Why is Bernard Arnault going to be the richest man in the world?
Among the 10 richest men in the world, most people know Elon Musk (Tesla), Bill Gates (Windows), Jeff Bezos (Amazon) or Mark Zuckerberg (Facebook). However, not many people know the gentleman in the third position, named Bernard Arnault (in the picture). French man, main shareholder of Louis Vuitton Moet Hennessy (LVMH), a holding company that owns iconic brands in Fashion & Leather (Louis Vuitton), Wines & Spirits (Moet & Chandon) and Jewelry (Tag Heuer) in a large conglomerate of luxury brands and the most valuable company in Europe.
After the initial merger between Louis Vuitton and Moet Hennessy in 1987, the company made subsequent acquisitions to expand its portfolio and now controls +60 subsidiaries that each manage a small number of prestigious brands, 75 in all. These include Christian Dior, Fendi, Givenchy, Marc Jacobs, Stella McCartney, Loewe, Loro Piana, Kenzo, Celine, Fenty, Princess Yachts, and Bulgari.
LVMH's strategy is clear: acquire high-margin luxury brands and reinvest capital in more high-margin luxury brand acquisitions. Mr. Arnault has even been called “The Monopoly Man” when he built his “Empire” by eliminating competition in the luxury market due to his strategy. This, combined with expansion into Asia, resulted in great performance, with Stock prices rising 20 times from September 2001 lows after the dot-com bubble.
His business has high pricing power, high margins, low competition, and low capital requirements to operate. All these characteristics are perfectly adapted to a particular economic phenomenon called inflation, which can prevail during the first years after the pandemic.
Why? Let's review the 1981 letter to Berkshire shareholders from Warren Buffett (also a member of the wealthiest 10). In this letter, Buffett highlighted two characteristics that make a business adapt well to an inflationary environment: 1) the ability to easily increase prices and 2) the ability to take on more business without spending too much to do so. In other words, asset-light businesses with pricing power win in an inflationary environment.
Therefore, Mr. Arnault may celebrate being number 1 in the aforementioned ranking sooner rather than later, probably with a bottle of DOM PÉRIGNON (his own).
Cheers Bernard.