbert?

  Right. Getting a great deal from the French government and really being able to spot that market inefficiency.

• 3:09:35David Rosenthal?

  So ironic that like the socialist French government essentially gifted the greatest business financial success of all time.

• 3:09:42Ben Gilbert?

  I tweeted this, but it's so deeply ironic that the greatest LBO artist in history is a Frenchman. This ultra competitive American culture that we're in, where we pride ourselves on GDP above all else and this great competition that we're in called capitalism and that this is the right way to produce the most value in the world. Bernard Arnault actually produced the most value in the world.

• 3:10:06David Rosenthal?

  I guess the Europeans just, you know, thinking longer time scales than anyone else.

• 3:10:10Ben Gilbert?

  Right. That's crazy.

• 3:10:12David Rosenthal?

  Okay, I've got a couple of quick ones. One interesting one, particularly in the leather goods business, I think, is that luxury turned out was a business that can scale. And I think the jury might still be out a little bit on luxury travel. I think it's definitely part of LVMH and a luxury conglomerate strategy to add travel and experiential luxury to what they're doing. But a hotel is never going to be like Louis Vuitton in that you can make a lot of leather handbags and a hotel only has so many rooms.

• 3:10:49Ben Gilbert?

  Especially when the quality of service that you have to deliver to each guest in a luxury travel experience is enormously high.

• 3:10:56David Rosenthal?

  Yes, definitely. So I do think there's like this kind of interesting industry analysis aspect to like, if you're going to enter an industry like of the Kennet scale and again, intentionally or not, Bernard got that really right with luxury, like it can scale. Okay, that's one. The other one, this is interesting, we'll see now in the period that we are currently in, but I think this played out pretty tellingly in the great financial crisis. Luxury is fairly recession resistant.

• 3:11:27Ben Gilbert?

  Oh, I've been waiting to talk about this. Yeah.

• 3:11:29David Rosenthal?

  Yeah. Which is another deep paradox about luxury.

• 3:11:33Ben Gilbert?

  Well, true luxury is recession resistant, but whatever LVMH is churning out may or may not be. Here's the thing that is an inarguable statement. Some percent of what LVMH makes is luxury. And one minus that percent is not luxury. And I don't know what those percents are, but they definitely have a class of things that they sell to people who are billionaires. And if the market drops 50%, we'll still be billionaires or multi-hundred millionaires. And that impacts their desire for something by approximately 0%. And so they will go buy it at the same price or more and are completely insensitive to that.

• 3:12:18David Rosenthal?

  I think, again, you could probably look to the car industry as a really clear example of this. I don't know. I haven't looked into it. I kind of doubt Ferrari sales are impacted that much by recessions.

• 3:12:28Ben Gilbert?

  Right. But someone who's going and considering buying a $400 Louis Vuitton clutch, I imagine that whether or not you currently have a $200,000 a year job, or were laid off from a $200,000 a year job, pretty dramatically affects whether you're going to go buy that clutch. And so for the class that they sell to that is not wildly price insensitive on everything, or who, if their stock holdings drop 50%, becomes concerned and changes their behavior, that affects their business. And I don't have a sense of how much is the sort of

• 3:13:08Ben Gilbert?

  completely price insensitive true luxury segment versus who falls into that more mastige segment? And I'm conflating two things here. There is the mastige segment, but then there's also the products that they have that are actually ultra-premium rather than being luxury. And so people are going to evaluate them on the merits of how useful are they? I think luxury travel is actually ultra-premium travel.

• 3:13:33David Rosenthal?

  I think there's different segments. I think it depends what type of travel you're talking about. I think if you're talking about Cheval Blanc, where there are 36 rooms in the Swiss Alps, right, is the first Cheval Blanc, I think?

• 3:13:43Ben Gilbert?

  Yep.

• 3:13:43David Rosenthal?

  I don't think that's going to be impacted too much by a recession.

• 3:13:46Ben Gilbert?

  That's fair. But the $1,500 a night, Four Seasons somewhere.

• 3:13:52David Rosenthal?

  Or Belmont, which LVMH acquired, like that. I think the average. Belmont Room is probably in that call it $1,000 a night range. Yeah, that's for sure going to be impacted.

• 3:14:02Ben Gilbert?

