In Good Company with Nicolai Tangen - Jean-Jacques Guiony CFO of LVMH

Episode Date: June 1, 2022

In this episode Nicolai Tangen talks to Jean-Jacques Guiony, CFO of LVMH. Mr Guiony gives a unique peek into the inner workings of the world's largest and most powerful luxury goods company.The production team on this episode were Plan B’s Tor-Erik Humlen and Olav Haraldsen Roen. Background research were done by Sigurd Brekke and Bård Ove Molberg with additional input from our portfolio manager Anthony Sleeman.Links:Watch the episode on YouTube: Norges Bank Investment Management - YouTubeWant to learn more about the fund? The fund | Norges Bank Investment Management (nbim.no)Follow Nicolai Tangen on LinkedIn: Nicolai Tangen | LinkedInFollow NBIM on LinkedIn: Norges Bank Investment Management: Administrator for bedriftsside | LinkedInFollow NBIM on Instagram: Explore Norges Bank Investment Management on Instagram Hosted on Acast. See acast.com/privacy for more information.

Well, hi everybody. We are now live from Paris. I'm here with Jean-Jacques Gionni, who is one of the leading forces behind LVMH. And LVMH is a company where every Norwegian person owns roughly $1,000. So it's quite incredible. But let's kind of kick off in a bit of a simple way here. So for you, Jean-Jacques, what is luxury? It's quite a complicated question. I thought about it ahead of the meeting. It's a fairly complicated question because if you start defining luxury

through only products, stores, marketing, et cetera, you miss the point. The point is the customer behavior, the customer's desire. What do people want and why do they buy luxury goods? It's actually to please themselves, to make good, to raise their self-esteem. I mean, that's exactly about personal behavior and what people are trying to achieve in terms of status, in terms of the way they look, in terms of how they interact with others.

status, in terms of the way they look, in terms of how they interact with others. And we are providing products, or not only products, actually experiences, I mean the global luxury industry, that help people really achieve the goals of looking better, feeling better. That's actually the definition, in my view, of luxury. And one important point is not to put in the same basket luxury and high end for for for instance i don't know take steinway pianos there is nothing more i mean i play the piano there is nothing better than steinway pianos it's not a luxury item it's a fabulous instrument but it's not a luxury item why not because it has no volume and because it is not something that you would show off with

or at the very least express yourself with. It's really a dialogue between the product and yourself. Luxury is not simply a dialogue between the product and the client. It's also showing off. I mean, it doesn't have a very positive meaning, showing off, but it's really expressing oneself through uh logos through products in in different ways which are very important for the people that that are buying it this is why we have such a large market i mean the dialogue with a steinway piano is not

a very it's a very intimate dialogue it's not something that you can interact with other people with so what is a good luxury brand for you then when you look at a company? Well, per se, stricto sensu, a good luxury brand is two things. It's a name that is well-recognized, but with attributes. Let me give you an example on why we got so interested in Tiffany.

When you look at Tiffany, the name, everybody knows about it. So we should just inject her. So Tiffany is a big American brand that you just bought. Indeed. Indeed. A jewelry brand that we bought. The name is pretty well known, but it's not sufficient. What was interested in the brand is that not only you have a well-known name, but you have a lot of things going with it. Audrey Hepburn, diamond, Romans, New York, 57th Street, the blue collar. I mean a lot of things are spontaneously associated

to the brand, we call these attributes, are associated to the brand by a large amount of customers. That makes the brand very attractive because it's already well defined and the customers know a lot of things about it so then you build strategies but you know the foundations are there you build trade marketing strategies retail strategies but the foundations which is really the the definition of the brand and the strengths of the brand is there already but how

do you how do you how do you build such a brand from scratch? Can you build a brand from scratch? It's not easy. It's not easy. I mean, it takes ages. I mean, it takes luck, time. And frankly, we have not developed so many luxury brands from scratch. Or each time we've done it, well, they remain small today. We are getting into another topic, which is the topic of barriers to entry, which is very important in luxury. But a lot of barriers to entry into the luxury business

are pretty high and very difficult to overcome. This is why it is so difficult to create luxury brands from scratch. And most of the luxury brands date back ages ago. But I mean, you deliberately draw the lines back with your brands, right? So in the entrance of LVMH in Paris, you meet, you know, the Baluti shoes of Greta Garbo,

the shoes of Andy Warhol, the champagne of Winston Churchill, etc., etc. You go on. I mean, you deliberately establish these links, no? What you do in luxury is basically create a dialogue between the past and the present, between heritage and modernity. And that's very important. You need roots.

