Company culture can be hard to define and even harder to measure – and it’s one of the most important factors that shape a company’s long-term performance.
I’ve seen this up close at companies ranging from Berkshire Hathaway BRK.A,
which I wrote about in “Berkshire Beyond Buffett: The Enduring Value of Values”, at Constellation Software CNSWF,
which I’ve been studying since just before I joined its board in 2017. More recently, I’ve seen this in work I’ve done for Paul Black’s WCM Investment Management, which specializes in studying the corporate culture.
As a case study, compare two of the world’s best-known luxury brand conglomerates, France’s LVMH Moet Hennessy Louis Vuitton LVMHF,
and Compagnie Financière Richemont CFRUY of Switzerland,
Although their business models and moats are similar, LVMH stock has significantly outperformed Richemont. Culture is a compelling explanation.
LVMH was created in 1987 by Bernard Arnault following mergers between Louis Vuitton (a fashion brand dating from the 19e century) and Moët Hennessy (champagne and spirits company founded in the 18e century). Through a series of acquisitions since then, LVMH owns around 60 glamorous brands, all marketed through separate individual business units where managers enjoy broad autonomy in brand management, from sourcing and production to pricing and product mix. Brands include: Bulgari, Christian Dior, Fendi, Givenchy, Marc Jacobs, Stella McCartney and Tiffany.
Arnault, who remains the majority shareholder and CEO of the company, is known for being hands-off and supportive of various management styles, as long as each is committed to protecting and promoting their brand. They do this by tightly controlling distribution – LVMH, for example, sells almost exclusively through its 2,400 wholly-owned stores.
Thanks to this coordinated but decentralized culture, LVMH’s divisions are particularly agile in adapting to changing consumer tastes and influential in shaping them. For example, LVMH hosts a biannual event, called the “Journées Particulières”, where more than 100,000 guests visit LVMH properties on four continents to catch up on the latest fashion offerings from the company’s top brands.
Richemont was founded in 1988 by Johann Rupert, following a spin-off from a conglomerate founded by his father in the 1940s. Brands include: Cartier, Dunhill, Montblanc, Piaget and Van Cleef & Arpels. However, most brands are not managed as brands, but rather according to the type of product.
With more or less cohesion, the company has three operating divisions: jewelry (including Cartier and Van Cleef); watches (including Piaget and half a dozen German and Swiss manufacturers); and “others,” a catch-all that includes Dunhill menswear, Montblanc pens, and various other investments such as a joint venture with Ralph Lauren.
The structure can increase the head office’s ability to provide oversight and could lead to synergies between the types of activities common to the brands. While such a strategy can be attractive for many types of goods, such as industrial products or low-cost consumer goods, it is not obvious for a luxury brand. He certainly prioritizes a reporting culture over brand strength.
A centralized strategy can be argued in the name of strengthening the parent brand, insinuating Richemont into the minds of high-end consumers. But this comes at the expense of individual brands, which can alienate those brands’ executives and employees, which ultimately hurts value.
For example, brands such as Van Cleef have long histories, distinct cultures and long-time employees. Among the half-dozen Richemont watchmakers, the most successful are those who enjoy the highest degree of independence. They were able to act faster and think more freely than the brands absorbed by a group like Richemont.
In global companies such as LVMH and Richemont, the international scope of operations increases the importance of culture. At LVMH, a proud French champion, deference to local brand leaders is also deference to their national cultures. By contrast, at Richemont, political infighting among senior executives is evident, pitting, for example, an older French guard with a fluid and open style against a more rigid and process-oriented German and Swiss younger group. Worse still, Richemont’s senior executive pay is among the highest in Europe, which doesn’t sit well with managers or troops on the ground across the continent and beyond.
LVMH and Richemont don’t just compare how corporate culture seeps into a company, they suggest its importance. Founded around the same time, and led and controlled by one person for more than three decades, the financial performance of these two companies have diverged sharply. LVMH is four times larger than Richemont in terms of total assets and annual revenue and has generated significantly higher shareholder returns while posting significantly higher market multiples. It’s clear: culture matters.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and editor of “The Essays of Warren Buffett: Lessons for Corporate America.” For updates on Cunningham’s research on quality shareholders, sign up here.
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