  Right. And it's because people are literally evaluating the value of is it worth it? Not purely on the signaling to other people or the intrinsic sense of self that comes from staying at one of those properties. You're like, okay, if I weren't going to share with anyone that I am here, is there value in staying at this very fancy hotel? Or can I get an almost as good experience for $500 less? I'll go do that.

• 3:14:32David Rosenthal?

  For sure. Yep.

• 3:14:33Ben Gilbert?

  The last thing that I want to bring up that's related to this idea of luxury is recession resistant, or at least true luxury is, which of course would be your bull case on LVMH over the next few years, is the unbelievable timing that Bernard had with the huge increase in global wealth.

• 3:14:56David Rosenthal?

  Yes.

• 3:14:57Ben Gilbert?

  As he was building this business, the internet happened, which connected us all and made it possible to announce these products to the whole world. It also made a whole lot of people really wealthy. I mean, LVMH did very, very well on the dot com boom and in the last five years of zero interest rate environments. On top of that, entire nations emerged out of poverty and other nations moved from having merely a middle class to having a ton of discretionary income. You look at the amount that the Japanese and the Chinese and in the near future and today, the South Koreans are spending on LVMH goods. There's this perfect storm of the creation of global wealth and desire to do something

• 3:15:41Ben Gilbert?

  with that wealth to signal your level of taste that none of this would have been possible without all of that going on, completely independent of Bernard's actions.

• 3:15:49David Rosenthal?

  Oh, yeah, it was super interesting. You were texting me some photos of luxury ad campaigns in the 90s. It was fun to look at them, but as we were looking at them, we're like, oh, wow. Clearly, the target market for these advertisements is Japan, not America.

• 3:16:04Ben Gilbert?

  Yep, I think that's right. All right. So moving out of playbook and closing our analysis, we're replacing grading. We're talking about it with bear and bull case from here.

• 3:16:15David Rosenthal?

  We're killing our dealings here.

• 3:16:17Ben Gilbert?

  Yes, exactly. Here is the bear case as I see it. They're too exposed to mastiage. I think I've tipped my hand on that over the course of this episode. Or perhaps put another way, they have attracted a lot of customers with entry level price points, at least entry level for these products, where they are selling a certain amount on value, not purely on luxury itself. And those customers haven't all graduated to their high price point, high margin products yet. And so a lot of the raw dollars that they are doing in revenue are more subject to a recession. I don't know. Hard to know how much.

• 3:16:58David Rosenthal?

  I bet there probably also are a good number of customers who did graduate to the high price point items over the last couple of years. And then now as the economy, in particular, certain sectors of the economy like tech have violently rerated here, might graduate out.

• 3:17:15Ben Gilbert?

  I mean, the number of people that we know, David, that a year and a half ago, thought they were millionaires or 10 millionaires or even higher and are now realizing that

• 3:17:24David Rosenthal?

  They're not. Yeah.

• 3:17:25Ben Gilbert?

  They're not. I bet a lot of those people were buying luxury goods.

• 3:17:28David Rosenthal?

  Yep, yep.

• 3:17:29Ben Gilbert?

  Another one, this is very short term, but luxury goods were on a tear during COVID. Obviously, China sales fell off a cliff as everyone was locked down. But globally, the luxury market grew 22% last year and is projected to slow down 3% to 8% next year. So that's sort of a short term impact on luxury sales. I don't think LVMH really thinks in two and three year timeframes. And then the two more that I have in the bear case is, one, despite buying 75 brands, there still isn't one that is as good as the original brand in the portfolio, Louis Vuitton. And so the fact that that is responsible for a quarter of all revenue and still makes

• 3:18:13Ben Gilbert?

  the product that is the best business. I mean, fashion leather goods is 50% of all of LVMH, but half of fashion leather goods is Louis Vuitton. That's not exactly a bear case on the business, but it is interesting to observe.

• 3:18:26David Rosenthal?

  Power laws are a thing.

• 3:18:27Ben Gilbert?

  Indeed. All right, David, do you have any other bear case?

• 3:18:30David Rosenthal?

  No, I have nothing to add.

• 3:18:33Ben Gilbert?

  Thanks, Charlie.

• 3:18:34David Rosenthal?

  You're welcome. I was wondering how long it would take you to get that.

• 3:18:38Ben Gilbert?

