LVMH

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to season 12, episode 2 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: 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? How can one quantify the impact that a brand has on a business? 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.

David: Ben, it's not mo-way, it's mo-wet.

Ben: Yeah, what is the deal with that? The Moet family, even though they're French, it is a Dutch name, so you don't pronounce it in French. You pronounce it as in Dutch with the hard T, mo-wet.

Ben: All right, it is actually mo-wet.

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

Ben: 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. Berkshire Hathaway, being 25%-plus 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.

David: Travel.

Ben: They own just an insane number of brands with 75 houses today that include Dior, Louis Vuitton, Moet, Hennessy, Veuve Clicquot, Dom Perignon, Tiffany. 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.

For those of you who have been 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. Fascinatingly, this richest man in the 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. All the lessons that we've learned on previous episodes, it's the exact opposite of what will show up today.

David: Everything that makes your beer taste better is ephemeral, so you need everything in-house.

Ben: Totally. 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. David, thank you for agreeing to do this episode. Can you share with us what your college thesis was on?

David: Oh, my goodness. I wrote my senior thesis in college on the champagne industry, specifically on the history of Moet. 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've since reformed.

Ben: I love it. Longtime Acquired listeners will remember, David actually lived in France for the first six months of…

David: 2017.

Ben: Yeah, so many an Acquired episode recorded with you sitting in Paris. 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.

Without further ado, this is not investment advice. David and I may have investments or may want to make investments in the companies that we discuss. This show is for informational and entertainment purposes only.

David: Indeed. First, we owe a big thank you to Adam Pritzker over at Assembled Brands and the luxury startup, Khaite. Adam was one of the cofounders of General Assembly back in the day and has just become a wealth of knowledge about the luxury industry. We had some great conversations with him.

We also owe a big thank you to Frederick Gieschen over at Neckar Value, who I think was the first piece of content that got you really interested in doing this episode, right?

Ben: Yeah, I read it in Hawaii over the holidays. That is one of the few substacks that I now pay for.

David: Frederick is awesome. 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 just spent about $400 to buy this thing. It is very rare. It chronicles, in real time, the story of Bernardo Arnault taking over LVMH.

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

David: 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 Bernardo 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 going to be fun. This episode has, especially here at the beginning, some Sony similarities. Indeed, just like Sony, LVMH and Bernard was a big influence on Steve Jobs and Apple.

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. 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. 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.

Into that time in place, steps one Christian Dior. 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 with heritage going back to folks like Coco Chanel, who famously created Chanel in 1910, thrives during the roaring 20s, were a huge part of culture all across the world.

I didn't realize this till we did the research. The Chanel perfume, Chanel No. 5, the most famous fragrance in the world, was introduced in 1921. Today, Chanel is a private company, so nobody really knows. But it's estimated that that one fragrance does about $3 billion or $4 billion in revenue a year.

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. There's a lot of really bad stuff that happened, particularly to the fashion industry.

There's a great piece in CR 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 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 oat couture industry of Paris, demanding that it operate within Nazi regulations and that all of its exports cease."

Dior had been a successful designer before the war. During the war, he gets co-opted into this. He works at the Maison Lucien Lelong, where he's mostly designing these boxy uniform-like dresses for the wives of Nazi officers.

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. The wealthy textile industrialist Marcel Boussac approaches him in 1946 to come, lead, and renovate his old flagship Parisian fashion house, Philippe et Gaston. It's like a Beauty and the Beast episode here.

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 revive this old brand and boost access. Oh, okay, that's fine. We don't need to do that. I agree with you. I'll just finance you starting this new fashion luxury maison here, revitalizing the industry in Paris, and we'll start fresh. They get to work, he finances Dior.

Ben: It's like the story of Fairchild Semiconductor. But if Fairchild Camera and Instrument had let the traitorous eight actually name it themselves, but still basically owned by the parent.

David: Yes.

Ben: Okay, you've got the brand Dior getting Started by the actual designer Christian Dior and totally owned by Boussac.

David: Yes, totally owned by Boussac. 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, whatever, that's clothes from the 40s and 50s. But this is after the war where there's rationing on fabrics. These new pieces that are life-embracing luxury, in 1947, the war had just ended. This is a radical, radical statement.

Ben: 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. Of course, not to mention, they're producing extremely fine goods. 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.

David: 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 were actually protests. 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 exclaimed to Christian, "It is quite a revolution, Dear Christian. Your dresses have such a new look."

Ben: It's super wasteful. Taking all the best materials and overusing them to create products for a very small set of people.

David: Yes, it's wasteful. It's expensive. The funniest protest is a group called the League of Broke Husbands, protesting the extreme cost of these materials and of these fashions. But we can't overstate the cultural importance of this.

CR 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." It's not just culturally around the world. This is a financial smash hit home run as well.

Two years later, by 1949, Dior fashions were literally 75% of Paris's fashion exports and 5% of the entire nation's export revenue. I believe to this day, the luxury industry is the largest export of France.

Later in 1947, they launched Christian Dior perfumes with the fragrance Miss Dior, a very famous fragrance. Then in 1950, the GM within Boussac who's running 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, both the old 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. What if we license the use of the brand out to other goods producers? We can just basically invent money, and they do.

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

David: Yes, and it works really well for a long time. 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, you name it, there was a Dior license label out there.

Ben: 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 Boussac company themselves.

David: 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. 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 then than it is now, of course.

Suddenly, right after that later, in 1957, at the height of his international cultural popularity, he dies suddenly of a heart attack, very unexpectedly. This is a huge deal. It'd be a huge deal today if the creative leader of a major fashion house died unexpectedly as happened sadly, often.

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

David: 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 in houses did not survive the death of their founders. Boussac and Rouet, 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. His name is Yves Saint Laurent. 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.

Almost as much as Christian Dior revolutionized the world with a new look 10 years earlier, Saint Laurent does the same thing again. He really modernizes fashion. If you go and you look at the new look clothes now, 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 modern fashion and clothing. He popularizes the pantsuit for women.

Ben: Oh, I didn't realize.

David: He's probably Hillary Clinton's number one fan. Later, not within Dior, but within a few years, he famously designs the Mondrian dress. The color-block dress that was so famous and emblematic of the 60s. That's Yves Saint Laurent. From this radicalism to pushing fashion in the world of culture forward, Yves totally takes up the mantle.

Unfortunately, for Boussac, it's a little too extreme for him. This old industrialist guy from the textile business doesn't like what Yves is doing,

Ben: Which probably means you shouldn't own a fashion house.

David: Exactly. He's from a different generation. After three years of Yves Saint Laurent running Dior, Boussac forces him out in 1960. Yves, after a short period of time, teams up with his life partner and business partner, Pierre Berge, 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, Kering. We're going to talk a lot more about his arguably, primarily the number one competitor to LVMH. It all comes full circle.

Back to Dior and Boussac. They basically never recover from this. Boussac installs the conservative and older Marc 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.

Ben: 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.

David: It fades very slowly over time. It's 1960 when they push Yves out. For basically the next 15–20 years, this is just a cash cow that they're milking. Meanwhile, though, unfortunately, the rest of the Boussac empire is basically going down the tubes.

It's mostly a textile manufacturing business. They're 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 $20 million a year across the whole company.

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

David: It's amazing. 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.

As Boussac is going down the tubes, they start trying to sell off pieces of the empire, monetize, and do anything they can. I don't know that Boussac really cares about saving the company. Maybe he does, but he cares about saving his fortune.

Ben: Right, get as much value out as possible.

David: He owns a lot of racehorses and breeds thoroughbreds. He needs money to do that. One of the activities that they do to raise cash is they sell off the perfume business within Dior in 1968 to Moet & Chandon, which we haven't talked about yet in the episode, but oh, boy, are we going to.

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

David: Things continue on the downward trajectory despite that. In 1978, the whole Boussac group finally files for bankruptcy in (up into this point) the largest bankruptcy in French national history. This is a big deal.

Ben: The way bankruptcy works, at least at this point in France, is that they basically nationalize the assets of the company. The government takes over the administration of what was previously the Boussac empire.

David: Yes. Like I said, France is basically becoming a socialist country at this point. In this case, the first bankruptcy of Boussac, the government doesn't run it for very long because a buyer emerges. They end up selling the company out of bankruptcy to a ragtag group called the Willot 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.

Ben: Right back where we started.

David: At this point, there are no real buyers for this thing. It's an albatross. The government takes over running it for multiple years.

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

David: Not due to innovation, but the licensing business.

Ben: Right. It's not that crazy that there are 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.

David: Right, and it's buried under all of this awfulness. There were 20,000 textile employees. They're unionized. The company is losing tons and tons of money. This is a bad situation. It may be a diamond buried in there, but it's buried way deep.

Enter one Bernard Jean Etienne Arnault. As we said, Bernard was born in 1949 in Roubaix. Remember, 1949, this is 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. It always stuck with him. I assume his mom owned pieces of Dior. How did she afford that?

His dad and Bernard's family on his dad's side are entrepreneurs. They're not just entrepreneurs, they're engineers and entrepreneurs. His dad, Jean, ran a company called Ferret-Savinel, which was a quite successful civil engineering and public works construction firm in the north of France. They employed about 1000 people.

It was started by Bernard's grandfather after World War I to rebuild a lot of the infrastructure in the north of France. The family all lives close together. His grandparents live right across the street in Roubaix. 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 10 or so at this point in time. He actually goes and lives with his grandmother across the street.

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 école. It's probably the most selective and famous grande école within France. It's like the MIT or the Caltech of France.

Ben: With the prestige of Harvard. Engineering is the most difficult and prestigious thing to study at any of these schools.

David: Yes. Especially after World War II in France, engineering is seen as the highest form of education. Actually, because I was a French major, I interned one summer in France in another of the grande écoles, I should say, the Hautes Etudes Commerciales, which is the main business grande école in France. I got to see and learn about this system. It's wild.

If you want to enter the grande école system in France, you actually, after high school, take another 1–2 years, where you just study for the entrance exams, and then the entrance exams are all evaluated blindly. It doesn't matter what family you're from, what your background is, it's literally just your test scores and your performance on this exam that is your entry into these institutions. Once you're there, they're not partying and having fun. They are working their butts off in the schools. That's what Bernard goes through.

