01:25:27 Ben Gilbert: That was none of their motivations, and so I don't think they could have seen how grand his were.

01:25:34 David Rosenthal: Yep. So once this happens and Bernard gets the blocking minority, Chevalier resigns immediately and just kind of rides off into the sunset. Racquevilliers, he's so pissed. He keeps fighting. He sues Bernard. He sues everybody. The cases drag out in court for a couple of years. It gets super ugly in the press. Finally, when it becomes clear that he's not going to win his court cases in April of 1990, he privately resigns and he walks off the job without telling Bernard or anybody else at LVMH. So that day, Bernard calls Louis Vuitton and the receptionist answers the phone and says, I'm sorry, Monsieur Racamier is no longer on the premises. And I think they 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. Bernard is not a corporate Raider. He has a big vision here. There's some great quotes from him from this time, from all these interviews he was doing. You know, he says, I told my team at the time that we will build the first luxury group. Like you were saying, Ben in the world. Obviously, it was very ambitious, but it galvanized the team and we started to build.

00:25:03 Ben Gilbert: Engineering is the most difficult and prestigious thing to study at any of these schools.

00:25:08 David Rosenthal: Yes, so especially after World War II in France, engineering is seen as the highest form of education. I actually, because I was a French major, I interned one summer in France in another of the Grands Écoles, the HSE, the Écoles des Hautes Etudes Commerciales, which is the main business Grande École in France. And so I got to like see and learn about this system. Yeah, it's wild. If you want to enter the Grande École 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 entrance exams are all evaluated blindly. So it doesn't matter what family you're from, what your background is, it's literally just your test scores and your performance on this exam. that is your entry into these institutions. And then, yeah, once you're there, they're not partying and having fun. They are working their butts off in these schools. And so that's what Bernard goes through. Like, this is a very, very different education and background that he's coming from than, shall we say, these traditional family-owned businesses or even like the Willows. He is a modern engineer businessman bred from birth to be so. So in 1971, he graduates and he goes to work back in the family business. I think this one actually is apocryphal. After he graduates, but before he goes to work, he visits America for the first time.

00:23:43 David Rosenthal: And I assume his mom owned pieces of Dior. How did she afford that? Well, his dad and Bernard's family on his dad's side, they're entrepreneurs. They're not just entrepreneurs, they're engineers and entrepreneurs. So his dad, Jean, ran a company called Ferret Savignel, which was a quite successful civil engineering and public works construction firm in the north of France. They employed about a thousand people. It was started by Bernard's grandfather. after World War I 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 Roubaix. And Bernard is totally taken under the wing of his grandfather and grandmother, absorbs tons of lessons. When his grandfather passes away, I think Bernard's like 10 or so at this point in time, he actually goes and lives with his grandmother across the street. So Bernard's growing up steeped in running this engineering family business. He ends up going for college to the very prestigious École Polytechnique. The French educational system is unique. It's one of the Grande Ecole. It's probably the most selective and famous Grande Ecole within France. It's kind of like the MIT or the Caltech of France.

00:25:00 Ben Gilbert: But with the prestige of Harvard, right? Yes. Engineering is the most difficult and prestigious thing to study at any of these schools.

00:25:08 David Rosenthal: Yes, so especially after World War II in France, engineering is seen as the highest form of education.

00:33:52 Ben Gilbert: This is not how anyone behaves.

00:33:53 David Rosenthal: Right. Well, and one of the reasons that Boussac became such an albatross was all these workers within the textile industry that the government's like, you can't lay these people off. You can't fire them. These LBO guys in America are just firing people left and right, selling off divisions, making billions. It could not be more different.

00:34:11 Ben Gilbert: All right, so Arnaud now knows of the leverage buyout, knows of this cutthroat 80s American business culture. He's not doing such a good job breaking in in the US. He's built these condos, but like whatever. He wants to take the nest egg from his family business and sort of turn that into something bigger. He wants to buy something of importance and really blow that up.

00:34:34 David Rosenthal: And I think he wants to take this concept that he just learned from his neighbor in America and bring it back to France.

00:34:40 Ben Gilbert: Yeah. And so he basically puts the word out. He tells his lawyer, he tells his folks he trusts back in France, I'm looking to buy something.

00:34:47 David Rosenthal: So he hears through the grapevine, there's actually the biggest of all opportunities, the troubled Poucek empire, of which literally christian dior is sitting buried within way deep the government at this point has been operating boussac for a couple years it's a disaster they're finally looking for somebody anybody to come take this thing off their hands so bernard through his connections back in france

00:38:53 David Rosenthal: The Buffett analogy is a good one. I think also he's like Kluge, but he's also like Murdoch. He wants to build Fox too. He wants to take these assets and build it into something.

00:39:01 Ben Gilbert: For $15 million of capital he's put up, he not only has the losses from Busek to figure out how to handle, but also the debt service on the company.

00:39:11 David Rosenthal: Yep. So pretty much as soon as he takes over, he calls Lazard back in and they immediately start restructuring BUSAC. So Arnaud over the next couple of years does what nobody else was willing to do. He lays off about 9,000 of the 20,000-ish 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 and doing this. He goes from being a nobody to a somebody very fast, but not a beloved somebody. But it works. Within a couple of years, the Boussec businesses as a whole, the empire is doing about $2 billion in revenue and it's back to profitability. It's doing over a hundred million dollars in profit. Then he turns it around.

00:40:01 Ben Gilbert: That's so fast, by the way. He went from taking his 15 plus Lazard's 45, so $60 million to buy something that was losing money.

00:34:47 David Rosenthal: So he hears through the grapevine, there's actually the biggest of all opportunities, the troubled Poucek empire, of which literally christian dior is sitting buried within way deep the government at this point has been operating boussac for a couple years it's a disaster they're finally looking for somebody anybody to come take this thing off their hands so bernard through his connections back in france he hooks up with Lazard Frere, the investment bank, specifically the legendary banker within Lazard, Antoine Bernheim, to put together a bid. Now, Lazard in France is kind of like Goldman plus Morgan Stanley plus JP Morgan. They are the bulge bracket all unto themselves. They have immense political connections, sort of referred to, especially at the time, as the French under ministry of finance. Kind of like Goldman is sort of like the treasury here, which is crazy.

00:35:47 Ben Gilbert: 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 or anything like that, but coming from a successful wealthy family, he was able to get to know the people that matter in the finance community.

00:36:05 David Rosenthal: Yes, I think that's part of it. There's no way we could really prove or research this, but his first wife came from a kind of even more successful multi-generational industrialist family in the north of France. And I think it's sort of implied and written that connections from her family helped get him into Lazard as well and into the government to lobby them to let him take over Brissac. Either way, no matter how it happens, he does, he gets in good with Lazard.

