LONDON — Diamonds are forever, as are other jewels made from precious rocks and minerals, and their long-term appeal will outlast any damage that COVID-19 may inflict on sales of hard luxury. So says Compagnie Financière Richemont’s Johann Rupert, who is paving the way for better years ahead.
The short- to medium-term may be grim but, as usual, Richemont’s founder and chairman is taking the long view. He believes his company, home of brands including Cartier, Van Cleef & Arpels and Montblanc, is run with enough “caution and cash” to emerge in a much stronger position post-pandemic.
During a call to discuss Richemont’s 2019-20 results — the first he has been on in about 18 months — Rupert said Richemont has enough liquidity to last 36 months, a net cash position of 2.4 billion euros, and an increasingly flexible, digitally led business model.
He noted that hard luxury products are not transient, nor are Richemont’s brands. He singled out Cartier, “which was established in 1847 and has survived two world wars, and Vacheron Constantin, which began manufacturing watches in its current premises in Geneva in 1755. Our maisons will survive these difficult times, supported by the strength of Richemont’s balance sheet,” he said Friday.
“We are lucky in that we prepared for an economic downturn. COVID-19 merely sped up what was probably going to happen in any case: Economic reality settling in. We didn’t know what was going to trigger the downturn, and obviously never thought it would be a pandemic of such proportions. A few years ago we acted decisively in cleaning up our watch market, and we’ve always been very careful with our cash and our liquidity.”
In that spirit of prudence, and patience, Rupert has also decided to downsize Richemont’s dividend this year to 1 Swiss franc per 1A share/10B shares and to give shareholders a warrant or “loyalty bonus” by way of options to acquire future shares on advantageous terms. He said Richemont was still ironing out all the details, but the aim is for shareholders to be “richly rewarded” once better times return.
That might take a while.
“We may be looking at 12, 24 or 36 months of grave economic consequences. Perhaps that is too pessimistic, but who knows?” said Rupert, whose company has been reducing production capacity and keeping a beady eye on inventory, working with Swiss authorities on furloughs, and offering thousands of employees the chance to work from home during lockdown.
Rupert’s social conscience, and talent for big-picture thinking, shined through on the call. He addressed the future, and the various lessons that might be drawn from these months of lockdown. He talked about future consumption trends, jobs, the environment, sustainability and how his own peers needed to put business into perspective.
He described meeting an acquaintance of his, the principal at a fashion company who was moaning about “missing” sales in the fall season due to the coronavirus. “I told him, missing the fall season is not a tragedy. A tragedy is a hungry child.” He said he hoped the virus was “a-once-in-a-lifetime event,” and expressed concern that millions have lost their jobs or been put on government supported schemes, and that some businesses would not survive.
As for Richemont itself, Rupert said “what we’re trying to do is to make sure that we run our business in such a way, responsibly, that we ride out the COVID-19 tragedy until such a time that enough people have been vaccinated. I believe in human ingenuity. I believe that when you have more than 100 institutions working on various ways to attack the virus that we will find something. I do not believe that it is going to be as quick as some of the politicians, especially those who are facing elections in November, are trying to tell their people. I am in weekly touch with some very serious scientists and they are quite hopeful about a number of breakthroughs. However, they do caution against people thinking that there’ll be a safe vaccine available in such quantities that it will be the cure, or the safety net.”
Rupert said hope for the future is one reason he’s proposed a “warrant,” or some type of financial instrument, “to try to reward loyal shareholders by betting on human ingenuity. They can take a warrant, keep it, and exercise once we have a vaccine. I am hopeful that we will have a vaccine. I am concerned about the economic fallout globally. I am very concerned that the politicians are promising things that may not be deliverable. I am concerned about the widening gap between what the scientists say and what the politicians hope for. We will run the company with enough caution and with enough cash” to emerge stronger and more competitive.
Rupert called this unusual moment as “not a pause, but a reset, and we don’t know what all the outcomes will be, but luckily we’ve positioned ourselves in such a way that we’re not in throwaway luxury. I don’t [believe in] this habit of buying something for the fall season, for the winter season. My mother never did that, my wife doesn’t do that. We have to look at the way we live, because there will be changes — and maybe changes for the better.”
He said “it’s up to science now to dig us out of the hole that we, as mankind, put ourselves into, by our lifestyle and our abuse of the environment and the way we were living. If you think every single human being alive today, if we had to be put in a tube and boxed in like sardines in a tin can, we could easily fit into one cubic kilometer. That’s all. And yet, look at the way we live. We’ve used and abused I would guess 70 percent of the world’s natural resources. We still act as if climate change is not real, we’re dumping plastic everywhere and now nature retaliated, so maybe it’s time for us to pause and to think. Maybe it’s a very good thing that’s happened to us, it gives us a pause.”
He believes that consumer, and social, habits will change drastically, post-pandemic. Vulgar displays of wealth will be frowned upon more than ever, while people will want to spend more time entertaining at home. “Look at the sale of flatware that people use for dining at home. For years people went to restaurants, but I think in the last month, people have been living at home and cooking at home. They will be more discreet, entertaining at home.”
