LVMH
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David, you're already. Did you bring a cloth for copying your bottle?

Of course I do. The only way to do IT.

I could have brought a sabor. You are far too classes. You did live in france, didn't you?

Cloth is going in the way.

Listen, is this is the best. We have planned to open bottles of moet to start the episode, and David .

is struggling to struggle and go of .

the day .

every day. Cheers, cheers, my friend, son.

Oh.

that is good. Easy, you wait, you wait, you who got to? I see me down story. On the .

welcome to season twelve, episode two of acquired the podcast about great technology companies and the stories and playbooks behind them.

Then gilbert, David.

and we are your hosts. David. I have talked about the power of brand on dozens, if not hundreds, of acquired episodes. At this point, brand is that unique attribute that will cause people to pay more for a product, because IT has a certain name or logo on IT.

But why do people do this? And how can one quantify the impact that a brand has on a business? Well, to study this, we decided to dive into the empire that has done this Better than anyone in history.

L. V, H, the conglomerate of moai henney. louv.

It's not moet. moet. yeah. What is the deal with that?

The mott family.

even though they are french, IT is a dutch name, so you don't prince IT like in french, you pronounce IT, as in duch with the hard tea moet.

right? What is actually .

moet brand is so famous ly squid in the discussion, these tech company that we wanted to dive into a company where is definitely not squshy. Very quantifiable.

Here is all the M H. Is the fifteenth largest company in the world today by market cap. IT is the only company in that top fifteen that is not technology or oil besides burker hathaway and breakfast half away being twenty five plus percent apple.

At this point, you could argue their market cap comes from being a tech company. Another crazy thing on L V image. Their market cap has grown twenty x in twenty 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 travel. They owe just an insane number of brands with seventy five houses today that include dear li biton, moet hennessy, voci, co down, paragon, Tiffany.

And it's not just the brands they've expanded into distribution with retail like safra and all the duty free shops that you see at airports. And they have even recently expanded in the travel with travel blank resorts and other travel companies. And for those of you who have been to are reading the headlines, this wide sweeping empires owned and controlled by the now wealthiest man in the world, more than BIOS gates or elon musk bernard, are no.

And fascinating. Ly, this richest man in the world wasn't the founder of any of these brands. This story has a dash of buffett, a little Better Steve jobs and some unbelievable deal making stories about how mr.

Are now turned fifteen million dollars of capital in one thousand nine and eighty five into the over two hundred billion dollar fortune that IT is today. I'm also super excited to doing the analysis on this one, David, because the luxury industry is like business strategy, bizarre world. You need these.

So there are constraints on your growth. You can't lower your cost structure too much without devaluing your brand. You can't really outsource activities even if they're not your core competencies. So like all the lessons that we've learned on previous episode, it's kind like the exact opposite of what will show up today.

Yeah, everything that makes your beer taste Better is a femoral. So you need everything in house .

totally and listeners, this ones 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. Then our own. David rosenthal, so David, thank you for agreeing to do this episode. Can you share with us what your college thesis was on?

Oh, my goodness. I wrote my new thesis in college on the champagne industry, and specifically on the history of moet. And I will talk about IT a little bit later. In the officer, there was a very, very bad piece of writing. I was a very lazy student in college, but I have since reformed.

I love IT. And long time acquired listeners will remember David also lived in france for like the first six months of twenty thousand seventeen. yeah. So many in acquired episode recorded with you sitting in paris. Okay, listeners, now is a great time to tell you about long time friend of the show service now.

Yes, as you know, service now is the A I platform for business transformation, and they have some new news to share. Service now is introducing A I agents. So only the service now platform puts A I agents to work across every corner .

of your business. yeah. And as you know from listening to us all year, service now is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of this.

So what are A I agents? A I agents can think, learn, solve problems and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control.

Yep, with service now, A I agents proactively solve chAllenges from I, T H R customer service software development. You name IT. These agents collaborate, they learn from each other, and they continuously improve handling the busy work across your business so that your teams can actually focus on what truly matters.

Ultimately, service now, an agenda I is the way to deploy AI across every corner of your enterprise. They boost productivity for employees and rich customer experiences and make work Better for everyone.

Yeah, so learn how you can put A I agents to work for your people by clicking the link in the show notes or going to service. Now, doc m. Ash, A I dash agents, well, after you finish this episode, come discuss IT with the fourteen thousand other smart, kind, curious members of the acquired community at acquired data, slash slack. And without further due, this is not investment advice that if I may have investments or may want to make investments in the companies that we discuss in the show is more information and entertainment purposes only.

Indeed, first, we owe big thank you to adam preisser over at assembled brands and the luxury start up. Kate adam was one of the co founders of general assembly back in the day and has just become a wealth of knowledge about the luxury industry. And we had some great conversations with him. We also have a big thank you to prediction over at neck value, who I think was the first peace of content. They get usually interested in doing this episode.

Ah I read in hawaii over the holidays, and that is one of the few sub stacks that I now pay for.

Frederick is awesome. And because I 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 nineties, originally written in french, we have to spend about four hundred dollars to buy this thing. IT is very rare, and chronicles kind of in real time, the story of bernard no taking over. L, V.

so David have been watering. Where are we starting?

The story is IT with dear. Yes, let's dive in. We start not in nineteen and forty nine, in a small city in the north of france named ed to rebate with the birth of burnt.

No, but actually three very short years earlier, in a very different part of france, in paris in one thousand hundred and forty six, immediately after the end of world war two. Got me find this episode has especially here to begin some SONY similarities. Oh yeah.

And indeed, just like SONY L V M H. And brett was a big influence on Steve jobs and apple. Yeah, so paris is in one thousand forty six. It's not quite as bad as tokyo in one thousand nine forty six. But this is not a happy place.

France and paris, of course, of an occupied during most of the war by the notes and although the economy wasn't totally destroyed like japan, IT was pretty much entirely shifted during the war to supporting the not the war effort so yeah let's to say there's a lot of emotional reckoning that needs to happen here in france and uh, all over the world in nineteen six. So into that time in place steps one Christian dior and dr, before the war had been a designer at various pression fashion houses, which were of course one of france is most important cultural and economic institutions with heritage. Going back to folks like coke, chanel, who famously created channel in nineteen and ten, thrives during the roaring twins, were like a huge part of culture all across the world.

I didn't realize this till we did the research. The channel, perfume channel, number five, the most famous migrants in the world, introduced in nineteen twenty one. Today, channel is a private company, so nobody really knows. But it's estimated that that worn for grants does about three or four billion dollars in revenue a year.

crazy.

The war, of course, changes all of these Frances occupied, actually really sad, doesn't come out till just about ten years ago, but coco chanel herself becomes a native agent. There's a lot a really bad stuff that happens, and particularly to the fashion industry. So there's a great piece in C.

R. Fashion book about the rise of dr. And this time coming out of the war in france, he says not. The ideology abhorred persian styles, and the slender feminine bodies IT idealized, arguing that they were both corruptive to natural strong area and women.

Instead, adou hitler advocated for the practicality and nationalist quality of german dress, which saw women in draw and boxy forms. He then took direct aim at the old culture industry of paris, demanding that IT Operate within nazi regulations and that all of its exports. So D.

R. Had been a successful designer before the war. And then during the war he can gets go, opted into this. He works at the amazon, Lucia long, where he's mostly designing these boxy you to form like dresses for the wives of native officers.

So after the war, he is one of the few really talented designers out there that are on the market and are totally tainted by the nazis. And the wealthy tex style industrial alist. Marcel bo sec approaches him in ninety forty sex to come and lead and renovate his old flagship prison fashion house.

Philip a. Gaston, like a beauty in the peace episode. The though, says, I want to make a fresh start after the war.

I think i'd rather do something under my own name and reviving this old brand and blue sexes. Oh, okay, fine. Like we don't need to do that.

I agree with you. I'll just finance you starting this new fashion legally mains on here and revitalizing the industry in paris will start fresh. So they get to work. He financed D. R.

It's kind like the story of fair child semiconductor. But a fair child, Cameron instrument had let the trader said, actually named IT themselves, but still basically owned by the parent. Yes, okay, so you ve got the brand dir getting started by the actual designer Christi on D. R. And totally owned by a booth.

Yes, totally owned by blue sec. So the arguments work in february nineteen and forty seven. He shows his first collection, and it's just incredible.

This fashion collection from Christian D. R. In nineteen forty seven literally changes the world. IT is a complete remediation 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, its soft, that has exaggerated sillett. Most importantly, his pieces use tons of fabrics, luxury fabrics.

This was a radical look at this stuff today, and like whatever that's like, closed from the forties and fifties. But this is after the war. Where is rationing on fabrics? And so these new pieces that are embracing life, embracing luxury in one thousand forty seven, the world I just ended. This is a radical, radical statement.

And to illustrate a thing that would become incredibly important over time, IT is all about the creativity of the designer. That is the necessary precondition for any other value to be created. You have to have the most hyper creative, talented people in the world to come up with such a radical collection like this.

And then, of course, not to mention they're producing extremely find goods of these things end up going for extremely high Prices because they use really real materials and all that. But IT does take this super divergent mind to create the collection. yes. And the .

radicalism is super important. This continues to the state in the luxury fashion industries. This was very controversial the time they are actually protests.

So this look from the r comes to be called the new look. Because at the show, introducing IT, the editor and chief of harper's bizarre, famously exclaims, to Christian IT is quite a revolution. Dear Christian, your dresses have such a new look.

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

Yes, it's watered. It's expensive. The funniest protest is a group called the league of broke husbands.

Is protest that the extreme cost of these materials and of these fashioned. But yes, we can't overstate the cultural importance of this. C. R. Fashion book continues in this article beyond fashion.

The new look reflected broader cultural sentiments and dies in the postwar era, specifically by creating a look that was so una abashedly populate, exaggerated, ated and exciting. Dior spoke to the universal desire to celebrate life again. And it's not just culturally around the world. This is a financial smash hit home run as well. So two years later, by one thousand hundred and forty forty nine, dior fashions were literally seventy five percent of parachutes, hio exports and five percent of the entire nations export revenue.

I was very french.

and I believe to this day the luxury industry is the largest export of france. Ha, so later in one thousand and forty seven, they launch Christian your perfumes with the fragrance mist, or very famous for grants. And then in one thousand hundred and fifty, the G M.

Within brisac, whose running canneloro or a business ja, comes up with a new business model idea. He wants to capitalize on the incredible international success of the fashion about the old future. The customer made incredibly expensive pieces, but also the ready to way lines that they were producing out of this, and standard size that women all over the world could buy.

Andy 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 good's producers? Banana da, we can just basically invent money, and they do.

as long as we don't put our foot on that petal too hard and devalue the whole thing, then this is basically one hundred percent girls margin money found that points in our company.

yes. And IT works really well for a long. I mean, ultimately, the deer label would get licensed to hundreds of third parties. I believe neck ties were the first, but women's hosy, hats, gloves, handbags, you name IT, there was A D, R license label out there. Thousands of .

products manufactured everywhere in the world, at every different level, quality, very few of which are actually created by Christian dior, the bacc company themselves. yes.

And this is super controversial. Even at the time the french chAmber of culture denounced this is devaluing the heritage of the french luxury fashion industry. But it's an incredible financial success in for good or bad, the, or is now everywhere, so much so that by the spring of one thousand nine hundred and fifty seven, Christian dior is on the cover of time magazine in the U.

S. Which was way more important than minute is now, of course. And then suddenly, right after that, later in one thousand nine hundred and fifty seven, at the height of his international cultural popularity, he dies suddenly of a heart attack very unexpectedly.

And this is a huge oma, huge deal. today. If the creative leader of a major fashioned house died unexpectedly is happen sadly, often.

especially the pony ist creative leader named after him and founded by him. Yes.

there was no concept of fashion levels as existing beyond the person and the artistic director. This was much more like an artist than IT was like a business. These labels and houses did not survive the death of their founders.

So be second the right, 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 works up within the italia in paris.

There's this one kid who's got a lot of talent. He's really Young, is twenty one years old, but he's already become one of the hour's top assistants by the time of his death. His name is eve.

So and so they make the incredibly bold decision to keep the brand, business label and promote this kid said, and learn all to artistic direction at eight twenty one and almost as much as Christian or revolutionized ed the world with the new look ten years earlier. Salon does the same thing again, and he really modernized its fashion. Like if you go and you look at the new look close now, like they're incredible, they're beautiful, but they don't look like anything that people would wear today.

If you look at if and on early designs that's like modern fashion and clothing, he popularised the pant suit for a woman, oh, I didn't realize he's finally hilary clinton s number one thing. And then later, not within the yor, but within a few years, he designs, famously, the monti, an dress, you know, the color black dress that was, like, so famous and ebola tic at the sixties that have. And to this radicalism, to pushing fashion in the world, in culture forward.

Eve totally takes up the metal. Unfortunately for good sec, it's a little too extreme for him. This old industrialist guy from the texas yle business, he doesn't like what eve is doing.

which probably means he shouldn't owe a fashion house.

exactly. He's from a different generation. Yeah so after three years of you've been around running the r bsec forces out in one thousand and sixty and eve, after a short period time teams up with his life partner and business partner peer burj and across, starts their own house eve and are on which we need to put a pin in that to come back much later in the episode.

Eve today is owned by the luxury conquerant caring that we're going to talk a lot more about and is arguably primarily the number one competitor. Two L V H. That all comes full circle.

So back to you're in Bruce sec. They basically never recover from this. Bruce c installs the conservative and older mark. And as artistic director, the innovation is gone. They basically just keep pumping out variations of the new look for the next ten, twenty years.

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 .

pade very slowly over time. It's one thousand, nine and sixty when they push event. And for basically the next fifteen and twenty years, this is just a cash cow that they're milking.

Meanwhile though, unfortunately, the rest of the boot sec empire is basically going down the tubes. So it's mostly a text style manufacturing business. They are like twenty thousand employees at all. Union zed france is basically becoming a socialist country. Gets to a point where by the late sixties, they're losing like twenty million dollars a year across the whole company.

By the way, how great is IT that the busic empire is a textile le manufacturer just like bircher hathaway before, warn buffett, seize the attractive opportunity to come in and buy IT.

It's amazing. And like all the parallels to so many other group business stories we've told unrequired, they're all here in the L. V. Mate story. It's amazing.

So as we sec is going down the tubes, they start trying to sell off pieces of the empire, monetized, do anything they can. I don't know that blue security cares about saving the company. Maybe he does. But you kind cares about saving. Is fortune.

right? Get as much value out as possible.

He owns a lot of resources and breeds their overhead, and he needs money to do that. And so one of the activities that they do to raise cash is they sell off the perfume business within the or in thousand and sixty eight two moet I shand, on which we haven't talked about yet in the episode old boy, are we going to the perfume .

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

So things continue on the downward trajectory despite that in in thousand nine hundred seventy, the whole book, sac, a group, finally files for bankrupcy, in what up into this point was the largest bankrupcy in french national history.

This is big deal. And the way bankrupcy works, at least at this point in france, is that they basically nationalize the assets of the company, right? Like the government takes over the administration of what was previously the blue sac empire. Yes.

like I said, Frances, basically becoming a socialist country at this point, in this case, the first bankrupcy of glue sec. The government doesn't run IT for very long because a buyer emergence, and they end up selling the company at bankrupcy to a rag tag group called the willow brothers, I believe, made their money manufacturing ACE bandages. These are not luxury.

Dudes is a total mess. One of the brothers ends up getting arrested for mister proprium funds within the company within a couple years. In one nine hundred eighty one, the whole group is back in bankers cy, right back where we started. And at this point, there are no real buyers for this thing, like gets an albatross. So the government takes over running IT for multiple years.

And interestingly, even though dr is still somewhat financially performing in the belly a of the bees from all these licenses to all these of their companies.

you not due the innovation but the licensing business.

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

right? And it's buried under all of this. Awful ness. There's twenty thousand textile employees, right? They unionize the companies.

Losing tones and tons of money like this is bad situation. IT may be a diamond buried in there, but it's burned way deep. So enter one.

bernard. John, eighty n no. As we said, burner was born in one thousand forty nine, in rebate.

Remember, one thousand and forty nine. This is what, two years after dr. Had launched the new look, supposedly his mother, muri, had a total fascination for. Dr, this is the legend the bernardo tells him, that always stuck with them.