  All right, bull case. We've talked about luxury as recession proof. We've talked about these brands are insanely durable. A thing we haven't talked about is Gen Z is buying luxury three to five years earlier than millennials did, which I think is pretty interesting. And also, especially under Alexandra's leadership, LVMH has been much more open to collaborations than they have in the past. You see the sort of Tiffany and Nike, you see the Jay-Z and Beyonce, you see some of the stuff they were doing with Ramoa. I think the rise of sort of luxury, streetwear and sneakers among Gen Z is going to end up playing in LVMH's favor.

• 3:19:16David Rosenthal?

  Yeah. The Tiffany Nike collaboration, one, those shoes look pretty awesome.

• 3:19:21Ben Gilbert?

  I want the whistle.

• 3:19:22David Rosenthal?

  Yeah. Two, did you look at the prices?

• 3:19:25Ben Gilbert?

  Yeah.

• 3:19:26David Rosenthal?

  Like 5,000 plus for these sneakers. That's crazy.

• 3:19:30Ben Gilbert?

  That's luxury. They do the exact same thing that my $120 sneakers do.

• 3:19:38Ben Gilbert?

  Another bull case is while there won't be another China, the current trend with South Korea is crazy. They did 17 billion of sales in the luxury industry in South Korea last year. So they've definitely got a market there and Southeast Asia is developing quickly. India could be a strong luxury market, so there's a lot to be hopeful there. A lot of people also think there is a lot more running room in China, especially as they sort of emerged from the pandemic. Another one that I mentioned earlier is LVMH as a brand itself and sort of building that corporate brand to be the acquirer of choice. We'll see if that happens, but that definitely is a bull case. And then my last one is really around family control, that if they are able to do this

• 3:20:20Ben Gilbert?

  succession well, it does allow for very, very long-term views and leadership at the company.

• 3:20:27David Rosenthal?

  Yep, that was the one thing I was gonna add on Bullcase if you didn't cover it there. We haven't gone into detail on any of the children, but I think a lot of the narrative around LVMH recently has been this like, oh, the succession thing and like, wow, you know, what drama? Who's gonna take over? The five kids are pitted against one another. You know, and I think to a certain extent, some people have thought, oh, that's an overhang on the stock. But having dug into it, I mean, I don't know, maybe they're just very French and very good at putting forth a united front, but at a minimum, most if not all of the children are extremely accomplished and appear to be extremely talented managers of luxury businesses.

• 3:21:07Ben Gilbert?

  Yeah, I think the whole succession battle is something that the press wants to exist that isn't real.

• 3:21:13David Rosenthal?

  Yep. And even if it is real, I think whoever wins is probably gonna continue to do a really good job.

• 3:21:19Ben Gilbert?

  Right? Yeah, that's a great point. Well, before we do carve outs, I did wanna do a little betting pool on succession now that we're here.

• 3:21:27David Rosenthal?

  Fun.

• 3:21:28Ben Gilbert?

  Let me lay out my, uh, what should we bet? Should we bet a bottle of Dom?

• 3:21:31David Rosenthal?

  Yeah. Yes. Which, oh man, we're now five plus hours into recording. I don't know what time this will be in the edited version, and we have not yet brought up the famous Steve Jobs quote.

• 3:21:44Ben Gilbert?

  Oh, yeah, lay that on us.

• 3:21:46David Rosenthal?

  Yeah, so Bernard and Steve Jobs were friends. They got to know each other. I mentioned at the top of the episode that LVMH was a big influence on Steve Jobs and Apple. It was particularly around the advent of the Apple retail stores that Jobs sought out Bernard and LVMH to get his advice and they became friends. And supposedly Bernard tells the story that as they were getting to know each other through all this, one of them said to the other, you know, this iPhone that you're launching, do you think people are gonna be using it in 20, 30 years? And Jobs supposedly said, I don't know, but I'm pretty sure that people are still gonna be drinking Dom Pérignon champagne in 30 years.

• 3:22:24Ben Gilbert?

  I love that. All right. Then the bet is on a bottle of Dom between you and I.

• 3:22:30David Rosenthal?

  On who becomes CEO of LVMH?

• 3:22:33Ben Gilbert?

  Yes.

• 3:22:34David Rosenthal?

  All right. Who's your pick? I'll let you go first.

• 3:22:36Ben Gilbert?

