## Power of Star Brands Bernard Arnault had the key insight that if a brand is truly luxury, you can extract extremely high margins from it. Not just a little bit, but a whole step change, because you’re serving a customer that has very little sensitivity to price changes. Even if manufacturing costs go up a little, the price can go up a lot. There are very few brands in the world that are both timeless and growing and have the capability to adapt to modern life without losing timelessness.  ## Features of a Luxury Brand What makes a luxury brand – heritage, provenance. Physical story of the goods — people, materials, physical locations. They are cornered resources. Luxury — more desirable than its function, and that desirability will last for generations. Desirability through place and story. If you own the place and story, you own the reason why someone would believe in the longevity of the brand. Brands with these features are extremely few in number and are therefore a cornered resource. ## First Among Equals Luxury Products Wines champagne spirits business is not as exposed to modernization issues. Truly timeless. The way to make spirits and wines by hand still exists today. Hasn't changed. So it’s a very consistent business.  Handbags are a great product in luxury. No need for measurements, it is used very often, and the same handbag can go with multiple outfits so customers can justify a high price tag. At the same time, women justify buying 4 new handbags per year (2004 coach study) since they use them so often. Margins are incredible — the sale price is often 13x the cost to make. It’s made using leather which is renewable unlike other luxury products made using diamonds which are non-renewable.  Luxury travel is a huge market, but not as scalable as leather goods. You can make a lot of handbags, but you are limited in hotel rooms. ## Synergies in Luxury `Synergies in advertising, real estate, and talent, but not design and creativity.` Scale economies are possible in luxury. Upstream, you have economies of scale in sourcing raw materials and talent. Talent is attracted to a conglomerate that can pay more and where employees can move across different businesses and increase their learning. Family-controlled single fashion houses usually can’t pay as much, don't have as much opportunity to learn different businesses, and don't offer as much vertical mobility since usually, the only way you get promoted is if your boss retires. Downstream, you can leverage scale in distribution (advertising budgets, relationships with retailers) and squeeze to get higher margins for yourself. Economies of scale in advertising are immense. After acquiring lots of brands, they became 50-70% of all brands going into department stores in the US. They go to department stores and say “We’re not going to sell you products wholesale that you retail to customers. Instead, we’ll lease space from you to set up our own stores. We’ll own the inventory, we’ll own the selling experience, and make a lot more money in margins.” The money they spent on advertising drew customers to the stores. They were the products that people wanted so department stores had to capitulate and agree to those terms. The most important reason why LVMH did this is not for margins but to control the direct relationship with the customer and have control over the brand.  They were also careful to avoid synergies in certain areas. They never scaled up production since it devalues the luxury aspect, and never outsourced since it degrades quality. They also never force designers to work on products across different fashion houses. That talent remains focused on a single product to ensure high quality.  The realization of where synergies could be realized in a luxury group and where to stay away from synergies was the greatest value-unlock by Bernard Arnault.  Alexandre Arnault talks about "light synergies" — you have synergies around negotiating advertising deals, negotiating real estate and distribution deals, and giving people the ability to make career moves within your company where they can move from brand to brand. But, you do not have any synergies — and be very careful not to mess this up — with the creatives. The person who owns design for a fashion house has complete control over design decisions. There’s no management meddling, or forcing designers to work across multiple shops. That stays walled off.  ## Vertical Integration For a long time, retailers, rather than producers of luxury goods took home the most profits. Producers were small family-run shops that didn’t have the operational muscle to get to know the customer intimately especially internationally. LVMH pioneered forward integration to set up retail stores to get a direct relationship with customers.  If you control your factories, you control your quality. If you control your distribution you control your image.  ## Why People Buy Luxury `"Luxury is about pleasing yourself, not dressing for other people." – Mark Jacobs` `"Luxury is a necessity that begins where necessity ends." — Coco Chanel` It’s about feeling a certain way about yourself, an intrinsic goal. Some luxury brands are not just about what you choose to identify with taste-wise, but also about “if you know you know”. Certain products are not marked so only people in the tribe understand why those products are so valuable and luxurious. A great example of this kind of product is Hermès bags. They are not marked, so only people who know Birkin and Kelly bags will recognize and appreciate them. ## Premium vs Luxury `Premium means paying a higher price for higher utility. Luxury means paying a higher price for no extra utility, and sometimes for lower utility` (A Ferrari has lower practical utility than a Prius since it consumes more gas and seats fewer people). Signaling your status is an essential human need.  