He also foresees more demand for “discreet, well-made artisanal products,” and said the big luxury companies like Richemont have a role to play to preserve and create these specialized jobs. “People will understand the value of job creation, and artisanal values will be appreciated more and more.”
Even before COVID-19 struck, when Rupert was reshaping the company to be a leaner, and more efficient machine, “my primary request from my colleagues has been, ‘Let’s live within our means and let’s all share the pain.’ I asked everyone from the top down to preserve as many jobs as possible for as long as possible, which is why we’ve been acting prudently all through these years.”
He said that at a group conference in 2010, “I predicted to our colleagues that the way central banks were acting, repressing interest rates, they were penalizing the good part of society that had saved, while [promoting] speculators. We predicted at that point that there would be a tearing of social fabric. This has been going on for a decade now. If you look at Brexit and if you look at the rise of President Trump, it is, in a sense, a vote on the tearing of the social fabric, which is why I believe the vulgar display of wealth will be frowned upon even more.”
Rupert was also quick to list all of the headwinds that luxury goods makers face in the months ahead as Europe and the U.S. struggle to recover. In addition to the time it will take to find and administer a vaccine worldwide, he said the decline in tourism and international travel will also weigh on growth.
While the short- and medium-term isn’t looking rosy for high-end brands, Rupert said the fundamentals of the hard luxury business — and Richemont itself — were strong.
He nodded to the enduring value of a brand like Cartier, noting the sale a few weeks ago of a Tutti Frutti bracelet at an online Sotheby’s auction. The Cartier bracelet, an art deco design studded with sapphires, diamonds, emeralds and rubies, sold for $1.34 million. It was the highest price ever paid for a piece of jewelry via online auction.
“If you look at Christie’s and Sotheby’s and look at sales for jewelry, you will consistently find Cartier and Van Cleef. You have design codes, craftsmanship that clients value to such an extent that, luckily, it’s not so much the price of the diamonds, the price of the gold that determines the brand equity. You’ve got to ask yourself how many other newcomers into the jewelry business would sustain prices like the Tutti Frutti because of customers knowing there is an investment value to it.”
Rupert is proud of having positioned Richemont to withstand the blows that inevitably come with running a 21st-century luxury business in a globalized world.
He said Richemont’s approach has been to “shift from a fixed-cost basis of operating, to a more flexible model. We see online marketing as a key element of that.” He also said the venture with Alibaba in China is helping to introduce Cartier and the other maisons to a new generation of shoppers.
“Having started to shop online, these Internet shoppers also tend to become good customers in our boutiques. In times when tourist traffic is impacted by concerns over the virus, Internet shopping has proven to be a key avenue and will remain key to the growth of our business,” said Rupert, adding that Richemont’s various brands have also become more efficient with procurement and more flexible with product development and manufacturing capacity, as a result of working with the JV.
In September, Net-a-porter planted its flag on Tmall’s Luxury Pavilion with a store that marked the start of the new joint venture, known as Feng Mao. Net has been placed in the key position on Luxury Pavilion, and stocks the latest seasonal collections from Net and Mr Porter under one storefront. At launch, the store offered more than 130 luxury and designer brands including Brunello Cucinelli, The Row, Balmain, Isabel Marant, Jimmy Choo and Tom Ford.
Cartier, Baume & Mercier, IWC Schaffhausen, Jaeger-LeCoultre, Panerai, Piaget, Roger Dubuis and Vacheron Constantin are among the brands with dedicated spaces on Luxury Pavilion.
In fiscal 2019-20, online sales from YNAP and Watchfinder rose 15 percent to 2.43 billion euros, and generated 19 percent of group sales, compared with 16 percent in the previous year.
All of YNAP’s businesses posted double-digit growth, Richemont said, while Net-a-porter’s Tmall store “continues to build momentum,” the company said. During fiscal 2019-20, Watchfinder, which deals in vintage and secondhand watches, expanded into the U.S., Hong Kong, and a host of new European markets.
Those online distributors have still not turned a profit. Instead, they had an operating loss of 241 million euros from a “highly competitive pricing environment” at YNAP (online fashion retailers — even the luxury ones — regularly engage in discounting wars).
Costs also came from international expansion at Watchfinder and increased investments in IT at Mr Porter and Net. Temporary closures of distribution centers from the COVID-19 outbreak also dented sales.
The failure of those businesses to turn a profit has been a recurring theme in the Richemont calls, and on Friday Rupert reminded his audience that for 10 years after he purchased the dusty old jeweler Van Cleef & Arpels, “I’d get not only analysts and journalists but board members asking me, ‘When will it finally become profitable?'” He said the same slow, focused, and patient approach applied to the online platforms.
Rupert, who was initially slow to see the potential in online hard luxury sales, is now evangelical about digital, in stark contrast to at least one of his luxury peers: LVMH Moët Hennessy Louis Vuitton’s chief Bernard Arnault.