Men, I assume his mom owned pieces of, dear, how did he afford that? Well, his dad and renards family, on his dad side, their entrepreneurs, they are not just entrepreneurs, their engineers and entrepreneurs. So his dad, john, ran a company called for seven yellow, which was a quite successful civil engineering and public works construction firm in the north of france.

They employed about a thousand people. I was started by bernard grandfather after a world war one, to rebuild a lot of the infrastructure in the north of france. And the family all lives close together.

So his grandparents live right across the street in rubi. And berardi totally take under the way of his grandfather and grandmother absorbs tonza lessons when his grandfather passes away. I think bran is like ten or so at this point.

Time actually goes and lives with his grandmother across the street. So bern's growing up steped in running this engineering family business, he ends up going for college to the very prestigious, equal public technique. The french educational system is unique, is one of the grand day call, is probably the most selective and famous grand day call within france. It's kind like the M I T year, the celtel of france.

But with the prestige of harvard, right? Yes, engineering is the most difficult and prestigious thing to study at .

any these schools. yes. So especially after world war two in france, engineering is seen as the highest form of education.

I actually, because I was a french ameer, I in turned one summer in france, in another of the ground equals the actually say the equal is attitude commercial, which is the main business granted call in france. And so I got to like, see and learn about this system. Yeah, it's wild.

If you want to enter the grounded coal system in france, you actually, after high school, take another one to two years where you just study for the entrance exams, and then the entered exams are all evaluated blindly. So IT doesn't matter what family are from what your background is, it's literally just your test cores in your performance on this exam that is your entry into these institutions. And then yeah once you there, they're not party in and having fun.

They are working their butts off in the schools. And so that's what burner goes there like this is a very, very different education and background that he's coming from then. So we say these traditional family on businesses are even like the willows.

He is a modern engineer, business man and bread from birth to be so. So in one thousand， nine and seven one, he graduates and he goes to work back in the family business. I think this one actually is a powerful ful after he graduates, but before he goes to work, key, this is amErica for the first time he goes on a trip to us.

Uh, he told the story so many times, every interview.

And on this first trip to amErica he goes to new york.

one thousand nine hundred seventy one.

He's talking with the cab driver. He says he's from france. And the taxi drivers like, I love france and but ids like, oh, h 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, now actually don't know who the president of france is, but I know Christian dior. And I think this story is a poker, but the kernel of IT is true that even all this time later, the brand value in the impact of the even far away in york, you really can't score IT up even though they're been screwing IT up.

You can't kill IT. In other words, the proper nounce might be the most recognizable french asset. Mean, maybe like the iphone tower or like the love, it's a pretty shirt list before you get to deal.

So but that goes to work in the family business back in friends. And five years later, he's doing so well that his fathers, like your goods, to take over a Better retire.

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

You're fully trained. The keys are yours jointly with. This is part of the next generation taking over. He decides and he convinces his father that actually the civil engineering business is not a great growth business to be in and that they should start to transition away from IT and into realistic development and that that's a bigger opportunity for the family. So under barns new leadership, they sell off the old industrial construction division.

They find a successful nitch building, vacation homes, second houses, a nees french of era, and throughout europe. And they do pretty well. They get to a point where they doing about fifteen million a year in revenue, and I would assume much higher margin than the old industrial construction business.

The family is doing great there, like one of the wealthy, successful family entrepreneurs in the north france at this point. And then the one thousand nine eighties come along one thousand nine hundred eighties. And france, where, shall we say, very different than the one thousand nine eighties in the U. S. That is when the socialist really come to power in the country.

right, is like the opposite of the pinstripe suits in wall street in the go go al years of american finance.

So everything we are talking about, the complications with blue c and the textile workers, that's because france, wait around in france, comes to power and IT becomes much more of a socialist country, so much so that they enact a wealth tax in france. And there's all sorts of opinions about whether something like that is good or bad. Certainly, what is inarguable happens is there is an amazing dream of wealth and business talent out of france at this point in time.

All right? So america, here we come.

So bernard moves his family to america.

And this is like my favorite ite weird twist in the story, where burner or know 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 a rap artist or champagne maker or a president, he has something that you want. He moves to amErica and develops palm beach condo. Dos.

yes, he's just like a very excuse to get out. Afraid at developing vacation homes is the family business yeah, he's like evict. There is an opportunity in the bomb beach .

market and not like fancy high rises, like a twenty unit palm beach. Ca crappy condo building.

Yeah, I don't know he was a retire home, but I imagine this is feel like snowbirds from the northeast.

I think so. And maybe i'm exaggerating the kind of graphical but like he did not move to amErica with this idea of getting into launching, he moved to amErica and found what was available. And he says in interviews he was actually quite hard to break into the business community here.

He sort of had all of his connections in france. He had his family lawyer, and he had the business confed dance people that trusted him. Body moved here, and he really had a hard time breaking in.

This is a far cry from the bernard. I know that we all know an either love or hate today, but you're right. He does not break into the elite business community in america.

But despite most of the business activities being in florida, he and his family moved to west ater county in new york. Specifically, they moved to new rochelle and the bayside and his next door neighbor. Or there happens to be a guy named john clues, which almost nobody, I think, listening now will know that name. But at the time, clue was the wealthiest person in america.

which is crazy, right? That's and this is what, in the eighties, ninety nine percent of people listening to the show won't know the name of the wealthiest men in america.

And eighties, you'd literally moves next door. He's like the poor relation next door to america's wealth est. person.

And now he is the wealthiest person in the world. amazing. So what he clues do, this is the eighties in america. What do you think he did? He was an L, B, O guy .

and an L B O guy in the T. V industry. yes.

So at this time, clue was in the middle of doing the largest L B O ever. That point time he was taking metro media private, what he did successfully. And then, of course, like all the corporators at the time, they carved IT up and they sold off all the assets and literally made billions. I think he made about five billion dollars from this, the TV stations that they sell out of this.

You know what they become? I do. And I knew this before researching, because desperately want to to do a episode on this. At some point.

I thought I was gonna a get you here.

The T, V stations that metro media cells off become the backbone of fox.

the of the fox network. So this is so interesting.

We didn't talk about this on the n fell episode, but in the eighties report, murdoch wanted to expand and had this pretty aggressive dream of creating a fourth major T V network in the united states. He wanted to basically create an upstart rival to A B C N B C N C B S, and starts fox out of nothing by buying the assets of metro media. And all those local affiloir tes, for all the new stations become the fox stations.

Yep, from include, which is amazing for so many reasons, especially because it's the best thing that ever happens to the totally. So are no clues. They are never actually close. But berna is fascinated by him.

is like toby of these leveraged biot. They seem to be working very well.

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

What is this american concept?

Yeah, like, wow, he's just blown away. Like, well, this is awesome. I want to do with that.

The french would never do this american corporate rater thing that you're doing where you're conducting business and this very uncongenial way. And if you're able to do something, you're just going in and doing IT and taking what's yours. I've never seen anything like this in france is not how anyone behave.

right? One of the reasons that blue sc became such an help the truss, with all these workers within the textile industry, that the governments like you can't lay these people off, you can't fire them. These L, B, O guys in america, just firing people left and right, selling off divisions, making billions. IT could not be .

more different. alright. So are no now knows of the leverage bio, knows of the cutthroat ties, american business culture.

He's not doing such a good job breaking in in the U. S. He's built these condos. But like whatever, he wants to take the next stage from his family business and sort to turn that into something bigger. He wants to buy something of importance and really blow that up.

And I think he wants to take this concept that he just learned from his neighborhood and in america.

bring back to france. yeah. And so he basically puts the word out. He tells his lawyer, he tells his foxy trust back and friends, i'm looking to buy some.

So he hears to the great fine. There's actually the biggest of all opportunities, the troubled, the second pire of which literally Christian dior is sitting buried within way deep. The government at this point has been Operating Bruce c for a couple years is a disaster.

They're finally looking for somebody, anybody, to come take this thing off their hands. So bernard do his connections back in france. He hooks up with lizards, fare the investment bank, specifically the legendary banker within lizards, and twin burnham, to put together a bit.

Now, lizards in france is kind of like gold man plus Morgan, stanly plus J P. Morgan. They are the bolt bracket all into themselves. They have immense political connections, sort of referred to, especially the time as the french under ministry of finance of the golbin is sort of like the treasury here. IT is crazy.

And so it's fair to say that bernard has this relationship with high ups at lazard because of his family business. He doesn't come from extreme wealth or royalty here and 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.

Yes, I think that's part of IT. There is no way we can really prove a research this. But his first wife came from can even more successful multi generational industrialist family in the north france.

But I think it's sort of implied in written that connections from her family helped to get him until his art as well in into the government to love them, to let him take over a precise either way, no matter how what happens he does. He gets in good with lizard and burn time specifically, and tom is impressed with this Young gun and decides to take a chance on him. So they put together a sixty million dollar bid to take over bsec from the government.

And this stings emerging cash. So the governments, like there are sixty million dollars to take a loss making thing off our hands, okay.

right? Have ging cash, but doing well over a billion dollars in revenue. This is a large asset. The r no family puts up fifteen million and lizard goes out and rounds up investors.

And I think invest some of their own baLances sheet into this for the other forty five million. So amazingly, this thirty five year old, I don't want to say, kid, if you're thirty five, you're not a kid. But in france at the time, like the successful business people, the industrialist of france, they were not thirty five. Maybe by the time you are in your sixties, you could run a business like this. Here's this relative kid coming back from amErica gonna take over one of the largest companies in the world.

crazy. And the thing he recognizes here is, again, very buff desk, 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 dear brand. And if I can do the right things to skinny the business down just to that, and then lean into that, how successful could I make the r once .

I have IT? yes. And this is the big difference between bernard and his old neighbor.

And the reason that, you know, bernard are knows name today, and you don't know john closures, he takes the tactics of the corporators and the lbs to get in, to get in. We're going to tell this whole story. It's amazing.

But his goal isn't to carve up these assets and seldom off and make a lot cash right into the sunset. He wants to Operate the r and build into a gem. He thinks that can be 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 fifteen million dollars buy something very, very, very large and then continue to do stuff like that you know, trading the paper clip for the house over and over over again but eventually just keeping IT all .

yeah the buffer analogy is a good one. I think also he's like clues, but he's also like murdoch. He wants to build fox too. He wants to take these assets, build in the something .

for fifteen million dollars of capital he's put up. He namely has the losses from booz c to figure out how to handle, but also the debt service on the company.

Yeah, so pretty much as soon as he takes over, he calls lizards back in. And they immediately start restructuring, reject. So are now, over the next couple years, does what nobody else was willing to do. He lays off about nine thousand of the twenty thousand dish workers.

and he gets .

reamed for this. The french press dubs him the terminator. This is such a not french, not socialist thing to do. He may be french, but he's like an ugly american coming in. In doing this, he goes from being a nobody to a somebody very fast, but not a beloved at somebody. But IT works within a couple years, the reseed businesses as a whole, the empire is doing about two billion dollars in revenue, and it's back to profitability, doing over one hundred million dollars in profit. And he turns IT around that so fast.

by the way, he went from taking his fifteen plus lazarite five so sixty million dollars to buy something that was losing money. And just a couple years later, he's spitting over one hundred million dollars per year of free cash flow. It's crazy.

Yeah, that's crazy. And then part two of the plan, I know and lizards starts selling off all the old textile assets and industrial assets like he doesn't to run these he wants to or so altogether. The biggest win here is they sell literally the disposable deep division like which has got produce, which is soft in english.

They sell that for four hundred million alone. And then the rest of the textile Operations they offload, they ultimately, they sell everything except Christian dior and the famous boma de artman store in paris that was within the group. In total, they make over five hundred million dollars selling off these assets.

Wow, if I know where an L B O guy, if he were john clues, he would be like, oh, hell, yeah. Mission accomplished. They took fifteen and million of his own equity.

Turn that into multiple hundreds of millions of dollars and a cash flow stream from dr. This is a win. He would go start K, K, R, whatever french equivalent in year.

Open build that. Yeah, but that's nobody wants to do. no.

And do you know how much of dior he owned at this point? I think at this point he formed group y are no, which is his sort of family office so you can think of rupa are no as bart's personal wealth and they owned some percentage but not all of the boot dior holdings .

at this point yeah so the boost c entity itself, I think I been released a gsh after the willow initial bankrupcy. So yeah group are now owns a majority stake in a gosh, which owns majority stake in D R. D R in bomar said the only assets left so there's like what's that one, two, three, four levels of russian doll of legal structure here.

right? But he's got majority economics and majority control in lavona and deal by this point. Yes, it's an interesting thing to observe here the sort of a playbook theme that I want to pull early that the efficient market hypothesis is not exactly correct.

No, I was shocked, shocked to hear you say that .

there are existed in asset here where IT took some work and IT took doing some ugly things. But I was incredibly valuable. And there were not other bitters, or at least there were not other bitterness that the government was selling to yeah.

I think there was one other bitter. And certainly the political influence and lobby from both are no. And lizards helps him get this. This wasn't just like he walked off the street. But yeah, nobody was clamouring for this asset.

Yeah, there were market inefficiencies and then are no create even more market inefficiencies to make IT so that the perfect Price discovery of this buzz empire was not found. But he figures how to had to be 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, idiot syncrude things in that market and the people that own those assets at that particular time.

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

Oh, it's so fun now. He is known as this almost reclusive wealth est men in the world. He doesn't do interviews very often. He used to do a lot of interviews.

right? And he would say, after that, we're super clarifying and illustrative of how we did all this. And so we're not just speculating that he learned this bag tricks about leverage BIOS for america. He actually said in an interview, when you live in a country and do business in IT for some time, you try to be influenced by IT, especially when you do business in the paradise of business, which is america, which I always love, that I just so like, okay, yep, I definitely learned this in america.

The other thing that I think he sort of learned from this first transaction is he really discovers the power of what he called 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 changed different of margins because you're serving a customer that has very little sensitivity to higher Prices even if manufacturing cost cop a little, the pricing cop a lot. And he starts to realize there's a very limited number of brands in the world that are both timeless and growing and then on top of that, have the capability to adapt to modern life without losing the timelessness. And this is sort of where he makes IT his mission once he realized, is that power of the or ways like this is super different than other fashion businesses or any consumer business, this characteristic of luxury and of a truly international star brand that so special think 你 find more of this。

Oh, that's interesting. Maybe we will talk more about this and analysis, but I do wonder if if sl on hadn't done that first kind of saving of the or and is certainly and transition IT from a tied to a person entity to an enduring in brand, this one in the case. But also, even though if he was only there for three years, that brief glimpse of modernizing fashioned luxury within dor, if dr, we're just the new look, would that have been the case with the r or no?

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

OK. Well, let's talk L V M W.

We don't talk about from .

strength to strength for Young bernard. So we're now in one thousand nine hundred and eighty seven and major news in the international business community. There is a huge merger that happens in france.

Two of the biggest, most important companies in the country merged together to form moet hennessy levitan, not lu vatan. Moet hennessy, I know. Is that funny? It's so funny. Yet the compromise was the actual name of the company is moet hennessy, but the symbol that they go by is L V M. flip.

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

Yeah, but IT was not because that was the goal. This is a marriage of convenience. This is not some grand strategy.

The reason that happens is they're trying to prevent take over attempts from corporate readers. All these americans and american style businesses come into e these old french companies. And as a result, deals like this, and this being the biggest of them, they're happening super quickly. If somebody starts buying up shares in one of these companies, which happened with boat hennesy at this, you'll get together with another company, in this case, on another family company. Live at on the families often don't even like each other that much or even know each other.

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

are also a couple hundred year old company. So the enemy I know a little bit about is Better than the enemy I know nothing about.

alright? So we ended up in this shotgun wedding defensive move where everyone thought I was their best option to combine these two family companies. Maybe lets go back to the origins of leave ata and the origins of moez and henney. How did we get to this position?

Yeah and it's super interesting because both of these companies on their own were on great trajectories, was actually bringing them together that killed the family. So it's time with more attuned sy. That itself was a merger that had happened in one thousand nine hundred seventy one between more and don henney henney Connie company watched on the champagne and other beverages producer.