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 the Willots. He is a modern engineer, businessman, bred from birth to be so.

In 1971, he graduates and goes back to work 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 the US.

Ben: He told the story so many times, every interview.

David: On this first trip to America, he goes to New York.

Ben: In 1971.

David: He's talking with the cab driver. He says he's from France. The taxi driver is like, oh, I love France. 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? 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.

Ben: In other words, the proper noun, Dior, might be the most recognizable French asset. Maybe like the Eiffel Tower or the Louvre, it's a pretty short list before you get to Dior.

David: Bernard goes to work in the family business back in France. 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.

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

David: 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, that they should start to transition away from it and into real estate development, and that's a bigger opportunity for the family.

Under Bernard's new leadership, they sell off the old industrial construction division. They find a successful niche building, vacation homes or second houses in Nice, the 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, and I would assume a much higher margin than the old industrial construction business. The family is doing great. They're one of the wealthy, successful family entrepreneurs in the north of France at this point. Then the 1980s come along. The 1980s in France were, shall we say, very different from the 1980s in the US. That is when the socialists really come to power in the country.

Ben: It's the opposite of the pinstripe suits in Wall Street and the go-go years of American Finance.

David: Everything we're talking about, the complications with Boussac and the textile workers, that's because Francoise made it around, France comes to power, and it becomes much more of a socialist country, so much so that they enact a wealth tax in France. There are all sorts of opinions about whether something like that is good or bad. Certainly, what’s inarguable happens. There is an amazing drain of wealth and business talent out of France at this point in time.

Ben: All right, America, here we come.

David: Bernard moves his family to America.

Ben: This is 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, a champagne maker, or a president, he has something that you want. He moves to America and develops Palm Beach condos.

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

Ben: Not fancy high rises, a 20-unit Palm Beach crappy condo building.

David: I don't know if it was a retiree home, but I imagine this is for snowbirds from the northeast.

Ben: I think so. Maybe I'm exaggerating with the crappy, but he did not move to America with this idea of getting into luxury. He moved to America and found what was available. He says in interviews, it was actually quite hard to break into the business community here. He 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.

David: This is a far-cry from the Bernard Arnault that we all know and either love or hate today. 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 move to New Rochelle. They buy a house. His next door neighbor there happens to be a guy named John Kluge, which almost nobody I think listening now will know that name, but at the time, Kluge was the wealthiest person in America.

Ben: Which is crazy, right?

David: That's a little wild.

Ben: This is in the 80s? Ninety-nine percent of people listening to the show won't know the name of the wealthiest man in America in the 80s.

David: 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. What did Kluge do? This is the 80s in America. What do you think he did? He was an LBO guy,

Ben: An LBO guy in the TV industry.

David: Yes. At this time, Kluge was in the middle of doing the largest LBO ever at that point in time. He was taking Metromedia private, which he did successfully. Of course, like all the corporate raiders at the time, they carved it up, 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?

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

David: I thought I was going to get you here.

Ben: The TV stations that Metromedia sells off become the backbone of Fox.

David: Yup, of the Fox Network.

Ben: 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 Metromedia. All those local affiliates for all the new stations become the Fox stations.

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

Ben: Totally.

David: Arnault and Kluge are never actually close, but Bernard is fascinated by him.

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

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

Ben: What’s this American concept?

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

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

David: Right. One of the reasons that Boussac 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.

Ben: All right. Arnault 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 whatever. He wants to take the nest egg from his family business and turn that into something bigger. He wants to buy something of importance and really blow that up.

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

Ben: 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.

David: Through the grapevine, there is actually the biggest of all opportunities, the troubled Boussac empire, of which, literally, Christian Dior is sitting, buried within.

Ben: Way deep.

David: The government at this point has been operating Boussac for a couple of years. It's a disaster. They're finally looking for somebody or anybody to come take this thing off their hands. Bernard, through his connections back in France, hooks up with Lazard Freres, the investment bank, specifically the legendary banker within Lazard, Antoine Bernheim, to put together a bid.

Lazard in France is like Goldman plus Morgan Stanley plus JP Morgan. They are the bulge bracket all unto themselves. They have immense political connections, referred especially at the time as the French under the Ministry of Finance. Goldman is like the Treasury here. It's just crazy.

Ben: 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, 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.

David: Yes, I think that's part of it. There's no way we can really prove or research this, but his first wife came from an even more successful multi-generational industrialist family in the north of France. I think it's implied and written that connections from her family helped get them into Lazard as well and into the government to lobby them, to let him take over Boussac.

Either way, no matter how it happens, he does. He gets in good with Lazard. Bernheim, specifically, Antoine is impressed with this young gun and decides to take a chance on him. They put together a $60 million bid to take over Boussac from the government.

Ben: This thing's hemorrhaging cash. The government's like, all right, $60 million to take a loss making thing off our hands, okay.

David: Right, hemorrhaging cash, but doing well over $1 billion in revenue. This is a large asset. The Arnault family puts up $15 million. Lazard goes out and rounds up investors and I think invest some of their own balance sheet into this for the other $45 million.

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, the successful business people, the industrialists of France 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.

Ben: It's crazy. The thing he recognizes here is, again, very Buffett-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. 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?

David: Yes, and this is the big difference between Bernard and his old neighbor. The reason that you know Bernard Arnault's name today and you don't know John Kluge's is he takes the tactics of the corporate raiders and the LBOs to get in. We're going to tell this whole story and it's amazing. His goal isn't to carve up these assets, sell them off, 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.

Ben: 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, trading the paperclip for the house over and over and over again, but eventually just keeping it all?

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

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

David: Yup. Pretty much as soon as he takes over, he calls Lazard back in, and they immediately start restructuring Boussac. Arnault, over the next couple of years, does what nobody else was willing to do. He lays off about 9000 of the 20,000 dish workers.

Ben: I think it’s reamed for this.

David: The French press dubbed 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 Boussac 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 then he turns it around.

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

David: Yeah, it's crazy. And then part two of the plan. Arnault and Lazard starts selling off all the old textile assets and industrialist assets. He doesn't want to run these, he wants Dior. All together, the biggest win here is they sell literally the disposable diaper division of Boussac, which is called Peaudouce, 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.

If Arnault were an LBO guy, if he were John Kluge, 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, but that's not what he wants to do.

Ben: No. Do you know how much of Dior he owned at this point? I think at this point, he's formed Groupe Arnault, which is his family office. You can think of Groupe Arnault as Bernard's personal wealth. They owned some percentage, but not all of the Boussac-Dior holdings at this point.

David: The Boussac entity itself, I think, had been renamed Agache after the Willot initial bankruptcy. Groupe Arnault owns a majority stake in Agache, which owns a majority stake in Dior. Dior and Bon Marche are the only assets left. There are four levels of Russian doll of legal structure here.

Ben: Right, but he's got majority economics and majority control in Le Bon Marche and Dior by this point. It's an interesting thing to observe here. It's a playbook theme that I want to pull early that the efficient market hypothesis is not exactly correct.

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

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

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

Ben: There were market inefficiencies, and then Arnault created even more market inefficiencies to make it so that the perfect price discovery of this Boussac 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.

David: That sounds like a really good transition. Should we talk about LVMH?

Ben: Yes, let's talk about LVMH. Before we do that, it is time to talk about one of our favorite companies, pilot.com. As you heard on our last episode on the NFL, we are doing something different this season. You probably already know that Pilot is the largest startup-focused accounting firm in America with over 1700 clients.

They have now scaled with companies that have grown 50X since becoming customers of Pilots by using their finance, accounting, bookkeeping, and tax prep products. We thought, what can we do with Pilot that would be helpful to listeners this season? We are joined by Waseem Daher, the CEO of Pilot for tips that he has for founders after starting three different companies himself.

David: I'm very curious to hear Waseem's take here when to ignore your investors.

Waseem: First of all, if you're an investor, maybe just stop the pod right now. Skip ahead about 60 seconds. Here's what I've observed. Everyone has advice for you when you're doing a startup, but a lot of it is just plain wrong. As a consequence, it can actually be really harmful. Nowhere is that more true than when the advice comes from your investors. And it's because they're so influential.

David: And there's a power dynamic.

Waseem: Absolutely, there's a power dynamic. There are many cases when you should listen to them, but there are a few key cases where I think you need to take investor advice with a grain of salt.

In particular, what worked for them might not work for you. Anyone's advice including your investors is based on their experience, and their experience may or may not be applicable to your business. You can't necessarily take their guidelines and just blindly apply them.

I generally recommend you ignore your investors' opinions on product features or specific marketing messages because you're the closest to what's happening on the ground. To make the point even clearer, the way you're going to get clarity on the questions of what marketing messages are going to resonate or what feature you should build, is not by spending time with your investors. It's by field testing it with your actual customers.

David: I love that. Have you found across your three companies that there are categories, where investors generally, and you're like, yeah, they knew more than me on this one?

Waseem: Absolutely. The place where you should always listen to your investors is around best practices. Your investors can be a huge asset in helping you with general "business questions" like things that are important and well understood, but not necessarily intimately linked to your core business.

A couple of examples here are like, how much should you compensate your new VP? How should you set up the sales team? What should your hiring process look like? What's an appropriate amount of cash burn for a company with revenue of XYZ?

I am constantly emailing and texting our investors about these questions. When there are clear best practices or standard answers, you absolutely should listen to your investors because they've seen the movie a million times. There are no bonus points for being creative on this stuff. Focus your attention to energy on the questions and problems that are unique to your business.

David: You might say, focus on what makes your beer taste better.

Waseem: Absolutely.

Ben: Our thanks to Pilot. You can click the link in the show notes or go to pilot.com/acquired and get 20% off your finance, accounting, and tax prep needs for your first six months.

David: Thank you, Pilot.

Ben: All right, before we get to LVMH, there are 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 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.

David: 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.

Ben: Right, and he would say stuff that was super clarifying and illustrative of how he did all this. 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." I always love that. It's just so like, okay, yup, I definitely learned this in America.

The other thing that I think he 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 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.

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.

This is where he makes it his mission. Once he realizes that power of Dior, he's like, this is super different from 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.

David: That's interesting. Maybe we'll talk more about this in analysis. I do wonder if Yves Saint Laurent hadn't done that first saving of Dior and certainly 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?

