Have you noticed what Richemont has been up to lately? In the past few months, Switzerland’s second largest watch group, with total revenues of €10.98 billion ($12.9 billion) in the last fiscal year, has been one busy beaver.
On May 16, it announced that it had launched a new watch brand called Baume (not to be confused with Baume & Mercier) targeted at Millennials.
On May 18, it announced that earlier this year it had launched another round of buybacks of excess watch inventory, $238 million worth at wholesale prices, primarily in Europe. That followed an even larger one in the previous fiscal year, mostly in Hong Kong.
On June 1, it announced that it had acquired Watchfinder.co.uk Ltd., a 16-year-old British company that is the world’s largest seller of pre-owned premium watches.
And on June 13, it announced that it had completed a takeover of the world’s leading online luxury retailer, Italy’s Yoox Net-a-Porter Group S.p.A. Richemont now owns 98% of the company.
We’re seeing such rapid change and we better be ahead of that curve. Our goal is to position Richemont that we’re ahead of curves.
Johann Rupert, Richemont Chairman
The flurry of initiatives is the result of a recent retooling of Richemont by its chairman and largest shareholder, Johann Rupert. For several years, Rupert has expressed concern about the “massive change” underway in the luxury goods world. “I am talking about a massive change in the way business is being done by going digital, a massive change in e-commerce,” he told financial analysts in November 2016. And not just e-commerce. “I think everything is changing,” he said.
“The change that’s going to come in the next 10 years – it’s exponential change,” he told financial analysts in May 2017. “Folks, we’re seeing such rapid change and we better be ahead of that curve. So, our goal is to position Richemont that we’re ahead of curves.”
To that end, Rupert launched a management shakeup of the group last year aimed at transferring power to a new, more diverse generation. He removed eight, white, male elders from the board of directors. They included 80-year-old Lord Renwick of Clifton, the 72-year-old 9th Duke of Wellington, as well as such Richemont war horses as former CEOs Richard Lepeu (65), Bernard Fornas, and Norbert Platt (both 70).
Rupert replaced them with nine new board members. Four were younger Richemont executives (three in the their 40s). Of the five non-executive directors, two were women, two were Asian, and one was a South African Millennial (Rupert’s son, Anton).
Last year Rupert executed a management shakeup, transferring power to a new, more diverse generation.
Rupert also restructured his executive management team. He elevated Richemont stars (and arch-rivals) Georges Kern and Jérôme Lambert to top management positions in an unorthodox, power-sharing arrangement. When that didn’t work out (a frustrated Kern decamped to Breitling after just three months in the post), Rupert put Lambert in charge of the group as chief operating officer. (There is no CEO.)
The most striking example of Richemont’s sweeping management changes is the group’s Specialized Watchmakers Division. In the past two years, six of the division’s eight brands have gotten new CEOs. (That division includes the group’s eight watch brands: A. Lange & Söhne, Vacheron Constantin, Jaeger-LeCoultre, IWC Schaffhausen, Roger Dubuis, Officine Panerai, Piaget, and Baume & Mercier. It does not include three other Richemont watch producers, whose primary product is not timepieces: the French jewelers and retailers Cartier and Van Cleef & Arpels, and the German pen producer Montblanc.)
Rupert’s mandate to the new board and management team was to address, as he put it, “the challenges our business is facing” and to develop “a transformation agenda to meet the rapidly changing demands of luxury consumers.” Since then, the group has tackled challenges like e-commerce, the grey market, the vintage watch market, and the changing tastes of Millennials. Rupert describes Richemont’s recent moves as a “transformation journey.” Here’s a look at what’s happening.
“The tender offer we launched for Yoox Net-a-Porter is a major milestone in our transformation journey,” Richemont chief finance officer Burkhart Grund told financial analysts in May, echoing Rupert. The takeover of the Yoox Net-a-Porter Group (YNAP) made Richemont a major player in the luxury e-commerce field overnight. Prior to the acquisition, e-commerce accounted for 1% of Richemont’s total revenues, according to Grund. With YNAP consolidated in the group, that figure will jump to 17%, Grund says.