The champagne n market is very fragmented. The brains are fragmented. But I was already starting to console ownership. And so moet had been consolidating that this merger, though, between mode and hennesy, made a tony sence and was super successful.

IT happened in one thousand nine hundred and seventy one, and IT was LED from the moat side by this pioneering guy, alan chavez a and he was the first non family outside manager of motion on and really like any of these old kind of family brands. Now what we're talking about here is different than the fashion houses. We're now talking about other more durable luxury brands, leather goods, drinks, spirits. There's not the same kind of change and turn noa that there is in fashion. And so these brands are truly multi hundred year brands.

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

back to travel a the other consequent of these brands and businesses not changing that much is the families around them outside professional management wasn't a thing in these companies until travel. I came in demo, eb has the first kind of recruit outside manager. And then he engineered emerging with hennesy and is brilliant, makes so much sense.

You're both in the spirits business. This is a regulated industry in most of the world with very important distribution networks. If you put these two businesses together, you know more than double effectively two plus two equals ten, your power in the distribution networks around the world.

So this was a huge business success. He also had the first sight to really invest in distribution in asia for these companies. So henney especially, it's the dominant connect brand all around the world.

But in asia into pay and IT is huge. So he grew travel a the combined revenue of the companies from about three hundred million till, like well over a billion in these ten years, super, super successful. So that was travel a in the moet side heading into this merger.

Over on the louv atton side, the story is Frankly even more impressive. Blue evita at this point time was headed by the legendary on a rec M B A, who was part of the vita family. But he had married in, he was an entrepreneur, professional manager, business man who who had married in in taken over the rains of leva.

He was like living's great granddaughter husband semaines.

That and what he did is Frankly amazing. I don't think it's an overstatement to say that on iraq, M A invented the modern global luxury brand.

And no, that exactly right. Levitan started way back in the eighteen hundreds, literally, the guy 路 ivon making trunks for basically royalty like napoli， the third wife, the impose u gene. The stuff that he would make, and actually not only make, but also pack, because your trunk maker was also your trunk packer, because you had, for women packing their clothes like core sets and also works, a crazy stuff. You had a german and not destroy your clothes.

I believe the position was called the royal. I think IT was like a royal appointment.

But to your point, IT used to literally exclusively before royals. Who else could just travel around the countryside and have a trunk weather loading up all of their goods? He went from making them for nail in the third wife to eber hero he to of japan. Finally, this trickles down to not just royalty, but a rester craters.

Still not like a huge market though.

No, not at all.

But there was a technical innovation that enabled what li was doing.

Did you get this? Let's see. I know a few of them. He got rid of metal hinges and use class hinges because they wouldn't stick out. He flatten the tops of the trunks so you could stack them.

Know why that was important?

Because they were taking trains around, presume.

and you put boxcars I V in of train travel. Li invented the flat pack trunk, and that was perfect for trains. And that was White. He became the royal.

Even more interesting, the trunks used to have rounded tops for reason, and that was because in the rain, in the OpenAIr, the water had to run off.

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

exactly. Everyone else also wanted to do flat tops, i'm sure. But he had the innovation of, well, if I take canvas and then I do some sort of waterproofing on top of IT, then I actually can make them flat rather than round at tops.

That's also, it's also, oh, there's such irony here, very much the anti L V M H out there and probably the most direct cop and biggest arrival to levon is, of course, is what is the logo of ms. And what do they embrace? Horse is horse and carriage.

They literally making sample. yeah. But to finish this trickle down from the emperor is usually to mr.

Hero, he to to capable ism taking full fold. And you've got people making good money. You've got Charles limbo. You've got cocoa l with her empire. You've got various vender belts, became levitan customers.

Yes, that was big. The vender belt. We are really in the living.

right? Yeah, you sort of have luxury expanding from the tiny nitch of literally making stuff for kings and queens to now that at least make stuff for rich people, because there is an expanding class of a new scent of royals in the world and the royals of money. So there's this great line dana Thomas has in her book, the lux have a 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. Gy, since the dawn of humanity right up to the turn of the one hundred th century, the world of luxury has been virtually totally isolated from the rest of the economy, its pleasures and delights reserved for a very small elite.

Practically the entire population were living in a subsistence economy firmly rooted in their rural environment, or living a life of misery and towns and cities without any access to culture. And 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. IT was like there's actually a different segment of society. This completely walled off from ninety nine point nine nine percent of people in the world. And these were the goods personally made for them until global wealth started to become a thing.

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

Oh yeah. So interestingly, if you flash forward through the rich history of li vatan passing down the brand to his son and his son, by the time you get to the one thousand seventies, love the thon is kind of foundering. I think they still only had two stores. This is what, one hundred years or more, since they're .

founding over one hundred years, yeah, paris son needs just two stores.

They did a grand total of twelve million dollars in sales in one thousand nine hundred seventy seven, which two million sounds like a lot. But when we tell you the numbers of what they're doing today, just thirty, forty years later, it's onna. Blow your mind. And so rock me is really the genius behind turning leiva from a two store twelve million dollar business to what seven years later, in one thousand nine hundred eighty four, he fifteen x revenue to one hundred and forty three million had taken the company public. And by the time as rain was over nineteen ninety, he had grown from two stores to one hundred and twenty five.

Yeah, I believe at point in time, IT had past a billion dollars in revenue .

right around there.

You yeah, for a hundred and twenty five year old company doing twelve million in revenue. This guy takes over, turns IT into a billion dollars in essentially a decade, and he and no get into a huge fight and are no kick him out of the company.

yeah. And he really did two things to grow from two stores to one hundred and twenty five and massively grow that revenue. And IO IT.

The first was internationalized. He was the first person to open stores in japan, which would really offer this glimpse at luxuries global future. We'll put a pin in that for now. I think we will talk about IT a lot later. But the other big one is vertical integration. Rock a 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 as well, especially in other countries. They would really only know the customers in the small towns where they had their tiny factories.

Yeah, products like live on were get sold in department stars totally.

And so his big insight was we really should own and Operate retail stores and invest in getting to know customers for the first time and building that direct relationship. So he sort of did vertical and 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.

Let's talk about what the levon business is. This isn't the r this isn't drinks. This is ten twenty thousand dollar pieces of luggage in the ninety eighties. The margins of these things are insane. Yes.

absolutely. So his competitors were all around or to fifteen to twenty five percent Operating margins with this strategy of just going direct to the customers who sort of the original data c he was earn ning forty percent profit margins, dramatically Better .

than the other truncate suitcases kers. This may be Better businesses in software.

They are so good, right? That's the crazy as insight from the whole thing regime, I really discovers what would become the key insight of L V mage today, which is if we do our jobs, right, we can soaked up all the profit from the whole value chain, from designer and manufacturer to distribution to marketing. Like there's all these players that I used to sort to be outsource to and recommended, really starts the ball rolling down the hill of we can be the people that own all the profit polls for the industry. Yes.

that's on the profit side of the equation. But he also is the first person to realize hate, the global market for consumers, for this is way bigger than anybody realizes. He has this great quote that you may read to.

He says, we understood that the world of luxury products had changed. The clients tell that could buy luxury products grew immensely in the nineteen sixty one thousand nine hundred seventies, and we saw this sleeping potential, which obviously that's translated from french and is like a very french thing to say. But who's incredible inside?

You are right.

So back to this ill, faded marriage here when they come together, though, unfortunately for rec, the compounding journey that he said in motion at live von wasn't far enough of long yet. And what had to see was still a bigger company.

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

Yeah, the families had IP od minority stakes in these companies to monitor .

ze their otherness. Yeah and so I mentioned in thousand and eighty four when rock um IPO leiva on, they were doing a hundred and forty three million that had grown to close to a billion by nineteen nineteen eighty seven when the merger talks started. And yet to your point, they were catching up. But no, I had to say was still the bigger business.

yes. So when the merger happens in this new L V M H uber corporate entity is created, it's genl a who takes the chairman position there. Rec M.

A is the number two. So he's still running the leiva business. Shelvy is running the moat tendency business.

There is never any planes to inaginary assets. The Operating companies were going to stay the same and IT did. The entities themselves are still separate. There's just a new parent holding company design to prevent external corporate takeovers. All the families combined owned over fifty percent of the company and the voting rates, and they can prevent corporate takeover vers.

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

Yeah right. They might have been and they certainly would have been if they had IPO the minority stakes for the families monti's. So there's a lesson there, but pretty much right away.

I mean, you can see there are writing on the wall here. These are two french dudes with some pretty big egos. The trouble starts. So recommend me. This is so petty, but it's what IT actually happens.

He has some stationary printed for the new L V M H company in which his name appears above on the stationary travel, a rounds up all the stationary and has IT destroyed. I feel like we're talking about, like, you know, the american revolution or something here. This is ridiculous.

They start fighting in the press like they just merged these companies and recommended gets quoted 啊。 Champagne can be found on the shelves of every corner supermarket. I mean, I literally bought mine at all foods last night, but our letter goods require exclusive distribution.

Now he's totally right, but you can imagine how that lands with travel. Yeah, it's not good. And then early the next year, in nineteen and eighty eight, there is another potential crisis out there.

For some reason, the trading volume in L V M H stock starts rising sharply again, which is a sign that maybe there's a takeover waiting in the wings. Now the families control fifty one percent of the company here. The combined families at this point at their member did these families.

They already 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, l.

va. Mate could be back in play. This is not good.

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.

but nobody really thinks that the structures could stay together, even internally within L, V. mage. So sevel aim and the moet said he's good buds with the C.

E, O of guinness over in the U. K. huge. Also drinks company, a good name, Anthony tenant, he comes to reach me 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 in three and a half percent that should be enough just to give us a little margin of safety here, short things up against whatever is going on in the markets.

But now three people love .

to link arms yeah right now three people love to link arms. But ganis is at this point, professional man is not a family and company. They're very large recommends like three and a half percent share whatever.

What he doesn't know though is that civilian is also working on a big distribution partnership with guinness, just like what LED to the original success of combining more. And hennessy was merging the distribution networks. And as part of these discussions, as they go on, guinness decides wants to own more of L V M H than just they're in a half percent.

What about a lot emerging of safety? What about a safety?

Maybe safety depends on your perspective. So civilian comes back to recommend pretty shortly they're after and says, hey, you know how I said they're going in a half percent. Well, i'm been talking with the Anthony.

We're now they in like twenty percent. What do you think about that? A rev. A goes ballistic from his point of view, and I totally think this is valid. He's like, this is a declaration of war.

You're trying to shift the whole baLance of this group to the drinks side and away from my leather goods business. My other goods business is the jewel here. You're trying to steam roll us said this is the future.

I've got the winning strategy. So he goes out and starts looking for his own ally to bring in the kind of counterbaLance in is on the drink side and he's slicked around his like he lands on the perfect person. Somebody who really gets luxury, luxury brands, he can explain the let good business to and why it's so powerful.

Maybe someone from the fashion world further from possible, from drinks.

And this guy that he finds us perfect. He's Young. He's ambitious. Both he and travel are older.

At this point, he could someday beat their protests and take over running the company. He would understand the lu van business. The perfect candidate, the head of Christian dr. The Young bernard are no. Well, that was kind of a mistake on at me part.

Let's just set this fox loose in our nice little hand house here. The hell house is already a little bit and interest, but maybe the fox can somehow make IT Better.

Really recommend. I should have known Better here because he approaches are no, and he suggests to him, hey, how about we work together here? I'm looking for somebody to coming on my side.

I think you should make a bid for twenty five percent, twenty five percent of lvs stock. And everything is wants tty percent at this point. And the vita family will support you. And together, we're not going to have a majority control over this company, and we're gna run IT together and can marginalized the drink's side of the business.

And where does recommend a expect burnt to come up with the cash to make that bit.

So this is critical burner. Know if he had his eyes on L V M H. I mean, L V H had only just been formed a few months before, but he certainly wanted to grow.

And he had already in his mind this idea, his unique strategy of, hey, there's actually economies of scale and bringing multiple brands together. And I think I wanna do this within my group and the or can be the coronal that is gna grow into something bigger. So he had started, remember, we talked about because of the legacy of brisk and how are no came into the business? There's this russian doll legal structure of multiple entities before you get to the actual Operating of dr, what are no in lizards start doing? They realized 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 iron clad voting and economic control over each of them.

You've got the Operating businesses of dr and lib on marche department store. And above that, you've got a gosh, that former booz coding company. Then you've got burnt personal entity group y or no where he could sell some shares of that on the public exchange, which by the way, this is still publicly listed two day. You can buy this instead of elva ge. So yeah, you totally can free up cash by just selling off minority pieces of each russian doll.

And this generates huge leverage for burnt. 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 you story, of how he turns fifty million dollars into this incredible two hundred billion dollar plus fortune. This is a key step of IT.

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

So burn's been doing this, building up this war chest. He actually does have the firepower to do what rem is suggesting here. Now, when recommend a promising, of course, he's thrilled.

He's like, yes, this is my chance. And what does he do? Naturally, he goes straight away to his friend and mentor and banker and one burn time over IT lizards.

Fair to talk about IT. Well, that was really the obvious thing that rk va. Should have thought about before he approached bernard. Because guess who? The investment bank for the moet hennessy .

side of the business, s was .

working with more always been the bankers of moet tenney. And during the L, V, M merger, lizards was on moet side. So as soon as I know who, again, he's super, super loyal to lizards as well. As soon as he goes to lizard, little start is like, well, you might want to think about your alliances here.

You should buy this company, but maybe you should ally with the person i'm alive with for, yes.

now this is very, very self interested on lizards part. But it's actually also, I think, pretty good advice because guinness, this is a much larger company and has much bigger financial resources. So this art is like, look, if you're gonna fighting in us, you guys are going to lose. This is not gonna work.

So clearly, what's happening here is burnt switching sides from the L, V side, the M, H side. Why does IT matter who he's allied with a day, a day he's just buying shares in the same company.

What we're about to see just that. So lizards sets up a secret late night meeting at their office between the .

three parties. So everyone's in the room.

except for vita cept live, and I know any, the tenant in is really hit IT off. Mean is much larger company, much quick finance or resources. So out of that are no ends up really a lying with guinness. And very shortly there after in july one thousand and eighty eight, they announced that they're creating a new J V together between banana no and ghana is a sixty forty J V controlled sixty percent by are no. They call IT jack robey this new entity and that that entity is going be financed with one point five billion dollars that is gonna buy twenty four percent of L V image.

So enter barda knows majority ownership of an entity that owns a minority stick of L V M H. The market cap around this time of L V H around six billion dollars. So that's sixty percent of twenty four percent of something that's worth six billion dollars, which is about eight hundred and sixty million dollars is the value of his new stake in L V M. H.

So yet he said that you know eight hundred million dollars a ish, that's the capital that had come up with through this warchest that he was doing. But the strategy that are no and lazarre design here is so brilliant because he retains majority control in each of these entity. So IT doesn't matter that he only owns sixty percent of this new jack Robert J. V and ginowan es forty percent are no controls IT once it's saying once the capital in guinness is capital is now just leverage for our no sure.

So it's leverage on a twenty four percent stake of alva image. Why does that matter? Why is that spell dooming gloom for M A?

Well, this is frequent. Terrible for recommend. Remember, he was terrified. Gino sonny, a twenty percent c he thought he had gone and found his ally to bolster his side of the business versus shaver. Get us hold a twenty percent stake.

Now his ally has defected and a twenty four percent stake showed up seemingly on the other side of the company here. So he literally feels like he just got stabbed in the back by this Young guy that he was going to make his protege and probably his successor either. He's not to some like dumb family member here, not to say that family members are dumb, but he's a legend.

Yeah, he's the most enterprising french business man.

So reckon me a he's like, what are you guys doing to me? Like, I built this thing. I built the jewel here and you all are stabbing me in the vaclav scissor. He can .

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

totally. So what does he do? The sad thing is he's basically out of options, but he starts casting about trying to do anything. He goes into the market personally with his money that he had made from his previous ventures and from the live on family money, starts buying up as much L V M H stock as he can. And his goal is to try and somehow a masa thirty three percent stick in the company because by, I think, french corporate law, if you have at least at thirty three percent stake in .

the company into blocking minority.

yeah, a blocking minority, you can block any decisions at the board level. So was literally at this point he's like, f you, everybody else travell here, of course he hated him already gines are no, i'm going to war against you in the market, in our own companies stock. So once this starts happening, are no, he just has no love lost for A M, A.

