For years, I have been fascinated by luxury as a business. I assumed that the industry could be an interesting ground for culture research because of the long corporate history of its key players and the fact that most of the industry’s leading players have been controlled by families for decades and even centuries. As discussed in past papers, family/owner operators owned companies can be a potential place to look for unique culture due to “skin in the game” (money wise and reputation wise).

“Many companies we have owned over the past decade have large intergenerational family ownership. This reflects the parallels between what we look for and what such family businesses offer: a focus on long-term value creation.”Quality Investing by Lawrence A. Cunningham, Torkell T. Eide and Patrick Hargreaves

In addition, luxury goods companies have to deal with sensitive issues that make the sustainment of company culture even more essential and make the topic even more fascinating and a fertile ground for research. One such subtle situation is the case of business people working with artists and fashion experts with a core objective to manage their relationships carefully in order to not damage creativity. During the research, I discovered numerous discussions revolving around sensitivity and flexibility required in attracting, working, and retaining the best artists within the firm. In the wonderful book entitled “Luxury Talent Management”, the authors emphasize this matter about the luxury industry, writing that “Creation is critical to its success – the management of creative teams and designers is a profession in itself that requires specific managerial skills.”

Furthermore, sustaining the family heritage while not being blinded by it and keep innovating is another unique ability needed in the industry.

As previously disclaimed, I am no expert at studying company culture.

Although I have had some exposure to the topic in my role as an Investment Analyst, I come at this with the perspective of an intelligent layperson, and perhaps with the benefit of fresh eyes.

The purpose here is to share some of what I’ve learned and to prompt conversations.

You will, no doubt, read things that you disagree with and will also see gaps in my knowledge. But with that in mind, please send me your thoughts – as I will revise and update this discussion based on your and other readers’ feedback, before recirculating this back out to you.

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Key Values in Luxury Brands:

First, it’s essential to explain the main concept of this paper. As explained in the past, culture is composed of values which the company acts upon. Potentially, we should be able to recognize the core values of the company from its actions – such as the way it treats its customers, employees, suppliers, society, etc. By doing Scuttlebutt on company culture, as explained in the first White Paper, speaking with a significant amount of varied stakeholders and reliable sources, being aware to each ones’ biases, we can understand better those actions, and as a result, identify what the key values of the company are and whether they are the same ones it states. This process can assist in finding out more about the “secret sauce”, or the culture, of winning companies, monitoring better their future actions and decisions and figuring out if they are in line with the company culture.

While researching several of the most successful luxury goods companies, three separate and repeating
values appeared to me: Quality, Scarcity, and Eternality. Each of those values is essential for the survival of a luxury goods company as there is a deep connection between each of them: A timeless object is probably of high quality. And high-quality items that have passed the test of time are probablyfew and scarce since history proves that most companies, ideas, and objects will not survive.

“The essence of quality is durability: a luxury product is generally made to last a long time and may even, in some cases, be transferred to the next generation.”¹

Those three values create the “brand equity” that is so important in the luxury world. It’s this brand equity that makes the consumer pay for her or his luxury product much more than its functional value; the consumer pays for the legacy, for the emotions, and for the status symbol. For that reason, the brand equity serves as the biggest asset for the industry’s companies, and their continued central mission is to preserve and grow this asset.

“.. the financial strategy of a luxury brand will be to maximize not the profit, but the brand’s value and this is very different from traditional strategies.” ²

As mentioned in past White Papers, the company’s core values should be an inherent part of its day-today life. Without actions taken and decisions made in light of those values, the company will get further away from its intended culture, and culture will only be a myth within the company. A one-time launching of a lower quality product, a branch that underserved its customers due to lack of training or acquiring a company with opposing values that might move the company away from its heritage could instil devastating results.

In addition, one of the things we can learn from the most successful luxury goods companies is their focus on “looking inside”, towards the product and its connection with clients, and not outside, towards the competition. A successful luxury brand is focused on its heritage and the characteristics of its clientele and what makes them want to purchase its products. In a conversation with Hermès’ IR, I was told: “The company we admire most is Hermès; we really don’t look outside too much”.
1Luxury Talent Management by Michael Gutsatz and Gilles Auguste
2The Luxury Strategy by J N Kapferer and V Bastien
“The quality is in the eye and the hand of the artisan,” Axel Dumas, CEO of Hermès³.

In luxury, quality should be taken in a wide perspective: quality of products, quality of ideas, and quality of people. The best luxury goods companies invest a lot in their ideas, in their brands, and in training their people. Some companies, like Hermès, have a training center for their employees and extensive training protocol.