Fashion is a small part of luxury. e.g. Dior, Chanel, etc. But luxury fashion is harder to monetize than durable leather goods and cars. Those are very clear-cut examples that show the difference between luxury and premium. `A key aspect of luxury products is that their value and status are durable over time, whereas a lot of fashion is the opposite (fashion trends change over time).` A Ferrari is likely to be more valuable in the future than the day you buy it — not for its utility, but because other people have bought into the dream that this is a valuable thing. If you buy a Birkin bag, there’s a very good chance that it will be a good investment, whereas a purse from Target depreciates 90% the minute you walk out of the store.  People justify buying luxury products by saying it's about the high quality and durability of the materials used to make the product. But that’s just justifying why it’s a premium product. The real durability is about its status. `It’s worth something for a long time so it **will** be worth something for a long time (Lindy effect).` That’s why LVMH’s acquisitions have been extremely old and long-lasting brands since the 1600-1800s.  It’s telling the consumer that this thing/brand that you’ve chosen to identify yourself with is part of something much bigger and valuable than you and will continue to remain so for a very long time in the future as well.  Luxury = quality + creativity. It's about brands built by incredible craftsmen at every price point. The Arnaults hate the idea that luxury is for rich people. They also don’t agree that rich people buy these things just for status. Some of the things LVMH sells are luxury. Like Louis Vuitton bags. But others are expensive premium — about craftsmanship (so good it’ll last forever), creativity (sets it apart in its category in a fundamental way such that it provides value to you). As LVMH targets more and more people with more brands, they’ll start to shift to expensive premium instead of luxury. Even the leadership is only talking about craftsmanship etc. which signals premium. LVMH is both luxury and premium under the same brand. Japanese have a huge appreciation for craftsmanship. By 2006, 40% of all Japanese owned a Louis Vuitton product. By 2008, all luxury goods were sold in Japan and another 30% were sold to Japanese traveling abroad. Japanese people bought half of all luxury goods.  ## Success in Luxury The way you succeed in fashion is by taking crazy risks and shock value creatively. Ford launched Pornochic, doubled Gucci's revenue, and hit profitability. ## Hermès Hermès — anti-LVMH. Always family-owned, one brand, no economies of scale. Don’t even use computers. Gucci uses computers to model the design of new brands. Hermès doesn’t even do that. No assembly lines — at LV different people handle different aspects of making the handbag in an assembly line. At Hermès, one person takes the bag from raw materials to the finished product. Hermès is about craftsmanship.  ## Luxury Margins LVMH does $80bn revenue, and $20bn EBITDA. ~30% EBITDA margins. Not even a software business. And this is after a lot of reinvestment of profits. They could cash flow much more than they currently are.  ## Globalization Before the 70s, luxury brands didn’t really advertise. There were just not enough people who could afford it, there was a benefit to customers finding them rather than the other way around. Global wealth was smaller, globalization hadn’t happened yet so you didn’t have stores all over the world, the internet hadn’t happened so it was also not easy to make a big splash everywhere all at once.  Bernard Arnault's takeover of LVMH coincided very well with globalization, the rise of China and East Asia, and with the rise of the internet as a means to advertise. ## Luxury Marketing Brands now realize they have to advertise. They never advertise the products. Every other industry advertises the products. Luxury advertises the dream. People know Louis Vuitton, but can never name its individual product names. Same for all luxury brands. In premium and ultra-premium (e.g. Apple), you know all about the products and their features. Luxury advertising is about convincing you to opt into the lifestyle and the dream. The product is secondary.  However, the marketing departments only get involved when the product is ready and it’s time to make the product attractive in the eyes of the world. You create crappy products when you commission market research studies to ask people what they want. Marketing and product work together to market the product, but marketing is never involved in product creation. This model is not particularly useful model outside of luxury.  ## Luxury = Creative Products Industry Luxury is the intersection of art and commerce. It's about creating something very close to art, except it has some function. That’s what differentiates it from art which has no function. Luxury is a creative products industry. Similar to movie industry, video game industry, music, and publishing. Parallels and lessons across these are very transferable. LVMH brought a professionalization of business management in the luxury industry.  Anytime you’re in a creative industry, it’s first about doing the necessary but not sufficient task of finding the most creative talent to make your product. If you work backward from your customer in the Amazon way, you end up with products with high utility but which are completely uninspiring. In a creative products industry, creatives need to understand and respect business and business leaders need to understand and respect creatives. Dominic De Sole (business) + Tom Ford (creative) leading Gucci. That’s how you turn the firm into a global brand. Tom Ford was in all the banker meetings during the Gucci days and true partner of De Sole. ## Acquirer of Choice LVMH has built a reputation of reinvention, blowing things up. So people are more likely to partner with them rather than stodgy old brands. They have positioned themselves as the acquirer of choice in luxury, just like Berkshire Hathaway. ## Books - 7 powers - Deluxe