I mean, it's very important to have roots. And how important is the product itself? The product is very important, is extremely important and usually makes the difference. I mean, you can have strong brands, but in the short term, the product makes the difference. The good product, and good product is a lot of things, aesthetics, functionality, quality, I mean, makes the difference. And usually the momentum of the brand, the short-term momentum, I'm not talking about the brand itself as being a very important brand for decades, but the momentum of the brand is usually connected with the quality of the of the products that are

being marketed at a given point in time. How do you segment the client base and how do you and how important is the middle class here? In luxury the middle class is extremely important because that's the driving force being being luxury is the let's say the upper middle middle class. Let's put it that way. We're talking about people having a little bit of money. We don't sell to rich people. We sell to people having a little bit of money. We do sell to rich people.

I suspect you sell to rich people too. We do sell to. You're absolutely right. We do sell, but in percentage of total, it's way less than the upper middle class, the affluent people. I mean, our customer base is affluent people. It's not rich people. We do business a little bit with rich people, but the bulk of what we do, we do it with affluent people. So it's extremely important for us. We come back to the distinction between luxury and high-end. We are not high-end. We have high-end products

and we serve high-end clients, but we do also have $1,500 handbags, which are aimed at upper middle class. And upper middle class has different meanings depending on the market. In some markets people are, average revenue is pretty high. In other markets, average revenue could be half that or even less. So it's a different definition. But it's very important for us to really aim at convincing these upper middle class, these affluent people, people having a little bit of discretionary money, that we have products for them. And that's what makes the luxury business what it is. It is not a volume business, but it's a large business.

We are not looking at ourselves as selling large volumes, but nevertheless, we do have sizable businesses. So we have to manage that. Before we go to the company, just finally, what is your favorite personal piece of luxury? Probably the brand with exceptional products that you feel are really exceptional.

Loro Piana, for instance, is for me a fabulous brand. Loro Piana makes sweaters and cashmere and those kind of things. Indeed. And I remember that when we bought it, the owner of Loro Piana said,

you should buy a Loro Piana product, but I warn you, all the rest of your sweaters, jumpers, etc., you will have the feeling that you wear cardboard afterwards. It was very true, actually. So it's very addictive. There is also some part of addiction in luxury, but a good addiction. Moving on to the history of LVMH, it's been just an unbelievable journey, right?

The value of the company is now equal to Denmark's GDP. So incomprehensible, really. It's made Bernard Arnault the richest man in Europe and one of the richest people in the world. Just what sort of characteristics does it take for somebody to build a company like this? That's a very good question. Well, obviously, strategic sense. And Bernard Arnault was able to spot 30 years ago,

which is not yesterday. I mean, 30 years ago, the fabulous potential of luxury. And he's been surfing on that ever since. But it also requires the ability. I mean, the surfing image is always interesting because in surf, you need a good wave. That's the demand. But you need certain skills to stay on top.

Yeah. And what are these skills? These skills are several. First of all, you need the brands. As we discussed already, you don't create good brands. You develop them, but you need the starting point has to be good brands. But the main skill is to develop,

to have the ability to develop those brands. And it's all about management. I mean, very good management in all forms. It could be creation. It could be a management. It could be how people are behaving in stores and how do they convince clients that they should be buying something, et cetera.

So it's a lot of things. But it's really about creating the conditions for a sophisticated management system to develop and to be able to manage so many brands at the same time. And when I mean manage, it's more develop so many brands at the same time and when I mean manage is more developed so many brands at the same time. So I think one of the key strengths

that Bernardo has shown over the years is beyond his strategic instinct and the strategic vision that he had about luxury that he started 30 years ago and he has been developing ever since in many ways he has also been able to develop a management system.