Hermès is an example of a company that took quality one step farther. In many cases, the company will first create the best product, and only then will it think how to price it. As one employee in a competing company told me: “People don’t understand how hard it is to do what Hermès does. Selling such expensive bags is much more difficult than selling expensive jewelries.”

Consumers expect the luxury product to really stand out, so it has to be perfect and look like a dream come true.

Scarcity

“The luxury industry is built on a paradox: the more desirable the brand becomes, the more it sells but
the more it sells, the less desirable it becomes” – Patrick Thomas, Former CEO of Hermès⁴

Luxury is about desire, and the scarcity of the product makes it appealing to the consumer. When selling scarce products, the company shouldn’t “chase the clients.” Instead, it should use marketing in sophisticated ways. For this reason, PR is a much more prevailing way of communication in luxury, and an aggressive selling approach would likely work to a much lesser extent. In the use of PR, luxury companies try to penetrate into the consciousness of the consumer, attracting her or him into the store (whether it’s physical or digital).

It’s crucial that the company’s focus is on creating a club or a community of individuals who feel deeply identified with the brand and the culture rather than focus on sales per se.

“History and sociology tells that there is luxury because not everybody can afford it”⁵

Here again, Hermès is a great example: In order to be aligned with the scarcity element of its brand, the company’s management decided the company’s products will not be sold in wholesale channels. When it comes to its most famous product, the Birkin bag, it will not be available for sale on the internet, and the client must visit the store in order to buy it.

For scarcity reasons, inventory management is a key point in luxury brands. In order to preserve the brand equity, a luxury brand should always be in lack of supply. This is a central part of the social status involved in luxury. In addition, clients expect the value of their luxury items to rise with time. The Birkin bag is always in lack of supply, and it has a waiting list. According to Time Magazine in 2016, “The Birkin bag outpaced both the S&P 500 and the price of gold in the last 35 years – a time period chosen to
3Wall Street Journal, 25.08.2011
4Carlo Pignataro, 13.08.2018
5The Luxury Strategy by J N Kapferer and V Bastien
reflect the date when Birkin bags were first produced in 1981. The annual return on a Birkin was 14.2%, compared to the S&P average of 8.7% a year and gold’s -1.5%”.

Jaguar in China is an example of inventory mismanagement which impacted the price and as a result
hindered the brand significantly. According to an interview made by “In Practice”, for some time the car
became to be known as the “30% discount brand” in China and lost its luxury element⁶.

Sales and discounts are also rare in luxury brands. Hermès is known for making a sale event only once a year in a different place in the world that is published only last minute. This element is very important in luxury since even though discounts and prices lowering can boost sales in the short term, it can lower the brand’s equity value in the long term. This is actually a big part of the importance of family control in luxury brands since this kind of ownership allows a much longer-term horizon and vision and the ability to control better short-term desires.

Eternality

Everything in luxury must be timeless. People who buy luxury want to know that they buy something they can pass to the next generations; it’s a way for the wealthy to acquire eternality.

James Bullock from Lindsell Train (LT) has years of experience in researching luxury brand companies. This type of companies is classic for LT, which emphasizes durability much more than the average investment firm.

James admits that the sector is one of the few LT is really fond of, being selective among industries and companies. If you are a luxury goods brand, you are more likely than not to have heritage that supports your brand. And if you’ve got a hundred years of heritage, and if over that period of time you’ve managed to build your brand equity and elevated your status as a luxury good, that’s a very hard thing to compete with.

James says that at LT, they are looking for evidence that consumers are being prepared to pay high prices because the brand has so much brand equity attached to it. You can’t fake the heritage, and you can’t recreate it. It’s that natural barrier to entry and one that self-reinforces because heritage keeps growing, he says.

“Heritage means that brand awareness is built over relatively long periods of time, which helps explain
the role that families have played in this industry” ⁷

The most successful luxury brands are iconic and have a rich and long heritage of more than a century. History proves that those brands need at least a few decades in order to become a commercial success. Those brands’ consumers want to buy a product that has a timeless value. The heritage is a central part of a brand’s spirit, and heritage cannot just be created in a day nor even within a decade or two – this is a
6In Practice – “Jaguar Land Rover: Underperformance in China”
7Luxury Talent Management by Michael Gutsatz and Gilles Auguste
part of the huge barriers to entry in this industry. Thus, when researching a luxury brand, one might want to observe whether a new employee who just joined the company is expected to learn what the brand stands for and its history.

