Innovation
The
Perfect
Paradox
of
Star
Brands:
An
Interview
with
Bernard
Arnault
of
LVMH
by Suzy Wetlaufer
From the Magazine (October 2001)
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-yearold 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 ...

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.
AReview.
version of this article appeared in the October 2001 issue of Harvard Business
SW
Recommended For You
Don't Underestimate China's Luxury Market
An Inside View of How LVMH Makes Luxury More Sustainable
PODCAST
The Difference Between a Plan and a Strategy
How Luxury Brands Are Manufacturing Scarcity in the Digital Economy