He's not the only one. He has a few people around him that have been able to share this vision and to develop it alongside his own view of it. Typically, I see that hard work is underestimated when you look at these success stories worldwide. How hard does he work? He works pretty pretty hard. I mean his age is no secret, he's 73. I've been working, I had the privilege to work with him for the last 20 years almost and frankly he's as active today as he was 20 years ago and probably 30 years ago or even further than that.

He works very, very hard. And it is part of it because knowing what's going on, knowing the clients, knowing the strategies, knowing, I mean, when you have the, a group like LVMH is a group with many brands, but many brands means many situations, many experiences that you can

draw learnings from, a lot of things. The more you know about it, the more you know about luxury and the more you know about how to develop the business. And Bernard spends an awful lot of time working on that. He attends management presentation

he visits stores each and every Saturday morning he's visiting stores talking to clients talking to

sales assistant so being very close to the customers and what's the driver here I mean what makes

him continue like this you should ask him I don't know but frankly the only thing I can say is that he's as active as he's ever been.

Yeah. Well, I love it. It's the way to stay young. Moving on to ready to drink. I think few listeners will really comprehend the range you have in a way. It's nearly a monopoly you have in the champagne market in terms of the big brands. And so for your information, they control things like at the very high end, the Dom Perignon, the Krug, the Veuve Clicquot, Moet Chardon, Ruinard.

I mean, wow, you have cornered it. How did you do it? That's a little bit different from the strategies we discussed before. How have we done it? We invested into distribution. I mean, we had very good brands. We were not the only one, but we had very good brands. But we invested a lot into our distribution networks

to make sure that our bottles would be found, not necessarily in France, which is a very competitive market, where price is of the essence. So basically, we went outside France, where competition on prices is less tough, and we invested into our own distribution companies. We don't talk to the end customer, but we talk to the wine merchant, the restaurants, etc., to make sure that our bottles are in front of the best clients. And with that, it enabled us to raise progressively the price of our bottles. And as you said, I mean, to sort of concentrate, if not monopolize,

but at least to concentrate on the top end of the market. So it requires, obviously, strong products, strong brands, and we never compromise on quality. And so we do invest. The marketing investment is complicated in Champagne because there are many locations where apart from having a picture of the bottle, you're not allowed to do anything else.

I think it is very true in France. I think it is true in the same way in Norway. But that's why the distribution investment is so important, being close to the, if not the end customer, but at least the one who talks to the end customer. That requires money, and we've been able to do this investment. Now, your background is in uh m&a mergers and acquisitions so are you buying and selling companies and you were head of m&a at

lazard which was probably the preeminent shop in uh in france i guess at the time at the time it was what characterizes a good acquisition well the the acquisition cycle cycle in luxury is something interesting to analyze. There are phases when there is concentration and then nothing happens. If you try to look at it from a more financial viewpoint, it's pretty simple to analyze. I mean, the finance people, when they trade stocks, would talk about bid and ask. I mean, the price at which people are ready to sell and the price at which people are ready to buy. First of all, there is a tendency from sellers and buyers. The sellers would look at tomorrow's price and the buyers at yesterday's price.

In good times, these two prices tend to be close. Because for buyers, they tend to look forward and they feel the price will go up, whereas for sellers, they know that the business was worse XYZ before, and if they can get a better price, that's a very good surprise. So the bid-ask spread is small. It goes the other way around in tough times. So the first thing you observe is that consolidation tends to take place in good times, when the cycle is on the way up.

In other words, there is no such thing as bottom fishing. We have never seen a company being able to buy at a very low price and taking opportunity of tough times. It's very difficult to do because you don't know how low is low. And that's the difficulty.