00:25:03 Ben Gilbert: Engineering is the most difficult and prestigious thing to study at any of these schools.

00:25:08 David Rosenthal: Yes, so especially after World War II in France, engineering is seen as the highest form of education. I actually, because I was a French major, I interned one summer in France in another of the Grands Écoles, the HSE, the Écoles des Hautes Etudes Commerciales, which is the main business Grande École in France. And so I got to like see and learn about this system. Yeah, it's wild. If you want to enter the Grande École 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 entrance exams are all evaluated blindly. So it doesn't matter what family you're from, what your background is, it's literally just your test scores and your performance on this exam. that is your entry into these institutions. And then, yeah, once you're there, they're not partying and having fun. They are working their butts off in these schools. And so that's what Bernard goes through. Like, this is a very, very different education and background that he's coming from than, shall we say, these traditional family-owned businesses or even like the Willows. He is a modern engineer businessman bred from birth to be so. So in 1971, he graduates and he goes to work back in the family business. I think this one actually is apocryphal. After he graduates, but before he goes to work, he visits America for the first time.

00:28:53 David Rosenthal: That is when the socialists really come to power in the country.

00:28:57 Ben Gilbert: It's like the opposite of the pinstripe suits in Wall Street in the go-go years of American finance.

00:29:03 David Rosenthal: So everything we were talking about, the complications with Boussac and the textile workers, that's because Francois Mitterrand 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 drain of wealth and business talent out of France at this point in time.

00:29:33 Ben Gilbert: All right, so America, here we come.

00:29:36 David Rosenthal: So Bernard moves his family to America.

00:29:39 Ben Gilbert: And this is like my favorite weird twist in the story where Bernard Arnault, who goes on to become this unbelievably wealthy, high taste, high class, high fashion, everyone looks up to him in every walk of life because whatever you're doing, whether you're a rap artist or a champagne maker or a president, he has something that you want. He moves to America and develops Palm Beach condos. Yes.

00:30:06 David Rosenthal: He's just looking for an excuse to get out of France. Developing vacation homes is the family business. Yeah. He's like, I think there's an opportunity in the Palm Beach market.

00:30:14 Ben Gilbert: And not like fancy high rises, like a 20 unit Palm Beach kind of crappy condo building.

00:30:22 David Rosenthal: Yeah. I don't know if it was a retiree home, but I imagine this is for like snowbirds from the Northeast.

00:30:27 Ben Gilbert: I think so.

01:25:27 Ben Gilbert: That was none of their motivations, and so I don't think they could have seen how grand his were.

01:25:34 David Rosenthal: Yep. So once this happens and Bernard gets the blocking minority, Chevalier resigns immediately and just kind of rides off into the sunset. Racquevilliers, he's so pissed. He keeps fighting. He sues Bernard. He sues everybody. The cases drag out in court for a couple of years. It gets super ugly in the press. Finally, when it becomes clear that he's not going to win his court cases in April of 1990, he privately resigns and he walks off the job without telling Bernard or anybody else at LVMH. So that day, Bernard calls Louis Vuitton and the receptionist answers the phone and says, I'm sorry, Monsieur Racamier is no longer on the premises. And I think they 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. Bernard is not a corporate Raider. He has a big vision here. There's some great quotes from him from this time, from all these interviews he was doing. You know, he says, I told my team at the time that we will build the first luxury group. Like you were saying, Ben in the world. Obviously, it was very ambitious, but it galvanized the team and we started to build.

00:27:36 David Rosenthal: So Bernard goes to work in the family business back in France. And five years later, he's doing so well that his father's like, all right, you're groomed to take over.

00:27:47 Ben Gilbert: I'm ready to retire. You're an engineer. This is a civil engineering and construction business. You're fully trained.

00:27:52 David Rosenthal: The keys are yours. jointly with this as part of the next generation taking over, he decides and he convinces his father that actually the civil engineering business is not a great growth business to be in and that they should start to transition away from it and into real estate development. and that that's a bigger opportunity for the family. So under Bernard's new leadership, they sell off the old industrial construction division. They find a successful niche building vacation homes, second houses, a nice French Riviera and throughout Europe. and they do pretty well. They get to a point where they're doing about 15 million a year in revenue, and I would assume much higher margin than the old industrial construction business. So the family is doing great. They're like one of the wealthy, successful family entrepreneurs in the north of France at this point. And then the 1980s come along. The 1980s in France were, shall we say, very different than the 1980s in the US. That is when the socialists really come to power in the country.

00:28:57 Ben Gilbert: It's like the opposite of the pinstripe suits in Wall Street in the go-go years of American finance.

01:23:44 David Rosenthal: two billion of his own capital, I think, into this.

01:23:47 Ben Gilbert: And he's, I believe, sold some of the Dior and the former Busec entities, getting closer and closer to not being the controlling shareholder anymore. So he's basically mortgaging that business in order to free up the capital to go and make a big play to win LVMH.

01:24:07 David Rosenthal: He's pushing the chips in, he's going all in. And with that purchase, he takes the Jacques Robert holdings to 43.5% economically and 35% of the voting rights, which means he gets the blocking minority and it's done. He has now in the span of a couple months come in from zero outsider and taken over the largest luxury conglomerate in the world.

01:24:38 Ben Gilbert: Yep. Large for the time, certainly not large for now. LVMH now is 75 houses, and LVMH then was three or four or five houses, something pretty small, and obviously way smaller in revenue. I mean, the concept of a luxury conglomerate was a new thing in the late 80s.

01:24:55 David Rosenthal: Totally. And achieving it was Bernard's explicit goal and strategy in a way that for Récumier and Chevalier, it was just a marriage of convenience.

01:25:04 Ben Gilbert: 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 were.

01:25:34 David Rosenthal: Yep.

03:10:15 David Rosenthal: Oh, when he put the 800 million into the JV with Guinness, that was 1988. And he bought Boussac and Dior in 1984, four years.

03:10:25 Ben Gilbert: Right. So in four years, he turned 15 million into 800. So a lot of that compounding happened right there. Yeah.

03:10:32 David Rosenthal: That was the key point, that four years of that jump and then the compounding since.

03:10:37 Ben Gilbert: Right. Getting a great deal from the French government and really being able to spot that market inefficiency.

03:10:43 David Rosenthal: So ironic that like the socialist French government essentially gifted the greatest business financial success of all time.

03:10:50 Ben Gilbert: I tweeted this, but it's so deeply ironic that the greatest LBO artist in history is a Frenchman. this ultra-competitive American culture that we're in, where we pride ourselves on GDP above all else, 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. Bernard Arnault actually produced the most value in the world.