He and guinness go back into the market themselves with jack air, with the J, V. And this is why guinness is so important. They have way more financial firepower than rama can put together on his own.

So within three trading days, jacko bear the entity, the J. V, deploys another six hundred million dollars into the market to raise their economic holding in L, V, M. To thirty seven point five percent. But because of the voting structure, they don't yet have the blocking minority thirty three percent voting structure.

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.

That's totally what's ending. So burner now is literally on the precipice of taking over L V. A match, which is not what anybody was intending.

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

yep. So now finally, this is what brings travel a and rec M. A. together. They hated each other before they like, oh, said, what have we done? We are both about to lose our companies to this Young guy.

The enemy of my enemy is my friend.

exactly. So they come together. And in december one thousand and eighty eight, they initiated very much like a last ditch effort to try and save their company, is which this is crazy.

So in december one thousand nine hundred eighty eight, remember, the merger that created L V H happened only like eighteen months before the two of them announce without telling our no, and I think without telling gna, see they are gonna break up LV h. They are going to separate the two companies. They're going to essentially a know the marriage IT was doomed from the beginning. They're going to go back to being separate publicly traded company is so literally, they are doing the corporate rather playbook of breaking up the companies to try and save their companies.

To save coral code, try and save their control of their companies.

yeah. To save their control.

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

And this, what are we are now the third or fourth miscalculation that they make about bernard? No, yeah, they think, obviously, they can't do this now without his approval, else he's gonna 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, even for them that he wants to run L V. Mage, they think he wants the dear perfume business back to reunite IT again with dr. Remember red my head by the are perfect business in one nine hundred and sixty eight.

And I think he'd been saying this, I think this is sort of his lip service like, well, that makes sense for me to be involved with this transaction because yours is missing one final piece of the puzzle and you guys owit. And also, this would make him very wealthy, because this whole time, the way that you go buy up stock in the market is you bid IT up.

So all this ownership that he had, A L V H that he'd been so buying with guinness has gone up and up and up in value. So they're like, look, he's gonna get even richer and he's gonna get the perfume brand back to reunited. Seems like this is what he .

would want yeah so recover a and chevaler newly reunited in their desire to break up the company offer are no a parting gift of gifting him essentially back the r perfume so he can regnant his business and then go on on his way. And this is where barry reveals his true intentions, which is he's coming up the king, not because he wants to steal his cept or something like that. He wants to be the king.

He wants L, V, M, H. So he gets this offer from the two of them. And he's like, yeah, get back to on that the next two days in the markets. He goes out and he blows essentially all of his capital, deploys another five hundred million dollars in the next two days in the markets, bringing up to over a billion dollars within a very short period time in additional capital that he's put up. So he's now, what, two billion of his own capital, I think, into this.

And he's, I believe, sold some of the deer and the former bsec entities getting closer and closer to not being the controlling shareholder anymore. So he's specially mortgage that business in order to free up the capital to go and make a big play to win l vy image.

He's pushed in the chips in. He's going all in. And with that purchase, he takes the jacaro bear holdings to forty three and a half percent economically and thirty five percent of the voting rights, which means he gets the blocking minority. And it's done. He has now, in the span of a couple months, come in from zero outsider and taken over the largest luxury complaint in the world.

Yep, large for the time, certainly not large for now. L V M H now is seventy five houses, and L V M H then was three or four, five houses, something pretty small, and obviously waste smaller in revenue. I mean, concept of a luxury can glora was a new thing in the lay ladies.

totally. And achieving IT was bernards explicit goal and strategy in a way that for recommending and travel a was just a marriage of convenience.

Yeah, this is where I think they misunderstood what bernard wanted and what his core motivations were. IT wasn't to become wealthier. IT wasn't to polish this one little fine piece that he had.

He wanted to build an empire, control that empire, and change the face of this entire industry by executing his strategy within that empire. That was none of their motivations. And so I don't think they could have seen how grand his war.

yeah. So once this happens and bernard gets the blocking minority travel, a resigns immediately and just kind of ride off into the sunset. Va, he's so piece.

He keeps fighting. He sees bernard. He sues everybody. The cases dragged out in court for a couple of years that gets super ugly in the press.

Finally, when IT becomes clear that he's not gonna win his court cases in April of one thousand nine hundred ninety, he privately resigns and he walks off the job without telling bernard or anybody else that will be IT. So that day, burner calls levon and the receptionist answers the phone and says, i'm sorry, mr. C, M, A.

Is no longer on the premises and I think they're never talk again. Wow, but to your point, that what they didn't understand, and you know if they had, maybe they would have acted differently toward him for not is not a corporate radar. He has a big vision here.

There's some great quotes from him from this time, from all these interviews he is doing. He says, I told my team the time that we will build the first luxury group like you're in bin in the world. Obviously, IT was very ambitious, but IT gavan's ze the team, and we started to build.

Some people say i'm a wolf. That is not at all true. wolves.

Ves break up companies in the pieces. IT was wrap M. A, who wanted to cut the company into pieces. I was the only one who did not want to dismantle, which is sort of double speak.

If you choose your own definition of what a wolf is, then IT is easy to not appear as one. Was he a corporate radar? I don't know.

He used corporate radar like tactics to acquire control. He didn't follow every single corporate radar playbook. Strategy to cut in all lap afterwards does IT make you not a corporate radar.

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 radar.

I mean, when I witted the other day that he was a corporate radar and new text to me, you like okon is more than that. You're right. He uses those tactics to acquire control.

You are being intentionally provocative.

yeah.

I think the most important strategic take away, though, from this episode in all this drama is something that bernard says at the time about travel a. He's much more conciliatory towards travel a than recommend. They didn't have the huge fight in the same way he says mr.

Chavez a 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 congal ary especially in the era of corporate rating. It's only gonna work if he has iron clad majority control ever everything.

So I think this is sort of worth identifying why levon was such a crown dual of this empire. I me, we talked about the fact that was growing much faster than the spirits division. But why, other than some brilliant business decisions to own more of the margin by controlling distribution and opening up internationally, why is this such a magical product? Well, levitt's business evolve from trunks into handbags.

And handbags became a culturally important item as women's fashion lost a lot of other elements. And the book deluxe really goes into this, that you lose the hat, the gloves. Sometimes shoes become less important.

The handbag moves up from this tiny, little handbag that used to sit on the risk to a bigger handbag that goes around the shoulder. As women, we're doing more with their hands. The sort of this concurrent liberation of women's movement in the handbag is sort of the one remaining accessory that you can put all your stuff in and be out on the go.

And by this point in history, women had stuff, even wealthy women. It's not like they were always walking around with servants in the early days of the levon trunks. You're just going out about your day and you don't have anyone else with you.

You're liberated and you're doing IT on your own. The handbag is this kind of magical symbol of the evolution of women's role in society. To this point.

there's also some great synergy gies here for a luxury group. And then what is the stuff that women have at this point? Make up? Sunglasses, perfume? Well, a lot of the stuff is luxury items that go into the bag. That L V M H is also now selling one hundred percent.

And so on top of all, this hampers s aren't unbelievable business. And this is out of the books deluxe one. They're easy to sell.

They don't require sizing or trying on or hemming or modifying the way you look at IT. And if you like IT, you buy IT is done. You also can justify sending a lot of money on IT because they go with everything, not all purses go with everything.

But you buy one really nice leather handbag. Yes, it's gonna with a lot of outfits. So you can justify a pretty high spend on IT because you're, you know, cosplay. Our for anyone who actually thinks about of that way is .

actually pretty low. It's not like a dress that aware of once, Frankly.

right? They're easier to create and produce when you compare to something like perfumes. The profit margins, as you mention, are astounding. For most luxury brands, the profit is ten to twelve times the cost to make, and at luv a ton, IT is thirteen x. The cost of good sold pretty amazing.

unlike the jewelry business, which is also can be a great business. And L, V, mate has gotten into these things are leather. There are a lot of cows out there.

People eat a lot of beef, right? It's a renewable resource. Yeah unlike the diamonds, which the earth has only made a certain amount of. And the earth doesn't move super fast to make more diamonds. The earth moves quite fast to make more leather.

So the interesting thing about the you can justify the high Price point, the opposite is also true, where, because there are things that you use so often, you can justify buying more of them. And so coach commission this research in two thousand, I believe that the average american woman who purchased a handbag purchased two new handbags per year. And by two thousand and four, that number was four new handbags per year.

So IT is a expensive recurring purchase that requires really low overhead to sell IT wild. And the margin structure is amazing. And one final fact on handbags at levett immense four floor global store in tokyo, o forty percent of all sales are made in the first room, which sells only monogram handbags, walls and other small other goods.

So IT very quickly became the product of luu van. But li vatan is a quarter of the entire empire, even today with the seventy five other brands. So the whole things are the revolves around this nice, extremely branded leather handbag.

And one more telling point to really illustrate this. Way back at the beginning, the whole empire there is your is a fashion house. It's about showing off the newest seasons clothing.

It's capital, you know they walking down the runway, it's custom made and the shows that people would go to originally to show off what customers could buy and customers would take notice. Seven and finance series would be there to get the demand signal from the customers to be able to fund the manufacturer to spend them up. And today, they don't really create this clothing for many people or anyone to order.

They do IT to show off A A branding event. So come to the levitan show and you'll be a first in a levitan experience. And we don't really expect you to buy any other things on the models, except all the models are Carrying our accessory.

So no matter what crazy cool close they are wearing, or person is singing, or crazy light show is happening. I will tell you, if you've not watched a fashion show in a long time, go to look at thor's website and just watch a video of what a show is today. IT is a super high production crazy .

event for like monday night. Foobar.

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

obviously leverton is the star then and now within L, V, and burner totally realizes that and leads into IT. But there is also this element of building a global luxury group that really is his unique, counter intuitive insight that you can achieve very powerful scale economies in the luxury industry, and you just can't do IT in the way you do IT in other industries. The reason is counter intuitive. You do you think about like practicing gambol, or somebody like that in other consumer goods. They have scale economies because they search production, they get a tie, you know, and they make more tired than anyone else, luxury that would defeat the whole thy right.

There is natural dietetic ies of scale, where the more of something you make, the less valuable the luxury consumer will think IT is.

We saw this with the or in the fifties and sixties when the licenses to look at the brand. So even innovators like rq, they never would have imagined that scale economies could exist in luxury like you would never outside its production in luxury.

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

right? Here's what bernard realized though. Yes, those dynamics are true for any given brand. But if you have a whole portfolio of friends, both the raw inputs, materials and talent and people and crashing, they go into making these things that you can scale across the portfolio brands, and even more importantly, the distribution that comes out of IT, the retail shops, the real estate, the experiences, the customer relationships that you can also scale across brands. And so his vision is like, wow, 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 squeak and then have a lot of power over them, will get into that in a minute. We can own our own realistic .

bulk by advertising.

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

Yeah, this decision of where cynical gies 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 ds, to work because his son Alexander describes IT as light synergies.

You only have synergy around negotiating advertising deals, negotiating real state 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 synergy gies, and you will be very careful not to mess this up with the creatives, the person who owns design for a given fashion house own's design period. There is no management medical. And now trying to say, well, the designers for this shop also worked for these three other shops. None of that that has to stay world off.

There's this really important point here that you're bringing up with the people. So bernardo say you'll do this day that the greatest advantage that L V M H has is its people and its talent. And I heard him to say this a bunch of times in research.

I was like, okay, that's like bernard being no public figure now. And like everybody says that, but he's actually right. It's really important, especially here in luxury.

What they realized by building this group is that they can get economies of scale on attracting the top, both creative talent and business management talent within the luxury industry and the economies of scale. That one is like a money thing because there's so much bigger as a group, they can pay more than anybody else. But too, it's a career thing for these people that go work there.

If you come and you work within the LV image family, they are always talking about IT as a family. Even the kids talk about IT as a family. And they say, like, I would don't mean family like us.

We mean this whole corporation is a family. They're constantly rotating people around both on the business and creative side, learning from and working in and getting opportunities to work across all these brands and all these different verticals. That's a much more compelling pitch for somebody than like go work in this family controlled LED single brand business.

Most companies the only way to advances your boss retiring. I mean, where are very fortunate to have worked in, especially in the tech industry or the industry and businesses where there are sort of lateral move to be made alone over the place for watching divisions. That's a fairly modern concept, and that's what burnt applied here, where you can sort of move up by changing houses without your boss retiring.

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

Yeah, we should give credit to our now also for pushing the vertical integration much further. Then on reaction, I did so recon. I 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 lux xury brand stems from in sort of the design and manufacturing, having a sense of place, an origin and story. And so li von had started doing a little bit down the path of what dordain deluding its brand.

They had outsource seventy percent of their production. So well, they didn't do the licensing that you are, did. They were having a manufactured in a bunch of different countries with varying levels of quality.

yeah. And if you're trying to sell twenty thousand million handbags.

that I can work right? So after he realized control, he bought that all back in house and triple the number of li von owned factories from five to fourteen over the next decade. And he is this wonderful quote that describes both sides of the house really well, which is, if you control your factories, you control your quality. If you control your distribution, you control your image.

Okay, let's double click on that too, because you're so right. Rec on me a had innovated and started this controlling your distribution. But I stopped that we're gona do our own retail outlets, what are known N L, V mage does. And this really just hollows out the global retAiling industry in the especially department stores. I believe they learn this from japan, where this was an accepted model in the japanese department stores. They realized now that they have so much scale by having all these brands, by the way, we should say, over the next ten years, L V, M, H under bernard goes out and they acquire sellem, they acquire bloody, the acquire kenzo, they acquire their, they acquire the way, they acquire more Jacobs. They're getting .

all these brands, fans totally.

They quire watch brands, quire luggage, brands.

tag hoe. At a certain point.

they like fifty, sixty, seventy percent of the products that are going into department stores take here in the us. Like a nord drama and ema markets had like they go to the department stores, to the retailers and they like, look, the old model where we sold you are goods wholesale and 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. And this is the store within a store concept. We're going to pay you rent. We're going to lease space from you for a boutique within your department store. We're going to the emitter we're going to have in 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. And lord.

yeah. And the really interesting thing is this all started happy in the early nineties before LV mature went on their shopping spring. And so the department store folks were like, what do you mean you're just going to do this to us with blue von and dear, which even though was owned separately, banner sort of treated at all like one empire, and sort Operated as if I were rolled into L, V.

Image, which IT would later become, but not for many years, but would sort of act this way. And over time, he sort of one the battle where department source said, okay, well, we need your stuff in the stores to bring people in because you're starting to spend all this money on advertising. You're the products that people want, your the brains they want to associate with so we can have to capital late.

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

And IT all works into the strategy. If you think about what you're doing when you're selling luxury, you are selling the experience. You're not selling a piece of leather, you're selling a dream. The idea that you would outsource the selling process of that to some else is kind of like an athena to what IT .

is you're doing, right? To your exact point, they can buy a other hand bag that fulfills the same jo B2Be don e fro m som ebody fas ter, cheaper. They are buying in to the levant dream. And incorporating a little bit of that dream under their life and identifying themselves with this token. And so you need to provide the best possible way for them to do that.

To put a final point on IT, they can go by the same physical product that says li va, on that is a knock off, wait easier. And for a way, last night, total, logically, the only reason you would go buy an official li a on bag is the dream, the experience, yeah, too quick. Other things, while in the midnight ties one on this new least 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 gonna go to all of the nord stream in amErica and you're going to be like i'm in at least space in all of your locations. So if you're an individual brand, you don't have the scale to do that.

But now all the image, they have the scale and the scale advantages to feel to do this, that's one. The other thing on the retail side, they also, during the nineties, go out and acquire some retailers. They acquire sea, 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 geography. Now they can fully on the whole chain. The duty free shoppers story is where it's just a real quick k side bar for folks you don't know.

This company was started by chuck feeney, who probably like one of the most interesting and amazing humans that have ever lived, he took the capital that he made from that started general atlantic, the private equity firm, the whole goal of which was to increase that capital, to then give IT away through atlantic philanthropies. He's still alive, but he gave away like all of the money in his lifetime. It's an unreal story.

