Ron Baron’s letter to shareholders for the third quarter 2014.
“I am not sure at all we are in the same business. I don’t know if we will use Apple products in 25 years, but I am sure we will still be drinking Dom Pérignon.” Bernard Arnault. Chairman. LVMH Moët Hennessy – Louis Vuitton. New York Times. October 4, 2014.
That was the response Bernard Arnault gave to Apple Inc. (NASDAQ:AAPL)’s Steve Jobs when several years ago Jobs reportedly asked Arnault “for some advice about retailing.” Arnault, the principal owner of LVMH Moet Hennessy Louis Vuitton SA (EPA:MC), is the wealthiest individual in France. According to Forbes, Arnault has an estimated net worth greater than $29.5 billion. This wealth is largely the result of Arnault’s successful efforts to build LVMH into the largest luxury conglomerate in the world. Among the brands LVMH owns is Moët & Chandon, the producer of Dom Pérignon champagne.
Arnault created LVMH as a holding company for “family businesses” that share his values of providing enduring, relevant, luxury products and services. Arnault, like many owners of family businesses, usually thinks in terms of generations, not quarters. Arnault’s vision about what makes a business, product or service endure is consistent with the “Built to Last” theme of the 2014 Baron Conference scheduled for November 7th at the Metropolitan Opera House in New York City.
Just like Tom Pritzker, Elon Musk, Kevin Plank and many other executives who manage businesses in which we invest, Arnault invests in people, not only their products and services. Just like we do. Further, Arnault’s interest in businesses’ cultures and values has enabled LVMH to retain many owners who sold their family businesses to LVMH as actively involved managers. That is Warren Buffett’s playbook. That is why businesses owned by Arnault … Buffett … and Baron Funds are “built to last.”
Few businesses many think are “built to last” actually do. In 1958, the lifespan of a Fortune 500 company was 61 years. It is now 15 years. Less than half the “Nifty Fifty” of the‘60s and‘70s remain. It is often a failure of management’s vision to create consistent values and culture that causes businesses to fail. Making sure products and services are attractive and relevant … comes from the values and culture of a business.
Attention to detail by managers trying to create the best possible products and services for their customers is emblematic of a successful business culture. As a former Director of Enforcement at the Securities and Exchange Commission described the culture of a firm, “it comes from the top.” We agree.
When we attended the opening of Wynn Resorts Las Vegas in April 2005, we toured the property with Sol Kerzner and Sol’s son, Butch. The Kerzners were the developers/owners of the Atlantis resort in the Bahamas. Sol told us that Steve Wynn was quite upset because many of his guests didn’t like a show in which Wynn had invested $100 million. Sol told Steve not to worry – the problems with the entertainment were small and could be easily fixed. Butch turned to his dad. “You have got to be kidding!!!You told Steve not to worry about a show that cost $100 million that his guests didn’t like? Dad, you had a total meltdown after we opened the Atlantis when in the middle of summer a waiter served butter outside that had melted!!!!”
Ron Baron – Vail Resorts: Built to Last
Vail Resorts, Inc. (NYSE:MTN) is a business in which we have been a shareholder since 1997. We think Vail Resorts is“built to last.” To use Bernard Arnault’s touchstone, people will still be skiing in Vail in 25 years, just as they have over the 48 years since the town was incorporated in 1966. You could build another town likeVail. But you cannot build another Vail mountain. We thought Vail’s prior management was smart, but didn’t like their strategy of using Vail’s lift ticket cash flow to invest in the hotels of other resorts. Vail replaced that management in 2006. Its new team, led by Rob Katz, has been using the cash flow from its ski mountains to invest in $15 million high speed lifts, $10 million restaurants, more grooming equipment, and $80 million summer mountain rides. We believe the last investment could earn more than $75 million per year in a few years. Management is also making an effort to “regentrify” Vail Village by building … and then selling … new hotel and condo beds. This is forcing neighboring hotels and condos to upgrade their facilities or risk losing their customers to facilities that have been renovated.
Katz also focused on season pass sales. Vail now sells about 45% of its ski lift tickets in advance, immunizing its business from “poor snowfall” seasons. Finally, Vail has acquired several other mountain resorts, with the most important, Park City, at a distressed sale price. These additional resorts have created a network that Vail can leverage to sell its season passes. Since Vail’s management has changed, we have tripled our investment in this business with, in our view, exceptional competitive advantages and strong growth prospects … and with a stock that is cheaper than hotels’ but that we think should be more expensive. We expect to at least double our money again in the next five or six years … and, after that takes place, we believe Vail will still be an unusually attractive investment. This is all because management remains focused on improving the customer experience and investing in their business. That’s what we mean about culture and values.
Ron Baron – Manchester United: Built to Last
U.K. soccer team Manchester United PLC (NYSE:MANU) is the most popular sports team in the world. More fans watch televised soccer matches than any other sporting event. That is why we consider our investment in Manchester United to be an investment in the most popular television program in the world. Twenty five years from now, we believe huge audiences will still be watching this team that has won more championships than any other in its 138-year history.
Manchester United televises 38 of its games a year. On average, 47 million fans watch each of those games! The NFL’s Super Bowl is played once a year. In 2014, it had 115 million viewers. Accordingly, we think Manchester United’s televised games are the equivalent of 16 Super Bowls a year! Because fans like to watch sporting events live with their attendant commercials, not time shifted with commercials eliminated, sports teams are unusually valuable media properties. Manchester United’s sustainable competitive advantage is its brand derived from its storied history and huge fan base. Media and licensing opportunities provide significant growth potential. Its management is investing its cash flow in star players and a new coach of champion teams to win more championships and make its franchise even more valuable. Manchester United’s investment in its business to benefit its fans at the expense of its short-term profits demonstrates the values we think make this business attractive.
Ron Baron – Tesla Motors: Built to Last
“We are not currently showing all our cards.” That was Chairman Elon Musk’s memorable comment on Tesla Motors Inc (NASDAQ:TSLA)’s second quarter 2014 earnings conference call. He then told investors that by the