As a top luxury brand with a heritage of six generations, Hermès doesn’t use celebrities for marketing since humans have time limit, while the story can last forever. The heritage is practically part of the promise of the brands’ durability and resistance to the changes of time and not some passing fashion, but a brand that is built slowly over time. That is the way to build the necessary trust with consumers

Source: Luxury Talent Management by Michael Gutsatz and Gilles Auguste

The best known and most successful luxury brands are European because of the heritage element – they have a rich history behind them. Some will also say that European businesses are more obsessed with the legacy they leave behind and the duration of the brands than American businesses

“Just as marketing of mass consumption goods was invented in the United States, and developed by large US groups such as Procter & Gamble, and then conquered the planet, so luxury strategies were invented in Europe, and developed worldwide mainly by French and Italian companies.” ⁸

“Time is a critical factor for the understanding of luxury.. A fundamental dimension of time is of essence
to a luxury brand: Heritage”⁹

In order for brands to have long-term durations, they need to stay relevant even as old brands. This is why innovation is a part of the eternality value – the manager of luxury brands should always care about innovation while not neglecting the brand’s heritage.
8The Luxury Strategy by J N Kapferer and V Bastien
9Luxury Talent Management by Michael Gutsatz and Gilles Auguste
Hermès vs LVMH – The two undisputed leaders of the industry emphasizing different values:

“It’s not a financial fight, because we would lose that. It’s a cultural fight” – Patrick Thomas, former
CEO of Hermès.

Is it possible that the same industry will be led by players with significantly different cultures?

Hermès and LVMH might be called the two leaders of the industry, but they appear to have some significant cultural differences. It seems like there are several major differences in decisions and behaviours made by those companies that may indicate for different cultures: For example, one is more about pride and tradition with a focus on its existing products while the other is more agile, decentralized, and focused more on consumer demand. In addition, one doesn’t have a formal marketing department while the other advertises much more; and one is growing more organically with almost everything made in-house while the other makes M&A’s and is less obsessive about in-house productionHermès

Hermès was founded in 1837 by Thierry Hermès, a French harness maker. It specializes in leather and silk goods made handiwork. It also produces and sells clothes and accessories, silk, and textiles, and other products such as perfumes, jewellery, watches, and home furnishings.

The group production is organized by “Metiers” – the artisanal divisions (Leather, Ready-To-Wear (RTW), Silk, Fragrances, Watches, Petith), Human capital and IT systems are common, and processes are centralized, with a very high involvement of the family.¹⁰

“Over the years, the most successful, in financial terms and stock market terms, luxury goods company by
some distance has been Hermès. The opportunity is to try and turn your business not just into something
that has growing market and it’s got individual brands but where its perceived longevity is
extraordinary.” James Anderson, Scottish Mortgage

Familyhood

Hermès emphasizes much the values of familyhood. A part of the secret to the loyalty of employees in Hermès is the fact that the company is big employer in rural France. Employees receiving a stable job with Hermès, a globally known company and a French symbol, and it makes a higher probability they will appreciate the opportunity and feel proud of being a part of this iconic company.

Overall, human capital is core to Hermès model. In order to recruit new craftsmen, Hermès has entered partnerships with schools and put a strong emphasis on a long internal training process (incl. cultural trainings such as “Inside the Orange Box”. Thanks to its significant investments in human capital development, its group cultural recognition of know-how and empowerment of artisans, there is limited turnover.¹¹

In addition, the company emphasizes the feeling of belonging by awarding the employees with equity regularly.10Hermès: The ultimate luxury company, HBS 09.12.2015
11Hermès: The ultimate luxury company, HBS 09.12.2015
Conservatism

While Hermès tries to stay relevant all the time and does not hesitate in taking action such as being one of the first companies in the industry founding an internet website, the company is very careful in staying within its clear boundaries: Throughout time it stayed around its core business. CEO of Hermès Americas, Robert Chavez, has mentioned in a past interview their failed attempt in the chocolate business decades ago, and the lesson learned: Until this day it receives many offers for cooperation in the hospitality business, but it respectfully declines each time. The Hermès structure is actually quite centralized as part of their family’s willing to control the business.

Another example for this conservatism is the company’s persistency in manufacturing in-house by hand and adversity to using outside consultants. Hermès maintained a tight control over its development with limited M&A and internal funding, and it’s very cautious about the pace of production and about the way it distributes products. The group is almost completely vertically integrated to control the quality of its raw materials their costs and ensure adequate supply.¹²

Authenticity

“The rule of one bag, one artisan, is part of our DNA.” – Axel Dumas, CEO of Hermès

In a world that continuously accelerates digitally and mechanically, handcraft has even more uniqueness and sense of authenticity.