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

an enormous part of the business. And the house by the duty free shoppers story, in the checking I story, so cool. He did IT all anonymous ly until very recently. One last fun little thing on this that we got to say, do you know who designed the duty free shopper's logo? No, this is like giving Better than the enron story.

No, I don't.

Andy war hall designed the duty free shoppers logo.

That's crazy. Isn't that crazy? I didn't know he ever .

did any logos, right? Literally, andy warhol decided a wild, amazing company.

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

So in another great book that we read to prepare for this called the luxury strategy, there's a great quote, which is premium means pay more, get more in functional benefits. Luxury is elsewhere. IT signals the capacity of the buyer to transcends needs, functions or objective benefits.

This is how luxury brands are different from premium or super premium brands. Beyond the experience they bring creative power, heritage and social distinction. I think this is a really good place to start, because this is probably the most classic definition of luxury where there are premium goods, which means you pay more and you get more utility like objective value. And it's not necessary a lindor curve like apple iphone are the best of 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.

Yeah but IT is a premium product.

right? It's premium. It's not luxury by this definition.

Yeah exactly. This nuance is so illuminating to be able to will understand this. You start seeing IT everywhere when you think .

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

And those two things, I think, get to stick down into this concept of the dream they are by. And this is a little like 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. Yes, for ri is a luxury brand. When you think about that, you like, oh.

I totally get that. There are many things about for aries that are worse. Then even like my moster C X five way way were 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.

totally. And if you wanted to upgrade the product that you have, you could buy a lexus S, U, V. And that would be a premium.

S, U, V, and you would pay more for IT and IT would be Better than your monster, right? But you buy a for ory, you're gonna pay twenty times, thirty times what you paid for that maaster. And it's gonna be worse, right?

And handbags are such a good example to to, because what do you need a handbag to do? You need IT to like zip on on zip. You need all the functions of IT to work. You need to put your stuff in IT, and you need IT to not look too bad.

And when you go to target and you buy something that thirty five dollars, or when you buy something from liberton for twenty thousand dollars, it's actually quite difficult to find a twenty thousand dollar lu a thon bag, but maybe of air messenger beggar or something, the function is actually identical. So all the value above the cost of the materials, at least sort qualify for luxury. Cocos l puts this really well too, which is luxury as a necessity that begins where necessity ends.

I love that. I O is like that.

I never heard that .

quote before.

That's great. Mark 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 signal, until you feel a certain way about yourself.

I buy that, but I buy at 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 as IT is a deeply human thing to signal your standing in the world.

And everybody is signalised in different ways. And 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 M S broken bag where like it's not marked, you'll notice luu a on has LV s everywhere.

But there are other brands that choose not to brands something so that only people in the tribe can understand why it's so valuable and luxurious. I don't know. I totally buy the argument that is an essential part of humanity.

And I think especially if you think about luxury and fashion as being two different dimensions, we talked about this a little earlier in the episode. There is luxury fashion for sure. The is a great example of that.

Chanel is a great example of that. But that's only a small part of what luxuries and is kind of harder to understand and Frankly, harder to monodist versus durable letter goods or cars. Those are very clear cut examples.

You can really understand intuitively, at least for me, greg, Better the difference betwen a luxury product and a premium product. And then there's also the derailment of IT. Like a key aspect, I think, of luxury products is that their value and status is durable over time, where so much of fashion IT is the opposite of that. If you buy a ferry, for example, there is a very good chance that, that for area is going to be worth more in the future than IT is the day you buy IT .

and not for its utility, right? It's because other people have bought into the dream that this is a valuable thing totally.

If you buy a broken bag, there is a very good chance that, that is gonna a good investment, whether if you buy a purse from target, that is going to appreciate ninety percent a minute you walk out of the store.

And it's so interesting because that is both about the durability of the materials, like that's a story that is sort of often sold to justify the Price of luxury goods, but actually that makes 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 Linda IT has been worth something for a long time. So IT will be worth something for a long time. And I think that, that is the most important thing for luxury brands, which is why, when you look at all this stuff, that banner dono has gone out and bot, they are from anywhere from the thirteen hundreds to the eighteen hundreds 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.

Yeah, totally. So here's the .

interesting thing about that bernards definition of luxury. And I save this one for last intentionally, is the combination of quality and creativity. And bernard actually doesn't like to use the word luxury outside of financial communications.

His son, Alexander is the same way. He in particular thinks about these, not as luxury y brands, but just brands built by incredible craft man at every Price point. And he hates this idea that luxury means things for rich people.

He also hates the idea that people are buying these finally crafted goods just for status. But I think that represents the shift of the business that elva h is in some of the things they make our luxury. I mean, if you're buying a twenty thousand dollar lar li vitale bag or trunk.

That's a luxury good, but there's lots of things that they sell that are actually expensive premium where it's about the craft manship, the crashed manship is so good, this durable thing will last forever. The creativity that went into this sets of apart from anything else in its category in a way that literally provides value to you. And I do think as they address more and more people with more and more brands and more and more Price point, there is a lot more about these products that is actually entrepreneur. And I think the way that the leadership of the company talks about them, the durability, the crash manship, those are signs of premium objects, not luxury objects .

of that idea that L V M H is both luxury adult premium within the same conclusion. Ate is a great point to make as we transition to the next big chapter of our L V mage drama here, which is just so delicious they made a whole movie out of this books. Movie is so create.

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And David sent you. And thanks to friend of the show, Christina anta CEO, all acquired listeners get a thousand dollars of free credit. venta. Com slash acquired, all right. So before we get to guti in the two thousands, it's probably helpful to know about the massive globalization that went on to get us there in the seven to the two thousands there.

Are you saying that the chinese consumer market became a thing?

Yes, but actually the japanese consumer market became a thing first. So in the seventies and eighties, there had finally been enough infrastructure built after world war two in japan, economy was soaring. Japan also had this characteristic, where they have, for thousands of years, had this reference for fine craft ship.

So as their economy develop, the metal class emerged their sort of prime to receive luxury. IT was this incredible hot bed, especially when louv athon first entered the market to sell handbags, I think, two thousand and six mark, where forty percent of all japanese people owned a vital product. wow.

And extremely branded monograms everywhere. By two thousand and eight, all luxury goods period were sold in japan. An and another thirty percent we're sold to japanese traveling abroad, especially in hawaii.

So that meant that japanese people bought half of all lucky y goods. Wow is wild. The globalization story around what happened, a luxury from the seventies to the two thousands. And then the next chapter after that, which is like a whole order of magnitude, Moore is china, which I think i'll put a pin in for now, because I think we can about IT more as IT relates to modern day.

L M H, yeah. But just a defocus sense of scale. I think before the pin demise, china was the largest luxury market in the world, right?

Yes, definitely was the number one revenue driver for L, V. image.

All right. Well, like you said, what's close up the nineties in style with duty? This is so amazing, and this is really like the one big, big fail. And IT IT truly was a failed for barden. lvmh.

Everything we were just talking about, with luxury, with other goods, with handbags, with li von and then with the strategy of building a portfolio of brands, there are a couple, not many. You can count on maybe the fingers of one hand, the very natural other brands you would want to go acquire to add to this. And gut, of course, is very, very top of the list.

Oh yeah, if you're thinking about the star leather goods brands, it's basically like by two thousand, the ones bernard owns, gucci and a mess, that cut of the landscape.

So at the end of the two thousands, L V M H had the perfect, perfect opportunity to buy GUI, and they totally let IT slip through their grasp. There is this unbelievable vanity fair article written by brian burgh, who was one of the co authors of barry, into the gate that comes out concurrently. As this is all happening, he's literally gets access and talks to everybody.

Bernardo, beauty folks, it's called gut and goliath will linked to IT in the show notes. IT is so great. So in the early night is gucci. Despite being a fable brand, best alia, later 88888， china had become this incredible disaster.

I have watch the house of gucci movie this week.

I mean, there's beetles that happen in the bedroom room. There is murder like it's a disaster.

I love you casually throw that. And I don't want to exploit the movie for anyone. The protectionist does get murdered.

And IT is the guy leading gucci, and his last name is gucci. So I guess there are spoil lers here. But unbelievable story. And oh my god, this is all unfolding as bernard is growing LV images revenue from four billion, eight billion, nearing twelve billion in two thousand. And now suddenly he's got this opportunity for the very best thing he could possibly buy to add, the empire is literally killing each other in the streets.

literally vender's each other.

and somehow he fails .

to actually take them over, oh my, as the family is falling apart. Investcorp, the private equity firm, comes in in bias first to fifty percent, taking the business and then ultimately end up buying the whole things they own, one hundred percent of the business. So by the mid nineties, they've suck about two hundred million dollars into this thing. It's totally falling apart. We talked about the brand illusion at deal with the licenses gucci this point had, I kid you not, twenty two thousand different licenses like toilet paper.

you can see guy like on the street and you'd have no idea if that was a counter fit or if something of that quality was actually gucci.

Yeah, totally IT was so bad, but these brand names of such value, and this was an obvious target for l image to scp up. And in fact, bernard goes in talks to invest corp. And reaches a verbal agreement in the midnight to buy guti from them for four hundred million dollars.

Investor gets a two extra turn on their money. They get rid of this problem. L V H gets this grape.

And they would have essentially been like stealing gucci, about four hundred million for what gucci became.

I mean, L V H wasn't the size IT is today, but four hundred million for god. Six, take a fire on this thing.

The parent company of gucci today Carrying does thirteen billion in revenue.

Yeah, oh my. Why were didn't pull the trigger on this is like unfaded mobile. But as he gets into diligence after agreed on the deal, he backs out and he tells invest corp, very famously, the duty is actually worth nothing.

Oh, boy, to see you regret that one. So invest court here. Now they're like upper create without a pado.

They've got this company, this brand. The family has destroyed each other who's gonna run IT. They tap the guy who had been lawyer to the family and then became C E O of gucci america.

the o desole.

the o desole. Total legend. He was familiar with the business.

He'd been a lawyer, but kind of Operating harvard last school guy total. Maybe he can save something here. So they became C E O of the whole company. And he promotes the last real designer that gucci has left on the payroll, a thirty two year old junior designer named tom ford, the creative director of guti.

You keep saying all these people's names like Young people getting promoted in a house, but I actually know them from their own opponents.

ous house that they had later, man. And this team, damon, tom, as they come to be known in the industry, they are like a phoenix arising from the ashes. So ford takes a huge risk.

Google time, ford, gucci, the thousand nine hundred ninety porno shek is the a term that becomes used to like the way you win in fashion is you take crazy risks and shock value and uh, people go nuts for IT like overnight after time for its first collections, gucci revenue doubles. They get back to profitability. So is the end of thousand nine hundred and ninety four, when bernard walked away from the deal by the end of one thousand nine hundred ninety five. The brand is so hot that investcorp IPO s the company on the new york stock exchange and IT trades up to like a three billion dollar market cafe.

Oh my god.

insane. But I just just got to be totally, totally pest at this point.

swing.

But he gets another by at the apple because just like we've seen with all these businesses and the families like bernt said, if you're not the primary principal shareholder in your business, you're vulnerable. And here's dm and tom, they are outsiders. They are not the family.

They don't know in this company, you know, an invest core bounded. They just IPO IT. The whole equity of the company is free float, public stick on the new york stock exchange.

So this is the perfect set up for burner and L, V mates to run their playbook, come in and take over the company. There's a great quote from ford in the family fair ticket. We were just sitting here waiting for someone to take us over IT really bothered me.

IT was just so frustrated. And then in june, a nine and a half percent outside shareholding stick gets disclosed by a large european luxury company. Everybody's thinking like dominant.

They're for sure. Burner is gna come make a run at this company. It's not L V image. It's prada, the fellow italian LED goods company, only afford they're this has gotten just be a front for L V age.

Like something weird is going on here couple months later, january one thousand nine hundred and ninety nine. L V M. Finally does show up.

They take a five percent stake in the company they buy on the market. Bro interviewing are no here. Rates that are no was adamant, but the plan was not to attempt an immediate takeover of gucci.

He was worried about whether the gucci turnaround can last, and so instead he wanted to build a stake and get on the board for a few years and then call from our no, then maybe we make a bit. And this is kind of rational, like, good. He was worth nothing a few years ago.

Damon, tom have totally turned IT around, but they have been proven that this can be lasting here, right? So guti routines, Morgan stanly to help them here. And they advise time ago that probably what's gonna happen next is burner is gona go to pda.

And by the good, he says the day on from them, so they should go back to proa and, like, get them to be an ala. But this soil doesn't do IT. He thinks there would be a sign of weakness to go to product because he thinks words gna go back to bernard anyway.

So he doesn't do IT. And of course, what happens within twenty four hours the news comes out. L.

V, M. H has acquired proud is sharing guy. They now own fifteen percent of the company.

One might call us a creeping takeover.

Creeping takeover. Is this all they called in the press? Then off this quote is so great, he says, to be embarrassingly ly candid.

We didn't think through our initial strategy very well. We were caught completely by surprise. They will take over professionals.

We spend their time figuring out how to sell more handbags. You can deal like he really doesn't want to sell a bernard. yeah.

So meanwhile more can can stand these like pulling their hair out. They're got got to do something or you're gonna get steam role. So they're like you we've been talking to L V M H.

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 twenty percent diva goes like twenty percent. He at fifteen. I don't want to voting more of the company.

Like what I deal is that you got ta find a White night and somebody else to come and invest in the company and keep elva image away. They start calling every other luxury and fashion CEO in the industry. Nobody's interested.

And this is weird, like gutties on the rise. Why would these other industry is? Why would nobody be interested in investing in guji?

Did someone plays on the world at home, put the word out what's happening here?

And then, like more weird stuff, started toughing a couple times, like twice. He doesn't say with you, but the to go gets close in negotiations, the companies interested, and then all of a sudden L V M H comes in and buy some more stock, write at that very moment. And then the negotiations and buro interviews are no, as this is going on, and he says, are no grinds. So I asked about this through our bankers. We knew exactly what was going on, he says, of the sola's aborted moves, the people who refused him called us.

I mean, I 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 pocket. Or if bernard shows up, they're gonna be loyal to him because they either are scared of him or want something from him in the future.

So at this point, the solo and forward in gucci are desperate. And one of their lawyers at the comes up with what sounds like a pretty crazy idea that he's like, well, if nobody outside is gonna buy a huge black of gucci stock and save you from LV image, what if we do is on the inside we can create an employee stock ownership plan and ease up.

And what if we just give the ease up something like twenty five percent of the company? This is like very much a kind of crazy last ditch attempt, even more instantly is like, no know about this one, but is like, right, let's do IT so the decides like, okay, we're onna do this. We need a paper trail that we're not totally acting against all shareholder interests in depending ourselves against delphi image.

So he gets in, touched with bernard and says, hey, i'll tell you, the whole company buy at now Price of eighty five dollars a share trading IT about thirty five dollars a share before this whole like curve all started. Eighty five is a high Price. Yes, that is asking far, but he needs our nodes rejection to show that he's acting.

And shareholder here aren't, of course, rejects IT. So guti hits the nuclear button and they create the ease up, and they issue at twenty five point five percent of the company. Now L V H is shocked because their understanding from having studied the files on this is that if you're traded on the new york stacks, you can do a transaction for twenty percent or more of the company without a alleging all shareholders and b getting a special exemption. It's a shareholder vote.

basically shareholder vote.

And I think from the stock itself, what they didn't know is that there's a uppal. Foreign companies are not subject to this rule. They are subject to the local laws of whatever country there incorporated in. In this particular in, you know, previously invest corbon version of duty happens to be incorporated in the netherlands where they can do this. So they do this and kind of all hell breaks loose.

Everyone's pissed, everyone's in a terrible position because now L V M H owns a lot of a company that is trying to hurt itself. So they have a lot of capital on the line. They mechanically can't take IT over. And so they're like, okay, let's let's call the truths. Can we just figure .

out how to get out of this? They sue gucci in dutch cords, but there's still a big problem. There's no money here in this is so it's not like gucci getting a bunch capital that I can then go used to like bulls to the company. This is like a one time shot.

They can fire so somebody else could still come in or L, V, image could come back and start buying on the market and say, like, okay, we don't care that you do, do do us we're onna make another run so they still need a new investor to come in. And at this point, Morgan stanly 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 france. Swan, P O, and this is the birth th of L V M S. Biggest arrival, caring.