I mean, if I tell you, you will turn left 200 meters before the next crossroad, you don't understand what I mean because it means nothing. It's exactly the same thing with acquisition when the cycle is on the way down. You never know how far you are from the bottom of the cycle. And if you know that it is the bottom of the cycle, everybody would be rushing to buy assets. And actually, the bottom of the cycle is

at the point in time when everybody has sold already and is not ready to buy. These things, you have a cycle. That's a very important point to bear in mind. The second thing I would comment is that when it comes to luxury, it's a tricky exercise because you do it on the way most of the acquisitions are done on the way up, but at pretty expensive prices. So you'd better be right on your assumptions when it comes to paying high earnings multiples on acquisition targets, because otherwise, I mean, your shareholders will be disappointed because you're not delivering the value you were supposed to deliver.

Do the acquisitions have to be friendly? I mean, you have some friendly ones. I guess the Bulgari one, the Loro Piana, they were friendly. Tiffany wasn't particularly friendly. It was not particularly friendly. I mean, Tiffany was a complicated acquisition because it was a typical U.S. acquisition, so it's not friendly,

but the U.S US boards tend to consider friendly and hostile as a direct function of price. How is it to now be married to somebody who didn't want to marry you? Well, they have, particularly in the US, they tend to have a system whereby all the management goes away after the acquisition. I don't mean that we have let them go. I mean that they go away because they have golden parachutes and they sort of trigger their golden parachutes 10 minutes after the acquisition. So we knew right from the

beginning that we would have to fill all the serious management position with new people, be they American, European, wherever from. In terms of management team, most of the management team at Tiffany is our newcomers. We don't have a legacy of hostility or being the barbarians at the gate as sometimes hostile takeovers are being analyzed because, once we did the acquisition, most of the management team, if not all of them, and I'm talking about a large number of people, went away because they exercised their golden parachute.

So that's a fact of life. I mean, that's the way it works in the US. What are the other things you would love to own? Well, you can dream about all sorts of companies, but one has to be realistic about what is achievable and what is not. That's the first point. And the second point is also to look at the portfolio that we have and whether there are areas in this portfolio where we don't really own exceptional assets. One example is high-end luxury watches. For instance, I mean, we have Hublot.

Hublot is a great brand. So for your information, Hublot is the big bang, pretty loud, big watches, right? Exactly. So it's very, I mean, we are very proud of this brand. It's a fantastic brand, but it's not everybody's watches. Let's put it that way. We lack in the portfolio the classical high-end watch,

typically the Patek Philippe, the Audemars Piguet, that type of watch. We don't have any. That's something that we would welcome as a potential acquisition opportunity. We also feel that in the wine and spirit business, I mean, there are fabulous whiskey brands. For instance, we do own Glenmorangie,

which is a great pure malt brand, but there are fabulous brands. And we would love to expand in this business, which is very similar to our champagne and cognac business. A lot of roots, a lot of aging of product, not so much emphasis on marketing. I mean, you sell always the same product, but importance of distribution, exactly what we have developed over the years with Moët and Hennessy. So there are plenty of categories.

I mean, we are not so much developed in skincare compared to our competitors, Estée Lauder or L'Oreal. I mean, we would love to expand there. Maybe acquisition would enable us to fulfill those gaps, but they depend. I mean, you don't create opportunities. I mean, it depends whether they come or not. We are patient and we are extremely, we are able to move very fast as we have shown in the past. We have a lot of

young people and students who follow these podcasts now what are you doing to appeal to those guys the younger people and the new generation it's a good a good point the fact and the matter is that the bulk of our customers are young ones so i would say that by definition or we'll try to discuss that a little bit later, but by definition, luxury is appealing to the young customers, not all luxury products. I mean, if you want to start your life and career and have the ability to buy a 40,000 euro crocodile handbag from Vuitton or Dior, maybe it's a little bit out of reach for a while.

But it's also part of many people's accomplishment in professional life to have the ability to buy and to invest into luxury goods. And the sooner they do it, the better they feel about it. Is it also that they feel a bit more insecure and need to have a brand to rely on? Not so sure. I think it's about self-accomplishment and also pleasing oneself. Just having the opportunity. Take handbag.

I mean, you take a plastic bag from a supermarket, it does a job of carrying whatever you have to carry. It does a job, but it's not the same feeling. So pleasing oneself is having a, I mentioned before the Loro Piana jumpers. I mean, the feeling of Loro Piana jumpers, which is much more expensive than any other jumper, is incomparable. Just pleasing myself, just feeling feeling I feel better into that.