  All right. So I'll go in order, starting with Delphine, who is around age 47 right now, who is the CEO of Dior, the couture house. I think with Delphine and Antoine, the two oldest, they will stay on the board of LVMH. They are the only two that are on the board right now. I think Delphine continues to run Dior. I think Antoine manages the family holding company, which does include some other outside investments. Continuing to the third child, I think Alexander is my pick and would be an awesome CEO for LVMH. He speaks in a way that really underscores how much he understands the principles behind the brands, the strategy,

• 3:23:18Ben Gilbert?

  the holding company strategy, the artistry of the company. He knows the soul of the company. He's amazingly only 30, but I think what he did with Ramoa was unbelievably entrepreneurial. He sort of independently went and worked with that family and said, I've been using your products despite taking shit from my dad for 10 years for using them because I think they're great. And then sort of cultivated that relationship and then ultimately waited for the Ramoa family to call him and say, we are looking to transition and sell the business. There's no one we'd rather sell to other than you. And our one condition would be if LVMH wants to buy it, that you be the CEO. And I think then he sort of took it upon

• 3:24:02Ben Gilbert?

  himself to go and sell LVMH leadership on that idea, ran that company and is now EVP at Tiffany in this pretty spectacular transformation that's happening at Tiffany. So my pick is definitely Alexander. I think Frederick and Jean are too young. They're like the babies of the family right now. I think they're 24 and 28 and they each run watches. So Jean runs LVMH's watches and Frederick, who is 28, is the CEO of Tag Heuer. And he was named that at 25.

• 3:24:34David Rosenthal?

  Crazy.

• 3:24:35Ben Gilbert?

  So Alexander's my pick. I mean, he's 17 years younger than Delphine. So maybe that would be crazy for him to take over, but.

• 3:24:44David Rosenthal?

  I think a lot of it depends on how long Bernard lives. I don't think he's giving up the reins anytime soon.

• 3:24:48Ben Gilbert?

  Well, they just voted to extend the limit of the CEO to 80. And actually Bernard put the limit in place of 74 or whatever it was.

• 3:24:57David Rosenthal?

  To oust Raconte, yeah.

• 3:24:59Ben Gilbert?

  Yes.

• 3:25:01David Rosenthal?

  So great. So great. Nobody's trying to oust Bernard right now. Yeah, it's funny. I mean, I think that the press definitely thinks that Delphine is the leading candidate.

• 3:25:10Ben Gilbert?

  That's what I thought too, coming into this, but after watching as many talks and all that as I could, I was like, ah.

• 3:25:15David Rosenthal?

  I think that Delphine and Antoine, Bernard's children from his first marriage, I think they're more comfortable speaking French than English. And the younger kids are more comfortable speaking English. I agree with you though. The interview that Alexander did at Oxford is awesome. Well worth watching. We'll link to it in our sources. He's incredibly compelling, clearly understands the business to his very core. So I think he would make an amazing CEO, but because it's a bet, I'm going to go with Delphine.

• 3:25:49Ben Gilbert?

  Ah, all right.

• 3:25:51David Rosenthal?

  I mean, I can't also pick Alexander here. That's not much of a bet.

• 3:25:54Ben Gilbert?

  I mean, you could, and then we just have to exchange bottles.

• 3:25:58David Rosenthal?

  Let's make it interesting.

• 3:25:59Ben Gilbert?

  All right. Great. Great. Great. It's on the record. Carve outs?

• 3:26:03David Rosenthal?

  Carve outs. Let's do it. I'll go first. I have two carve outs. One semi-related to the episode and one not. The one not is the Gamecraft podcast from our friends Mitch Lasky and Blake Robbins. Over at Benchmark Principal, the not so secret Benchmark Principal and Mitch, the retired uncle Benchmark Partner. They have put together an amazing limited podcast series on the goal, I think of being the equivalent of the genius of the system book about how the Hollywood creative management business works. I guess this is related to the episode after all, you know, in the luxury creative management business, how we've been talking about.

• 3:26:43David Rosenthal?

  But about the video game industry, there's nothing really like that. And it's so good. It's in podcast form. It's super compelling. They do a great job. They're friends of the show, but I'm just like huge, huge fan of the show. I've consumed all of their episodes so far. I love it. That's number one. Number two, also related to the show and also a fellow creator is Doug DeMuro, my favorite car YouTuber. I don't even care that much about cars, but I just like, he's very compelling. This amazing, amazing thing happened. Just go watch the video, the story. He just bought a Porsche Carrera GT, which is like his lifelong dream of his. The Porsche Carrera GT, for anybody who knows about it, I didn't know or care that much about cars, but I care about Doug.