03:11:14 David Rosenthal: I guess the Europeans just, you know, thinking longer timescales than anyone else. Right. That's crazy. Okay. I've got a couple of quick ones. One interesting one, particularly in the leather goods business, I think is that luxury turned out was a business that can scale. And I think the jury might still be out a little bit on luxury travel. I think it's.

00:41:23 Ben Gilbert: No. And do you know how much of Dior he owned at this point? I think at this point he's formed Gruppe Arnaud, which is his sort of family office. So you can think of Gruppe Arnaud as Bernard's personal wealth. And they owned some percentage, but not all of the Bussac Dior holdings at this point.

00:41:42 David Rosenthal: Yeah, so the Booseck entity itself, I think had been renamed Agache after the Willow initial bankruptcy. So yeah, Group Arnaud owns a majority stake in Agache, which owns a majority stake in Dior. Dior and Balmarshay are the only assets left. So there's like, what's that? One, two, three, four levels of Russian doll of legal structure here. Right.

00:42:05 Ben Gilbert: But he's got majority economics and majority control in Le Bon Marché and Dior by this point. Yes. It's an interesting thing to observe here. It's sort of a playbook theme that I want to pull early that the efficient market hypothesis is not exactly correct. No, I'm shocked, shocked to hear you say that. There existed an asset here where it took some work and it took doing some ugly things, but it was incredibly valuable and there were not other bidders, or at least there were not other bidders that the government was selling to.

00:42:38 David Rosenthal: Yeah. I think there was one other bidder and certainly the political influence and lobbying from both Arnaud and Lazard really helped him get this.

01:22:15 Ben Gilbert: I think this is sort of his lip service of like, well, it makes sense for me to be involved with this transaction because Dior is missing one final piece of the puzzle and you guys own it. 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 of LVMH that he'd been sort of buying with Guinness has gone up and up and up in value. So they're like, look, he's going to get even richer and he's going to get the perfume brand back to seems like this is what he would want.

01:22:45 David Rosenthal: Yep. So Racamier and Chevalier newly reunited in their desire to break up the company offer Arno a parting gift of gifting him essentially back Dior perfumes so he can reunite his business and then go on on his way and this is where Bernard reveals his true intentions which is he's coming at the king not because he wants to steal his scepter or something like that he wants to be the king he wants LVMH So he gets this offer from the two of them and he's like, yeah, I'll get back to you on that. The next two days in the markets, he goes out and he blows essentially all of his capital, deploys another $500 million in the next two days in the markets, bringing it to over a billion dollars within a very short period of time in additional capital that he's put up. So he's now what? two billion of his own capital, I think, into this.

01:23:47 Ben Gilbert: And he's, I believe, sold some of the Dior and the former Busec entities, getting closer and closer to not being the controlling shareholder anymore.

00:38:53 David Rosenthal: The Buffett analogy is a good one. I think also he's like Kluge, but he's also like Murdoch. He wants to build Fox too. He wants to take these assets and build it into something.

00:39:01 Ben Gilbert: For $15 million of capital he's put up, he not only has the losses from Busek to figure out how to handle, but also the debt service on the company.

00:39:11 David Rosenthal: Yep. So pretty much as soon as he takes over, he calls Lazard back in and they immediately start restructuring BUSAC. So Arnaud over the next couple of years does what nobody else was willing to do. He lays off about 9,000 of the 20,000-ish 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 and doing this. He goes from being a nobody to a somebody very fast, but not a beloved somebody. But it works. Within a couple of years, the Boussec businesses as a whole, the empire is doing about $2 billion in revenue and it's back to profitability. It's doing over a hundred million dollars in profit. Then he turns it around.

00:40:01 Ben Gilbert: That's so fast, by the way. He went from taking his 15 plus Lazard's 45, so $60 million to buy something that was losing money.

00:23:43 David Rosenthal: And I assume his mom owned pieces of Dior. How did she afford that? Well, his dad and Bernard's family on his dad's side, they're entrepreneurs. They're not just entrepreneurs, they're engineers and entrepreneurs. So his dad, Jean, ran a company called Ferret Savignel, which was a quite successful civil engineering and public works construction firm in the north of France. They employed about a thousand people. It was started by Bernard's grandfather. after World War I 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 Roubaix. And Bernard is totally taken under the wing of his grandfather and grandmother, absorbs tons of lessons. When his grandfather passes away, I think Bernard's like 10 or so at this point in time, he actually goes and lives with his grandmother across the street. So Bernard's growing up steeped in running this engineering family business. He ends up going for college to the very prestigious École Polytechnique. The French educational system is unique. It's one of the Grande Ecole. It's probably the most selective and famous Grande Ecole within France. It's kind of like the MIT or the Caltech of France.

00:25:00 Ben Gilbert: But with the prestige of Harvard, right? Yes. Engineering is the most difficult and prestigious thing to study at any of these schools.

00:25:08 David Rosenthal: Yes, so especially after World War II in France, engineering is seen as the highest form of education.

01:11:12 David Rosenthal: So he had started, remember we talked about, because of the legacy of Boussac and how Arnaud came into the business, there's this Russian doll legal structure of multiple entities before you get to the actual operating businesses of Dior. What Arnaud and Lazard start doing, they realize they can IPO minority stakes in each of these levels of business and raise capital by doing that while still being very careful about making sure they maintain ironclad voting and economic control over each of them.

01:11:47 Ben Gilbert: You've got the operating businesses of Dior and Le Bon Marché department store, and then above that you've got Agache, that former Boussac holding company. Then you've got Bernard's personal entity, Groupe Arnaud, where he could sell some shares of that on a public exchange, which by the way, this is still publicly listed today. You can buy this instead of LVMH. So yeah, you totally can free up cash by just selling off minority pieces of each Russian doll.

01:12:14 David Rosenthal: and this generates huge leverage for Bernard. He gets access to all of this capital, but because his successive chain of entities have majority control every step in the chain, He owns and runs these things while getting access to capital at every single level. It's amazing. Again, back to your story of how he turns $15 million into this incredible $200 billion plus fortune. This is a key step of it.

01:12:46 Ben Gilbert: And the reason that this is not Enron is because there's 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 underlying entities, so you can do this financial engineering and still be able to sort of justify all of it.

00:40:01 Ben Gilbert: That's so fast, by the way. He went from taking his 15 plus Lazard's 45, so $60 million to buy something that was losing money. And just a couple of years later, he's spitting off over $100 million per year of free cash flow. It's crazy.

