“Products are made in the factory, but brands are created in the mind." — Walter Landor
One of the richest men in the world doesn’t make cars, rockets, or enterprise software — he makes handbags. Bernard Arnault (dubbed “the Pope of Fashion” by the global press), the CEO of LVMH (Moët Hennessy Louis Vuitton), has held the position since 1989. Over the past three decades, LVMH has become a global juggernaut, overseeing more than 70 prestigious brands like Louis Vuitton, Christian Dior, Dom Perignon, Moët et Chandon, Hennessy, Sephora, and TAG Heuer. LVMH's success goes beyond labels; it's a force shaping perceptions and defying gravity with its unparalleled pricing power.
Established in 1987 through the merger of Louis Vuitton and Moët Hennessy, LVMH spans industries, including fashion, leather goods, perfumes, and more. Its diverse portfolio, emphasizing quality and craftsmanship, extends globally, with key markets in Asia, the United States, and Europe.
LVMH Key Segments
Asia, the United States, and Europe play pivotal roles, contributing 30%, 27%, and 24% to LVMH's sales, respectively.
Fashion and Leather Goods (e.g., Louis Vuitton, Dior): 49%
Watches and Jewelry (e.g., TAG Heuer, Tiffany & Co): 13%
Wines and Spirits (e.g., Moët & Chandon, Hennessy): 9%
Perfumes and Cosmetics (e.g., Christian Dior, Givenchy): 9.8%
Selective Retailing (e.g., Sephora): 19%
Other (e.g., Cheval Blanc hotels, Les Echos): 0.2%
Each year, LVMH sells billions of dollars of items that serve little purpose in the lives of consumers except to fulfill desires. And those desires don’t come cheap — a magnum of 1985 Dom Pérignon Rosé champagne costs about $1400; a Givenchy gown $20,000; and the finest TAG Heuer watch upwards of $18,000 - $100,000. No one needs these items, of course, yet millions desire them.
LVMH is a prime example of the perfect fusion of CREATIVITY and FINANCIAL DISCIPLINE.
LVMH has not only mastered the art of crafting captivating star brands but has also demonstrated unmatched pricing power. Arnault's visionary approach set the stage for LVMH's growth strategy, where creativity and financial acumen are not seen as opposing forces but as complementary elements. This unique combination has allowed LVMH to establish itself as a powerhouse in the luxury market.
The Art of Crafting Star Brands
LVMH's success lies in innovating while maintaining financial discipline. Financial Discipline and Creativity are key tenets core to the LVMH growth story. The company invests heavily in fostering creativity, nurturing designers, and allowing artistic freedom. This commitment to creativity, evident in iconic brands like Louis Vuitton and Dior, has propelled LVMH to the forefront of the luxury industry.
Each year, new products account for approximately 20% of LVMH sales, and some of them enjoy operating margins of up to 47%. What makes these statistics all the more remarkable is that many of these products at first appear utterly outlandish — a kidney-shaped handbag covered with safety pins, for instance, or a pot of green eye shadow named “gangrene.” But somehow, and quite quickly, the LVMH “process” makes these items indispensable to some of the world’s most selective consumers. How?
It begins with radical innovation—an unpredictable, messy, highly emotional activity that the company wholly endorses. Indeed, unlike many executives who oversee the work of creative types—be they engineers, writers, or designers—Arnault does not believe in managerial limit setting. Artists must be completely unfettered by financial and commercial concerns, he insists, to do their best work. You don’t “manage” John Galliano, the wildly iconoclastic head of the House of Dior, just as no one could have “managed” Leonardo da Vinci or Frank Lloyd Wright. That is why, two years ago, Arnault did not flinch when Galliano sent models down the haute couture runways wearing dresses made of newspaper. To have blocked the plan—noting, perhaps, that paper dresses were dumb—would have crushed the designer’s spirit. Soon after, when Dior manufactured the dresses in news-type-printed fabric, they sold at a clip. “So you see, with certain techniques, everyone can win,” Arnault notes, “the company, the designer, and the customer.”
