At Richemont’s annual results presentation in May, chairman Johann Rupert said that if the company did not recognise the pace of change in the retail market and position itself to be ‘ahead of the curve’, the firm risked going the same way as US department stores like Sears, Kmart and Dillard’s.
Repositioning is easier said than done. Richemont’s brands are not Campbells soup. Some of its brands are 200 years old or more. Its watches and bespoke jewellery items can cost the equivalent of a middle class home, and tradition and luxury waft out of every velvet-carpeted store.
Until recently Rupert’s instinct has been to protect and preserve the Richemont heritage for fear that change and innovation would dilute the brand. Protecting the status quo included retaining a board whose age was starting to rival those of the brands they served and whose titles stem from battles fought centuries ago.
The turning point followed 2015 and 2016 – when years of good growth stalled in the luxury and high-end fashion market. In 2016 the market for personal luxury goods was essentially flat at €249 billion, according to the Bain Luxury Study, which analyses the global luxury goods industry. The market was valued at €251 billion in 2015 (at constant exchange rates).
“In 2015 the high-end fashion industry saw huge levels of executive turnover,” says Jason Forssman, a portfolio manager with Ashburton Investments. “The industry was changing and those brands that were out of touch with what their clients wanted – often because of an ego-driven top-down approach to design – faced bankruptcy or acquisition.”
Rupert understood that unless the high-end luxury market adapted, its customers would be similarly unforgiving. This wasn’t just another cycle in the industry. In an environment of lower growth what made luxury brands great in the past wasn’t necessarily going to make them great in the future.
Millennials and e-commerce can no longer be ignored
In a report called the Millennial state of mind, Bain and luxury goods website Farfetch estimated that millennials will represent 40% of the global personal luxury goods market by 2025.
What is significant about the millennial influence is that they are more inclined to shop online. Already e-commerce has emerged as the fastest growing distribution channel globally for luxury goods. In a December 2016 report, Euromonitor estimated that global brick-and-mortar luxury sales will increase at a compound annual growth rate of 2% between 2016 and 2021, compared to 8% for digital. Just like digital sales overall, digital luxury has more room to grow.
Of course the online market is still a small fraction of the global luxury market, with online sales of luxury goods accounting for about 8% of total luxury sales. However, Bain expects the online share to reach 25% of sales by 2025.
Richemont is exposed to the online market through its investment in luxury e-commerce website Yoox Net-a-Porter (which has a market cap of around $4.5 billion). It posted record revenues of $1.19 billion in the first half of 2017, up more than 15% year on year. Website users rose by 15% to 394 million and orders rose by more than 15% to 4.5 million in the first half.
Competitors are entering the market too. LVMH, which has 70 brands of its own, offers other luxury brands on its 24sevres.com site. French fashion and accessory house Hermes has plans. And in China, one of the worlds biggest markets for luxury goods, e-commerce site Secoo has just listed on Nasdaq.
Exactly how Richemont will tackle the online market remains to be seen. While its brands do have an online presence, it has until now been a half-hearted affair.
“There is a difference between the luxury that is attainable to people in the middle and upper classes and the type of luxury offered by the Richemont brands, where a Cartier necklace could cost upwards of $50 000,” says Forssman. “These products do not easily lend themselves to online sales. People are more likely to browse online and shop in-store.”
However, Rupert is keenly aware of the need to act. “Richemont faced a crisis in 2016 – not of the type faced by Lonmin and Anglo – its balance sheet is too strong for that, but a crisis nonetheless. Rupert used the terrible results of 2017 [it reported a 33.6% decline in diluted headline earnings per share (Heps) in the year to March] as a reason to act,” says Forssman.
With the convenient exit of CEO Richard Lepeu who retired in March, Rupert restructured the executive team, removing the CEO layer entirely, so that the company can react quickly to the challenges facing businesses in general and the luxury industry in particular.
He also changed the composition of the board, commenting at the time: “The changes we have proposed today will strengthen the group’s ability to respond to the dynamic markets in which we operate, especially in the developing field of digital marketing and e-commerce.”
In September, Rupert went a step further, creating the position of chief technology officer and appointed digital whiz-master JJ van Oosten to the position.
Currently the chief digital officer at the Rewe Group, and former CIO at Tesco, Van Oosten has been described by former colleagues as “brilliant”; a man who “sees things differently” and who is “relentless in pursuit of the objective”.
Van Oosten describes himself as “uncompromising”. “Never ever compromise. I do not compromise at all. When we do something we do it completely and we bring it to life,” he told an audience at the JavaLand 2017.
What becomes apparent is that he doesn’t do things in half measures. Richemont, it seems, may well be entering a new era.
Van Oosten joins the board of Richemont in January. Meanwhile the company has room to breathe. Sales for the first five months of the financial year increased by 12% at constant exchange rates.
Shareholders certainly have great expectations. In August last year Richemont shares were trading at around the R80 mark, putting them well into the value range. Today they are trading at about R123.57, which in a low-growth world and on a forward PE of 24x, puts the share back into pricey territory.