YNAP will add more than €2 billion to Richemont’s consolidated top line. (The YNAP group reported revenues of €2.1 billion [$2.52 billion] in 2017.) It owns four e-commerce sites (Net-a-Porter, Mr. Porter, the Outnet, and Yoox) and operates another 30 for luxury brands like Dolce & Gabbana, Chloé, and Stella McCartney. As of this January, it had 3.1 million active customers. Last year its online stores had 842.2 million visits. It delivers products to more than 180 countries.
The Yoox Net-a-Porter purchase “demonstrates our commitment to developing a robust omnichannel proposition,” Rupert says.
Rupert has had his eye on the company for years. In 2002, Richemont took a 20% share of the then two-year-old Net-a-Porter. In 2010, Richemont became NAP’s largest shareholder. In 2015, Rupert orchestrated a merger of NAP with Yoox, which left Richemont with a 50% share of the company. This year, Richemont bought the rest of the shares, paying a total of €2.69 billion to boost its share to 98.394%.
“With this new step,” Rupert said in announcing the planned takeover in January, “we intend to strengthen Richemont’s presence and focus on the digital channel, which is becoming critically important in meeting luxury consumers’ needs.” The purchase, he said in May, “demonstrates our commitment to developing a robust omnichannel proposition.”
Richemont plans to keep the YNAP management team intact and to operate the company as a separate business. The goal is to use the parent company’s financial clout to strengthen YNAP’s leadership position in luxury e-commerce.
It also intends to tap into YNAP’s expertise as Richemont develops e-commerce platforms for its brands – particularly its Specialized Watchmakers brands, which generally have avoided selling on their websites. “We believe that we are now strongly positioned to seize the opportunities offered in the digital field,” Grund said in May.
Richemont had been exploring e-commerce synergies with YNAP. Last year Cartier offered a pre-launch of the new Panthère collection of jewelry and watches on the female-oriented Net-a-Porter. And NAP recently launched a Fine Jewelry & Watch Suite on the site, selling items from Richemont’s Piaget, IWC Schaffhausen and Jaeger-LeCoultre brands, among others. Meanwhile, YNAP’s men’s site, Mr. Porter, is an authorized distributor of six Richemont watch brands (IWC, Jaeger-LeCoultre, Piaget, Panerai, Montblanc and Baume & Mercier).
The acquisition of Watchfinder&Co., the online seller of pre-owned luxury watches, is another case of Richemont becoming overnight a player in a new market for the group. (Richemont is acquiring 100% of Watchfinder. Terms of the deal, which is expected to close this summer, were not disclosed.)
Like virtually all Swiss luxury watch producers, Richemont pretty much ignored the rise of the vintage and pre-owned watch market over the past two decades. Swiss brands concentrated on producing, marketing and selling new watches and left the pre-owned business to established brick-and-mortar retailers (like Tourneau, Betteridge, and Govberg Jewelers in the U.S.) and e-commerce entrepreneurs (like Watchfinder co-founder Stuart Hennell in the U.K.).
That’s changing. With the pre-owned watch market growing consistently (financial analyst Jon Cox, of Kepler Cheuvreux, estimates the size of the second-hand-watch market at $5 billion annually, including auctions), watch companies are taking note. F.P. Journe now buys and sells pre-owned Journe watches at his boutiques and lists available models on his website. Earlier this year, Audemars Piguet said it would roll out a pilot program in Switzerland to buy and sell pre-owned APs in its boutiques. Others, like LVMH, Breitling and Richard Mille, say they are exploring the option to buy and sell their pre-owned models.
Richemont has taken another tack, buying outright one of the leading pre-owned watch dealers. Hennell launched Watchfinder in 2002. The company is private, but in a filing in the UK, it reported sales of £86.7 million (around $114 million) for the fiscal year ended March 31, 2017, a 43% increase over the previous year. Net profit was £4.22 million ($5.57 million). Watchfinder sells pre-owned watches from more than 50 brands on its website and at seven company boutiques in the U.K. The company employs around 200 people and operates its own in-house service center.