LVMH’s philosophy is quite simple: If one looks over a creative person’s shoulder, he or she will stop doing great work. LVMH, as a company, is decentralized. Each brand very much runs itself, headed by its own artistic director.
Achieving success in branding goes beyond mere genius — A brand must have a heritage; there are no shortcuts.
At the heart of LVMH's mission is the creation of "STAR BRANDS," held to the highest standards across four artistic and financial dimensions. LVMH brands must be:
Timeless — It means the brand is built, if you wish, for eternity. It has been around for a long time; it has become an institution. Dom Pérignon is a perfect example. It was created 250 years ago, but it will be relevant and desired for another century and beyond that. It is for the ages.
Modern — It is edgy, it has sex appeal, and it is fashionably modern.
Fast-growing — Growth (high desire, new markets) shows the shareholders that you have struck the right balance between timelessness and fashion and that you have been able to charge a premium price because of that correct balance.
Highly Profitable — High profitability is achieved through meticulous planning and modern engineering in LVMH's atelier (factory), where each product undergoes up to 1,000 carefully organized manufacturing tasks. This focus on precision and efficiency, from sourcing materials to production, ensures exceptional quality while maximizing productivity for optimal financial success.
According to Arnault, star brands are born only when a company manages to make products that “speak to the ages” but feel intensely modern. Such products sell fast and furiously, all while raking in profits. “Mastering the paradox of star brands is very difficult and rare.”
The Alchemy of Pricing Power
LVMH's pricing power is a testament to the perceived value of its brands. Desirability allows for increased prices without denting demand. Scarcity further fuels this power, creating a cash volcano. Consumers willingly pay premiums, acknowledging craftsmanship, heritage, and exclusivity. This pricing power provides LVMH with a competitive edge and ensures sustained profitability.
A brand has to pay its dues — it has to come to stand for something in the eyes of the world.
In the world of luxury, LVMH doesn't just set prices; it sets the standard.
Universally Applicable Lessons
The principles behind LVMH's success are not exclusive to the luxury sector. Aspiring brands across various industries can learn from LVMH's approach to balancing creativity and financial discipline. The key lies in understanding the value your brand brings to consumers and strategically pricing products to reflect that value. LVMH's rocket ride to success holds lessons for all brands, whether selling handbags or hamburgers.
The winning formula? Creativity and Financial Discipline aren't mutually exclusive—they're power partners. This dynamic duo isn't just for luxury labels; it's the launchpad for any brand aiming to shoot for the stars.
Beyond LVMH: Starbucks, Disney, Apple — Their Secret?
Starbucks, Disney, and Apple aren't just companies; they're cultural icons. Each has created a unique brand identity that resonates with consumers, allowing them to command premium prices. These brands, like LVMH, each in its orbit, radiate a unique identity, leveraging the power of storytelling and emotional connection to build enduring relationships with their customers and command premium prices.
A narrative that resonates and pricing strategies that make consumers feel like they're part of an exclusive club.
The Key Takeaway
In the quest to emulate the success of LVMH and other star brands, businesses must recognize the importance of harmonizing Creativity with Financial Discipline. Striking this balance fosters brand loyalty and allows for sustained growth in any industry.
The genius of LVMH’s process is that, although the front end of a star brand — the innovation ... the creative process ... the advertising — is very, very expensive, but the back end of the process in the atelier (the factory) is a place of amazing discipline and rigor that drives high profitability behind the scenes. Brands with unbelievably high quality require unbelievably high productivity, so every single motion and every step of every process is carefully planned with the most modern and complete engineering technology.
A Question to Ponder
As we navigate the dynamic landscape of brand building, one must wonder:
Can the magic formula of Creativity and Financial Discipline be the cornerstone for future global brands, transcending industries and shaping tomorrow's LVMHs?
Note: Certain parts of this article are quoted from an interview conducted by Suzy Wetlaufer with Bernard Arnault of LVMH, as featured in HBR.
“What the hell is good design? Is it something that gives satisfaction to your own ego? Or is it something that creates a positive response in the eyes, minds, and hearts of millions of people? Also, is it something that is appropriate to its category? Ideally it is all of these.” — Walter Landor