00:40:17 David Rosenthal: Yeah, that's crazy. And then part two of the plan, Arnaud and Lazard start selling off all the old textile assets and industrialist assets. Like he doesn't want to run these, he wants Dior. So all together, the biggest win here is they sell literally the disposable diaper division of Boussac, which is called Produce, which is soft skin in English. They sell that for 400 million alone. and then the rest of the textile operations, they offload. They ultimately sell everything except Christian Dior and the famous Balmarché department store in Paris that was within the group. In total, they make over $500 million selling off these assets. Wow. If Arnaud were an LBO guy, if he were John Cluj, he would be like, Oh, hell yeah. Mission accomplished. They took 15 million of his own equity, turned that into multiple hundreds of millions of dollars and a cashflow stream from Dior. This is a win. He would go start KKR or whatever French equivalent in Europe and build that. Yep. But that's not what he wants to do.

00:41:23 Ben Gilbert: No. And do you know how much of Dior he owned at this point?

00:22:30 David Rosenthal: Right back where we started. And at this point, there are no real buyers for this thing. Like it's an albatross. So the government takes over running it for multiple years.

00:22:39 Ben Gilbert: And interestingly, even though Dior is still somewhat financially performing in the belly of the beast from all these licenses to all these other companies. Yep.

00:22:47 David Rosenthal: Not due to innovation, but the licensing business.

00:22:49 Ben Gilbert: Right. It's not that crazy that there's not a lot of suitors for this thing, because even if Dior was independent, without the right person running it, it's not that attractive of an asset.

00:23:00 David Rosenthal: Right. And it's buried under all of this awfulness. There's 20,000 textile employees, right? They're unionized. The company is losing tons and tons of money. Like this is a bad situation. It may be a diamond buried in there, but it's buried way deep. So enter one Bernard Jean Etienne Arnault. As we said, Bernard was born in 1949 in Roubaix. Remember 1949, this is what, two years after Dior had launched the new look. Supposedly his mother, Marie, had a total fascination for Dior. This is the legend that Bernard tells and it always stuck with him. And I assume his mom owned pieces of Dior. How did she afford that?

00:24:47 David Rosenthal: Well, then immediately after that would be the beginning of the Celtics-Lakers rivalry. Wilt Chamberlain wouldn't go to the Lakers until 68, I believe. But in 1959, he was drafted and joined the league with the then Philadelphia Warriors, who moved to San Francisco a couple years into Wilt's tenure there. And that just like… Any listener who knows anything about Wilt Chamberlain knows like there's so many crazy stories about Wilt and he was a character extraordinaire. If you don't know about Wilt Chamberlain, like pause this episode, go Google him now. Still the only player to ever score 100 points, right? Scored 100 points in a game, had over 50 rebounds, I think multiple times. I think he also, at least once if not multiple times in his career, averaged over 50 points a game for the entire season. Oh my God. It's I mean so many stories my favorite one though is so will played college ball at the University of Kansas But he wasn't super happy there and he wanted to leave and start playing professional Early, but the NBA didn't allow it at the time So he left after his junior year joined the Globetrotters and played for a year for the Globetrotters. Did you know this? No, this is amazing. And so during the Globetrotters at that point they were still really big at this point and

00:26:06 Ben Gilbert: And were they doing like what they do today? They sell tickets, they come to town.

00:26:09 David Rosenthal: It was more of a show than it was like an actual game. And this is amazing.

02:24:29 Ben Gilbert: Yeah, the interesting thing about this one is that it actually gets shaken out in the French courts. So in 2014, a French court ruled that LVMH had to sell down its stake from 23%.

02:24:38 David Rosenthal: Because it was illegal. How they masked their identity in acquiring the stake.

02:24:42 Ben Gilbert: But the net of it is they had done some of it through Group ARNO and some of it through LVMH. And so Group ARNO had ended up with about 8%, and the rest was owned by LVMH. So the court orders LVMH to distribute that out to shareholders. So awesome little dividend for all the LVMH shareholders. And what Group ARNO does with their 8% is they use that to pay for the 25% of Dior that it does not already own.

02:25:11 David Rosenthal: Yeah, this is the minority stake way back in the day that they had IPO'd of Dior to help finance buying into LVMH.

02:25:20 Ben Gilbert: Yes. And so, of course, just like Dom Desoliers says, Group Arnault ended up with about $5 billion in profit from this whole thing. Even when he loses, he wins. And so they end up with more control over Dior, which then ends up just getting rolled into LVMH finally in 2017. the holding company, Group Arnault, gets to go from 37% to about 48% economics, and I think somewhere like 63% of the control of LVMH by basically doing stock swaps. So now there's a problem solved where neither LVMH, nor Dior, nor Group Arnault own any more Hermes. And because all of this has appreciated since 2001 when he started, Bernard Arnault has now solidified control over Dior and LVMH for the foreseeable future. Yeah.

00:20:54 Ben Gilbert: Right. Get as much value out as possible.

00:20:56 David Rosenthal: He owns a lot of racehorses and breeds thoroughbreds. 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 Dior in 1968 to Moet & Chandon, which we haven't talked about yet in the episode, but oh boy, are we going to.

00:21:21 Ben Gilbert: the perfume thing actually does make sense because a major component of manufacturing perfumes is alcohol.

00:21:27 David Rosenthal: So things continue on the downward trajectory despite that and in 1978 the whole Boussac group finally files for bankruptcy in what up until this point was the largest bankruptcy in French national history. This is a big deal.

00:21:42 Ben Gilbert: And the way bankruptcy 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 Boussac empire.

00:21:57 David Rosenthal: Yes, like we said, France is basically becoming a socialist country at this point. In this case, the first bankruptcy of BUSSEC, the government doesn't run it for very long because a buyer emerges and they end up selling the company out of bankruptcy to a ragtag group called the Willow Brothers. They, I believe made their money manufacturing ACE bandages. These are not luxury dudes. It's a total mess. One of the brothers ends up getting arrested for misappropriating funds within the company. Within a couple of years in 1981, the whole group is back in bankruptcy. Right back where we started. And at this point, there are no real buyers for this thing.

01:33:32 Ben Gilbert: crazy light show is happening. I will tell you, if you have not watched a fashion show in a long time, go to Louis Vuitton's website and just watch a video of what a show is today. It is a super high production, crazy event. It's like Monday Night Football. Yep. But at the end of the day, what they cause consumers to do, love the brand more and buy more handbags.