In a statement, Rupert noted that “Watchfinder’s founders foresaw the need for an online marketplace for premium pre-owned timepieces.” Richemont’s aim, he said, “is to help grow the company further in a complementary, growing and still relatively unstructured segment of the industry.”
The biggest challenge facing Richemont recently has been to get a grip on a wholesale watch business that had spiraled out of control over the past three years. A combination of market shocks and lack of internal production controls sent the watch inventories of Richemont’s dealer network soaring. Richemont has taken extraordinary measures to deal with the problem. In the past two years, it has bought back more than $540 million worth of watches it had sold to its wholesale network.
In 2016, it bought back watches worth €278 million ($305 million). Those were primarily Cartier watches from retailers in Hong Kong and other Asian markets. Between January and March of this year, it bought back another €203 million worth ($237.6 million) of excess inventory from its retail agents. Those watches were from brands in its Specialist Watchmakers division sold mostly to retailers in Europe, where luxury watch sales have suffered due to the strength of the euro, which sent the travel retail business elsewhere.
Richemont took the watches back to prevent retailers from disposing of them through grey-market channels, where they would be sold at substantial discounts, damaging the brands’ reputations.
The problems were not particular to Richemont. They were industry-wide and can be traced to the great China watch boom that began in 2010. In general, the Swiss watch industry overproduced and oversold luxury watches for the Greater China market (mainland China, Hong Kong, Macau, and Taiwan) during the boom. Two unforeseen events sent watch demand way down and watch inventories way up in retail shops.
The first was the Chinese government’s sudden crackdown on gift giving that began in 2012 and worsened over the next two years. The second was the Swiss franc shock of January 2015, when the Swiss National Bank suddenly removed the artificial peg to the euro it had imposed to stop the franc from strengthening. Overnight, the franc jumped 15% against the dollar and the euro, causing chaos in export markets.
That one-two punch, plus a contraction in the Chinese economy, sent the Swiss watch industry into a wicked two-year downturn. When inventories rose to alarming levels, authorized retailers, particularly in Asia, dumped watches onto the grey market to get them out of the store to clear the way for the next year’s watch crop. By 2016, the flood of Swiss luxury watches for sale at deep discounts on grey-market websites had reached all-time highs.
With watch supply and demand dangerously out of whack, Richemont bit the bullet and began the first wave of watch buybacks. Most watch companies engage in some small-scale buybacks. But the size of the Richemont action was unprecedented, watch executives say.
A Watch-Supply Czar
Burned to the tune of €287 million, Rupert began to preach the gospel of smaller sell-in. “There are too many watches in the world,” he proclaimed to financial analysts in May 2017, while reporting dismal sales and profits for fiscal 2017. “Is your sell-in smaller than your sell-out? That’s really the question to ask the whole industry.” Rupert said that aligning watch supply with demand was a top priority for the company.
Later that year, he took another step to deal with the problem. He created a new position, head of distribution, for the Specialized Watchmakers division – in effect, a watch-supply czar. To fill it, he tapped Emmanuel Perrin, Cartier’s head of international sales, who led Cartier’s watch clean-up efforts. Perrin’s “prime area of focus,” Rupert announced, “will be matching supply with end-customer demand.”
Perrin and COO Lambert devised a tougher, three-pronged strategy to solve the group’s excess inventory problem, which they put into place in January of this year.
They launched the second round of buybacks. They installed new inventory controls for the wholesale network, introducing key performance indicators that brands must strictly follow to ensure that sell-in does not exceed sell-out. And they trimmed the wholesale network.
The brief that Lambert and Perrin gave to the watch division CEOs “was very clear,” Grund told financial analysts. “You will do whatever is necessary to bring the inventory to the level that is healthy. It was done on a maison-by-maison basis, on a market-by-market basis, and on a customer-by-customer basis.” (“Maison” is Richemont’s term for brand.)
The Cartier Cure
The buybacks were costly. The latest round lowered Richemont’s gross profit for fiscal 2018 by €135 million ($158 million), according to Grund. But they are worth it. “We took a view, which is probably different from other players in the market, to address the [oversupply] problem by buying back this inventory,” he says. “This is about brand equity.”