Ben: Arnault 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.

David: Yup. Okay. Let's talk about LVMH.

Ben: Louis Vuitton.

David: Talk about from strength to strength for young Bernard. We're now in 1987. Major news, in the international business community, there's 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.

Ben: I know. Isn't that funny?

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

Ben: This is the first luxury conglomerate or at least the first significant large one in the world.

David: 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.

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.

Ben: It's like, all I know is I don't trust the activists who're buying up our shares in the open market. I don't know if I trust you or not, but at least you're also a family.

David: 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.

Ben: All right, 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?

David: It's super interesting because both of these companies, on their own, were on great trajectories. It was actually bringing them together that killed the family. Let's start with Moet-Hennessy. That itself was a merger that had happened in 1971 between Moet & Chandon. Hennessy, a cognac company and Moet & 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, so Moet had been consolidating that.

This merger between Moet and Hennessy made a ton of sense and was super successful. It happened in 1971. It was led from the Moet side by this pioneering guy, Alain Chevalier, and he was the first nonfamily, outside manager of Moet & Chandon and any of these old family brands.

What we're talking about here is different from the fashion houses. We're now talking about other, more durable luxury brands—leather goods, drinks, spirits. There's not the same change and turnover that there is in fashion. These brands are truly multi-hundred-year brands.

Ben: 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. 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.

David: Back to Chevalier. The other consequence of these brands and businesses not changing that much is the family's random. Outside professional management wasn't a thing in these companies until Chevalier came into Moet as the first recruited outside manager. He engineered the merger with Hennessy and it was brilliant. It 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, 2+2=10, your power in the distribution networks around the world.

This was a huge business success. He also had the foresight to really invest in distribution in Asia for these companies. Hennessy especially, it's the dominant cognac brand all around the world, but in Asia, in Japan, it is huge.

Chevalier grew the combined revenue of the companies from about 300 million to well over a billion in these 10 years. It's super, super successful. That was Chevalier in the Moet side heading into this merger.

Over on the Louis Vuitton side, the story is frankly even more impressive. Louis Vuitton at this point in time was headed by the legendary Henri Racamier, who was part of the Vuitton family, but he had married in. He was an entrepreneur and professional manager-businessman who had married in and taken over the reins of Louis Vuitton.

Ben: It was Louis Vuitton's great granddaughter's husband, something like that.

David: What he did is frankly amazing. I don't think it's an overstatement to say that Henri Racamier invented the modern global luxury brand.

Ben: 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 women packing their clothes like corsets and all the crazy stuff you had to jam in and not destroy your clothes.

David: I believe the position was called the royal malletier, I think. It was like a royal appointment.

Ben: 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? He went from making them for Napoleon III's wife to Emperor Hirohito of Japan. Finally, this trickles down to not just royalty, but aristocrats.

David: Still not like a huge market, though.

Ben: No, not at all.

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

Ben: 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 trunk so you could stack them.

David: Do you know why that was super important?

Ben: Because they were taking trains around, presumably, and you need to put them in boxcars?

David: Yup. This was the 1850s. This was the beginning of train travel. Louis invented the flat pack trunk, and that was perfect for trains. That was why he became the royal malletier, essentially.

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

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

Ben: 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 waterproofing on top of it, then I actually can make them flat rather than rounded tops.

David: That's awesome. 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. What is the logo of Hermes and what do they embrace?

Ben: Horse and carriage.

David: The horse and carriage.

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

David: Yup.

Ben: To finish this trickle down from the Empress Eugenie to Emperor Hirohito, to capitalism taking full fold, 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.

David: Yup, that was big. The Vanderbilts were really in the Louis, right?

Ben: Yeah. You 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.

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. We're living in a subsistence economy firmly rooted in their rural environment. We're living a life of misery in towns and cities without any access to culture."

I think that's the best framing for luxury of anything I found, which is, you really can't think of it as stuff that's expensive. There's actually a different segment of society that is completely walled off from 99.99% of people in the world. These were the goods personally made for them until global wealth started to become a thing.

David: Yes, and this is what Racamier recognized. He was so genius. 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.

Ben: 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 floundering. I think they still only had two stores. This is 100 years or more since their founding.

David: Over 100 years, yup. Paris and Nice, just two stores.

Ben: 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. Racamier is really the genius behind turning Louis Vuitton from a two-store $12 million business to seven years later in 1984, he 15X'd revenue to $143 million, and had taken the company public. By the time his reign was over in 1990, he had grown from 2 stores to 125.

David: Yup. I believe at that point in time, it had passed $1 billion in revenue.

Ben: Right around there, yup.

David: For a 125-year-old company, doing $12 million in revenue, this guy takes over, and turns it into a billion dollar business in essentially a decade. He and Arnault get into a huge fight and Arnault kicks him out of the company.

Ben: Yeah, and he really did two things to grow from 2 stores to 125, 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.

The other big one is vertical integration. Racamier 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.

David: Products like Louis Vuitton were getting sold in department stores.

Ben: Totally. His big insight was that we really should own and operate retail stores, invest in getting to know customers for the first time, and building that direct relationship. He 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.

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

Ben: Yes, absolutely. His competitors were all around 15%–25% operating margins. With this strategy of just going direct to the customers who were the original D2C, he was earning 40% profit margins dramatically better than the other trunk and suitcase makers.

David: Louis Vuitton, Hermes, these may be better businesses and software. They are so good.

Ben: Right? That's the craziest insight from this whole thing. Racamier really discovers what would become the key insight of LVMH today, which is that 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. There are all these players that it used to be outsourced to. Racamier really starts the ball rolling down the hill of we can be the people that own all the profit pools for the industry.

David: Yup. 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. 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." Obviously, that's translated from French and it's a very French thing to say, but it was an incredible insight.

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

Ben: They were both publicly traded, which is why they were worried about the activist investors.

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

Ben: I mentioned, in 1984 when Racamier IPO'd Louis Vuitton, they were doing 143 million, that had grown to close to a billion by 1987 when the merger talks started. To your point, they were catching up, but Moet-Hennessy was still the bigger business.

David: Yes. When the merger happens and this new LVMH uber corporate entity is created, it's Chevalier who takes the chairman position there and Racamier is the number two. He's still running the Louis Vuitton business, Chevalier's running the Moet-Hennessy business. There were never any plans to integrate these assets. The operating companies were going to stay the same. 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 own over 50% of that company, the voting rights, and they can prevent corporate takeovers.

Ben: 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 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.

David: 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. Pretty much right away, you can see the writing on the wall here. These are two French dudes with some pretty big egos. The trouble starts.

Racamier, 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 the American Revolution or something here. This is ridiculous. They start fighting in the press.

They just merged these companies and Racamier gets quoted. "Champagne can be found on the shelves of every corner supermarket," I literally bought mine at Whole Foods last night. "But our leather goods require exclusive distribution." He's totally right, but you can imagine how that lands with Chevalier. It's not good.

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. The families control 51% of the company, the combined families at this point. But remember, these families don't really like each other. There are so many family members. 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.

Ben: 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.

David: Nobody really thinks that the structure is going to stay together, even internally within LVMH. Chevalier and the Moet side, he's good buds with the CEO of Guinness over in the UK. Huge, also drinks company guy, named Anthony Tennant. He comes to Racamier 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 3½ 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.

Ben: But now, three people have to link arms.

David: 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. Racamier's like 3½ 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, it was merging the distribution networks. As part of these discussions, as they go on, Guinness decides it wants to own more of LVMH than just 3½ percent.

Ben: What about a lot of margin of safety?

David: What about a lot? Safety maybe safety, depends on your perspective. Chevalier comes back to Racamier pretty shortly thereafter and says, hey, you know how I said 3½ percent. I've been talking with Anthony. We're now thinking like 20%. What do you think about that? Racamier 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 drink side and away from my leather goods business. My leather goods business is the jewel here. You're trying to steamroll us. This is the future, I've got the winning strategy.

He goes out and starts looking for his own ally to bring in, to counterbalance Guinness on the drink side. He's looking around and he's like, ah. He lands on the perfect person. Somebody who really gets luxury, luxury brands. He can explain the leather goods business to him and why it's so powerful.

Ben: Maybe someone from the fashion world for this impossible, from drinks.

David: 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 beat their protégé, take over running the company, and he would understand the Louis Vuitton business. The perfect candidate, the head of Christian Dior, the young Bernard Arnault. That was a mistake on Racamier's part.

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

David: Really, Racamier should have known better here because he approaches Arnault. 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% of LVMH's stock. Remember, Guinness only wants 20% at this point. The Vuitton family will support you. Together, we're now going to have majority control over this company. We're going to run it together and marginalize the drink side of the business.

Ben: Where does Racamier expect Bernard to come up with the cash to make that bid?

David: This is critical. Bernard, I don't know if he had his eyes on LVMH. LVMH had only just been formed a few months before, but he certainly wanted to grow. 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. I think I want to do this within my group. Dior can be the kernel that is going to grow into something bigger.

He had started. Remember we talked about, because of the legacy of Boussac 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. 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.

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

David: 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 fortune, this is a key step of it.

Ben: The reason that this is not Enron is because there's both financial engineering and a crap ton of value-created 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 justify all of it. Why should people pay you for pieces of your shell corporation? Because the underlying businesses are sound.

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

Ben: Lazard was working with Moet-Hennessy.

David: Lazard, yup. In the merger, Lazard had always been the bankers of Moet-Hennessy. During the LVMH merger, Lazard was on Moet's side. Arnault, again, he's super, super loyal to Lazard as well. As soon as he goes to Lazard, Lazard is like, you might want to think about your alliances here.

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

David: Yes. 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. Lazard is like, look, if you're going to be fighting Guinness, you guys are going to lose. This is not going to work.

Ben: 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.

David: We're about to see just that. Lazard sets up a secret late night meeting at their office between the three parties.

Ben: Everyone's in the room except for Louis Vuitton.

David: Except for Louis Vuitton. Arnault and Anthony Tennant at Guinness really hit it off. Remember, Guinness, a much larger company, has much bigger financial resources. Out of that, Arnault ends up really aligning with Guinness. Very shortly thereafter, in July of 1988, they announced that they were creating a new JV together between Bernard Arnault and Guinness. It's a 60/40 JV, controlled 60% by Arnault. They call it Jacques Robert, this new entity. That entity is going to be financed with $1.5 billion that is going to buy 24% of LVMH.