01:33:54 David Rosenthal: Yes, obviously. Louis Vuitton is the star then and now within LVMH. And Bernard totally realizes that and leans into it. But there is also this element of building a global luxury group that really is his unique counterintuitive insight that you can achieve very powerful scale economies in the luxury industry. And you just can't do it in the way you do it in other industries. The reason it's counterintuitive, you know, you think about like Procter and Gamble or somebody like that in other consumer goods, they have scale economies because they outsource production, they get it cheaper, you know, and then they make more tide than anyone else. In luxury, that would defeat the whole thing.

01:34:43 Ben Gilbert: Right. There's natural diseconomies of scale where the more of something you make, the less valuable the luxury consumer will think it is.

01:34:50 David Rosenthal: We saw this with Dior in the 50s and 60s when the licenses diluted the brand. So even innovators like Racamier, they never would have imagined that scale economies could exist in luxury. Like you would never outsource production in luxury.

01:35:05 Ben Gilbert: Nobody realized that these things could be large scale businesses, period.

01:40:35 David Rosenthal: Had innovated and started this controlling your distribution, but it stopped at, we're going to do our own retail outlets. What Arno and LVMH does. And this really just hollows out the global retailing industry and especially department stores. I believe they learned this from Japan where this was an accepted model in the Japanese department stores. They realize now that they have so much scale by having all these brands. And by the way, we should say over the next 10 years, LVMH under Bernard goes out and they acquire Celine, they acquire Berluti, they acquire Kenzo, they acquire Guerlain, they acquire Loewe, they acquire Marc Jacobs. They're getting all these brands. Fendi and Bulgari are big ones.

01:41:18 Ben Gilbert: Yep, totally.

01:41:19 David Rosenthal: They acquire watch brands, they acquire luggage brands, et cetera.

01:41:22 Ben Gilbert: Tag Heuer.

01:41:23 David Rosenthal: Yeah. At a certain point, they're like 50, 60, 70% of the products that are going into department stores. Take here in the U S like a Nordstrom or a Neiman Marcus and like they go to the department stores to the retailers and they're like, look, the old model where we sold you our goods wholesale and you bought it from us and then you retailed 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 the store concept. We're going to pay you rent. We're going to lease space from you for a boutique within your department store. We're going to own the inventory.

01:40:35 David Rosenthal: Had innovated and started this controlling your distribution, but it stopped at, we're going to do our own retail outlets. What Arno and LVMH does. And this really just hollows out the global retailing industry and especially department stores. I believe they learned this from Japan where this was an accepted model in the Japanese department stores. They realize now that they have so much scale by having all these brands. And by the way, we should say over the next 10 years, LVMH under Bernard goes out and they acquire Celine, they acquire Berluti, they acquire Kenzo, they acquire Guerlain, they acquire Loewe, they acquire Marc Jacobs. They're getting all these brands. Fendi and Bulgari are big ones.

01:41:18 Ben Gilbert: Yep, totally.

01:41:19 David Rosenthal: They acquire watch brands, they acquire luggage brands, et cetera.

01:41:22 Ben Gilbert: Tag Heuer.

01:41:23 David Rosenthal: Yeah. At a certain point, they're like 50, 60, 70% of the products that are going into department stores. Take here in the U S like a Nordstrom or a Neiman Marcus and like they go to the department stores to the retailers and they're like, look, the old model where we sold you our goods wholesale and you bought it from us and then you retailed 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 the store concept. We're going to pay you rent. We're going to lease space from you for a boutique within your department store. We're going to own the inventory.

00:02:26 Ben Gilbert: Another crazy thing on LVMH, their market cap has grown 20x in 20 years, which I'll take that any day of the week. Some of you love their products and some of you think they are stupid and frivolous. They have brands across fashion, handbags, perfume, watches, jewelry, wine, spirits, you name it. Travel. They own just an insane number of brands with 75 houses today that include Dior, Louis Vuitton, Moet, Hennessy, Voud Cleco, Dom Pérignon, Tiffany. And it's not just the brands. They've expanded into distribution with retail like Sephora and all the duty-free shops that you see at airports. And they have even recently expanded into travel with Chaval Blanc Resorts and other travel companies. And for those of you who have been sort of reading the headlines, this wide-sweeping empire is owned and controlled by the now wealthiest man in the world, more than Bezos, Gates, or Elon Musk, Bernard Arnault. And, fascinatingly, this richest man in the world wasn't the founder of any of these brands. This story has a dash of Buffett, a little bit of Steve Jobs, and some unbelievable deal-making stories about how Mr. Arnault turned $15 million of capital in 1985 into the over $200 billion fortune that it is today. I'm also super excited to do the analysis on this one, David, because the luxury industry is like business strategy bizarro world. You need scarcity. So there are constraints on your growth. You can't lower your cost structure too much without devaluing your brand. You can't really outsource activities, even if they're not your core competencies.

00:09:24 David Rosenthal: So, Dior had been a successful designer before the war, and then during the war he kind of gets co-opted into this. He works at the Maison Lucienne Lelong, where he's mostly designing these boxy uniform-like dresses for the wives of Nazi officers. So, after the war, he's one of the few really talented designers out there that are on the market and aren't totally tainted by the Nazis. And the wealthy textile industrialist, Marcel Boussac, approaches him in 1946 to come and lead and renovate his old flagship Parisian fashion house, Philippe et Gaston. It's like a Beauty and the Beast episode here. Dior, though, says, I want to make a fresh start after the war. I think I'd rather do something under my own name than reviving this old brand. And Boussac says, oh, okay, that's fine. Like, we don't need to do that. I agree with you. I'll just finance you starting this new fashion luxury maison here and revitalizing the industry in Paris and we'll start fresh. So they get to work, he finances Dior.

00:10:31 Ben Gilbert: It's kind of like the story of Fairchild Semiconductor, but if Fairchild Camera and Instrument had let the traitorous eight actually name it themselves, but still basically owned by the parent. Yes. Okay, so you got the brand Dior getting started by the actual designer Christian Dior and totally owned by Boussac?

00:10:51 David Rosenthal: Yes, totally owned by Boussac.

00:51:10 David Rosenthal: So the enemy I know a little bit about is better than the enemy I know nothing about.

00:51:15 Ben Gilbert: Alright, so we ended up in this shotgun wedding defensive move where everyone thought it was their best option to combine these two family companies. Maybe let's go back to the origins of Louis Vuitton and the origins of Moet and Hennessy. How did we get to this position?

00:51:30 David Rosenthal: Yeah, and it's super interesting because both of these companies on their own were on great trajectories. And it was actually bringing them together that killed the family. So let's start with Moet Hennessy. That itself was a merger that had happened in 1971 between Moet and Chandon and Hennessy, Hennessy, the cognac company, Moet and Chandon, the champagne and other beverages producer. The champagne market is very fragmented. The brands are fragmented, but it was already starting to consolidate ownership. And so Moet had been consolidating that. This merger though, between Moet and Hennessy made a ton of sense and was super successful. It happened in 1971, and it was led from the Moet side by this pioneering guy, Alain Chevalier. And he was the first non-family outside manager of Moet and Chandon, 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 turnover that there is in fashion.