So now started. His career is a timber trader of all things. And then he got into retAiling.

He's kind of more like a closer to see and button than bernard. Now here in france, finites definitely not a luxury guy, but he's also a Morgan stanly client. So the bankers put the two of them together, the som, po and ford.

All china hit IT off. They are talking after, and ford says in the vanity fair re article that he did solo are talking after they meet. He says, pino was perfect, a nice man, obviously good to as people.

But his greatest asset, as he saw, 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 peo. Obviously not what bernarda was going to deal.

So the hammer out a deal. And in the next few days, they agree that peo is going to invest three billion dollars at seventy five dollars a share for forty two percent. Of duty and .

that's ten hours cheaper than what they offer. Renoir.

yes, but the so and ford are going to continue to control the board. And as part of IT, they're going to cancel. This is thing. And then they're like all agreed in principal on the deal.

And peos, like I got one more thing I think you're gonna like I was thinking anyway about buying sanoh es beauty division, which has a couple assets that I want. But buried within IT is sort of the reminds of a label you might be interested in called eva cell, that is now owned by yenoki. And i'm thinking about buying IT.

And if I do that and we do this deal, how give you guys you've said learn and you can run out, ford says. He asked, did I want IT and I said, f, yes, if all is the number one brand in all the world, they're so Better. Arena and LV mates, all of them together. Now they're like, work.

Can I go crush these guys so they anise the deal? And for art goes nuts. This could not have backfired more spectacularly.

He had the option to buy IT on the table for four hundred million dollars to buy gucci. Missed that. Then he thought he was gonna cute and do this. And instead, he just created an incredibly well capitalized direct competitor with its own legendary fashion brand within IT.

Yep, brutal and caring to this day is the number one rival. I mean, when you look at luxury groups, you've got elva a, which is a monster doing eighty billion in revenue. But then you look around, you've got caring, which is much smaller, but the closest at thirteen billion in revenue and reach month, which has we've been talked about IT yet.

But as a swiss company, they own cardie and small of things doing fourteen billion in revenue. So everyone else sort of down around that range. There are some other family owned players not in this category but in jewelry.

So rolex does thirteen billion. You've got channel, which does sixteen billion, but that's privately owned by the family. You've got brought a much smaller four billion in revenue. You got, of course.

emese, which i'll talk about in a minute. I think they're about ten billion.

Yep the rider on ten but creating formidable luxury group competitors yeah caring is that smaller but that .

yeah they are the clear number two. But when it's all over, L, V, M, A still owns nine percent of the company, even though peno escaped in and bothered and is going to transform IT into caring the three parties, P, O, L, V, mage, gucci, they all negotiate for like two years, until finally, crazy enough, on september eleven, two thousand one, they announced a deal in the mourning paris time. Before september element happens, the image will sell its duty stake in two tranches, and because of the appreciation in duty stock through all of this, they will end up making a profit of about seven hundred and .

sixty million eos, which LED dime to go days away to remark. Even when he loses, he wins totally.

which, you know, it's upset as a homework of bernard although I think if you were to ask him today and he were, to be honest, he lost here. Even if we made seven hundred and sixty million years old, he lost on this one. Yes, the solely in ford eventually do clash with peno.

So they kind of number one thing that they wanted from him to stay out of the business doesn't happen, maybe predictably into dozen four. They leave and they started tom ford international. That itself becomes a huge success.

That just got a quired last fall by S A laughter for two point eight billion dollars. And that two point eight billion dollars, that doesn't sound like a lot compared to the other numbers we're rowing around. But from a start up brands to acquisition and you know was at fifty and eight years, that's pretty awesome.

So this gucci, we've talked a lot about the rise of or know an l va image. And this is pretty much the only time so far that they weren't successful. Even then, they made seven hundred million dollars and this whole time had been generating more and more and more revenue.

I think in two thousand, they did twelve billion in revenue that would continue to grow to close to two by two and ten, and up to forty in twenty seventeen. And more recently, right before cove IT hit, they are right around fifty five. And then I mentioned, of course, closer to eighty today. So on the one hand, it's a miss. On the other hand, they were plenty productive during the wife .

is kind of like the nfl, missing social media. IT is a mess, but they're just fine. right?

right? That's a great comparison. All right, David. good. He was in some ways, the White whale, but there was another White whale and wearing, I could to tell IT in full detail, because I really do want to just do a full air mail episode at some point. But we got to talk about our .

MaaS a little, that here, gucci became the core of caring, which is the little brother to L V M. H M. Is the anti L V M.

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

Yes, there's one brand. It's not a family, a brand. There's no economies of scale. Weren't you telling me of a text that they like, don't even use .

computers in the business? correct? Gucci uses computers to model new designs. Armas definitely doesn't, or at least didn't doz of the writing of the book to ocs about ten years ago.

The other thing that they don't do is use any assembly lines. You'll get a batch at leve a ton of a stack of twenty sides of a handbag to sew a certain piece of stitching on, and you'll do all those. And then someone not deliver you another batch of MaaS. The very same person takes IT from raw material to completely finished without any economic scale of the assembly line arms as crash manship. And of course, but of course he does.

So right, as the gucci drama is ending for arts starts very quietly, buying little, little stakes of arms on the public market, owning control Better family. But they had floated, just like all these other families, a small twenty percent stick on the public market. But whenever he gets an opportunity, he buys a little bit. He doesn't want to disclose that a team has just had .

this disaster with guy, right? So he keeps that sub five percent.

He is at like four point nine percent. And he uses other entities and equally derivative bed with other entities, to look, have the rights to stock that they buy, but not have a LV mages name or anything associated with him. This goes on truly a decade. He ends up buying most of the public float of hermas, which is crazy.

Yeah, he had fourteen point two percent by october of twenty ten, literally a ten year period, slowly taking little bites through sub city areas and through equity swap.

Finally then, like you say, an october tony tani gets announced. The C E O at that point time of makes a very famous comment that you can go look up about rnr knows intentions that we won't say here on the podcast.

not on a family friendly show.

that a family friendly comment, let's say it's a extreme voices of his displeasure, what is going on. But the nettie IT is l mate doesn't win again, and they never really were going to hear. This is the difference between the R M S situation and the gucci situation.

Gucci was like a fail. They should have won. They were never gonna arms.

Although armees, they did get up to twenty three point one percent in twenty thirteen.

they did. But I think, like I said, that was pretty much hundred percent of the public float.

Alright, there was no path to getting to the thirty three percent necessary yeah.

I think at one point or means almost got delisted from the stock market because because there was no longer any trading in the extreme. yeah.

The interesting thing about this one is that IT actually gets shaken out. The french courts, so in twenty four teen in a french court ruled that L, V H had to sell down its stake from twenty three percent .

because IT was illegal, how they mass their identity in acquiring the stake.

But the net of IT is they had done some of IT through group. They are no, and some of IT through L V A H. And so group, I know, had ended up with about eight percent, and the rest was owned by L V H.

So the court orders L V M H to distribute that out the shareholder. So awesome little dividend for all the L V H shareholders. And what group are no does with there eight percent is they use that to pay for the twenty five percent of dior that IT does not already own.

Yeah, this is the minority stake way back in the day that they had IPO of the or to health finance buying in the L. V H.

yes. And so of course, just like down this oasis group are no added up with about five billion and profit from this whole thing. Even when he loses, he wins. And so they end up with more control over deer, which then ends up just getting rolled in the lvmh.

Finally, in twenty seventeen, the holding company group are now gets to go from thirty seven percent to about forty eight percent economics, and I think somewhere like sixty three percent of a control, A L V H, by basically doing stocks swap. So now there is a problem solved where neither L, V, M, H, nor d or nor group, or no on any more L M S. And because all of this has appreciated since two thousand and one when he started, bernard o has now solidified control over D R and L V M H for the first able future.

Yeah, well, he, I can try into the picture. He makes you all of this, besides simplifying the structure, is about five billion dollars in profit. And the kicker, because of the way this all happened with the stocks swap free IT was all tax free. Believable dum to soli had a rate, even when he loses huge.

Yeah.

her is the incredible company is like a hundred eighty billion dollar market cap company today.

crazy. And IT trades at a crazy multiple two. All of its multiples are like double the rest of the industry. I think L V H S P E actually trades pretty close to like a tech company, like big tech at something like four and a half times sales and twenty four times earnings. Airms trades at forty eight times hurdles and thirteen next sales yeah it's a market .

cap is way higher than Carrying a rich manner. And these other companies.

yeah.

all right.

let's bring this one home. alright. One big thing that happened right before coved L. V. Image says, you know what? I think we're going to make the biggest luxury acquisition of all time. We are going to pay sixteen point two billion dollars and we're gona buy Tiffany three .

times the charm with these big deals, right?

yes. And this one is particularly important because tiffanie is american luxury. There's not a lot of luxury brands in amErica because there's not a lot of history in amErica related of to europe pe.

And Frankly, every time the americans try to start something, there's some kind of fast corporate transaction. I mean, tom ford is actually a great example, lots of value creation company cells pretty quickly. Maybe IT was fashion more than luxury. Maybe you know there's just a lot of like IT. Turns out tom ford is not going to be a five hundred dear brand either.

It's kind of against the american business culture, right? Like here in entrepreneur, you started something and especially in this industry where it's going to take fifty, one hundred years to make A A hundred billion dollars and and you can sell IT for a few billion dollars. Why wouldn't you do that exactly?

Get the cash of the family coffers, and you can compound at another way. So tiffani is a big deal because IT is kind of the only american luxury company started by Charles Tiffany. any.

He's worked with the U. S. government. He's worked with major sports leagues.

the nfl.

Tiffany e makes the vince in party trophy. In fact, a vice president at Tiffany SAT down with Peter rosel himself and sketched out over a lunch the design of the trophy. And of course, they don't make IT today.

They make the M. A champion chip trophy, major 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 leverage, biot is coming in buying our crown jewel.

Hey, we're a big tent country here. He can be in amErica and any time he wants.

that's right. He posed with trump and taxes to open a new levon factory there over the pandemic.

That's right. So there are starting .

to do the tiffanie deal. And of course, it's L V image. So they're going to exercise some tactics, one of which the pandemic has hit by this point in mid twenty twenty.

They basically retrained. L, V, M H says, you know what? Instead of sixteen point two billion, we'd like to pay fifteen point eight billion.

And Tiffany ese pierce, they're like, why are you doing this? They're like, oh, tiffanie is mismanaging the company and so it's losing all this money now that IT should have made. So we think it's worthless and you're like, what do I determine sheet? And so the whole thing kind of evolves.

Tivy starts issuing dividends out to its shareholders before the change of control happens. So now L V H 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 that needs to go on pause.

It's like you can help himself you think would learn a lesson from it's four hundred and twenty million .

dollars or something that they are talking about here. No, it's for the only company he's interested in buying in america. So ten months go by, they finally do the deal.

IT is at bernard renegotiated Price of fifteen point eight billion instead of sixteen point two. But there are no family now owns Tiffany. And my god, has the business transformed under their own ownership totally?

I mean, the biggest and splash st symbol being the huge marketing campaign and new faces of Tiffany. J Z N B N C.

yep. And that campaign with the basket, a painting in Tiffany blue.

Yeah, oh my gosh. So perfectly execute. I mean, there's so much controversy for all sorts of reasons around that, but you hate what Better press to generate for Tiffany .

and the campaign around not your mother's Tiffany. They're insulting the entire existing customer base in order to try to get jensie adoption. They're showing models wearing things you'd never imagine seeing in a Tiffany.

They took this behemoth and they turned IT into something kind of rugged and in your face and Alice, no talks about this in an interview. He's like, yeah I mean, and i'm not quoting in here in pair freezing, it's not really insulting to the existing customers, ed, because like the mothers don't want to be mother's either. They want to be cool like the daughters. So no one wants to be your mother's Tiffany y IT.

Turns out there's actually some deeper stuff. All this that I think is worth going into here is one thing we fast forwarded over to get to the end. Here is, in the late two thousands and early twenty tens, there is a huge amount of controversy in the luxury industry about what to do about black culture embracing these old luxury brands.

All right, the whole Crystal thing, which, by the way, Crystal was originally created to be the champagne, specifically for the russians, to like luxury for royals, happened in every country.

Yes, totally. For a folks that don't know, there are some great articles that are in our sources that will linked to about this. But this was actually part of my old these suspect in printed and writing about the champaign industry.

I was wondering if you're going to reference.

yeah, but J. Z. LED this boycott Crystal. Because the then managing director of lyre, which don't Crystal put this statement out, he was interviewed in the economist about what he thinks about rappers drinking.

Crystal was like, i'm sure do parana on would love to have their business. They can have IT or something like that. I'm percy, and this is amazing. What happens next? So jie leads a boycott, the rap industry of Crystal. He goes out and he acquires another small campaign label called arman, the brin yak three brands IT as asic of spades launches the aces of spades campaign brand in his show me what you got music video, directed by f gary. Gary, fast forward to twenty one, right?

As B, N, C, N, J, Z are becoming the global face of Tiffany.

who comes in requires fifty percent of ash of spades for unannounced by probably hundreds of millions of dollars. L V M H, L V H. Meanwhile, one of the very few brands that they have built.

Internally within L V A H over the past couple years is 3 with riano。 Rihanoff is on J Z S. Regnant label.

That's how the relationship gets started. Fenty is this unbelievable success. They originally started IT with concept that IT was going to be like all the traditional mazes.

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 two billion in revenue. I think at this point.

yeah, fenty beauty is definitely one of the recent success stories.

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

IT is interesting. Is L, V, M, H? Are they intentionally being inclusive? Or does burner just always know where to find money? He definite always knows where to find money, and I would say he also knows where to find artists.

That's been an interesting shift toward celebrities in luxury, where of course, celebrities have distribution. But I think L, V, M, H. And a lot of the other companies now are recognizing the sort of dual benefit of working with a celebrity music or film artist. Because they are a creative person. They do actually know how to design product that will appeal to the masses, so they can sort of be the Christian dior and they can be the natural apartment.

Yeah mean, I think the Kelly cosmetics and Kelly pave the way here and then fenty is been even more successful .

than that has IT really?

Yeah, based on everything I could find in the research, I think fenty beauty is significantly larger than Kelly cosmetics at this point. Wow, wild rianna is now a billionaire and is the wealth est female music artist of all time significantly wealthier than Taylor swift, and it's all because of fenty beauty.

wow. And just to wrap on Tiffany here, the financial performance is exceptional as well. It's very quickly going to become a great financial deal. Tiffany, I was acquired a little over two years ago for the fifteen point eight billion dollars that we mentioned.

And Tiffany just announced add earnings that they will surpass a billion euros of profit, which we're going to equate with dollars since you've been close several last couple years, which is double what the business was earning at acquisition wow, just two years ago. yes. So this now means that L V M H paid just thirteen x earnings for Tiffany is pretty .

impressive. And so ban, like he had a minute ago in twenty nineteen, right before the pandemic, L V H as a group did about fifty billion in revenue. In twenty twenty two, they just reported earnings.

They did almost eighty billion in revenue and margins have expanded. They did over twenty billion dollars in Operating profits. That's like close to a thirty percent ebit margin across the whole group. That's a wild. This is not a software business.

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 we've grown from.

I think they've doubled revenue in the last five years and they would ve doubled the profits in the last four years. And this is a company at eighty billion dollar revenue scale. I mean, great. And some of that's been through acquisitions. So it's not all organic growth, but they clearly have a machine that they are putting these brains into when they acquire them.

It's such a validation of the strategies that started back with recommended travel a and the then burnt no added. And like the transformation of the industry is doing all this. And there's Carrying out there and there's reason out there and there's a miss out there. It's not like they own the whole industry. There's still so much room to run, whether do if they can pull off some of these acquisitions or take share whatever, like people don't realize how big the luxury .

industry is and especially if they expand in a luxury travel, like right now, they only have the small acquisitions that they ve made, but luxury travel is huge ude.

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

So here's some more numbers just to contextual ize. The business today, it's two hundred thousand employees across all the businesses. There's seventy five houses. There is nearly six thousand stores around the world. And David, you mention the eighty billion in revenue and twenty billion and profit.