Ben: 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. That's 60% of 24% of something that's worth $6 billion, which is about $860 million is the value of his new stake in LVMH.

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

Ben: Sure. It leverages a 24% stake of LVMH. Why does that matter? Why is that spelled doom and gloom for Racamier?

David: This is freaking terrible for Racamier. 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 shown up seemingly on the other side of the company here. He literally feels like he just got stabbed in the back by this young guy that he was going to make his protégé and probably his successor. He's not just some dumb family member here, not to say that family members are dumb, but he's a legend.

Ben: He's the most enterprising French businessman.

David: Racamier's like, what are you guys doing to me? 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.

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

David: Totally. 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 his goal is to try and somehow amass a 33% stake in the company.

By French corporate law, if you have at least a 33% stake in the company, it's a blocking minority. You can block any decisions at the board level. Literally at this point, he's like, FU to everybody else. Chevalier, of course he hated him already. Guinness, Arnault, I'm going to war against you in the market in our own company's stock.

Once this starts happening, Arnault, he just has no love lost for Racamier. He and Guinness go back into the market themselves with Jacques Robert with the JV. This is why Guinness is so important. They have way more financial firepower than Racamier can put together on his own.

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.

Ben: It's 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.

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

Ben: No. He was brought in as bolstering partner for either side, whichever one he picked, but certainly not to be the one, the wolf, as he is known as the wolf and cashmere, to come in and take over everything.

David: Yup, Now, finally, this is what brings Chevalier and Racamier 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.

Ben: The enemy of my enemy is my friend.

David: Exactly. They come together, and in December 1988, they initiate a very much like a last ditch effort to try and save their companies. This is crazy. In December 1988, remember, the merger that created LVMH happened only 18 months before. The two of them announce, without telling Arnault, and I think without telling Guinness, either, that they're going to break up LVMH. They're 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. Literally, they are doing the corporate raider playbook of breaking up the companies to try and save their companies.

Ben: "To try and save their control of their companies."

David: Yeah, to save their control.

Ben: Of course, Bernard would make them far more successful than they ever imagined.

David: This is the third or fourth miscalculation that they make about Bernard Arnault. 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 reunite it again with Dior. Remember, Moet had bought the Dior perfume business in 1968.

Ben: I think he'd been saying this. I think this is 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. 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. All this ownership that he had of LVMH that he'd been 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 reunite it. It seems like this is what he would want.

David: Yup. Racamier and Chevalier are 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 his way. 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.

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 out, and he blows essentially all of his capital. He deploys another $500 million in the next two days in the markets, bringing it to over $1 billion within a very short period of time in additional capital that he's put up. He's now $2 billion of his own capital, I think, into this.

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

David: He's pushing the chips and he's going all in. With that purchase, he takes the Jacques Robert holdings to 43½ percent economically and 35% of the voting rights, which means he gets the blocking minority and it's done. He has now, in the span of a couple of months, come in from zero outsider and taken over the largest luxury conglomerate in the world.

Ben: Large for the time, certainly not large for now. LVMH now is 75 houses and LVMH then was 3, 4, or 5 houses, something pretty small and obviously way smaller in revenue. The concept of a luxury conglomerate was a new thing in the late 80s.

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

Ben: 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, so I don't think they could have seen how grand his were.

David: Yup. Once this happens and Bernard gets the blocking minority, Chevalier resigns immediately and just rides off into the sunset. Racamier, he's so pissed. He keeps fighting. He sues Bernard, he sues everybody. The case is 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.

That day, Bernard calls Louis Vuitton. The receptionist answers the phone and says, I'm sorry, Mr. Racamier is no longer on the premises. I think they've never talked again. To your point, what they didn't understand, and if they had, maybe they would have acted differently toward him, Bernard is not a corporate raider. He has a big vision here.

There are 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 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 Racamier who wanted to cut the company into pieces. I was the only one who did not want to dismantle it," which is doublespeak.

Ben: 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 tactics to acquire control. He didn't follow every single corporate raider playbook strategy to cut it all up afterwards. 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. 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.

David: You are being intentionally provocative. 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 Racamier 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 going to work if he has ironclad majority control over everything.

Ben: I think this is worth identifying why Louis Vuitton was such a crown jewel of this empire. 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? 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.

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 the shoulder as women were doing more with their hands. There's this concurrent liberation of women's movement, and the handbag is the one remaining accessory that you can put all your stuff in and be out on the go.

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, you don't have anyone else with you, you're liberated, and you're doing it on your own. The handbag is this magical symbol of the evolution of women's role in society to this point.

David: There are also some great synergies here for a luxury group. What is the stuff that women have at this point?

Ben: Makeup, sunglasses, perfume.

David: A lot of the stuff is luxury items that go into the bag that LVMH is also now selling.

Ben: 100%. On top of all this, handbags are an unbelievable business. This is out of the book, Deluxe. One, they're easy to sell. They don't require sizing, trying on, hemming, or modifying any way you look at it. 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 if you buy one really nice leather handbag, it's going to go with a lot of outfits. You can justify a pretty high spend on it because your cost per hour, for anyone who actually thinks about it that way, is actually pretty low.

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

Ben: 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 10–12 times the cost to make them. At Louis Vuitton, it is 13X the cost of goods sold. Pretty amazing.

David: Unlike the jewelry business, which 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.

Ben: Right, it's a renewable resource. 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. The interesting thing about 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.

Coach commissioned this research in 2000, I believe, that the average American woman who purchased a handbag, purchased two new handbags per year. By 2004, that number was four new handbags per year. It is an expensive recurring purchase that requires really low overhead to sell. It's wild, and the margin structure is amazing.

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. 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. The whole thing revolves around this nice, extremely branded leather handbag.

One more telling point to really illustrate this. Way back at the beginning of the whole empire, there's Dior. It's a fashion house. It's about showing off the newest season’s clothing. It's couture. They're walking down the runway. It's custom-made. The shows that people would go to were originally to show off what customers could buy. Customers would take notice of it. Financiers would be there to get the demand signal from the customers to be able to fund the manufacturers to spin them up.

Today, they don't really create this clothing for many people or anyone to order. They do it to show off a branding event. Come to the Louis Vuitton show and you'll be immersed in a Louis Vuitton experience. We don't really expect you to buy any of the things on the models, except all the models are carrying our accessories.

No matter what crazy, cool clothes they're wearing, a person is singing, or a crazy light show is happening, I will tell you, if you've 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.

David: It's like Monday Night Football.

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

David: Yes. Obviously, Louis Vuitton is the star then and now within LVMH. 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. You just can't do it in the way you do it in other industries.

The reason it's counterintuitive, you think about Procter & Gamble or somebody like that in other consumer goods. They have scale economies because they outsource production, they get it cheaper, and then they make more time than anyone else. In luxury, that would defeat the whole thing.

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

David: We saw this with Dior in the 50s and 60s when the licenses diluted the brand. Even innovators like Racamier, they never would have imagined that scale economies could exist in luxury. You would never outsource production in luxury.

Ben: 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. It was almost tautological that they were small businesses.

David: 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, talent, people, and craftsmen that go into making these things, that you can scale across a portfolio of brands. 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.

His vision is like, whoa, if we can put together a whole bunch of brands in one 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.

Ben: Bulk buy advertising.

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

Ben: 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. His son Alexandre 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.

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.

David: There's this really important point here that you're bringing up with the people. Bernard will say and he'll say to this day, that the greatest advantage that LVMH has is its people and its talent. I heard him say this a bunch of times in research and I was like, okay, that's Bernard being a public figure now, 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. The economies of scale are that, one, It's a money thing. Because they're so 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. They say like, oh, we 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, 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 to go work in this family-controlled single brand business.

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

David: Even look at the kids, the Arnault children now, 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. They're not the only ones there. Outside executives are doing the same thing, too.

Ben: Yup. We should give credit to Arnault also for pushing the vertical integration much further than Henri Racamier did. Racamier 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 the design and manufacturing having a sense of place, origin, and story.

Louis Vuitton had started doing a little bit down the path of what Dior did in diluting its brand. They had outsourced 70% of their production. 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.

David: If you're trying to sell $20,000 handbags, that ain't going to work.

Ben: Right. After he realized control, he bought that all back in-house and tripled the number of Louis Vuitton-owned factories from 5 to 14 over the next decade. He has this wonderful quote that describes both sides of the house really well. "If you control your factories, you control your quality. If you control your distribution, you control your image."

David: Okay, let's double click on that, too, because you're so right. Racamier had innovated and started this controlling your distribution, but it stopped at we're going to do our own retail outlets. What Arnault 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 realize 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, Berluti, Kenzo, Guerlain, Loewe, Marc Jacobs. They're getting all these brands.

Ben: Fendi and Bulgari are big ones.

David: Yup, totally. They acquire watch brands, luggage brands, et cetera.

Ben: TAG Heuer.

David: Yup. At a certain point, they're 50%, 60%, 70% of the products that are going into department stores to take care in the US like Nordstrom, 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, you bought it from us, and then you retail them, we're not going to do that anymore. We are going to retail our own products within your stores. This is the store within the 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. And we're going to make a lot higher margins, and you're going to be reduced to essentially like a third-rate landlord.

Ben: The really interesting thing is, this all started happening in the early 90s before LVMH really went on their shopping spree. 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 treated them all like one empire and operated as if it were rolled into LVMH, which it would later become but not for many years?

When act this way and over time, he won the battle where department stores said, okay, 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 have 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.

Almost at admission that the department stores had figured out how to be the best at that, that was a thing that if Bernard wanted to really create multi-generational brands in this multi-generational holding company, they would have to have the direct relationship with the customers, too.

David: 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 an anathema to what it is you're doing.

Ben: 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, incorporating a little bit of that dream into their life, and identifying themselves with this token, so you need to provide the best possible way for them to do that.

David: Yup. 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 way less money. Tautologically, the only reason you would go buy an official Louis Vuitton bag is the dream, the experience.

Two quick other things while we're in the mid 90s, one on this new lease 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 to lease space in all of your locations. 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. 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 worth just a real quick sidebar. For folks who don't know, this company was started by Chuck Feeney, who probably is 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. He's still alive, but he gave away all of the money in his lifetime. It's an unreal story.