00:48:28 Ben Gilbert: And this is sort of where he makes it his mission, once he realizes that power of Dior, where he's 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's so special. I think I need to find more of these.

00:48:49 David Rosenthal: Ooh, that's interesting. Maybe we'll talk more about this in analysis, but I do wonder if Yves Saint Laurent hadn't done that first kind of saving of Dior, and certainly transitioned it from a tied-to-a-person entity to an enduring brand, this wouldn't have been the case. But also, even though he was only there for three years, that brief glimpse of modernizing fashion and luxury within Dior, if Dior were just the new look, Would that have been the case with Dior?

00:49:18 Ben Gilbert: Arnaud wouldn't have had the demonstrated proof point that you can imbue new life into a brand that has durable brand value outside of its current designer.

00:49:30 David Rosenthal: Yep. Okay. Well, let's talk LVMH. Louis Vuitton. Talk about from strength to strength for young Bernard. So we're now in 1987 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 Louis Vuitton. not Louis Vuitton, Moet Hennessy.

00:50:01 Ben Gilbert: I know, is that funny?

00:50:02 David Rosenthal: It's so funny.

01:32:00 Ben Gilbert: And one final fact on handbags. At Louis Vuitton's immense four-floor global store in Tokyo, 40% of all sales are made in the first room, which sells only monogrammed handbags, wallets, and other small leather goods. So it very quickly became the product of Louis Vuitton. But Louis Vuitton is a quarter of the entire empire, even today! with the 75 other brands. So the whole thing sort of revolves around this nice, extremely branded leather handbag. And one more telling point to really illustrate this. Way back at the beginning of the whole empire, there's Dior, it's a fashion house, it's about showing off the newest season's clothing, it's couture, you know, they're walking down the runway, it's custom made, and The shows that people would go to were originally to show off what customers could buy. And customers would take notice of it, and financiers would be there to get the demand signal from the customers, to be able to fund the manufacturers, to spin them up. 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 Louis Vuitton show and you'll be immersed in a Louis Vuitton experience. And we don't really expect you to buy any of the things on the models except all the models are carrying our accessories. So no matter what crazy cool clothes they're wearing or person is singing or crazy light show is happening. I will tell you, if you have not watched a fashion show in a long time, go to Louis Vuitton's website and just watch a video of what a show is today.

00:13:36 David Rosenthal: So two years later, by 1949, Dior fashions were literally 75% of Paris's fashion exports and 5% of the entire nation's export revenue.

00:13:50 Ben Gilbert: How very French.

00:13:52 David Rosenthal: And I believe to this day, the luxury industry is the largest export of France. So later in 1947, they launched Christian Dior perfumes with the fragrance Miss Dior, very famous fragrance. And then in 1950, the GM within Boussac, who's running kind of like Dior as a business, Jacques Rouet, comes up with a new business model idea. He wants to capitalize on the incredible international success of Dior fashion, both the haute couture, the custom-made, incredibly expensive pieces, but also the ready-to-wear lines that they were producing out of this in standard sizes that women all over the world could buy, and the budding success of the perfume line. He thinks, this name, this brand has so much value. What if we license the use of the brand out to other goods producers? We can just basically invent money.

00:14:52 Ben Gilbert: And they do. As long as we don't put our foot on that pedal too hard and devalue the whole thing, then this is basically a 100% gross margin money fountain that points at our company.

00:15:03 David Rosenthal: Yes, and it works really well for a long time. I mean, ultimately, the Dior label would get licensed to hundreds of third parties. I believe neckties were the first, but women's hosiery, hats, gloves, handbags, you name it, there was a Dior license label out

00:15:22 Ben Gilbert: bear. Thousands of products manufactured everywhere in the world at every different level of quality, very few of which were actually created by Christian Dior or the Boussac company themselves.

00:13:36 David Rosenthal: So two years later, by 1949, Dior fashions were literally 75% of Paris's fashion exports and 5% of the entire nation's export revenue.

00:13:50 Ben Gilbert: How very French.

00:13:52 David Rosenthal: And I believe to this day, the luxury industry is the largest export of France. So later in 1947, they launched Christian Dior perfumes with the fragrance Miss Dior, very famous fragrance. And then in 1950, the GM within Boussac, who's running kind of like Dior as a business, Jacques Rouet, comes up with a new business model idea. He wants to capitalize on the incredible international success of Dior fashion, both the haute couture, the custom-made, incredibly expensive pieces, but also the ready-to-wear lines that they were producing out of this in standard sizes that women all over the world could buy, and the budding success of the perfume line. He thinks, this name, this brand has so much value. What if we license the use of the brand out to other goods producers? We can just basically invent money.

00:14:52 Ben Gilbert: And they do. As long as we don't put our foot on that pedal too hard and devalue the whole thing, then this is basically a 100% gross margin money fountain that points at our company.

00:15:03 David Rosenthal: Yes, and it works really well for a long time. I mean, ultimately, the Dior label would get licensed to hundreds of third parties. I believe neckties were the first, but women's hosiery, hats, gloves, handbags, you name it, there was a Dior license label out

00:15:22 Ben Gilbert: bear. Thousands of products manufactured everywhere in the world at every different level of quality, very few of which were actually created by Christian Dior or the Boussac company themselves.

00:53:54 David Rosenthal: So Hennessy, especially it's the dominant cognac brand all around the world, but in Asia, in Japan, it is huge. So he grew Chevrolet, the combined revenue of the companies from about 300 million to like well over a billion in these 10 years, super, super successful. So that was Chevalier and the Moët side heading into this merger. Over on the Louis Vuitton side, the story is frankly even more impressive. Louis Vuitton at this point in time was headed by the legendary Henri Raquemier, who was part of the Vuitton family, but he had married in. He was an entrepreneur and professional manager businessman who had married in and taken over the reins of Louis Vuitton.

00:54:41 Ben Gilbert: He was like Louis Vuitton's great granddaughter's husband, something like that.

00:54:45 David Rosenthal: And what he did is, frankly, amazing. I don't think it's an overstatement to say that Henri Racamier invented the modern global luxury brand.