The buybacks are most likely over now, Richemont execs say. “Sell-out is higher than sell-in,” Lambert told financial analysts in May. “We can say that on a global level, we have now reached a good level of stock.” There were no buybacks in the April through June period.
Richemont executives have their fingers crossed that the new round of buybacks will work as well as the first one. Cartier’s watch sales soared last year, up double-digits, Richemont said. (It does not break out sales by brand.) That was due to 2016’s market cleanup and a successful relaunch of the Panthère collection. There were no Cartier buybacks last year. “Cartier is in a very healthy situation,” Grund said.
Says Rupert, “We continue to address the challenges that affect our watch business. Our approach to the grey market remains uncompromising.”
Rise of Jewelry & Retailing
It’s worth noting that Richemont’s wholesale watch woes are accelerating two major trends in the group: the increasing importance of the jewelry category and of watch retailing.
Four years ago, watches were Richemont’s most important product by far. In fiscal 2014, they accounted for more than half of group sales, 52%. The second most important product, jewelry, accounted for 30% of total sales. Not anymore. Last year, jewelry sales surpassed watches, thanks to a recent jewelry boom and the slump in the wholesale watch business. Jewelry represented 41% of total sales, watches 40%. Between fiscal 2015 and 2018, jewelry sales jumped 36.5%, while watches fell 15.5%.
Jewelry is clearly Richemont’s new star. “We’re particularly well placed to capitalize on the growth opportunities in our relevant product lines,” Grund told financial analysts in May, “first and foremost in jewelry.” Long-term, given Richemont’s strength in watches, and its efforts to fix its wholesale watch network, we’ll see if that trend continues.
Lagging wholesale sales also have spurred Richemont’s evolution into a watch retailer. Ten years ago, Richemont relied heavily on its wholesale network of third-party, multi-brand jewelers. They accounted for 58% of its total group sales versus 42% from its own retail network, primarily Cartier and Montblanc stores.
Now that’s completely reversed. In fiscal 2018, the wholesale network accounted for just 37% of total sales. Richemont’s own retail channel jumped three points to 63% of sales. (Sales in the wholesale channel are down €909 million in two years to €4.06 billion [$4.75 billion].)
That’s the result of a boutique-building binge in the watch division that began in 2005 and the launch of e-commerce sites by some brands. (As of March 31, Piaget operated 92 boutiques; JLC, 87; IWC, 86; Panerai, 77; and Vacheron Constantin, 68.) Moreover, watch sales in Richemont’s retail network are doing just fine: they were up by double-digits in fiscal 2018. It’s the wholesale watch network that is suffering. Given Richemont’s aim to become an omnichannel player, this trend is almost certain to continue.
Baume, No Mercier
The launch of Baume (yep, just Baume), a new brand for Millennials marks a first for Richemont and is another response to changing times. In this case, concerns that traditional wristwatches are not on the radar of Millennials. The watch is not Swiss-made and not a luxury piece. It is assembled in the Netherlands and uses Japanese movements (Citizen’s Miyota) for its quartz and automatic collections. It also uses Swiss (Ronda) movements for some quartz pieces. Its hallmarks are that it is affordable (priced at $650, $630 and $1,100), customizable, available on the web, and produced with care for the environment. (See Jon Bues’s report on Baume here.)
“What is Baume?” asked Grund at the financial analyst meeting in May. “It’s young, it’s eco-conscious, it’s digital. I think that captures the essence of it.” And, he added, “For us, it’s a bit of an edgy proposal, being in a quite conservative industry.”
Lambert welcomed “the birth of a new maison within our portfolio.” Baume was developed by a special team within Baume & Mercier (hence the name) but has its own management team. Lambert explained the strategy. “We want to recruit new clients for the luxury watch segment, and it is very important for us to nurture the desire step by step, and to continue to raise the relevance of fine watchmaking to a new generation. We go one step further with Baume. It’s a different positioning for clients interested in shopping digital, personalization, and an environmental awareness approach.”
If you want a glimpse of how Switzerland’s watch brands will navigate the omnichannel, brick-and-click future of the luxury watch business, keep an eye on Richemont.