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

David: And now owned in-house by LVMH. The Duty Free Shopper 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 got to say. Do you know who designed the Duty Free Shoppers logo?

Ben: No.

David: This is even better than the Enron story.

Ben: No, I don't.

David: Andy Warhol designed the Duty Free Shoppers logo.

Ben: That's crazy.

David: Isn't that crazy?

Ben: I didn't know we ever did any logos.

David: Right? Literally, Andy Warhol designed it.

Ben: That's wild.

David: Amazing company.

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

In another great book that we read to prepare for this, called The Luxury Strategy, there's this great quote. "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. It's not necessarily a linear curve. Apple iPhones are the best at this. 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.

David: Yup, but it is a premium product.

Ben: Right. It's premium. It's not luxury by this definition.

David: Yup, exactly. This nuance is so illuminating to be able to understand this. You start seeing it everywhere once you think about things this way.

Ben: 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: (1) you have the wealth to spend on things, even though they are no more utilitarian to you, and (2) you have taste. 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.

David: Those two things, I think, get distilled down into this concept of the dream that you're buying. This is all little abstracts, 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. Ferrari is a luxury brand. When you think about that, you're like, oh, I totally get it.

Ben: There are many things about Ferraris that are worse than even my Mazda CX-5. Yay, 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.

David: Totally. If you wanted to upgrade the product that you have, you could buy a Lexus SUV, and that would be a premium SUV. You would pay more for it and it would be better than your Mazda. If you buy a Ferrari, you're going to pay 20–30 times what you paid for that Mazda and it's going to be worse.

Ben: Right. Handbags are such a good example, too, because what do you need a handbag to do? You need it to 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. 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, maybe an Hermes Birkin bag or something, the function is actually identical. All the value above the cost of the materials at least qualify for luxury. Coco Chanel puts this really well too, which is, "Luxury is a necessity that begins where necessity ends."

David: I love that.

Ben: I always like that.

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

Ben: 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. It's how 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 that it is a deeply human thing to signal your standing in the world. Everybody signals it in different ways. Now this is one of the infinite ways that someone could choose to signal to the world. 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 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 totally buy the argument that it's an essential part of humanity.

David: 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, it's 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. There's also the durability of it. A key aspect, I think, of luxury products is that their value and status is durable over time, where 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.

Ben: And not for its utility. It's because other people have bought into the dream that this is a valuable thing.

David: 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.

Ben: It's so interesting because it is both about the durability of the materials. That's a story that is 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.

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 anywhere from the 1300s to the 1800s with some stuff 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.

David: Totally.

Ben: 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. Bernard actually doesn't like to use the word luxury outside of financial communications. His son Alexandre 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.

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. If you're buying a $20,000 Louis Vuitton bag or trunk, that's a luxury good, but there are lots of things that they sell that are actually expensive premium, where it's 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.

I do think, as they address more and more people, with more and more brands, and more and more price points, there's a lot more about these products that is actually ultra premium. 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.

David: 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, it's so great. Should we talk about some Gucci drama?

Ben: Gucci. Yeah, let's do it. But first, we have a new sponsor joining the Acquired family today to tell you about, and this one has been a long time coming. It is a company called RevenueCat. RevenueCat makes in-app subscriptions easy for developers and product teams to implement, and is used by companies like Notion, VSCO, and Cameo, for their in-app purchases.

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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.

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

Ben: Yes, but actually the Japanese consumer market became a thing first. In the 70s and 80s, there had finally been enough infrastructure built after World War Two and Japan's economy was soaring. Japan also had this characteristic where they have, for thousands of years, had this reverence for fine craftsmanship.

As their economy developed, the middle class emerged, and they're 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 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. That meant that Japanese people bought half of all luxury goods. It is wild, the globalization story around what happened to luxury from the 70s to the 2000s.

The next chapter after that, which is 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.

David: Just to give folks a sense of scale, I think before the pandemic, China was the largest luxury market in the world, right?

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

David: All right. Like you said, let's close out the 90s in style with Gucci. This is so amazing. This is really the one big, big fail. 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. Gucci of course is very, very top of the list.

Ben: If you're thinking about the star leather goods brands, basically by 2000, the ones Bernard owns, Gucci and Hermes. That's the landscape.

David: 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 Bryan Burrough, 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.

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

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

David: There are beatings that happen in the boardroom, there's murder. It's a disaster.

Ben: I love that you casually throw that in. I don't want to spoil the movie for anyone, but the protagonist does get murdered. It is the guy leading Gucci, and his last name is Gucci. I guess there are spoilers here, but an unbelievable story. 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. 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.

David: Literally murdering each other.

Ben: Somehow he fails to actually take them over.

David: Oh my God, unbelievable. As the family is falling apart, Investcorp, the private equity firm, comes in and buys the first 50% stake in the business, and then ultimately ends up buying the whole thing. They own 100% of the business. 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.

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

David: Totally. It was so bad, but these brand names have such value. This was an obvious target for LVMH to scoop up. 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, and LVMH gets this great brand.

Ben: They would have essentially been like stealing Gucci. $400 million for what Gucci became?

David: LVMH wasn't the size it is today, but $400 million? For God's sake, take a flier on this thing.

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

David: Oh, my gosh. Why Bernard didn't pull the trigger on this is unfathomable. But as he gets into diligence after agreeing on the deal, he backs out and he tells Investcorp very famously that Gucci is actually worth nothing. Oh, boy, does he regret that one.

Investcorp here and now, they're 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 a lawyer to the family and then became CEO of Gucci America.

Ben: Domenico De Sole.

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

Ben: A Harvard Law School guy.

David: Totally. Maybe he can save something here. They make him CEO of the whole company. 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.

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

David: Yes. This team, Dom and Tom as they come to be known in the industry, are like a phoenix rising from the ashes. Ford takes a huge risk. Google Tom Ford Gucci in the 1990s. Porno chic is the term that becomes used. The way you win in fashion is you take crazy risks and shock value. People go nuts for it.

Overnight, after Tom Ford's first collections, Gucci revenue doubles. They get back to profitability. At the end of 1994, when Bernard walked away from the deal, by the end of 1995, the brand is so hot that Investcorp IPO is the company on the New York Stock Exchange, and it trades up to a $3 billion market cap. Insane, Bernard just got to be totally, totally pissed at this point.

Ben: A swing and a miss.

David: But he gets another bite at the apple. Because just like we've seen with all these businesses and the families, Bernard said, if you're not the primary principal shareholder in your business, you're vulnerable. Here's Dom and Tom, they were outsiders. They're not the family. They don't own this company. 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.

This is the perfect setup for Bernard and LVMH to run their playbook to 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 me. It was just so frustrating."

In June, a 9½ percent outside shareholding stake gets disclosed by a large European luxury company. Dom and Tom were like, for sure Bernard is going to come to make a run at this company. It's not LVMH. It's Prada, the fellow Italian leather goods company. De Sole and Ford were like, this has got to just be a front for LVMH. Something weird is going on here.

A couple of months later, in January 1989, LVMH finally does show up. They take a 5% stake in the company that they buy on the market. Burrough interviewing Arnault here writes that, "Arnault was adamant that the plan was not to attempt an immediate takeover of Gucci. He was worried about whether the Gucci turnaround can last. Instead he wanted to build a stake and get on the board for a few years." Then a quote from Arnault. "Then maybe we make a bit." This is rational. 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.

Gucci retains Morgan Stanley to help them here. They advise Domenico that probably what's going to happen next is Bernard is going to go to Prada and buy the Gucci shares that they own from them. They should go back to Prada and 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 back to Bernard anyway, so he doesn't do it. 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.

Ben: One might call this a creeping takeover.

David: A creeping takeover as De Sole calls it in the press. 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." You could tell that he really doesn't want to sell to Bernard.

Meanwhile, Morgan Stanley's pulling their hair out. They're like, dude, you got to do something or you're going to get steamrolled. They're like, 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%. Domenico was like, 20%? He said 15%. I don't want him owning more of the company. What kind of deal is that? He's like, no, we're not going to do it.

Morgan Stanley's like, you got to find a white knight and 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. This is weird. Gucci is on the rise. Why would these other industry CEOs—why would nobody be interested in investing in Gucci?

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

David: More weird stuff starts happening a couple of times, like twice. He doesn't say with whom, but Domenico gets close in negotiations. A company is 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. Burrough interviews Arnault as this is going on and he says, Arnault grins when asked about this. "Through our bankers, we knew exactly what was going on." He says of De Sole's aborted moves. "The people who refused him called us."

Ben: It just goes to show that he has people's loyalties in a way that makes it really hard to compete against him. Because 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 going to be loyal to him because they either are scared of him or want something from him in the future.

David: At this point, De Sole, Ford, and Gucci, are desperate. One of their lawyers at Skadden comes up with what sounds like a pretty crazy idea. He's like, well, if nobody outside is going to 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 a very much of crazy last ditch attempt.

Even Morgan Stanley is like, oh, no, about this one. But Dom is like, all right, let's do it. He decides, okay, if we're going to do this, we need a paper trail that we're not totally acting against all shareholder interests in defending ourselves against LVMH. 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 kerfuffle started. Eighty-five is a high price that he's asking for, but he needs Arnault's rejection to show that he's acting in shareholder interest here.

Arnault of course rejects it. Gucci hits the nuclear button and they create the ESOP. They issue it 25.5% of the company. 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 alerting all shareholders and getting a special exemption.

Ben: It's like a shareholder vote, basically.

David: Yeah, a 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. This particular in previously Investcorp-owned version of Gucci happens to be incorporated in the Netherlands, where they can do this. They do this and all hell breaks loose.

Ben: 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. They're like, okay, let's call a truce. Can we just figure out how to get out of this?

David: They sue Gucci in Dutch courts, but there's still a big problem. There's no money here in this ESOP. It's not like Gucci is getting a bunch of capital that it can then go use to bolster the company. This is a one time shot they can fire. Somebody else could still come in or LVMH could come back and start buying on the market and say, okay, we don't care that you diluted us. We're going to make another run. They still need a new investor to come in.

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. They call up Francois Pinault. This is the birth of LVMH’s biggest rival, Kering.