I think that profit margin, that twenty five percent Operating income is actually depressed because of how forward looking they are, are no is reinvesting more into like fix cost of stores and landing the best talent and signing long term deals, especially doing long term ad deals. They're investing in building all the brand equity across all seventy five of these brands. They could be cash flowing much more than they are.

one hundred percent great point. All that has, of course, very famously recently made burner the newly recorded wn wealth est person in the world.

two hundred and eighteen billion dollars, up from, I think, seventy six billion before the pandemics. So quite a .

Spike as elan and basics have been going down. He's been going up.

And if he flashed back ten years ago, he was war, thirty billion dollars. So that's quite the transformation from thirty billion. There are many thirty billiards. There are no other two hundred billionaire.

Yeah wow, man, that's .

compounding seriously.

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

right like strikingly, strikingly competent and very, very smart. And it's worth knowing each of the kids it's reported that they each have a twenty percent stake in the holding company, but there's a mechanic where they can't sell their shares for thirty years. So there is sort of an interesting longevity thing built into that regardless of the Operating position within L.

V M A itself interest well, I mean, i'm sure given that bernard has mastered fully exploded famous clinton ing in other brands in the past with a notable exception of duty. But ah he's not even that happened to his own .

family anytime soon. IT appears to be pretty genuine to that. They're close. They see to spend lots of time together. They've all mentioned family dinners, often growing up.

Alexander often mentioned how he sort of got an MBA from berth, always talking about the business, but that doesn't apply. Like dad was always at dinner, wasn't just raised by mom, you know. Well, I do think there is actually like a very close family dynamic here.

And unlike other succession battles which are highly reported and you know I think the murdoch ch families is a great one. People leaking things about each other. This seems ridiculously emiko. And I don't know if it's just very french and proper, but they all seem to have great working relationships with each other. Yeah.

a striking thing about the kids in the family is that at least most, if not all of them doesn't seem like they were gifted these positions. They came up through the business and quote, quote, earned IT, but earned their positions in much the same way that burner did in his own family company like Alexanders. A great example. He went to the technique. There is a blind admissions test.

I also think it's funny. A lot of the background of a lot of the people that we've talked about on this episode, people won't really be familiar with. If you look at Alexander resume, IT looks like a lot of yours listener's.

I think that's a really interesting thing to point out. He would to college for computer science. He worked in mickens. He worked at K, K, R. Before going into the family business. I mean, IT is interesting how much he has sort of weaved into the american tech business world right enough about the succession stuff for now in Alexander.

And I actually think this place of leaving IT with Tiffany and starting to speculate on the future is the right place to catch us up to now for the history and facts. And let's go into the analysis section. And there's a lot of analysis to do in this company. So i'm pumped about IT.

This going to be so fun.

We, of course, have our playbook section. But before we do that, let's do power. And for folks who are new to the show, this is the section based on the book hamilton helma route called seven powers, or really asked the question, what is IT that enables a business to achieve persistent differential returns or put another way, to be more profitable than their closest competitor and do so sustainably? And there are seven of these .

and seven powers.

yes, the seven, our counter positioning scale economies, switching costs, network economies, process power, branding and corded resource. And David, one thing that I would propose doing for this episode is actually doing this exercise twice, one for L V M A itself as a business versus its nearest competitors, which really are the other other holding companies. But then doing that for a brand and L V M H.

let's do little.

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

are going to be really different for the holding .

company level versus the bread. Super different to your observation earlier that bernard realized that luxury groups could be much Better businesses than luxury brands and have completely different methods of profitability and sustainability. I think that was super astute. And I think this is .

one sort of teasing apart yeah we totally well, I think that as we talked about a lot earlier, the episode at the holding company level, there is now no doubt in my mind that L V M H has extreme scale, economy, power.

I'm glad you bring that up. Bernard has a great quote we have been seeing for the past twenty five years a growing desire for high quality products and an acceleration of buying power. Nowadays, the internet makes this planet much smaller.

Product launches now need to be global in order to be successful. When you start something today, you usually have to start IT all over the world at the same time to be successful. And you need to be able, able to see going on everywhere instantly. This requires higher investment, which gives us an advantage.

There are so many dimensions to this. And again, we talked about a lot of him 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.

right? Do you want the L V M H rate for the pillbot? Or do you want to pay the rack rate for the pillbot?

I think the people element is huge. Are you going to attract the best creative and management talent to X Y Z family brand adversus L V M H?

Good luck with that. Yes, you are super right. I think it's in negotiating contracts in capital. Everything about this industry takes way more money to get something off the ground than IT used to and Frankly, to compete.

It's the exact same thing that bob eggar realized when he took over disney and actually why he did the fox deal as he sort of realized there is going to be very few players left standing in this reorganization of content and distribution. And why he wanted to make disney one of the few scale players is because you need scale to be successful. And I think he realized that I was worth deluding shareholders to go and make a bunch of acquisitions in order to accomplish that scale, I think, but not realized the exact same thing about luxury.

There is also another dimension to this, which maybe you could jump into the advertising economies of scale, but that, I think is maybe something a little different, which I, we call cultural economics of scale that have come out in, especially in the social media. Think about the J, Z, beyond a relationship and the rianta relationships.

These are relationships that extend across multiple L, V, M brands that i'm sure are incredibly expensive and require a lot of capital, but is not just the capital, right? Why did J, Z and beyond a choose to work with Tiffany? Would they have work to a Tiffany for this campaign if Tiffany any were still under its previous ownership? Like I don't know, maybe not maybe.

but your right that makes IT more attractive, right?

Their business partners with your space without vm, their business partners indirectly with .

fenty with L V H. L V M H has now also built a corporate brand around reinvention. So like what jane rona trust, the old dog, old Tiffany es, when they said, hey, we want you to be the global face, and we're gonna totally blow everything up and sort of appeal to a completely new set of people. I don't know if you do that deal, but if it's burnt and alex center or no and the rest of the family and proven success.

well, I think the calculation for J, Z, beyonce, a riano, you know, anybody of that stature is not a purely financial one in these things. I don't think anywhere closely. Their brand value is the most important thing to them.

And so they can be very certain now partnering with an L V H group brand or a group of brand. So with an L V H, 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.

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 while someone goes, uh, someone got paid like if you have a really high and actor come and advertise your new startup jewelry brand, people go weight what and they don't trust your brand.

Or let's not say I start up. 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 erms wanted to do a campaign like that.

I don't know. I think that's a big risk for a celebrity of the statue of a beyond to do that. Even something, a brand is great as her mez theyve never done anything like this before.

There would be such a radical change for the whole organization. Where's L V mage? Even though there was a radical change for Tiffany to do this. That's just another day in the office for group bel V H.

An interesting point.

Like they know how to manage that.

right? okay? What besides scale economy is exist at the group level. There is no counter positioning. I don't think only .

to the extent that the whole idea of a group of brands was different, but the rational behind doing so scale economies other brands could have. And dib create their own conglomerate. See, Carrying in rush moon in the lake. So IT wasn't unique.

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

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

in the same way that a warn buffer t built corporate brand around burch's health way by saying it's Better to be acquired by me than someone else for the same Price.

Yes, I totally buy that, which is ironic given the history of the meeting burn's acquisitions. But yeah.

totally right. Ill be interesting to see if L V image shows up on more consumer facing things. It's very boring, like it's just a serious L V M H. And I actually have been working on the good album t thing for this episode, and i'm having a hard time figuring out what to do with IT and listeners. You'll be able to see whatever I came up with after this, but it's so no one recognizes elva image in the broader world yet. Should I use the vatan logo so people will click on IT? Should we use the L, V, H logo to be the most intellectually honest, even though most people don't know what IT is, sort of an interesting knni m and I think L V M H is trying to solve that by building the L V M H brand in the business world.

which is definitely happening, like there have been moments in the past where bernard was the wealth est person in the world. And I don't remember anywhere near as much, hey, being made about IT as there is this time.

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

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

right? In practice, it's about staying independent or selling delby image like when Christian luberon eventually does decide that he's gonna sell or George, our money does or will see if I MaaS ever does IT seems like it's gonna be L V ih.

yeah. Even just related. This is outcome of the scale economies advance try. But if her mez ever does sell, which maybe you won't happen for one hundred years, but might happen in one hundred years, who else is gonna the capital to buy them?

Yeah okay, power at the brand level and let's k study and leave at on.

Oh yes, this is great because this is the direct competitive example of her mass right there.

You actually, let's put IT a different way, what exists besides brand power .

for the brands?

Because the brand power thing is super obvious. I can go and get something of the existing utility at target, or I can go to love the town and they serve the same utility at ten thousand x Price points. So I am willing, willing to pay more for something.

With that mark on IT, I have two thoughts. I don't know though, if both of them ultimately collapsed under brand value, but I think might be an element of corner resource here in that you think about like what's so important for these luxury brands is heritage and experience and the physical story of the goods. And those are people, materials and physical locations and those accorded resources. Champagne yeah or like her m hasn't live on with the is that the products are made .

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

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

right?

To have have to debate the finer points .

of that one.

We maybe there's a little bit counter positioning here too. I mean, like I do think that maz and levon are directly counter positioned. I mean, our maz is counter positioned.

are directly .

positioned against each other. Yeah, no, no, no.

I don't think blue fitton is at all counter position against her mez. I think the other way around IT definitely is blue von is pretty mass market.

And that lets be honest, there's some delusion risk there too like you can buy a lot of products that have the lvs or the lay of name on them totally like LV is very in your face with the monogram and the flashiness and arms is very deliberately not in your, if you do not know, you know yeah.

but man is a good business.

So there are just incredible businesses. Anything else you get any arguments for any the others?

no. But that section could annoyingly be mb up by luxury brands. Power comes from brand.

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

the alleged do IT. So the way that I want to do playbook, the way that i've been sort of thinking about IT is what should you walk away with this episode and have as insights? Or are things you learned or things that could be applicable all to your business? I think one of the most interesting ones is bernard had the insight that with scale economies, there were going to be massive profit pools in the luxury industry.

And we can talk about the sort of trend of why luxury became big in the nineties today. But when he had that inside, he Operates the business in such a way where he made sure those profit pools all collected with the properties that he owned. So department stores have not had a great twenty years. Faceless manufacturers in china have not had a great twenty years. All the profit dollars gets freezed out of those.

especially in the american, less familiar with the rest the world. But the straight of retailer has been .

designated great.

If you're not a walmart, target or amazon, you basically did if you are just a popularly retailer in amErica or if you are a speciality retailer or in america, in which case in certain cases you might be doing extremely well. See, for example, home debo.

yep. So I think that one of the bigger things for me is he just really figured out how to make sure he owned not only the locations of the value chain like brand that they were going to recruit to, but the brands in particular that all the profits were going to recruit you job. I think another big one is realizing where to realize synergies and where not to.

As Alexander puts, that we have light synergies and specifically around media buying, real estate retaining talent. There's also something that we really didn't talk about that much, which I think this is a good place to bring up, which is around advertising. So before the seventies, luxury brands didn't really advertise.

And if you think about why it's who their clients were, it's that there was a benefit to their clients finding them. There were fewer of their clients. Global wealth was Frankly just smaller.

And global ization haven't happened as much yet. And so there weren't the stores in japan and china. The internet didn't exist. He didn't need to, like, make a big splash everywhere all at once. Literally, these companies would spend zero dollars on advertising, whether now L V M H spends over a third of their revenue on marketing.

Broadly, L V H is the largest lugger's advertiser in the world, and they spend what's a third of revenue, over twenty billion dollars a year on marketing. It's astonishing. And this creeping trend from the seventies to today of realizing that, oh, we do need advertise, or at least IT massively benefits us if we advertise, sort of begged the question, what do they advertise and what they are advertising is, interestingly, not the products that is differently in luxury. Everyone else, advertisers, is their .

products the dream.

It's always the dream. Luxury advertisers the dream. I actually can't tell you live on product names, but I know levitan.

And so if you were to ask me, oh, you have a lot of money and you'd like to go spend IT on something fancy, what are you going to buy? I can tell you brands, but I cannot tell you any of their products. And I think that, that is really interesting difference about selling the .

dream was in the premium and alter premium industry, which, as I said, is very different. Let's take apple the most successful example of that. You know all about the products.

Oh, you should go buy the expensive iphone because IT has a dynamic island.

It's like literally the opposite. They brand feature of the products like a largely brand is never onna brand a feature of a product, right? They're almost never even going to .

brand up product. Luxury brands are about convincing you to opt into their lifestyle and their dream, and the products are secondary. Dub, another thing that we haven't talked about that I thought was worth bringing up in playbook is that at L.

V, H, and maybe this is some lip service. IT was always lip service at apple to some extend around not doing focus groups. The marketing department is the same way that Steve jobs always thought about a marketing department.

The designer is a creative person who has a genius idea and works with a team of implementation to make the product. And the marketing only gets involved when IT is time to make that product desirable for the world. But at least in bern's view, you sort of create crappy products or uninspired products when you commission market research studies to ask what people want and create IT for them.

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

Yes, which again, i'm not sure that that's particularly useful outside of creating luxury goods. Luxury is the intersection of art and commerce. IT is literally like creating something that is so close to art, except that has to have some function.

That's what makes something a luxury good outside of being pure art, which has no function and is all about either buying to signal or buying to interpret for your own beauty, for that sort of luxury, for self concept, who you're talking about early, as soon as I I D like some function. Now it's a logs. Very good.

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 IT is a creative products industry, there are other creative products industries such as the movie industry, the music industry, the publishing industry, the video games industry, and the parallels and lessons across all of these are very transferable.

I think, and in particular, I think one innovation that we probably didn't do enough justice in in history, in fact, that burner brought to the industry and L, V, mage brought to the industry is the professionalized of business management within luxury and partnering with creatives. And that there is a art to the business too. And that is so applicable in many things we ve covered on the show, like in the media industries, that is the nf, that is C A A, that is disney, that is the video game industry for sure. I think I was like a big aha moment for me and doing this like, oh, the luxury industry is actually very similar.

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

Yes, maybe this is speculating a little, but industries could come in here. But I think also IT works both ways. I think if you're going 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 here, right? There's totally an invention in that leadership structure. You look at at tom ford and adam is a that is the right structure to lead a house. And IT is interesting when you come from the small family owned heritage of its an artist 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.

Yep, totally gets super telling that tom ford was in all the banker meetings and I don't know, we didn't talk to him, but I bet the monico is like he's my partner. He's going to be there.

I think that's right. The one beat that I want to hit in playback here, I want to phrase you as a question, which is, what were the dominant factors in enabling bernard to go from fifteen million dollars to two hundred billion dollars in equity value?

Oh, man.

and what were the big .

leaps that's such an enormous leap to go from, not the founder of any of these businesses, fifteen million of capital invested to two hundred billion.

One takeaway could be leverage works. When you're right, you can take on a lot of leverage. And I don't literally mean leverage. I'm not sure if it's like borrowing money in pay against the dead.

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

right in different forms. When the businesses do become enormously cash flow positive, it's not a problem that you took on leveraging, in fact, that only multiples your returns, lovering your return is a great way to increase your I R. R, which is effectively what he did.

And what we don't do and acquired is tell the stories of people who were wrong in their leverage and did a bunch of crazy stuff and then went out of business. And in fact, most of the time, nobody cares about those stories. We don't even know of them to tell them. And ron was this unusual example. There are famous, huge, catastrophic blowups, but most blowups s are small and insignificant.

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

right? The most interesting thing is that a story like L V M H is the story of compounded. He was one of ten that survived the first chapter, and then he was one of ten that survived the second chapter, and then he was one of ten.

And suddenly he's an outline ish one in seven billion case of a person who managed to turn a very small amount of money into the most money in the world. And of course, we're going to tell that story, but someone was going to accomplish that story. I was gonna happen to someone.

And so I think about this a lot on acquired, like, wow, yet another very, very unlikely set of circumstances that should we learn from the lessons? Or was this going to happen to someone? And so you sort of make up its survival by us, make up the fact that, well, if you did all these things that they did, you too can become like .

that for sure. There is a lot of survival by is here. I suspect that burner did have a view that almost nobody else had, which was that both that luxury brands and particularly like levitan, let a 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. And so even when a brand falls on hard times, if IT has enough heritage and provenance, you can bring you back lake, let's do this as a thought exercise.