• 3:27:27David Rosenthal?

  It's like one of the ultimate luxury car buyers, this legendary car that Porsche made in the mid 2000s. I think when it came out, it sold for like $400,000, I think, new. And now pristine and rare color models of these are selling for like $2 million, $3 million, $5 million. Doug just bought one and he made a video about it and it is one of the best things you will ever watch on YouTube. It's so great. It's just like so heartwarming.

• 3:27:55Ben Gilbert?

  All right. That'll be my first Doug DeMuro video, but I gotta check it out.

• 3:27:58David Rosenthal?

  It's so cool. He tells his whole story of being a creator and then he built a business called Cars and Bids. It's a enthusiast car auction website for cars from the modern era, as he says. And that's the only advertising that he does on the channel is for this company, this business, this internet business that like he built within his creator world. He owns his own distribution and they just raised a big round from the Churning Group and he took some secondary as part of it.

• 3:28:25Ben Gilbert?

  Cool.

• 3:28:25David Rosenthal?

  Yeah. Go watch the video. It's great.

• 3:28:27Ben Gilbert?

  Sweet. Will do. I have two also. One's purchase I just made that has been awesome so far, which is the Peloton Tread.

• 3:28:35David Rosenthal?

  Ooh, luxury product or ultra-premium?

• 3:28:38Ben Gilbert?

  Uh, I'm not even sure it's ultra. I think it's premium. Good treadmills are expensive, so it's not that much more expensive than a good treadmill, but it's great. Like I get access to all the Peloton content under the same membership fee. Seattle's fricking brutal in the winter and so it's nice to be able to like get some steps in when I don't want to go outside in the gray muck. So best summers in the world. I think we rival Lake Como, but the winters are tough.

• 3:29:05David Rosenthal?

  Ah, Seattle summers are amazing. Well, the fall is incredible in San Francisco, but now is my favorite time in San Francisco because it's February and it's 65 degrees and sunny out. And I'm just like, this is why I live here.

• 3:29:16Ben Gilbert?

  We got a couple of specials coming up. Let's just do them in person.

• 3:29:19David Rosenthal?

  Yeah, come on down. Guest Room is ready to go for you.

• 3:29:21Ben Gilbert?

  Thank you. My second is an article. It is by Derek Thompson, and it is called, "The Eureka Theory of History is Wrong." It's awesome. Long form. I read it in December, and it's basically about how we really make hay about someone's invention and the idea. And so much of the value comes from doing all the hard things to make that idea real in the world, especially around distribution. And one of the big case studies is around vaccines, and in particular around the original smallpox vaccine that came from taking some cowpox and using that and injecting it into humans. And even after someone discovered

• 3:30:04Ben Gilbert?

  it, it was really like the government effort to push that out into the world. And the reason why we don't fear smallpox today is not because someone had a genius idea. I mean, that's part of it. But it's so much about the distribution and about what a disservice it has done to all of us to make government jobs unsexy when they're responsible for the hard part and the important part of so many of the innovations in our world. So highly recommend it. There's a bunch of other stuff in there, too. That's just one of the case studies, but the eureka theory of everything is wrong.

• 3:30:36David Rosenthal?

  Cool. Check it out.

• 3:30:38Ben Gilbert?

  Well, with that, after you finish this episode, come discuss it with the 14,000 other smart, curious members of the Acquired community at acquired.fm/Slack. If you want to get some of that sweet Acquired merch that everyone was talking about, check it out, acquired.fm/store. If you want to listen to the LP show, we are dropping an awesome episode, actually tomorrow, right after David and I record this, with Vijay Raji, the CEO of Statsig, talking about some really interesting stuff that he worked on at Facebook. He started basically Facebook's mobile business model of app installs and talks about his sort of winding journey at Facebook.

• 3:31:14David Rosenthal?

  You know, just a cool, like, couple hundred billion in market cap creation.

• 3:31:18Ben Gilbert?

  Right, to sort of invent that and all the crazy internal tooling that they have at Facebook that he has now built into a company called Statsig that he's sort of bringing to the mass market, which is very cool to learn about as a former engineer and PM. So that is in the LP show. Search for that in any podcast player by searching for Acquired LP Show. With that, listeners, we'll see you next time. We'll see you next time.