Earlier this year, Arnault weighed in on online pure players at an LVMH results presentation.
“They’re all losing money. That’s not a great sign. And the bigger they get, the more money they lose. We’ve been asked several times to participate in these businesses, and I’ve always said ‘no,’” Arnault said, acknowledging that the French group’s e-commerce site 24S.com, launched in 2017, is no exception.
“It’s also losing money, but it’s not losing a lot because it’s small. We’re growing it modestly. We hope to find a way to make it profitable, but for the time being, we haven’t. We shall see,” he said.
By contrast, Rupert — who at one time offered to open up YNAP to shareholders from other luxury groups, including LVMH — views online as a way of better serving customer needs, and said that over the past weeks, the online platforms helped to mitigate the loss in sales from tourism and enforced store closures. Plus, he said, YNAP is not causing Richemont any problems in terms of cash flow.
“We’ve always been interested in how technology can help us. We look at online as a way of serving customer needs. We believe in new retail, meaning that the client can get what he or she wants when he or she wants it — all the time. It will migrate more and more to online. If you look at Peter Millar [the upscale golf and sports clothing retailer owned by Richemont] in the United States, a percentage of their products are being sold and have been sold through department stores. But we all see what’s happening to the department store business. It’s, in a sense, heading the same way as some of the malls.
“Luckily, they’ve developed an online presence which is growing in leaps and bounds. I would ask you to look at our online business, whether it is Peter Millar, Cartier in the U.S., NAP, Watchfinder or our JV with Alibaba as something that we’ve been working on for many years. Because, ultimately, if we can service our clients to their satisfaction in the new retail environment, it will also help us to take the fixed cost of leases and turn that into variable costs. So when there’s a downturn, we don’t get stuck with leases all over the world. It’s all part of an integrated strategy.
“The steady but certain progress from offline to online won’t be stopped,” Rupert said, arguing that online will be so normal for luxury that during future conference calls, analysts and media will soon be asking companies: “How’s your off-line business going?”
Although Richemont suffered in the fourth quarter, Rupert said China has bounced back quickly.
In the final three months of fiscal 2019-20, Richemont said sales declined by 18 percent at actual exchange rates, with the Asia Pacific region down by 36 percent and China alone falling 67 percent. In the quarter ended March 31, sales in Europe fell 9 percent while in the Americas region they were up 9 percent.
Richemont would not say how sales fared in April, or over the past few weeks, nor would it offer any projections for fiscal 2020-21, arguing there was “limited visibility” and that “no one can say when we will see economic activity normalize.”
Rupert did point out that the company’s 462 boutiques in China have reopened and “we have seen strong demand.” He said that one of Richemont’s directors, a Chinese citizen, reported that city life feels “normal” once again.
“The Chinese are going back to running their lives in a normal fashion. We’ve seen traffic increasing, also in the malls. As in many other fields, the Chinese are quite ahead in terms of their shopping, so we are seeing a very pleasing uptick” in online and off-line sales, he said, referring to Richemont’s new luxury joint venture with Alibaba, which last year saw the opening of Net-a-porter on the Tmall site.
He said sales in Richemont’s reopened Chinese stores are “good — very good in fact,” but added that other economies will probably find it difficult to emulate China. Richemont’s year-end results announcement coincided with news that industrial production in China rose 3.9 percent last month compared with the previous year. It was the first increase so far this year and beat economists’ forecasts of 1.5 percent.
In the full year, which had not been an easy one for Richemont given the violent street protests in two of its most important markets, Hong Kong and France, revenue was up 2 percent to 14.24 billion euros. Stripping out sales from the online distributors Yoox Net-a-porter and Watchfinder, sales for the year decreased by 1 percent.
Profit was down 67 percent 931 million euros, due in part to the nonrecurrence of a posttax, noncash gain of more than $1 billion euros on the revaluation of YNAP shares held prior to the acquisition, and net foreign exchange losses on monetary items. Operating profit was down 22 percent to 1.52 billion euros, due mainly to the impact of the pandemic.
Despite the year’s many woes, jewelry eked out growth, with revenues climbing 2 percent to 7.22 billion euros. Operating results were down 7 percent to 2.08 billion euros, reflecting the muted sales performance, higher gold prices and an increase in costs due to digital initiatives and store changes, in particular the renovation of Van Cleef & Arpels’ Rodeo Drive boutique in Los Angeles, and the relocation of the Cartier boutique in China World Beijing.
Specialist watch sales fell 4 percent to 2.86 billion euros, hammered both by the Hong Kong protests and COVID-19. Richemont said sales were better in Japan and the Americas, while Panerai and A. Lange & Söhne, performed well due to launches.
Rupert made the point that Richemont’s watch inventories were as “clean” as ever while the specialist watch business had been performing “very, very well” until Jan. 15, when the pandemic was spiking in China and the Asia Pacific region.
Richemont’s shares closed down 2 percent at 51.30 Swiss francs on Friday.
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