00:54:55 Ben Gilbert: No, that's exactly right. Louis Vuitton started way back in the 1800s, literally the guy, Louis Vuitton, making trunks for basically royalty, like Napoleon III's wife, the Empress Eugenie. The stuff that he would make, and actually not only make, but also pack, because your trunk maker was also your trunk packer because you had for women packing their clothes like corsets and all sorts of crazy stuff you had to jam in and not destroy your clothes.

00:55:25 David Rosenthal: I believe the position was called the Royal Laetiae, I think.

00:55:29 Ben Gilbert: It was like a royal appointment. But to your point, it used to literally exclusively be for royals.

00:52:29 David Rosenthal: We're now talking about other more durable luxury brands, leather goods, drinks, spirits. There's not the same kind of change and turnover that there is in fashion. And so these brands are truly multi-hundred year brands.

00:52:44 Ben Gilbert: Right. The products don't change. The benefit of drinking Dom Perignon is that you're drinking basically the same thing that the monk originally came up with and they're making the exact same way by hand all these years later. If you look at the wine and spirits division of LVMH, it's the most predictable, durable, not fashion and trend driven part of the business.

00:53:05 David Rosenthal: Back to Chevalier, the other consequence of these brands and businesses not changing that much is the families ran them. Outside professional management wasn't a thing in these companies until Chevalier came into Moet as the first kind of recruited outside manager. And then he engineered the merger with Hennessey and it was brilliant. It makes so much sense. You're both in the spirits business. This is a regulated industry in most of the world with very important distribution networks. If you put these two businesses together, you now more than double effectively 2 plus 2 equals 10, your power in the distribution networks around the world. So this was a huge business success. He also had the foresight to really invest in distribution in Asia for these companies. So Hennessy, especially it's the dominant cognac brand all around the world, but in Asia, in Japan, it is huge. So he grew Chevrolet, the combined revenue of the companies from about 300 million to like well over a billion in these 10 years, super, super successful.

00:53:54 David Rosenthal: So Hennessy, especially it's the dominant cognac brand all around the world, but in Asia, in Japan, it is huge. So he grew Chevrolet, the combined revenue of the companies from about 300 million to like well over a billion in these 10 years, super, super successful. So that was Chevalier and the Moët side heading into this merger. Over on the Louis Vuitton side, the story is frankly even more impressive. Louis Vuitton at this point in time was headed by the legendary Henri Raquemier, who was part of the Vuitton family, but he had married in. He was an entrepreneur and professional manager businessman who had married in and taken over the reins of Louis Vuitton.

00:54:41 Ben Gilbert: He was like Louis Vuitton's great granddaughter's husband, something like that.

00:54:45 David Rosenthal: And what he did is, frankly, amazing. I don't think it's an overstatement to say that Henri Racamier invented the modern global luxury brand.

00:54:55 Ben Gilbert: No, that's exactly right. Louis Vuitton started way back in the 1800s, literally the guy, Louis Vuitton, making trunks for basically royalty, like Napoleon III's wife, the Empress Eugenie. The stuff that he would make, and actually not only make, but also pack, because your trunk maker was also your trunk packer because you had for women packing their clothes like corsets and all sorts of crazy stuff you had to jam in and not destroy your clothes.

00:55:25 David Rosenthal: I believe the position was called the Royal Laetiae, I think.

00:55:29 Ben Gilbert: It was like a royal appointment. But to your point, it used to literally exclusively be for royals.

00:47:14 David Rosenthal: Now he's known as this almost reclusive wealthiest man in the world. He doesn't do interviews very often. He used to do a lot of interviews.

00:47:20 Ben Gilbert: Right. And he would say stuff that were super clarifying and illustrative of how he did all this. And so we're not just speculating that he learned this bag of tricks about leverage buyouts from America. He actually said in an interview, when you live in a country and do business in it for some time, you try to be influenced by it, especially when you do business in the paradise of business, which is America. Which I always love that. It's just so like, okay, yup, 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 calls star brands. where if a brand is truly luxury, you are able to generate much higher margins from it. Not a little bit, but the whole step change different of margins because you're serving a customer that has very little sensitivity to higher prices. Even if manufacturing costs go up a little, the price can go up a lot. 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 realizes that power of Dior, where he's 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's so special.

02:24:29 Ben Gilbert: Yeah, the interesting thing about this one is that it actually gets shaken out in the French courts. So in 2014, a French court ruled that LVMH had to sell down its stake from 23%.

02:24:38 David Rosenthal: Because it was illegal. How they masked their identity in acquiring the stake.

02:24:42 Ben Gilbert: But the net of it is they had done some of it through Group ARNO and some of it through LVMH. And so Group ARNO had ended up with about 8%, and the rest was owned by LVMH. So the court orders LVMH to distribute that out to shareholders. So awesome little dividend for all the LVMH shareholders. And what Group ARNO does with their 8% is they use that to pay for the 25% of Dior that it does not already own.

02:25:11 David Rosenthal: Yeah, this is the minority stake way back in the day that they had IPO'd of Dior to help finance buying into LVMH.

02:25:20 Ben Gilbert: Yes. And so, of course, just like Dom Desoliers says, Group Arnault ended up with about $5 billion in profit from this whole thing. Even when he loses, he wins. And so they end up with more control over Dior, which then ends up just getting rolled into LVMH finally in 2017. the holding company, Group Arnault, gets to go from 37% to about 48% economics, and I think somewhere like 63% of the control of LVMH by basically doing stock swaps. So now there's a problem solved where neither LVMH, nor Dior, nor Group Arnault own any more Hermes. And because all of this has appreciated since 2001 when he started, Bernard Arnault has now solidified control over Dior and LVMH for the foreseeable future. Yeah.

00:09:24 David Rosenthal: So, Dior had been a successful designer before the war, and then during the war he kind of gets co-opted into this. He works at the Maison Lucienne Lelong, where he's mostly designing these boxy uniform-like dresses for the wives of Nazi officers. So, after the war, he's one of the few really talented designers out there that are on the market and aren't totally tainted by the Nazis. And the wealthy textile industrialist, Marcel Boussac, approaches him in 1946 to come and lead and renovate his old flagship Parisian fashion house, Philippe et Gaston. It's like a Beauty and the Beast episode here. Dior, though, says, I want to make a fresh start after the war. I think I'd rather do something under my own name than reviving this old brand. And Boussac says, oh, okay, that's fine. Like, we don't need to do that. I agree with you. I'll just finance you starting this new fashion luxury maison here and revitalizing the industry in Paris and we'll start fresh. So they get to work, he finances Dior.

00:10:31 Ben Gilbert: It's kind of like the story of Fairchild Semiconductor, but if Fairchild Camera and Instrument had let the traitorous eight actually name it themselves, but still basically owned by the parent. Yes. Okay, so you got the brand Dior getting started by the actual designer Christian Dior and totally owned by Boussac?

