Who would want to run a company that makes and sells products no one needs? Only a fool, right? Unless, of course, the company is LVMH Moët Hennessy Louis Vuitton, the world’s largest and by far most successful purveyor of luxury goods. Each year, LVMH sells billions of dollars— $ 10 billion in 2000 to be exact—of items that serve little purpose in the lives of consumers except to fulfill dreams. And those dreams don’t come cheap—a magnum of 1985 Dom Pérignon Rosé champagne costs about $ 925; a Givenchy gown $ 15,000; and the finest TAG Heuer watch upwards of $ 58,000. No one needs these items, of course, yet millions desire them. The executive driving that desire is Bernard Arnault. The 52-year-old chairman of LVMH, he is as shrewd a businessman as they come. Dubbed “the Pope of Fashion” by the global press, Arnault has spent the past 15 years building LVMH from a small, nearly defunct clothing manufacturer to a conglomerate comprising approximately 50 of the world’s most powerful brands. According to the French research group Jacques Chahine, LVMH’s combined revenues are expected to reach $ 11 billion this year, with a market capitalization of roughly $ 27 billion. Without a doubt, Arnault has made missteps along the way—some of his own personal Internet investments have not exactly soared—but he can only be called masterful in his ability to manage creativity for the sake of profit and growth. Each year, new products account for approximately 15 % of LVMH sales, and some of them enjoy operating margins of up to 47 % . (For a list of the company’s brands, see the exhibit “The House of Arnault.”) 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? The answers may surprise you. 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.” In a series of recent interviews with HBR, conducted in Paris and New York, Arnault spoke in depth about the other techniques he uses to bolster profitable creativity. The company listens to focus groups with “one ear,” for instance, and only hires managers so respectful of the creative process that they will endure its necessary chaos. Yet when it comes to getting its creativity onto shelves, chaos is banished. The company imposes strict discipline on its manufacturing processes, meticulously planning, for instance, all 1,000 tasks in the construction of one purse. The LVMH process has one goal: star brands. 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,” Arnault notes dryly, “fortunately.” The House of Arnault *Christian Dior is one of the indirect holders of LVMH What was your reaction when you first saw John Galliano’s newspaper dresses? I was shocked, which is good, of course. A new product is not creative—it is not important—if it does not shock when you first see it. And after the shock wore off, did your managerial alarm bells start ringing? I don’t have alarm bells when it comes to creativity. If you think and act like a typical manager around creative people—with rules, policies, data on customer preferences, and so forth—you will quickly kill their talent. Our whole business is based on giving our artists and designers complete freedom to invent without limits. Our philosophy is quite simple, really. If you look over a creative person’s shoulder, he will stop doing great work. Wouldn’t you, if some manager were watching your every move, clutching a calculator in his hand? So that is why LVMH is, as a company, so decentralized. Each brand very much runs itself, headed by its own artistic director. Central headquarters in Paris is very small, especially for a company with 54,000 employees and 1,300 stores around the world. There are only 250 of us, and I assure you, we do not lurk around every corner, questioning every creative decision. So no one in the company asked Galliano, “Who in the world will actually wear a newspaper dress?” Absolutely not, and we did not need to. The most successful creative people—and you would have to say that John Galliano is one of these—want to see their creations in the street. They don’t invent just to invent. Yes, they come up with many exciting ideas, and many of these ideas shock; they look crazy at first, completely crazy. But the true artists that make LVMH a success, they don’t want the process to end there. They want people to wear their dresses, or spray their perfume, or carry the luggage they have designed. The responsibility of the manager in a company dependent on innovation, then, very much becomes picking the right creative people—the ones who want to see their designs on the street. And that desire inside them is something that you, as a leader of a company, can only sense. After all, most artists don’t go around proclaiming, “I want to be a commercial success.” They would actually hate to say that. And frankly, if you asked them, they would say they don’t actually care one way or another if people buy their products. But they do care. It’s just buried in their DNA, and as a manager, you have to be able to see it there. I know you are going to ask, “How can I see into a person’s DNA, to know if he is an artist with commercial instincts?” So I will answer, it just takes experience. Years of practice—trial and error—and you learn. And just as important, to allow creativity to happen, a company has to be filled with managers who have a certain love of artists and designers—or whatever kind of creative person you have in your company. If you deeply appreciate and love what creative people do and how they think, which is usually in unpredictable and irrational ways, then you can start to understand them. And finally, you can see inside their minds and DNA. Dior didn’t actually end up selling Galliano’s newspaper dresses, right? No, there was never any intention to sell them. I am absolutely convinced it was excellent to send them down the runway, because