LVMH and the Man Behind the Curtain- Part Two

To understand the formation of LVMH and their subsequent acquisitions of some of the most fabled fashion houses in history, one must first take a look at the man behind the curtain: visionary Frenchman Bernard Arnault.

Mr. Arnault, born and raised in France and formally educated in Engineering at Ecole Polytechnique, started his career with the family construction business and property firm, Ferret-Savinel.  Within 5 years, at the age of 25, he was assigned the role of Chairman and took the company reins from his father.

In the early 80's, Mr. Arnault brought his family to the United States, where he developed a U.S. branch of his family's company and took a liking to the way Americans did things - if you want something done, then do it yourself! While the business venture didn't fare well, he took this "can do" attitude back to France, where he invested $15 million of the family assets (Lazard Freres invested an additional $80 million) into a defunct textiles company, Boussac, which included a disposable diaper company, department store Le Bon Marche and the house of Christan Dior. This was Mr. Arnault's foray into the world of fashion. That's right, diapers and Dior.

Though primarily purchased for Dior, Mr. Arnault also acquired the fashion house of Christian Lacroix and Celine and unloaded the disposable diaper business. Monies from the sale provided a way into the LVMH Group, purchasing $1.8 billion in shares that gave him 24% of the group.  At the time of purchase, LVMH was split into two primary companies (unlike the 5 areas that exist within the company today), under one umbrella: Louis Vuitton and Moet Hennessy.  

In 1989, Mr. Arnault joined forces with Henry Racamier--who was the number two man at LVMH as well as the chairman of Louis Vuitton--to oust the Moet side of the company.  Mr. Arnault purchased more stock, giving him majority ownership of the company, and after brutal legal battles, he ousted Mr. Racamier, ultimately taking charge of the mega conglomerate, LVMH.

Building a Giant: 
Immediately after seizing control of the group, Mr. Arnault hired John Galliano, a neophyte in the fashion world who had a flare for the unusual and eccentric, to help revamp Dior.  Unlike many CEO's, he could actually relate to many of the artists he brought in, as Arnault himself was an amateur piano player--an artist in his own right.  To his mind, "A company must have managers who love and understand artists.  They are consistently late, think differently than those in business and are often seen as erratic."

Soon thereafter, wine and spirits were added to the group, while Louis Vuitton luggage, Fendi and Thomas Pink followed close in suit. The acquisitions didn't stop there.

Like a giant star spinning out of control, imploding in on itself, LVMH was becoming a metaphorical black hole: an unexplainable force in the universe so immovably powerful, that all objects within it's reach fall victim to its inescapable gravitational pull. Would-be Stephen Hawking's aside, LVMH was growing more and more powerful and pulling any orbiting fashion brands into its growing aura. Drawn into the LVMH void were Givenchy clothes and perfume, TAG Heuer watches, retail chain Sephora and cosmetic line Fresh. And the LVMH star continued to spin faster and faster...

Despite the meteoric rise of the group, and the inescapable grasp of its powerful orbit, there is no such thing as a perfect world, nor will one find a company without it's mistakes.  In 1999, Mr. Arnault paid $97 million for Phillips, the number three ranked auction house, after being unable to secure the purchase of Sotheby's.  It was dumped just three short years later, after the tragedy of September 11, 2001.  Additionally, his attempts to create a brand in Christian Lacroix failed and was soon dropped from the conglomerate in 2005 (Christian Lacriox filed for bankruptcy last year).  Most disappointing, however, was Arnault's failed insider acquisition of Gucci. At the time, he tried to turn his minority share in the company into something much larger, but ultimately lost the battle to French billionaire Mr. Francois Pinault, head of luxury goods conglomerate Pinault-Primtemps-Redoute.  

For all his relative successes and failures, Arnault's plan is simple, yet brilliant.

First, he places a premium on maintaining the group's financial integrity, continual growth, and brand diversity of the companies under the LVMH umbrella.  For example, if one leg, such a watches and jewelry falls in revenue, it's likely that another leg such as wine and spirits or leather goods will be on the upswing,  balancing out the profit margin.  In a sense, it's kind of like the post-Titanic compartmentalization of a ships hull; the Titanic hit an iceberg and the entire hull filled with water insuring that the mega-liner tore apart under the pressure and sunk to the deepest part of the ocean. Under the compartmentalization approach, if a tear or hole occurs, only one section fills up with water, while the others remain insulated from the hole and the subsequent intake of water. The ship stays afloat because the damage is isolated. Metaphorically speaking, Arnault has compartmentalized LVMH, so that if one sector hits the proverbial iceberg, the damage to the overall "ship" will be isolated and cannot sink the rest of the brands.

Second, Arnault is a devout believer in the "power of the first mover." A central tenet to supply-side economics, there's always a premium in being the first person in on an idea, a market, or a consumer base. Arnault believes just that and consequently, he focuses on emerging markets and corners the profit in areas where no luxury good outposts formerly existed. Setting up a retail shop in areas, like Mongolia, drives up the demand for luxury goods, but has a low overhead and operating costs, which increases the revenue for the conglomerate.  The Louis Vuitton retail store in Mongolia, set up just last year, is already turning a profit. This is incredible for two reasons: 1) turning a profit in a high-end luxury goods market in one year is unthinkable, and 2) it was in Mongolia!

Preserve the past by Ensuring the future...

Currently, two of Mr. Arnault's children work for the company, but both started at the bottom and worked their way up to an executive position.  Early on, Antoine and Daphine were introduced to the company, when their father would take them to retail stores and discuss with the children what was taking place within the confines of the company.

Antoine, now head of communications for Louis Vuitton, earned his MBA at Instead and spent two years on an internet venture before joining LVMH.  He started off working as a sales associate at Louis Vuitton in Paris and eventually taking a management position overseeing 13 retail stores.  Dalphine, Mr. Arnault's daughter, studied at the London School of Economics, and worked elsewhere for a few years before joining LVMH as a perfume girl for Dior.  She is now third in charge at the Dior label.

Mr. Arnault has three younger boys, all of whom he hopes will also join the family business, though he vows to never force such a role onto any of them.  Even Helene Mercier, Mr. Arnault's wife, will weigh in from time to time, when a new bag or perfume is in the works, and asked for her more "feminine opinion." It truly is a family affair.

On the surface, the bags are gorgeous, the perfumes are lavish and the watches are exquisite, but peeling back the curtain reveals a man who had an idea, made a few mistakes and yet continues to grow.  A story of heritage and a story of hard work.  A man who is in high demand on the French social scene, but who prefers to stay at home and help his children with their homework.  A book where the inside story fits the beautifully crafted exterior cover.