Pino started his career as a timber trader of all things, and then he got into retailing. He's closer to Sam Walton than Bernard Arnault here in France. Definitely, definitely not a luxury guy. But he's also a Morgan Stanley client. The bankers put the two of them together. De Sole, Pino, and Ford, all 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. He says, "Pino was perfect. 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 Pino."

Obviously, not what Bernard was going to do, so they hammer out a deal. In the next few days, they agree that Pino is going to invest $3 billion at $75 a share for 42% of Gucci.

Ben: That's $10 cheaper than what they offer Bernard.

David: But De Sole and Ford are going to continue to control the board. As part of it, they're going to cancel this ESOP thing. They 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 are the remnants of a label you might be interested in called Yves Saint Laurent that is now owned by Sanofi.

I'm thinking about buying it. If I do that and we do this deal, I'll give you guys Yves Saint Laurent and you can run it. Ford asked, did I want it? And I said, F yes. Yves Saint Laurent is the number one brand in 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.

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.

Ben: Yup, brutal. Kering to this day is the number one rival. When you look at luxury groups, you've got LVMH, which is a monster doing $80 billion in revenue. Then you look around, you've got Kering, which is much smaller, but the closest at $13 billion in revenue, and Richemont, which 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 down around that range.

There are some other family-owned players, not in this category, but in jewelry. 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.

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

Ben: Yup, they're right around 10. But creating formidable luxury group competitors, yeah, Kering is that. Smaller, but that.

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

Ben: Which led Domenico De Sole to remark, even when he loses, he wins.

David: Totally. It subsets 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, he lost on this one.

De Sole and Ford eventually do clash with Pino. The 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. That doesn't sound like a lot compared to the other numbers we’re throwing around. But from a startup brand to acquisition in 15-ish years, that's pretty awesome.

Ben: 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 billion by 2010 and up to $40 billion in 2017. More recently, right before Covid hit, they were right around $55 billion and then I mentioned, of course, closer to $80 billion today. On the one hand, it's a miss. On the other hand, they were plenty productive during the whiff.

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

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

David: Gucci became the core of Kering which is the little brother to LVMH. Hermes is the anti-LVMH.

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

David: 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 don't even use computers in the business?

Ben: Correct. Gucci uses computers to model new designs. Hermes 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. You'll do all those and then someone will deliver you another batch of 20 Hermes. The very same person takes it from raw material to completely finished without any economies of scale of the assembly line. Hermes has craftsmanship. Of course, Bernard wants it.

David: Of course he does. Right as the Gucci drama is ending, Bernard starts very quietly buying little, little stakes of Hermes on the public market. Owned and controlled by the family, but they had floated just like all these other families, a small 20% stake on the public markets. Whenever he gets an opportunity, he buys a little bit. He doesn't want to disclose that attempt because he just had this disaster with Gucci.

Ben: Right. He keeps it sub-5%. He's at 4.9%.

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

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

David: Finally then, like you say, in October 2010, it gets announced the CEO at that point in time of Hermes, and 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.

Ben: Not on a family-friendly show.

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

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

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

Ben: Right, there was no path to getting to the 33% necessary.

David: I think at one point, Hermes almost got delisted from the stock markets because there was no longer any trading in the stock. It was that extreme.

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

David: Because it was illegal, how they mask their identity in acquiring the stake.

Ben: The net of it is they had done some of it through Groupe Arnault and some of it through LVMH. Groupe Arnault had ended up with about 8% and the rest was owned by LVMH. The court orders LVMH to distribute that out to shareholders, so awesome little dividend for all the LVMH shareholders. What Groupe Arnault does with their 8% is they use that to pay for the 25% of Dior that it does not already own.

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

Ben: Yes. Of course, just like Dom De Sole says, Groupe Arnault ended up with about $5 billion in profit from this whole thing. Even when he loses, he wins. They end up with more control over Dior, which then ends up just getting rolled into LVMH finally, in 2017.

The holding company, Groupe Arnault, 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. Now there's a problem solved, where neither LVMH nor Dior, nor Groupe Arnault, own anymore Hermes. 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.

David: He had control. 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, it was all tax-free. Unbelievable. Dom De Sole had it right. Even when he loses, he wins. Hermes, though, incredible company. It's a $180 billion market cap company today.

Ben: It's crazy. It trades at a crazy multiple, too. All of its multiples are double the rest of the industry. I think LVMH's PE. It actually trades pretty close to a tech company, like big tech, at something like 4½ times sales and 24 times earnings. Hermes trades at 48 times earnings and 13X sales.

David: Its market cap is way higher than Kering, Richemont, or any of these other companies. All right. Let's bring this one home.

Ben: 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.

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

Ben: Yes. 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. Frankly, every time the Americans try to start something, there's some fast corporate transaction.

Tom Ford is actually a great example. Lots of value creation, company sells pretty quickly. Maybe it was fashion more than luxury. It turns out Tom Ford is not going to be a 500-year brand.

David: It's against the American business culture. If you're an entrepreneur, you start something. 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?

Ben: Exactly. Get the cash into the family coffers and you can compound it in other ways. Tiffany is a big deal because it is the only American luxury company started by Charles Tiffany. He worked with the US government. He worked with major sports leagues.

David: He worked with the NFL.

Ben: Yes. Tiffany makes the Vince Lombardi trophy. In fact, a vice president at Tiffany's sat down with Pete Rozelle himself and sketched out over lunch the design of the trophy. Of course, they still make it to this day, they made 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.

David: We're a big 10 country here. He can be an American anytime he wants.

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

David: That's right.

Ben: They're starting to do the Tiffany deal. 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. Tiffany's pissed. They're like, why are you doing this? They're like, oh, Tiffany is mismanaging the company, so it's losing all this money now that it should have made, so we think it's worth less, and you signed a term sheet.

The whole thing devolves. Tiffany starts issuing dividends out to its shareholders before the change of control happens, 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.

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

Ben: It's $420 million or something that they're talking about here. It's for the only company he's interested in buying in America. Ten 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.

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

Ben: Yup, and that campaign with the Basquiat painting in Tiffany blue.

David: Oh, my gosh. It's so perfectly executed. There's so much controversy for all reasons around that, but what better press to generate for Tiffany.

Ben: 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 rugged and in your face.

Alexandre Arnault talks about this in an interview. He's like—and I'm not quoting him here, I'm paraphrasing—it's not really insulting to the existing customer base because 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.

David: There's actually some deeper stuff to all this that I think is worth going into here. 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.

Ben: Right, the whole Cristal thing, which by the way, Cristal was originally created to be the champagne specifically for the Russian czars to luxury for Royals happened in every country.

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

Ben: I was wondering if you're going to reference it.

David: Yeah. Jay-Z led this boycott of Cristal because the then Managing Director of Louis Roederer, 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. 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 What You Got music video directed by F Gary Gray. Fast forward to 2021...

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

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

Ben: Yeah, Fenty beauty is definitely one of the recent success stories.

David: Yeah, it's amazing. All this comes together in this Tiffany deal.

Ben: Right. It is interesting. Is LVMH intentionally being more inclusive, or does Bernard just always know where to find money? He definitely always knows where to find money. 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 dual benefit of working with a celebrity music or film artist because they are a creative person. They do actually know how to design products that will appeal to the masses so they can be the Christian Dior and they can be the Natalie Portman.

David: I think the Kylie Cosmetics and Kylie Jenner paved the way here, and then Fenty has been even more successful than that.

Ben: Has it really?

David: Yeah. Based on everything I could find in the research, I think Fenty beauty is significantly larger than Kylie Cosmetics at this point.

Ben: Wow, wild.

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

Ben: Wow. 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. Tiffany just announced at earnings that they will surpass €1 billion of profit, which we're going to equate with dollars since they've been close for the last couple of years, which is double what the business was earning at acquisition.

David: Wow, just two years ago.

Ben: Yes. This now means that LVMH paid just 13X earnings for Tiffany. It's pretty impressive.

David: Ben, like you said a minute ago, in 2019, right before the pandemic, LVMH as a group did about $50 billion in revenue. 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 close to a 30% EBIT margin across the whole group. That's wild. This is not a software business.

Ben: 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. This is a company at an $80 billion dollar revenue scale. 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.

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

Ben: Especially if they expand into luxury travel, right now they only have the small acquisitions that they've made, but luxury travel is huge.

David: Let's talk about that a little bit in analysis in just a sec because I have some thoughts on that.

Ben: Here's some more numbers just to contextualize the business today. It's 200,000 employees across all the businesses, there are 75 houses, and there are nearly 6000 stores around the world. 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 fixed costs of stores, landing the best talent, and signing the 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.

David: 100% great point. All that has, of course, very famously, recently made Bernard the newly recrowned wealthiest person in the world.

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

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

Ben: If you flashback 10 years ago, he was worth $30 billion. That's quite the transformation from $30 billion. There aren't many 30 billionaires, there are no other 200 billionaires.

David: Yeah, wow. Man, that's compounding.

Ben: Seriously.

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

Ben: Strikingly competent and very, very smart. 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. There's an interesting longevity thing built into that, regardless of their operating position within LVMH itself.

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

Ben: 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. Alexandre often mentions how he got an MBA from birth, always talking about the business, but that does imply Dad was always at dinner, wasn't just raised by mom.

I do think there's actually a very close family dynamic here. Unlike other succession battles, which are highly reported—I think the Murdoch family is a great one, people leaking things about each other—this seems ridiculously amicable. I don't know if it's just very French and proper, but they all seem to have great working relationships with each other.

David: 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 "earned" it, but earned their positions in much the same way that Bernard did in his own family company. Alexandria is a great example. He went to Polytechnique. Those are blind admissions tests.

Ben: 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 Alexandre'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 in McKinsey, and he worked at KKR before going into the family business. It is interesting how much he has weaved into the American tech and business world.

David: All right, we should talk about another of our very, very favorite companies here on Acquired, Vanta.

Ben: Definitely premium, much more about value than about luxury.

David: Ultra premium for sure.

Ben: I don't think anybody is getting SOC 2 certified. Actually, you could say a SOC 2 certification is really about signaling to your customers that you really value their privacy, data security, and all these things.

David: You're using utility language here.

Ben: Am I stretching it?