it put the idea out there. It was a new concept—edgy, ahead of anyone’s thinking. It made everyone talk. When the dresses came out, you could hear the whole audience gasp. There was a buzz—an excitement. Galliano was thrilled, the audience was thrilled. But once the idea was out there, we had no problem reproducing the dresses in fabric and selling them, and they did very well. The important point is, you cannot compromise creativity at its birth. The dresses had to start in newspaper. We did not begin the creative process by talking about the bottom line. Now, that does not mean that you shouldn’t make suggestions during the creative process. Not long ago, I said to one of our designers, “Why don’t you take a trip to Japan and see what the teenage girls are wearing on the streets at night?” These girls are very leading edge in fashion; they create trends years before they hit the mainstream, like with those very high shoes, and it makes very good sense to watch them. I did not say to the designer, “Go and see what kinds of shoes they are wearing and copy them,” although I was hoping he would notice their shoes. I just suggested, “Go look.” And in fact, he came home very inspired. That’s all a manager can hope to do, or should do, in my opinion. What if the marketplace is screaming for one kind of product or another—should that factor into the creative process? That is one mind-set, but it is not consistent with true creativity. Some companies are very marketing driven; they follow the consumer. And they succeed with that strategy. They go out, they test what people want, and then they make it. But that approach has nothing to do with innovation, which is the ultimate driver, we believe, of growth and profitability. You can’t charge a premium price for giving people what they expect, and you won’t ever have break-out products that way—the kinds of products that people line up around the block for. We have those, but only because we give our artists freedom. Are you saying you shouldn’t conduct market tests, such as focus groups, before you release a product? You should, but you will never be able to predict the success of a product that way. What a test shows you is limited: whether the product has a potential problem, such as with its name. You may discover that the name of a product is good in English, say, but it means something else in Japanese. Or you can test a perfume and find out that in some part of the world, one part of its formula carries a bad connotation that you have not thought of. But these tests will never tell you if a product is going to be a worldwide success. Take J’adore, the fragrance we released in 1999. Nothing in the tests suggested what would happen; the people in the focus groups said it was fine, just that. But look what happened—according to our estimates, it was among the top three best selling perfumes in the world last year. LVMH Net Sales and Operating Profits Obviously, we won’t launch a product if the tests clearly show it is going to be a failure, but we won’t use tests to modify products, either. I just heard that many movie studios now show the endings of films to audiences, and they change them according to the audiences’ reactions. So movies end up being a marketer’s dream, not an artist’s. Our strategy is to trust the creators. You have to give them leeway. When a creative team believes in a product, you have to trust the team’s gut instinct. That is the case with a perfume we launched this year: Flower, by Kenzo. We put it forward not because of the tests but because the team believed in it. It’s a very special creation. In the tests, people did not know what to make of it—the shape of the bottle is different, and its signature flower is a poppy, which has no scent. It’s not like anything else. But it’s a fantastic product, and it’s been an unbelievable success for the company: The Kenzo Fragrance Group’s sales rose 75 % in the first six months of 2001, based largely on the success of Flower. That’s why you should listen to focus groups with only one ear. When you give creative people as much freedom and control as LVMH does, do you have to be prepared to accept some failures? Well, we don’t like failures. We try to avoid them. That is why, with many of our new products, we make a limited number. We do not put the entire company at risk by introducing all new products all the time. In any given year, in fact, only 15 % of our business comes from the new; the rest comes from traditional, proven products—the classics. Vuitton is a perfect example. This year, Marc Jacobs came up with the graffiti design, and it was a big departure for the line. Did you see it? It is beautiful and crazy, right? It does not look like Vuitton at first glance; who would have thought of that on suitcases? But we only had that on several items—for which, by the way, there is now a waiting list worldwide. The rest of the products were Vuitton that you could have bought last year, or five years ago, or ten years from now. They are legacy pieces. We will use the same approach with the new Dior handbag. It is very exciting, very expensive. You will see it in all the ads and want to buy it. I assure you we will be out of stock fast. But it is very expensive: $ 1,800. We will make only several thousand of them. The rest of the line will reflect some ideas of that new purse—the same shape—but will be less radical in terms of fabrics and design. We will make more of those and sell them for less. That way, we can have our creativity but also minimize risk. Of course, with some businesses, you cannot avoid risk, and sometimes you do not succeed. And so you learn. (For Arnault’s thinking on his Internet ventures, see the side-bar “Stars on the Net? Be Patient.”) With still other businesses, you cannot say they are outright failures or learning experiences, just that their success is taking time. That is the case with Christian Lacroix. Stars on the Net? Be Patient At the start, everybody in business was saying, ‘The rules of the Internet are new and different. When you look at a project, you look at the number of users and the number of viewed pages, but you don’t worry about old notions like cash flow.’ Then the market went crazy: It went very high and then completely collapsed. Now we are back to the old rules. That’s a good thing, because now an investor or entrepreneur can make investments decisions in a more rational way. The Internet is a fantastic new media, and it will stay with us if we understand how it should be used. Sephora.com is a good example of what works on the Internet. Eighteen months ago, Sephora.com had ten competitors. Today, all of them have disappeared. We are still losing money, but next year we will break even. This year we had sales of $ 40 million to $ 50 million; at $ 60 million we will break even, so we are almost there. Sephora.com is, you see, fulfilling a real need that exists—through a combination of bricks and clicks. It has a large and growing store network and a very compelling on-line offering. Together, they create a model that satisfies customers. ELuxury will also succeed. We see it not as competition for our own businesses but as a convenience for our customers. Say they have seen a pair of shoes or a suitcase they liked in a store, but they cannot purchase it at that moment. They can buy it on-line instead. This is particularly useful to them during busy seasons, like around Christmas. Also, eLuxury allows our customers to feel confident that they are buying the real thing. You know, many of our products get imitated, and fakes are sold on the Internet. But eLuxury guarantees original products. ELuxury won’t change the way we do business, but it will help us serve customers that much better. The Internet will not transform business the way many people initially thought it would. It will enhance it. Success on the Internet, like any other business, will take time. You need patience. LVMH launched that fashion house ten years ago, and while many consider it to be one of the most creative of your entire portfolio, it has yet to turn a profit. Why not close shop? Because we have learned so much from Lacroix. It has been like a laboratory for us where we have learned how to start a brand from scratch. I mean, at the beginning, we thought, “Okay, we have a genius here with Christian Lacroix,” but we learned that genius is not enough to succeed. It was something of a shock, to be honest, to discover that even great talent could not launch a brand from zero. A brand must have a heritage; there are no shortcuts. The fact is, star brands take time to grow. Take some of the small makeup companies we have acquired recently, like Bliss and Urban Decay. When we bought them, they were little start-ups run by their founders—very simple businesses, but with a lot of originality in the products. So now we know we must nurture them until they have some history. But even if it takes ten or 15 years for them to become stars, that has been an amazing investment, right? So is heritage the main characteristic of a star brand? I would say that there are four characteristics required. A star brand is timeless, modern, fast growing, and highly profitable. Can a brand be all four at once? It is rare. In my opinion, there are fewer than ten star brands in the luxury world. It is very hard to balance all four characteristics at once—after all, fast growth is often at odds with high profitability—but that is what makes them stars. If you have a star brand, then basically you can be sure you have mastered a paradox. Let’s talk about each characteristic in more detail. What do you mean by 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. I can guarantee that people will be drinking it in the next century. It was created 250 years ago, but it will be relevant and desired for another century and beyond that. It is for the ages—just like certain pieces of luggage that you buy for your entire life. Timelessness, of course, is not just something you find in LVMH brands. I would say Cartier is timeless, and Hermes. Also Rolls-Royce, and even, say, IBM. That is an excellent brand. The problem is that the quality of timelessness takes years to develop, even decades. You cannot just decree it. A brand has to pay its dues—it has to come to stand for something in the eyes of the world. But you can, as a manager, enhance timelessness—that is, create the impression of timelessness sooner rather than later. And you do that with uncompromising quality. A lot of companies talk about quality, but if you want your brand to be timeless, you have to be a fanatic about it. Before we launch a Louis Vuitton suitcase, for example, we put it in a torture machine, where it is opened and closed five times per minute for three weeks. And that is not all—it is thrown, and shaken, and crushed. You would laugh if you saw what we do, but that is how you build something that becomes an heirloom. By the way, we put some of our competitors’ products through the same tests, and they come out like bouillie—the mush babies eat. Quality also comes from hiring very dedicated people and then keeping them for a long time. We try to keep the people at the brands, especially the artisans—the seam-stresses and other people who make the products—because they have the brand in their bones—its history, its meaning. At the stores, too, many of the salespeople have the brand in their bones. Most companies clean house when they acquire a new brand. We don’t do that because we have found it hurts quality terribly. When you clean house, you usher out the people who respect the brand the most and who contribute to its