00:10:51 David Rosenthal: Yes, totally owned by Boussac.

00:51:10 David Rosenthal: So the enemy I know a little bit about is better than the enemy I know nothing about.

00:51:15 Ben Gilbert: Alright, so we ended up in this shotgun wedding defensive move where everyone thought it was their best option to combine these two family companies. Maybe let's go back to the origins of Louis Vuitton and the origins of Moet and Hennessy. How did we get to this position?

00:51:30 David Rosenthal: Yeah, and it's super interesting because both of these companies on their own were on great trajectories. And it was actually bringing them together that killed the family. So let's start with Moet Hennessy. That itself was a merger that had happened in 1971 between Moet and Chandon and Hennessy, Hennessy, the cognac company, Moet and Chandon, the champagne and other beverages producer. The champagne market is very fragmented. The brands are fragmented, but it was already starting to consolidate ownership. And so Moet had been consolidating that. This merger though, between Moet and Hennessy made a ton of sense and was super successful. It happened in 1971, and it was led from the Moet side by this pioneering guy, Alain Chevalier. And he was the first non-family outside manager of Moet and Chandon, 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 turnover that there is in fashion.

01:33:32 Ben Gilbert: crazy light show is happening. I will tell you, if you have not watched a fashion show in a long time, go to Louis Vuitton's website and just watch a video of what a show is today. It is a super high production, crazy event. It's like Monday Night Football. Yep. But at the end of the day, what they cause consumers to do, love the brand more and buy more handbags.

01:33:54 David Rosenthal: Yes, obviously. Louis Vuitton is the star then and now within LVMH. And Bernard totally realizes that and leans into it. But there is also this element of building a global luxury group that really is his unique counterintuitive insight that you can achieve very powerful scale economies in the luxury industry. And you just can't do it in the way you do it in other industries. The reason it's counterintuitive, you know, you think about like Procter and Gamble or somebody like that in other consumer goods, they have scale economies because they outsource production, they get it cheaper, you know, and then they make more tide than anyone else. In luxury, that would defeat the whole thing.

01:34:43 Ben Gilbert: Right. There's natural diseconomies of scale where the more of something you make, the less valuable the luxury consumer will think it is.

01:34:50 David Rosenthal: We saw this with Dior in the 50s and 60s when the licenses diluted the brand. So even innovators like Racamier, they never would have imagined that scale economies could exist in luxury. Like you would never outsource production in luxury.

01:35:05 Ben Gilbert: Nobody realized that these things could be large scale businesses, period.

00:02:26 Ben Gilbert: Another crazy thing on LVMH, their market cap has grown 20x in 20 years, which I'll take that any day of the week. Some of you love their products and some of you think they are stupid and frivolous. They have brands across fashion, handbags, perfume, watches, jewelry, wine, spirits, you name it. Travel. They own just an insane number of brands with 75 houses today that include Dior, Louis Vuitton, Moet, Hennessy, Voud Cleco, Dom Pérignon, Tiffany. And it's not just the brands. They've expanded into distribution with retail like Sephora and all the duty-free shops that you see at airports. And they have even recently expanded into travel with Chaval Blanc Resorts and other travel companies. And for those of you who have been sort of reading the headlines, this wide-sweeping empire is owned and controlled by the now wealthiest man in the world, more than Bezos, Gates, or Elon Musk, Bernard Arnault. And, fascinatingly, this richest man in the world wasn't the founder of any of these brands. This story has a dash of Buffett, a little bit of Steve Jobs, and some unbelievable deal-making stories about how Mr. Arnault turned $15 million of capital in 1985 into the over $200 billion fortune that it is today. I'm also super excited to do the analysis on this one, David, because the luxury industry is like business strategy bizarro world. You need scarcity. So there are constraints on your growth. You can't lower your cost structure too much without devaluing your brand. You can't really outsource activities, even if they're not your core competencies.

00:53:54 David Rosenthal: So Hennessy, especially it's the dominant cognac brand all around the world, but in Asia, in Japan, it is huge. So he grew Chevrolet, the combined revenue of the companies from about 300 million to like well over a billion in these 10 years, super, super successful. So that was Chevalier and the Moët side heading into this merger. Over on the Louis Vuitton side, the story is frankly even more impressive. Louis Vuitton at this point in time was headed by the legendary Henri Raquemier, who was part of the Vuitton family, but he had married in. He was an entrepreneur and professional manager businessman who had married in and taken over the reins of Louis Vuitton.

00:54:41 Ben Gilbert: He was like Louis Vuitton's great granddaughter's husband, something like that.

00:54:45 David Rosenthal: And what he did is, frankly, amazing. I don't think it's an overstatement to say that Henri Racamier invented the modern global luxury brand.

00:54:55 Ben Gilbert: No, that's exactly right. Louis Vuitton started way back in the 1800s, literally the guy, Louis Vuitton, making trunks for basically royalty, like Napoleon III's wife, the Empress Eugenie. The stuff that he would make, and actually not only make, but also pack, because your trunk maker was also your trunk packer because you had for women packing their clothes like corsets and all sorts of crazy stuff you had to jam in and not destroy your clothes.

00:55:25 David Rosenthal: I believe the position was called the Royal Laetiae, I think.

00:55:29 Ben Gilbert: It was like a royal appointment. But to your point, it used to literally exclusively be for royals.

01:40:35 David Rosenthal: Had innovated and started this controlling your distribution, but it stopped at, we're going to do our own retail outlets. What Arno and LVMH does. And this really just hollows out the global retailing industry and especially department stores. I believe they learned this from Japan where this was an accepted model in the Japanese department stores. They realize now that they have so much scale by having all these brands. And by the way, we should say over the next 10 years, LVMH under Bernard goes out and they acquire Celine, they acquire Berluti, they acquire Kenzo, they acquire Guerlain, they acquire Loewe, they acquire Marc Jacobs. They're getting all these brands. Fendi and Bulgari are big ones.

01:41:18 Ben Gilbert: Yep, totally.

01:41:19 David Rosenthal: They acquire watch brands, they acquire luggage brands, et cetera.

01:41:22 Ben Gilbert: Tag Heuer.

01:41:23 David Rosenthal: Yeah. At a certain point, they're like 50, 60, 70% of the products that are going into department stores. Take here in the U S like a Nordstrom or a Neiman Marcus and like they go to the department stores to the retailers and they're like, look, the old model where we sold you our goods wholesale and you bought it from us and then you retailed 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 the store concept. We're going to pay you rent. We're going to lease space from you for a boutique within your department store. We're going to own the inventory.