This has no age and it starts, and people start early. And we end up with the architecture of most of our brands. Don't take me wrong, I mean a brand like Loro Piana, which is very expensive, has on average older customers than a brand like Vuitton that has a lot of luxury, how can I say, entry-price product. It doesn't mean cheap, but entry-price. Can you elaborate a bit on that, how you look at price architecture?

What do you mean by that? What I mean by that is the ubiquity of luxury brands from a pricing viewpoint. Most of the brands, and particularly the bigger ones and the more global ones, are ranging from pretty low amount to very high amount. Take even Chanel or Dior. Chanel or Dior, when you go to their stores, they start at a pretty high price point.

But think about it. Cosmetic business is Chanel and Dior, and it's really Chanel and Dior. So a lipstick, a Chanel lipstick or a Dor lipstick is probably worth 30 or 35 euros so it's not a lot of money but it's genuinely a dior or chanel product it's a luxury item and the motivation of people in buying a dior lipstick is actually because they feel that they will look better they please themselves by buying a Dior lipstick. You don't have to invest thousands of euros or dollars

into product to have a really luxury attitude and buy a luxury product. So the strengths, in my view, of the luxury brands is this ability to offer a very, very large price range of product to different people, be different things to different people with a sort of common thread, which is pleasing oneself, looking good, feeling good. I wanted to finish off with some cultural issues. How do you disagree with the wealthiest man in Europe?

He's very open to different views, even sometimes expressed in a fairly vivid manner. Let's put it that way. So he's very open to that. It doesn't mean that he listens or that he would do, even when I disagree with him, that he would do what I suggest. But sometimes he does.

Most of the time he follows his own views. He's a boss, I have no problem with that, but he listens. So the most important point is this ability to be welcoming different opinions and it's frankly not complicated. Have you managed to get him to change his mind often? Not often, but from time to time, yes. Now, what we're seeing is that family businesses, in my mind, can work really well in retail and in luxury and so on.

And we are seeing an example in LVMH where the next generation is kind of being groomed to take over. There is a saying that nepotism works well as long as it stays in the family. And I think this is perhaps one of the examples of that. Can you just tell how this works? Well, first of all, the first thing to bear in mind is that Bernard Arnault is there 12 hours a day,

more than five days a week, because he works also on weekends. and he's very active on managing the group as he's always done so that's very important to bear in mind as you said I mean his grooming is his successes let's put it that way and getting them to understand what is luxury, what are the luxury brands of the group and what it is to manage a group of that size. And there are different ages and they're working on that. The succession is not, in my view, a question for tomorrow, but probably for the day after tomorrow. question for tomorrow, but probably for the day after tomorrow, time will pass before the question really rises as a hot one and a burning one. So discussing the conditions of the succession today, when the time is not ripe, is in my view a little bit useless. But what I know is that Bernard Arnault is extremely keen on developing the business

for the next generation and for the generation after. I mean, he doesn't feel that nothing exists after him. I mean, he's very keen really to develop the business and to pass the business to the best suited persons in your course. So I'm not particularly worried about that. I think it will be achieved in your course smoothly and to the best interest of his family and of the shareholders.

Lastly, what would be your advice to people, and in particular young people, who would like to get into the luxury goods industry? Well, they should send a resume to the HR division. We are always in search of talents. The talent war is probably the most important thing that we have to manage on a day-to-day basis. And starting from the commercial side is probably very advisable. I mean, it's not what I've done because I've been in finance all my career, but getting in touch with the clients and knowing how they react,

how they feel, what they like. You get to understand everything at the same time. You understand the client, you understand whether the marketing strategies have any impact on them, you understand the strengths or the weakness of the product. So starting from sales is, in my view, extremely important. It doesn't mean that people have to stay there 10 years, but they have to start from being in front of the client. view, extremely important. It doesn't mean that people have to stay there 10 years, but they have to start from being in front of the client. It's awfully important. Thank you so much.

It's been fantastically interesting and good luck going forward. Thank you. Take care.