Could you permanently destroy the arm's brand, or the levitan brand, or the Tiffany SE brand? You could starting ly temporarily destroy IT. And we told a few of those stories on this episode. But could you permanently forever wipe IT from the face of the earth?

You, you would need that to be bad for like sixty because I think you needed to be bad for an entire human lifetime adult memory. yeah. I think some of the reasons why a gucci survives is because even if you don't know gucci good in the last ten years, there are a lot of people alive who recall IT being something prestigious, but yet they're hard to destroy.

well. And I think the likelihood that would happen is extremely low because whatever a company is currently managing that brand would go bankrupt at a certain point or would change controller whatever.

There's just too much incentive now for somebody outside to come in and buy IT and recitation and like the shelf life is so long, you know yeah I think you're rate you would have to have a dormant period of a human lifetime to permanently kill one of these brands. And I was certainly the case with dr. That banner, I think, recognize more than anybody else.

Yeah, I think you are going back to the question of how did he build so much wealth in this period of time without starting as a hundred percent equity owner of something which has founders get wealthy? I think the dear transaction and him being correct in how much value there was in the dear brand and all the assets he could sell off, I think that was a huge multiple very quickly. Guy think he went from a network of fifteen million to a network of actually we can do this calculation because when was he worth eight hundred million from his share in elva age oh when .

he put eight hundred million into um the J V with guinness that was nineteen eighty eight and he bought bu second D R in thousand and eighty four four years right so .

in four years he turned fifty million and eight hundred. So a lot of the compounding happened right there.

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

right, getting a great deal from the french government and really being able to spot that market and efficiency so erotic that.

like the socialist french government, essentially gifted the greatest business financial success of all time and .

tweeted with this. But it's so deeply ironic that the greatest lbo artist and history is a frenchman. This ultra competitive american culture that were in where we pride ourselves on GDP above all else, and this great competition that we're in called capitalism, and that this is the right way to produce the most value in the world, but are now actually produced the most value in the world.

I guess the europeans just, you know, think in longer time scales than anyone else.

right? It's crazy OK.

I've got a couple of quick ones. One interesting one, particularly in the letter goods business, I think, is that luxury turned out was a business that can scale. And I think the jury might still be out a little bit on luxury travel. I think it's definitely part of uh, L V H and luxury concrete strategy to add travel and experience luxury to what they doing. But a hotel is never gonna a be like leiva in that you can make a lot of other handbags, and a hotel only has so many rooms.

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

Yes, definitely. So I do think there's like this kind of interesting industry analysis aspect too, like if you're gona enter an industry like of the kennet scale and again, intentionally or not. But now I got that or really right with like you like I can scale OK, that's one.

The other one, this is interesting. We'll see now in the period that we are currently in. But I think this played out pretty tellingly in the great financial crisis. Luxury is fairly recession resistant.

I ve been wanting to talk about this.

yeah, yeah. Which is another deep paradox about luxury.

While true, luxury is recession resistant. But whatever L V M H is turning out may or may not be. Here's the thing that is an inarguable statement.

Some percent of what L V H makes is luxury, and one minus that percent is not luxury. And I don't know what those percent are, but they definitely have a class of things that they sell to people who are billionaire. And if the market drops, fifty percent will still be billionaire or multi hundred millionaire. And that impacts their desire for something by approximately this zero percent. And so they will go buy IT at the same Price or more and are completely insensitive to that.

I think, again, you can finally look to the car industry as a really clear example of this. I don't know. I ve ve looked into IT. I kindly doubt furry sales are impacted that much by recessions.

right? But someone who's going and considering buying a four hundred dollar levitan clutch, I imagine that whether not you currently have a two hundred thousand dollar your job or were laid off from a two hundred thousand or your job pretty dramatically affects what if you're going to go buy that clutch.

And so for the class that they sell to, that is not wildly Price sensitive on everything or who, if their stock holding dropped fifty percent, becomes concerned and changes their behavior that affects their business. And I don't have a sense of how much is the sort of completely Price and sensitive true luxury segment verses who falls into that more massage segment. And I am conflicting two things here.

There is the like mastah segment, but then there's also the products they have. They are actually entrepreneur ther than being luxury. And so people are going to evaluate them on the merits of how useful are they. I think luxury travel is actually entrepreneur vel.

I think there is a different I think IT depends what type of travel you're talking about. I think if you're talking about travel block, where there are thirty six rooms in swiss, observes the first development, I think, yes, I don't think that's going to be impacted too much by a recession.

That's fair. But the fifteen hundred dollar and nine four seasons somewhere or belt.

which of the required like that? I think the average delmon room he has probably in that called a thousand dollar and I ranga that's for surging to be impacted, right?

And is because people are literally evaluating the value of is IT worthy, 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 their value in staying at this very fancy hotel or can I get an almost stands good experience for five hundred dollars less?

I'll go do at for sir. Yep.

the last thing that I want to bring up that related to this idea of luxury is recession resistant, or at least true luxury, is which, of course, would be your bulcke on L. V. H.

Over the next few years is the unbelievable timing that bernard had with the huge increase in global wealth. Yes, as he was building this business, the internet happened, which connected us all and made IT possible to announce these products to the whole world. IT also made a whole lot of people really wealthy.

I mean, LV image did very, very well on the dock 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 middle class to having a ton of directionally income. You look at the amount that the japanese and the chinese and in the near future, and today the south koreans are spending on L, V, H.

goods. There's this perfect storm of the creation of global wealth and desire to do something with that wealth to sign your level of taste, that none of this would have been possible without all of that going on. Completely independent of aris actions.

Oh ah very interesting. You text to me some photos of luxury add campaigns in the nineties and I was fun like at them but we are looking them. We like, oh, well. Clearly, the target market for these advertisements is japan, not america.

I think that's right. alright. So moving on a playbook and closing our analysis. We are replacing grading. We're talking about IT with bear and bull .

case from here. We're killing .

our darlings here. Yes, exactly. Here is the bare case as see they're too exposed to master and they gave take my hands on that over the course of the episode.

Or perhaps put another way, they have attracted a lot of customers with entry level Price points, at least entry level for these products where they are selling a certain amount on value, not purely on luxury itself. And those customers haven't all graduated to their high Price point, high margin products yet. And so a lot of the raw dollars that they are doing in revenue are more subject to a recession. I don't know hard to know how much.

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

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

realizing that they're .

not a they're not i've been a lot of those people .

were buying luxe goods.

Another one, this is very short term, but luxury goods were on a terror during COVID. Obviously, china sales fell off a Cliff as everyone was locked down. But globally, the laundry market grew twenty two percent last year and is projected to slow down three to eight percent next year.

So that sort of a short term impact on luxury sales. I don't think l ve really thinks in two and three year time frames. And then the two more that I have in the bare case is, one, despite buying seventy five brands, there still isn't one that is as good as the original brand in the portfolio. And so the fact that, that is responsible for a quarter of all revenue and still makes the product that is the best business, I mean, fashioned leather goods is fifty percent of all of elva image, but half a fashioned leather goods is li vita. That's not exactly a bare case on the business, but IT is interesting .

to observe paralo thing indeed.

Or I, David, do any other bear case?

No, I have nothing dead.

thanks.

You welcome as one thing, how long are a tickets to get that right?

bulk. We've talked about luxuriates recession proof. If we ve talked about these brands are insanely durable. I think we haven't talked about is Jenny is buying luxury three to five years earlier than millennial did, which I think is pretty interesting.

And also especially under Alexander's leadership, L V M H has been much more open to collaborations then they have in the past. You see the sort of Tiffany and nike. You see the J Z and beyond, say, you see some of the stuff they are doing with, I think, the rise of sort of luxury street wear and sneakers among Jenny is gna end up playing in LV mages favor yeah.

the Tiffany e nike collaboration. One, the shoes, like.

pretty awesome. I want .

the whistle. yeah. Two, did you look at the places?

Yeah.

like five thousand plus for these sneakers.

That's crazy as luxury. They do the exact same thing that one hundred and twenty dollars sneakers do. Another bull case is, well, there won't be another china.

The current trend with south korea is crazy. They did seventeen billion of sales in the luxury industry in south korea last year, so they've definitely got a market there. And south east stages developing quickly.

India could be a strong luxury market. So there's a lot to be hopeful there. A lot of people also think there is a lot more running room in china, especially as they sort of emerge from the pandemic.

Another one that I mentioned earlier is L V H as a brand itself and sort of building that corporate brand to be the acquire of choice. We ll see if that happens. But that definitely is able case. And then my last one is really around family control, that if they are able to do this succession, well, IT does allow for very, very long term views and leadership at the company up.

That was the one thing I was gonna d on bad case if you didn't cover IT there. We haven't got one into detail on any of the children, but I think a lot of narrative around l recently has been like, oh, session thing, wow, you know what drama who's gonna take over? The five kids are pitted against one another.

Like to a certain extent, some people have thought that's an overhang on the stock, but hoping that can do IT. I mean, I don't know, maybe they are just very front and very good at putting for the 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.

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

And even if IT israel, I think whoever wins is probably gonna continue to do a really good job.

right? Yeah, that's a great point. Well, before we do carve fouts, I did want to do a little betting pool on succession now that were here. But let me lay out my what should we bet, which we bet down?

Yes, which are all bit. We're now five plus hours into recording. I don't know what time this will be in the edited version, and we have not yet brought up the famous Steve .

jobs could um yeah lay that on us .

yeah so burnout and Steve jobs were friends. They ve got to know each other. I mentioned at the top of the episode that heavy, which was a big influence on Steve jobs and apple IT was particularly around the advent of the apple retail stores that jobs sought out. Barn in the image, get his advice, maybe came friends, and suppose library tells the story that as they are getting to know each other through all this, one of them said to the other, you know, this iphone that you're launching, do you think people are going to be using IT in twenty thirty years and jobs s supposedly said, I don't know, but i'm pretty sure that people are still going to be drinking dump in Young jin years.

You, I love that all right. Then the bed is on the bottle. Dumb between .

the uni on who become C O O L V image? Yes, who's you back on the eager first?

right? So i'll go in order, starting with delphine, who is a round age forty seven right now. Who is the C E O of dur, the cartoon house, I think with delphine and and one the two oldest, they will stay on the board of the image.

They are the only two that are on the board right now. I think delphin continues to run deer. I think anti manages the family holding company, which does include some other outside investments continuing to the third child.

I think Alexander is my pic and would be an awesome C E O for L V M. H. 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 is, amazingly, only thirty. But I think what he did with rama was, unbelievably entrepreneurs.

He sort of independently went and worked with that family and said, i've been using your products despite taking ship from my dad for ten years for using them, I think they're great and then sort of cultivated their relationship and then ultimately waited for the remote family to call him and say, we are looking to transition and sell the business. There is known when we rather sell to other than you. And our one condition would be F L V image wants to buy IT that you be the C E O.

And I think then he had to took IT upon himself to go and sell L V H leadership on that idea and that company and is now evp tifany in in this pretty spectacular transformation is happening at Tiffany. So my think is definitely Alexander. I think frederic gene are too Young.

They're like the babies of the family right now. I think they're twenty four and twenty eight, and they each run watches. So john runs L, V, images, watches.

And frederic, who is twenty eight, is the C. E. O of tag lawyer. And he was named that at twenty five.

Yeah, crazy.

So Alexanders my pic. I mean, he's seventeen years Younger than delphin, so maybe that would be crazy for him to go.

But I just up and soon to extend the .

limit of the C. E. O. To eighty. And actually, bernard put the limit in place of seventy four.

whatever. IT was so great, so great. nobody. He's trying to hospira right right now. Yeah, it's funny. I mean, I think that the press definitely thinks that the delphine is the leading canada.

That's what I thought to coming into this. But after watching as many talks in all those I could.

I was like, I think that delphine and and twin burnit's children from his first marriage, I think they are more comfortable speaking french than english, and the Younger kids are more comfortable speaking english. I agree with you though. The interview that Alexander did at oxford is awesome, well worth watching.

Will linked to IT in our sources. He's incredibly compelling, clearly understands the business, who is very core. So I think he would make an amazing C E O. But because it's a bit i'm .

going to go a delphin. Ah right.

And I can also pick alex on here.

That's not much of a bit. I mean, you could and then we just have to exchange bottles.

Let's make an .

interesting, alright, great, great, great. On the record.

Fouts carrots. Let's do IT OK. First, I have two carvels, one that I related to the episode, and one not. The one not is the game craft podcast from our friends mitt asi and Blake robbins over at benchmark principle, the not so secret penchard k principle admit the a retired uncle benchmark partner.

They have put together an amazing limited package 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, I don't in the luxury creative management business, how we've been talking about, but about the video game industry, there is nothing really like that. And it's so good.

It's in podcast form. It's super compelling. They do a great job different to the show.

But i've just like huge, huge fan of the show, have consumed all of their episodes so far. I love IT. That's number one.

Number two, also related to the show and also a filtrate or is dug demo my favorite car, youtube R I don't even care that much about cars, but I just like he's very compelling. This amazing, amazing thing happened to go out to the video, the story. He just bought a porch career G, T, which is like a lifelong dream of his, the porch career G T.

For anybody who knows about IT, I didn't know or care that much about cars, but I care about dug. It's like one of the ultimate luxury car vires. This legendary car, the portrait in the mid two thousands, I think when I came out, it's sold for like four hundred thousand dollars, I think knew.

And now pristine and rare color models of these are selling for like two million, three million, five million dollars dug. Just pop one. Any mato video about IT and IT is one of the best things you will ever watch on you too. It's so great. It's just like, so heart .

warming, right? That will be my first demo video, but I can check that out.

So he tells his whole story of being a creator. He built a business called cars and bids enthusiasts car auction website for cars from the moderna, as he says that the only advertising that he does on the channel is for this company, this business, this internet business, that, like he built within his creator world, he answer on dirigo tion. And he just raised a big round from the turning group, and he took some second as part of a cool go watch the video. It's great.

So IT, i'll do I have to also once purchase I just made that has been awesome so far, which is the plot on trade .

oh like product product premium.

Um i'm not even sure it's alter. I think it's premium good trend mills are expensive, so it's not that much more expensive than a good tread mill. But it's great like I get access to all the palon content under the same membership fee.

See adults freaking brutal in the winter. And so it's nice to be a little like get some steps in when I don't anna go outside in the the grain muck. So best summer in the world, I think we rival like como, but the winters are tough.

See, other summers are amazing. Well, the fall is incredible on t tesco's pe, but now is my favorite time in tesco's because it's february at sixty five degrees and Sunny on. Now, just like this is why I live here.

We ve got a couple specials coming up, was just do in person.

Yeah, come on down. Just ready to go for you.

Thank you. My second is an article is by direct thomson and IT is called the era theory of history is wrong. It's awesome. Long form, uh, read in december.

And it's basically about how we really make hey about someone's invention and the idea and so much of the value comes from doing all the hard things to make that idea real in the world, especially around distribution and one of the big case studies around vaccines, and in particular around the original smallpox vaccine that came from taking some cowpox and using that and injecting IT to humans. And even after someone discovered IT, IT was really like the government effort to push that out into the world. And the reason why we don't fear smallpox today is not because someone had a genius idea.

I mean, that's part of IT, but it's so much about the distribution and about what a disservice IT is done to all of us to make government jobs on sexy when they're responsible for the hard part and the important part of so many of the innovations in our world. So highly recommended. There's bunch other stuff in there. Two, that's just one of the case studies, but the Erica theory .

of everything is wrong. cool.

Well, with that, after you finished this episode, come discuss IT with the fourteen thousand other smart, curious members of the acquired community had acquired F M slack slack, if you want to get some of that sweet acquired merch that everyone is talking about, check IT out acquired that f ms. Lash store if you wanted. Listen to the L P show. We are dropping an awesome episode actually tomorrow, right after David and I record this with vj roj, the CEO of state sig, talking about some really interesting stuff that he worked on a facebook. He started basically facebook s mobile business model of install and talks about his sort of winding journey at facebook.

You know, it's just the cool, like a couple hundred billion in market cap creation.

right to sort of and that and all the crazy internal tooling that they have a facebook that he has now built into a company called stati g that he sort of bring to the mass market, which is very cool to learn about as a former engineer. And pm, so that is in the lp show. Search for that in any podcast player by searching for acquired lp show with at listeners. We'll see you next time.

will see the next time. you. 哼。