How important is authenticity for Hermès? One Birkin bag or Kelly bag takes approximately 48 hours to make and only about five units are manufactured each week. It takes two years of training for a newly hired artisan to learn how to work leather “the Hermès” way, and six years of training when it comes to precious leather. One of Hermès’ core principles is that each bag is made by the same artisan, from start to finish.¹³

As mentioned before, Hermès is recruiting in villages and rural areas in France and doesn’t look much to recruit employees from other luxury companies like some of its competitors since what they experienced there is not relevant for Hermès; it wants to do things differently.

LVMH:

LVMH, on the other hand, emphasizes more the values of creativity and entrepreneurship.

LVMH was formed through a merger of Louis Vuitton, which was founded in 1854 and Moët Hennessy, the first founded in 1743 and the later in 1765. The company can be seen as a luxury empire with more than 70 brands that run independently. In general, the business is divided into the LV – Louis Vuitton, the fashion side and the MH – Moet and Hennessy, which is the wine and spirit side.
12Hermès: The ultimate luxury company, HBS 09.12.2015
13Hermès: a history of pride and luxury, by Carlo Pignataro 13.08.2018
Entrepreneurship

As a huge and diversified luxury conglomerate, LVMH gives employees the opportunity to expose themselves to different luxury areas ranging from jewellery, watches, wine and champagne to clothing and accessories. The caveat to this is you need to push yourself throughout the different parts of the business and show proven foundations of entrepreneurship. This entrepreneurship aspect and the independency during career paths at LVMH are expressed in the more decentralized structure of the company. Brands in LVMH are actually quite independent, which is a key strategic decision that I assume is responsible for the brands’ ability to not lose their special identity. It’s a very important element to luxury that each brand keeps its own story around it – stories that successfully emotionalize each product line.

An additional factor of this entrepreneurship element is that a brand’s management is expected to act on its own and ask for the group’s support if necessary. As a result, the brand’s management is also accountable for the brand’s performance. In LVMH, there are books on every single brand explaining “what we stand for”, and most brands have their own distinctive cultural codes. In fact, some managers will state more than ten of them. Designers can “play” around with those codes, be creative, and customize the brand according to local tastes in different geographic areas while also staying within the brands heritage and identity borders. The way LVMH is run as a portfolio group of luxury brands is a huge benefit for people with entrepreneurship sense, and LVMH’s employees say that management is good at fostering talent and supports employees in their career journey

Creativity and Innovation

“For Bernard Arnault, creativity is the lifeblood of what we do across the entire organization.” PierreYves Roussel, CEO of LVMH Fashion Group

LVMH employees say that discussions within the group are mainly based on creativity and innovation. Every single brand needs to come up with a great idea along with a roadmap to transform that said idea into a tangible reality. Mr. Arnault, Owner, Chairman and CEO of the group, himself is known as being very passionate about creativity and very “hands on” in that regard.

Competitiveness

I have read and heard several times during the research that there is a perfectionism type of environment across the different brands. For instance, managements and employees are expected to be the best at every single thing they are doing. It can add quite an intense pressure, and employees that cannot handle it will not progress, resulting in them unfortunately posing a high risk of not surviving long-term in the company.

Current and Long Time Cultural Challenges:

While having one of the most resilient business models that survived the test of hundreds of years, the traditional luxury brands business faces challenges and changes. To name a few:

• The internet and E-commerce sales that separates the customer from the physical connection with the store, which is actually kind of a temple or a prestige museum in the luxury world that makes the important experience of shopping for luxury.
• Globalization, which can be seen as a great opportunity, is also a big challenge. Penetrating other geographies, with population from varied culture without losing from the brand’s identity is a sensitive issue. The offices in the different countries should serve as proper ambassadors of the brand. They shouldn’t be just order takers – they are guarders of the brand equity. They should deal with the complicated task of representing the brand, knowing all the details about its Heritage and “live it”, and simultaneously make the connection of the brand to the local clients. Global penetration is also an inventory management challenge. In luxury brands, expanding must be done more carefully than most industries due to the importance of scarcity, the feeling of shortage during all times. Opening too many stores in a fast manner can hurt brand equity meaningfully.
• Research and interviews with senior luxury brands’ managers show that consumer tastes are changing in a faster pace than in the past. Gucci is an example of a brand that tries to capture more the younger generation. This is definitely a challenge for those brands that try to preserve their values, history, and image in front of the many changes. According to different sources, the younger generations and the Chinese audience, both expected to gain more and more share in luxury goods companies’ sales, tend to be less connected to brands
• There is a constant temptation for brands to fall in love with their own ideas and symbols and not be focused on the clients instead. Clients don’t like to work hard in order to understand the product, and so, the idea must be simple and understandable. In luxury brands, where beauty, aesthetics, and art are the main subjects, it’s even more tempting to be distracted by the company’s internal ideas, forgetting the client’s desires – and in luxury brands with their demanding clients, such a mistake can be costly.
• As noted in the introduction, managing artists while not damaging their creativity is indeed a challenge. While the CEO is in charge of managing the luxury company and the different areas of the business such as merchandising and logistics, the head designer is actually the front person of the brand itself and the one who is in charge of building up the brand’s image and maximizing the DNA potential. That way, enough sources are dedicated to the brand’s culture management, enabling the CEO to confront any managing hardships more rationally and business-oriented while the head designer focuses on the artistic and emotional factor. Like the right and left side of the human brain, one more artistic and emotional and the other more rational and organized, they complete each other.