David: Yeah, this is a premium product.

Ben: It's pure utility because it's a way to go generate more revenue because you have a certification.

David: Which means you should do it.

Ben: Which means you should do it. All right. David, tell us about Vanta.

David: Indeed. Just like you're saying, if you sell B2B, and you want to close and grow major customers, you have to demonstrate trust, and you have to prove your security and compliance. But doing that on your own can be time consuming, tedious, expensive, a huge pain, especially if you're a startup, unless you use Vanta.

Vanta automates up to 90% of the work for the most sought after compliance standards like SOC 2, ISO 27001, and gets you audit ready in weeks instead of months. This is huge. Especially if you are a startup, no. You should use Vanta. You can get up to 400 hours of your team's time back and an 85% cost savings. This is the perfect example of don't do what doesn't make your beer taste better.

If you're not a luxury brand, and you need to do everything to make your dream taste better, if you're not that, if you're selling B2B, for God's sake, use Vanta. For a limited time, Acquired listeners can get $1000 off of Vanta. Just go to vanta.com/acquired to get started. You will be in great company with over 4000 other Vanta customers strong.

Ben: Our huge, huge thank you to Vanta. All right, enough about the succession stuff for now and Alexandre. 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. Let's go into the analysis section. There's a lot of analysis to do on this company. I'm pumped about it.

David: This is going to be so fun.

Ben: We of course have our playbook section. But before we do that, let's do power. 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? There are seven of these.

David: Hence, seven powers.

Ben: Yes, the seven are counter-positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. 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 their other holding companies, but then doing it for a brand in LVMH.

David: Let's do Louis.

Ben: I think that's the appropriate one to do. 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. I think, let's take one of the most spectacular luxury brands in the world and examine its power.

David: I think these are going to be really different for the holding company level versus the bread.

Ben: It's 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. I think this is where we'll tease it apart.

David: Yup, totally. 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.

Ben: 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. You need to be able to see what's going on everywhere, instantly. This requires higher investment, which gives us an advantage."

David: There are so many dimensions to this. Again, we talked about a lot of them earlier in the episode. 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.

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

David: 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.

Ben: Yup, 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. The exact same thing that Bob Iger realized when he took over Disney and actually why he did the Fox deal, is he realized there are going to be very few players left standing in this reorganization of content and distribution. Why he wanted to make Disney one of the few scale players is because you need scale to be successful. 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.

David: Yup. 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 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.

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? I don't know. Maybe not.

Ben: Maybe. But you're right, it makes it more attractive.

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

Ben: LVMH has now also built a corporate brand around reinvention. 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 going to totally blow everything up and appeal to a completely new set of people? I don't know if you do that deal. But if it's Bernard, Alexandria Arnault, and the rest of the family, and proven success...

David: I think the calculation for Jay-Z, Beyonce, Rihanna, 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. 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.

Ben: 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, someone got paid. 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.

David: 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 Hermes 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 is 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.

Ben: That's an interesting point.

David: They know how to manage that.

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

David: Only to the extent that the whole idea of a group of brands was different. But the rationale behind doing so with scale economies, other brands could have and did create their own conglomerates. See Kering, Richemont, and the like. It wasn't unique.

Ben: 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 a higher production value around the LVMH brand whenever they're creating videos or anything for shareholders. I do think they're trying to build LVMH as a corporate brand.

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

Ben: 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.

David: Yup, I totally buy that, which is ironic given the history of LVMH and Bernard's acquisitions. But yeah, totally.

Ben: It'll be interesting to see if LVMH shows up on more consumer-facing things. It's very boring. It's just a serifed LVMH. I actually have been working on the little album art thing for this episode. I'm having a hard time figuring out what to do with it. Listeners, you'll be able to see whatever I came up with after this.

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 an interesting conundrum. I think LVMH is trying to solve that by building the LVMH brand in the business world.

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

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

David: It's barely even a battle. Kering is the second biggest and they have so many fewer star brands.

Ben: Right. In practice, it's about staying independent or selling to LVMH. When Christian, Louis Vuitton eventually does decide that he's going to sell, or Giorgio Armani does, or we'll see if Hermes ever does, it seems like it's going to be the LVMH.

David: Yeah, even just it’s related. This is an outcome of the scale economies advantage. If Hermes 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?

Ben: Yup. Okay, power at the brand level and let's case study on Louis Vuitton.

David: Yes, this is great because there's the direct competitive example of Hermes right there.

Ben: Yup. Actually, let's put it in a different way. What exists besides brand power for the brands? 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. I'm wildly willing to pay more for something with that mark on it.

David: I have two thoughts. I don't know 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 what's so important for these luxury brands is heritage, provenance, and the physical story of the goods. Those are people, materials, and physical locations. Those are cornered resources.

Ben: Champagne, yeah.

David: Or Hermes and Louis Vuitton with the malletiers the products are made in.

Ben: Right, because to your point of what makes a luxury brand by the most traditional definition of luxury, different from premium, defensible, is the fact that it is more desirable than its function alone, and that people believe that desirability is durable among generations. The way the implementation that you create that durability is often through place and story. 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.

David: But at the end of the day, it gets expressed in brand value. We'll have to have Hamilton on the debate the finer points of that one.

Ben: We will.

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

Ben: Hermes is counter-positioned.

David: Or directly positioned against each other.

Ben: 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.

David: Let's be honest, there's some dilution risk there, too. You can buy a lot of products that have the LVs or the Louis Vuitton name on them. LV is very in your face with the monogram and the flashiness, and Hermes is very deliberately not in your flake. It's if you don't know, you don't know.

Ben: Yeah, but man, is LV a good business.

David: They're both just incredible businesses. Anything else? You got any arguments for any of the others?

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

David: At the brand level, yeah, but I think the holding company level is interesting and different. Okay, let's talk about playbook.

Ben: Yeah, let's do it. The way that I want to do playbook, the way that I've been thinking about it is, what should you walk away with this episode and have as insights, 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 are going to be massive profit pools in the luxury industry.

We can talk about the 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.

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.

David: Especially in America. I'm less familiar with the rest of the world, but the straight up retailer has been decimated. 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're a specialty retailer in America in which case in certain cases, you might be doing extremely well. See, for example, Home Depot.

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

I think another big one is realizing where to realize synergies and where not to. As Alexandria puts it, we have light synergies. 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.

Before the 70s, luxury brands didn't really advertise. 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. There weren't the stores in Japan and China. The Internet didn't exist, so you didn't need to 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 over $20 billion a year on marketing. It's astonishing.

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. It begs the question, what do they advertise? What they're advertising is interestingly not the products. That is differentiated in luxury. Everyone else advertises their products.

David: The dream, it's always the dream.

Ben: Luxury advertises the dream. I actually can't tell you Louis Vuitton product names, but I know Louis Vuitton. If you were to ask me, oh, you have a lot of money and you'd like to 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. I think that that's a really interesting difference about selling the dream.

David: 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.

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

David: Right. The brand features of the products. A luxury brand is never going to brand a feature of a product. They're almost never even going to brand a product.

Ben: Luxury brands are about convincing you to opt-in to their lifestyle and their dream, and the products are secondary.

Another thing that we haven't talked about that I thought was worth bringing up in playbook is that at LVMH—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, 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 create crappy products or uninspired products when you commission market research studies to ask what people want and create it for them.

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

Ben: Yes. 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 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 luxury for self concept we were talking about early. As soon as it has some function, now it's a luxury good.

David: I actually think this lesson is incredibly useful. I had my notes to bring this up a little earlier, but now is actually the perfect time and analysis. I think, after having done this now, that the luxury industry is a creative products industry. There are other creative product industries, such as the movie industry, music industry, publishing industry, video games industry, and the parallels and lessons across all of these are very transferable, I think.

In particular, I think one innovation that we probably didn't do enough justice in history and facts that Bernard brought to the industry and LVMH brought to the industry, is the professionalization of business management within luxury, partnering with creatives, and that there is an art to the business, too. That is so applicable in many things we've covered on this show. In the media industry, that is the NFL, CAA, Disney, the video game industry for sure. I think that was a big aha moment for me and doing this like, oh, the luxury industry is actually very similar.

Ben: 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 also has a function. And then figure out how to market that. If you work backwards from the customer in a very Amazonian way—they literally call it working backwards—you end up with Amazonian products, which are unbelievably high utility and completely uninspired.

David: Yes. Maybe this is speculating a little bit and industries could come in 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.

Ben: You're right. There's totally an invention in that leadership structure. If you look at Tom Ford and Dom De Sole, that is the right structure to lead a house. It is interesting, when you come from this small family-owned heritage of 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.

David: Yup, totally. It's super telling that Tom Ford was in all the banker meetings. We didn't talk to him, but I bet Domenico was like, he's my partner, he's going to be there.

Ben: 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? And what were the big leaps?

David: 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.

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

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

Ben: Right, in different forms. When the businesses do become enormously cash flow positive, it's not a problem that you took on leverage. In fact, it only multiplies your returns. Levering your returns is a great way to increase your IRR, which is effectively what he did.

What we don't do on Acquired is tell the stories of people who were wrong in their leverage, did a bunch of crazy stuff, and then went out of business. 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 blow-ups, but most blow-ups are small and insignificant.

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

Ben: Right. The most interesting thing is a story like LVMH is the story of compounded. He was 1 of 10 that survived the first chapter, and then he was 1 of 10 that survived the second chapter. Suddenly, he's an outlier-ish, 1 in a 7 billion case of a person who managed to turn a very small amount of money into the most money in the world. Of course, we're going to tell that story, but someone was going to accomplish that story. It was going to happen to someone.

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, so you make up at survivorship bias? Make up the fact that, well, if you did all these things that they did, you too can become like that?

David: For sure, there's a lot of survivorship bias here. I suspect that Bernard did have a view that almost nobody else had, which was that both those luxury brands, and particularly, Louis Vuitton and leather good 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. Even when a brand falls on hard times, if it has enough heritage and provenance, you can bring it back.

Let's do this as a thought exercise. Could you permanently destroy the Hermes brand, the Louis Vuitton brand, or the Tiffany's brand? You could certainly temporarily destroy it. We told a few of those stories in this episode, but could you permanently forever wipe it from the face of the earth?