longevity—its timelessness, its authenticity. At the same time, you want people to constantly reinvent the brand, right? Yes, otherwise you won’t be current, and a star brand is current—or you could call it fashionable. It is edgy, it has sex appeal, it is modern. In some way, it fulfills a fantasy. It is so new and unique you want to buy it. You feel as if you must buy it, in fact, or else you won’t be in the moment. You will be left behind. Fashion, of course, comes from innovation—the creativity of the designers. That is sometimes harder to guarantee than quality, which you can actually build in to a product, but just as important. The hard truth is, you must be old and new at once. In a star brand you honor your past and invent your future at the same time. It is a subtle balance. And meanwhile, you grow? Without growth, it is not a star brand, as far as I am concerned. In 2000, Louis Vuitton, which is by far the largest luxury brand in the world, had 40 % growth in sales, which makes it a superstar, no? Growth 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. Now, growth is not just a function of high price. You also grow when you move into new markets, such as those in developing countries. But mainly, growth is a function of high desire. Customers must want the product. That sounds simple, I am sure, but to get advertising right is very, very difficult—it’s difficult to get advertising to represent the true brand. Most companies think it is enough to use advertising to present a picture of the product. That’s not enough. You need to project the image of the brand itself. The latest Dior ad campaign is a perfect example of how to do this right. You would know this was an ad for a Dior product even without the name of the company there. You cannot mistake it for anything else. You know this is Dior because the model projects the image of the brand—very sexy and modern, very feminine and energetic. The biggest mistake a consumer company can make, Arnault says, is to delegate advertising to the marketing department. The last thing you should do is assign advertising to your marketing department. If you do that, you lose the proximity between the designers and the message to the marketplace. At LVMH, we keep the advertising right inside the design team. With the Dior campaign, John Galliano himself did the makeup on the model. He posed her. The only thing Galliano did not do himself was snap the photo. Advertising is expensive—so expensive it must be a challenge to achieve the high profitability you consider essential to star brands. It is true that the front end of a star brand—the innovation, supporting the creative process, the advertising, and so on—is very, very expensive. High profitability comes at the back end of the process, and behind the scenes. It comes in the atelier—the factory. Our products have unbelievably high quality; they have to. But their production is organized in such a way that we also have unbelievably high productivity. The atelier is a place of amazing discipline and rigor. Every single motion, every step of every process, is carefully planned with the most modern and complete engineering technology. It’s not unlike how cars are made in the most modern factories. We analyze how to make each part of the product, where to buy each component, where to find the best leather at the best price, what treatment it should receive. A single purse can have up to 1,000 manufacturing tasks, and we plan each and every one. In that way, the LVMH production process is the exact opposite of its creative process, which is so freewheeling and chaotic. If you walk into a Vuitton factory, you will see very few machines. Almost every piece is made by hand. Usually, piecework is the most inefficient operating system in the world, but for us it is different because we give our craftsmen and women fantastic training. They are trained for months before they touch the products, and then, every task they do has been studied and refined for many years, so we know precisely how to arrange the atelier. No moment or motion is wasted in there. And that allows us to offer a very high quality product at a cost that makes our business very profitable. The one catch to this system is that it takes time. You cannot rush the training of the artisans or the planning of the atelier to make a product at maximum efficiency. When we come up with a new purse, for instance, it takes months to plan a process for producing it so that it will be profitable. So sometimes customers have to wait because output is so limited. Which is why you get long lines outside your stores. That’s right. And actually, that is not such a bad thing sometimes, because those lines have a way of increasing demand even further. But the main reason for the lines of customers is the combination of exceptional quality and craftsmanship at a good price. You manage a collection of luxury brands with long and rich legacies. But with the right management, can any brand become a star? No, I ’m afraid not. That is like asking, “Can any human being become a genius?” You cannot become Vladimir Horowitz, even if you can play piano and you practice ten hours a day. You need something more to be a star brand—you must have a gift. Many brands have the potential to be stars, but they are poorly managed. That’s too bad for them. But there are more brands that are as well managed as can be, and they will never be stars. They will never be successful the world over. They don’t have that something—that magic that you really can’t explain. I don’t want to sound like a pessimist. Some brands out there will make it to stardom. But their managers cannot be in a hurry. It takes time. But once you get the elements of a star brand aligned, they last for a long time. They stay and stay, and they deserve to.