Last thoughts

“I had gone looking for what I thought ought to be there, a vivid smoking gun such as a brand name, a location, a clever re-insurance contract, or a patent. However, there is no a priori reason why a comparative advantage should be one big thing, any more than many smaller things. Indeed, an interlocking, self-reinforcing network of small actions may be more successful than one big thing.” Nick Sleep

The famous investor Nick Sleep wrote in his letters to Nomad investors that throughout the years, he found that he shouldn’t look for one big thing or one big advantage for a winning business and as a result a wining investment. Instead, the best companies are doing many small things in the right way.

It’s harder to notice those small things and to find the connection between them as some of them are really soft and non-numerical. But this connection might actually be the reason for the victory of the company over its competitors in the long term; it’s those actions around its DNA, around its culture.

I found that the leading companies in the industry made those actions over the years that are connected to their values, probably because management has never settled on them. As in other cases, the proximity to the core values, those that made the company’s historic success, can make a big impact on its future direction. We all know companies that in certain time periods got away from their founders’ values, such as Apple in the period after Steve Jobs was fired.

I hope that this White Paper, discussing luxury goods companies and specifically LVMH and Hermès in terms of culture, contributed to the reader in shaping his/her mind regarding performing a corporate culture Scuttlebutt, or at least gave him/her some new idea or direction. If not, I hope it was at least an entertaining read. I would like to bring to the reader’s attention two main lessons I tried to emphasize throughout this process:

The first is that different cultures can work in the same industry, and even though there are similarities, there are also contradictions. I think persistency and discipline in maintaining the same company culture could be a good indication for a winning culture since the losing one will try to be changed. Nevertheless, it’s just one indication since persisting in a losing culture could also exist. Both LVMH and Hermès showed persistence in the actions they took – the majority of those actions led to a path around values that are clear to the companies’ many stakeholders.

The second is that culture must be monitored over time. The long corporate history of the luxury brand’s industry allows us to test the actions taken in a wide range of time. It allows us to explore the actions that helped the companies in their continuous winning path in the industry as well as some devastating failures. The long-term investor should always be on guard and watch the company’s actions in light of its values since those values are probably why consumers, employees, and vendors decided to engage with the company in the first place. It’s also essential to see what the company did when it realized it took a wrong action that was against one of its core values. What was the reason for this step? What is the severity of it? Is it a onetime stumble or a new direction? If it’s a onetime stumble, what did the company do in order to learn from its mistake? How much time did it take? You see my point.

As mentioned before, assessing company culture is not an easy task; it’s more an art than science. The exercise I performed, both in this White Paper and in the last one, is inverting actions companies take into values while the natural way in which a culture is formed is from values to actions and not the other way around. Even though, I decided to conduct it that way in order to be as close as I could be to the actual values, aiming for independent thinking. I’m aware of the fact that this exercise will still bare subjective results.Further Resources:

I found the following materials useful while writing this white paper:

Books – “The Luxury Strategy” by J N Kapferer and V Bastien, “Luxury Talent Management” by Michael Gutsatz and Gilles Auguste, “Rethinking Prestige Branding” by Wolfgang Schaefer and JP Kuehlwein and “Future Luxe” by Erwan Rambourg

Other resources – Harvard Business Review, INSEAD Knowledge, In Practise, Tegus, Companies fillings and luxury brands blogs.

I would like to make special thanks to James Bullock, Portfolio Manager at Lindsell Train, Hassan Elmasry, Managing Partner at Independent Franchise Partners and Mario Russo, Founder of Conditor Asset Management.

You can access the White Paper here.