Ben: You could. You would need it to be bad for 60-plus years because I think you needed to be bad for an entire human lifetime adult memory. I think some of the reasons why 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.

David: 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, buy it, and resuscitate it. And the shelf life is so long. I think you're right. You would have to have a dormant period of a human lifetime to permanently kill one of these brands. That was certainly the case with Dior that Bernard I think recognized more than anybody else.

Ben: Yeah. 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, 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?

David: When he put $800 million into the JV with Guinness. That was 1988. He bought Boussac and Dior in 1984. Four years.

Ben: Right. In four years, he turned $15 million into $800. A lot of that compounding happened right there.

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

Ben: Right, getting a great deal from the French government and really being able to spot that market inefficiency.

David: It's so ironic that the socialist French government essentially gifted the greatest business financial success of all time.

Ben: I tweeted this. 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, 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.

David: I guess the Europeans are just thinking longer timescales than anyone else.

Ben: Right? That's crazy.

David: 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. 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. A hotel is never going to be like Louis Vuitton. You can make a lot of leather handbags, and a hotel only has so many rooms.

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

David: Yes, definitely. I do think there's this interesting industry analysis aspect, too, if you're going to enter an industry like, can it scale? Again, intentionally or not, Bernard got that really right with luxury. It can scale. That's one.

The other one, and 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.

Ben: I've been waiting to talk about this.

David: Yeah, which is another deep paradox about luxury.

Ben: 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. One minus that percent is not luxury. I don't know what those percents are, but they definitely have a class of things that they sell to people who are billionaires. If the market drops 50%, we'll still be billionaires or multi-hundred millionaires. That impacts their desire for something by approximately 0%. They won't go buy it at the same price or more and are completely insensitive to that.

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

Ben: 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.

For the class that they sell to that is not wildly price-insensitive on everything, or if their stock holdings drop 50% becomes concerned and changes their behavior, that affects their business.

I don't have a sense of how much is the completely price-insensitive, true luxury segment versus who falls into that more masstige segment. I'm conflating two things here. There's the masstige segment, but then there are also the products that they have that are actually ultra premium rather than being luxury, so people are going to evaluate them on the merits of how useful are they. I think luxury travel is actually ultra premium travel.

David: I think there are 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, is the first Cheval Blanc, I think?

Ben: Yup.

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

Ben: That's fair, but the $1500 a night, four seasons somewhere...

David: Or Belmond which LVMH acquired. I think the average Belmond room is probably in the $1000 a night range. Yeah, that's for sure going to be impacted.

Ben: Right. 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.

David: For sure, yup.

Ben: 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. 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.

LVMH did very, very well in 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, the Chinese 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 with that wealth to signal your level of taste, that none of this would have been possible without all of that going on and completely independent of Bernard's actions.

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

Ben: Yup, I think that's right. All right. Moving out of playbook and closing our analysis, we're replacing grading. We're talking about it with a bear and bull case from here.

David: We're killing our darlings here.

Ben: Yes, exactly. Here is the bear case, as I see it. They're too exposed to masstige. I think I've put my hands on that over the course of this episode. 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. Those customers haven't all graduated to their high price point, high margin products yet. A lot of the raw dollars that they are doing in revenue are more subjected to a recession. It's hard to know how much.

David: 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. Then now as the economy in particular, certain sectors of the economy like tech have violently rerated here, might graduate out.

Ben: The number of people that we know, David, that a year-and-a-half ago thought they were millionaires, 10 millionaires, or even higher, and are now realizing that they're not, I bet a lot of those people were buying luxury goods.

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%–8% next year. That's a short-term impact on luxury sales. I don't think LVMH really thinks in two- and three-year timeframes.

The two more that I have in the bear case is despite buying 75 brands, there still isn't one that is as good as the original brand in the portfolio, Louis Vuitton. The fact that that is responsible for a quarter of all revenue and still makes the product that is the best business, I mean fashion and 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.

David: Power laws are a thing.

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

David: No. I have nothing to add.

Ben: Thanks, Charlie.

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

Ben: All right, bull case. We've talked about luxury as recession-proof, we've talked about how these brands are insanely durable. I think what we haven't talked about is Gen Z buying luxury three years to five years earlier than Millennials did, which I think is pretty interesting.

Also, especially under Alexandre's leadership, LVMH has been much more open to collaborations than they have in the past. You see the Tiffany and Nike, you see the Jay-Z and Beyonce. You see some of the stuff they were doing with Rimowa. I think the rise of luxury streetwear and sneakers among Gen Z is going to end up playing in LVMH's favor.

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

Ben: I want the whistle.

David: Two, did you look at the prices?

Ben: Yeah.

David: $5000-plus for the sneakers. That's crazy.

Ben: That's luxury. They do the exact same thing that my $120 sneakers do. 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. They've definitely got a market there. 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 emerged from the pandemic.

Another one that I mentioned earlier is LVMH as a brand itself and building that corporate brand to be the acquirer of choice. We'll see if that happens, but that definitely is a bull case. My last one is really around family control. If they are able to do this succession well, it does allow for very, very long term views and leadership at the company.

David: Yup, that was the one thing I was going to add on bookcase if you didn't cover it there. We haven't gone into detail on any of the children. I think a lot of the narrative around LVMH recently has been this like, oh, the succession thing. Wow, what drama, who's going to take over? The five kids are pitted against one another.

I think to a certain extent, some people have thought, oh, that's an overhang on the stock. Having dug into it, 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.

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

David: Even if it is real, I think whoever wins is probably going to continue to do a really good job.

Ben: Right? Yeah, that's a great point. Before we do carve outs, I did want to do a little betting pool on succession now that we're here. What should we bet? Should we bet on a bottle of Dom?

David: Yes. We're now five-plus hours into recording. I don't know what time this will be in the edited version. We have not yet brought up the famous Steve Jobs quote.

Ben: Yeah, lay that on us.

David: Yeah. 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.

Supposedly, Bernard tells the story that as they're getting to know each other through all this, one of them said to the other, this iPhone that you're launching, do you think people are going to be using it in 20–30 years? Jobs supposedly said, I don't know, but I'm pretty sure that people are still going to be drinking Dom Perignon champagne in 30 years.

Ben: I love that. All right, then the bet is on a bottle of Dom between you and I.

David: On who become CEO of LVMH?

Ben: Yes.

David: All right, who's your pick? I'll let you go first.

Ben: All right, 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 Alexandre 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, 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 Rimowa was unbelievably entrepreneurial.

He 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, then cultivated that relationship, and then ultimately waited for the Rimowa family to call him and say, we are looking to transition and sell the business. There's no we'd rather sell to other than you. Our one condition would be if LVMH wants to buy it, that you'll be the CEO.

He took it upon 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. My pick is definitely Alexandre.

I think Frederick and Jean are too young. They're the babies of the family right now. I think they're 24 and 28. They each run watches, so Jean runs LVMH's watches. Frederic, who is 28, is the CEO of TAG Heuer. He was named that at 25.

David: Yeah, crazy.

Ben: Alexandre is my pick. He's 17 years younger than Delphine, so maybe that would be crazy for him to take over.

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

Ben: He just voted to extend the limit of the CEO to 80. Actually, Bernard put the limit in place of 74 or whatever it was.

David: To oust Racamier.

Ben: Yes.

David: It's so great. Nobody's trying to oust Bernard right now. It's funny. I think that the press definitely thinks that Delphine is the leading candidate.

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

David: I think that Delphine and Antoine, Bernard's children from his first marriage, are more comfortable speaking French than English. The younger kids are more comfortable speaking English. I agree with you, though. The interview that Alexandre did at Oxford is awesome. It's well-worth watching. We'll link to it in our sources. He's incredibly compelling and 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.

Ben: All right.

David: I can also pick Alexandre here, but that's not much of a bet.

Ben: You could and then we just have to exchange bottles.

David: Let's make it interesting.

Ben: All right, great. It's on the record. Carve outs?

David: Carve outs, let's do it. I'll go first, I have to 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 Principle, the not so secret Benchmark Principle, 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 in the luxury creative management business that we've been talking about. About the video game industry, there's nothing really like that. It's so good. It's in podcast form. It's super compelling. They do a great job. Different to the show, but I'm a 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 really care that much about cars, but 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 his lifelong dream.

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—is one of the ultimate luxury cars, this legendary car that Porsche made in the mid-2000s. I think when it came out, it sold for $400,000 (I think) new. Now, pristine and rare color models of these are selling for $2 million, $3 million, $5 million. Doug just bought one, 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 so heartwarming.

Ben: All right. That would be my first Doug DeMuro video, but I got to check it out.

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

Ben: Cool.

David: Go watch the video. It's great.

Ben: Sweet, will do. I have two also. One is a purchase I just made that has been awesome so far, which is the Peloton Tread.

David: Luxury product or ultra premium?

Ben: 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. I get access to all the Peloton content under the same membership fee. Seattle's freaking brutal in the winter, so it's nice to be able to get some steps in when I don't want to go outside in the gray muck. The best summers in the world, I think we rival Lake Como, but the winters are tough.

David: Seattle summers are amazing. The fall is incredible in San Francisco. But now it's my favorite time in San Francisco because it's February and it's 65° and sunny out. I'm like, this is why I live here.

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

David: Yeah, come on down. The guest room is ready to go for you.

Ben: Thank you. My second is an article by Derek Thompson. It is called The Eureka Theory of History is Wrong. It's awesome. Long form, I read it in December. It's basically about how we really make hay about someone's invention and the idea, so much of the value comes from doing all the hard things to make that idea real in the world, especially around distribution.

One of the big case studies is around vaccines, and in particular, around the original smallpox vaccine that came from taking some cowpox, using that, and injecting it into humans. Even after someone discovered it, it was really the government's effort to push that out into the world.

The reason why we don't fear smallpox today is not because someone had a genius idea. 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.

I 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.

David: Cool. I'll check it out.

Ben: With that, a huge thank you to Pilot, Vanta, and new Acquired sponsor, RevenueCat. You can click the links in the show notes to learn more. 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 Vijaye 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 winding journey at Facebook.

David: It's just a cool couple of hundred billion in market cap creation.

Ben: Right, to 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 bringing to the mass market, which is very cool to learn about as a former engineer and PM.

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.

David: We'll see you next time.