LONDON — Johann Rupert is shaking up and whittling down the management structure at Compagnie Financière Richemont, as the group gets used to the “new normal” of slower growth in the luxury watch industry.
After reporting a 51 percent decline in first-half profit to 540 million euros, or $605 million, and a 12.6 percent drop in sales to 5.09 billion euros, or $5.70 billion, Rupert believes it’s time for change at his luxury goods pole, the parent of brands including Cartier, Van Cleef & Arpels and Dunhill.
He’s eliminated the role of chief executive officer altogether, and wants the board to run the company.
“It’s not possible for one individual to be ceo and this was highlighted to me by poor Mr. Lepeu, who ended up with 35 direct reports,” said Rupert, referring to his current ceo, Richard Lepeu, who will retire in March.
“We need to look at spreading that load and having a structure that allows managers more time to really address their responsibilities,” said Rupert, adding he’s expecting a lot more harmony under the new structure.
“These are people who have been working with one another for decades and are extremely happy about the clear allocation of responsibility and authority.”
Rupert will remain as executive chairman, as well as Richemont’s shareholder of reference.
“My role will be the same as before. I am an air traffic controller of egos — and nothing’s changed,” said the famously straight-talking Rupert, who has served as Richemont’s ceo on three separate occasions.
Markets applauded the move, with the shares climbing 6.7 percent to 67.30 Swiss francs, or $69.18, following the announcement.
Regarding the new management structure, Rupert isn’t the only luxury leader who’s been doing some soul-searching during hard times for luxury.
Earlier this year, Burberry announced that Christopher Bailey would make way for a new ceo, Marco Gobbetti, and return to a full-time role of chief creative officer. Bailey will also take on the title of president as the company aims to outstrip luxury industry growth, and cut costs.
Rupert said he wanted to take advantage of the impending retirement of two valued company veterans — ceo Lepeu and chief financial officer Saage — to make the structural changes.
Burkhart Grund, deputy cfo, will succeed Saage while Georges Kern, who is currently ceo of IWC, will become head of watchmaking, marketing and digital, a new position.
Jérôme Lambert, ceo of Montblanc, has been named head of operations, responsible for central and regional services and all of the product divisions other than jewelry and watchmaking. His is also a new position.
All will join the board, in addition to Nicolas Bos, ceo of Van Cleef & Arpels.
This is not the first time that Rupert has retooled the top management structure.
As recently as this year, the company was run by co-ceo’s, Bernard Fornas and Lepeu. They both took over in 2013 after Rupert gave up his ceo position to take a yearlong sabbatical. Fornas has since retired, leaving Lepeu as ceo.
Rupert is not giving up on his old team. Alongside the changes and in the interest of “continuity in the decision-making process,” and the “wealth of knowledge” among Richemont veterans, many former managers and current non-executive directors will join a new international advisory council.
They include Yves-André Istel, Simon Murray, Lord Renwick of Clifton, Professor Jürgen Schrempp and The Duke of Wellington. The council will act as a sounding board for the board of directors, drawing on the “significant expertise” of its members, according to Rupert.
Fornas, Lepeu, Norbert Platt, and Alain-Dominique Perrin — all former Richemont ceos — will be appointed as senior advisers to group management, liaising directly with Rupert and the senior executives.
Although Richemont saw a return to positive sales growth in October, Rupert said the management shakeup is part of a larger vision to position the company for the future, making it more flexible and responsive especially in “the developing field of digital marketing and e-commerce.”
Like many luxury goods captains, Rupert has long been wary of the web and the leap into e-commerce. Of late, the company has begun to embrace digital, selling Cartier watches through the London-based online retailer The Watch Gallery, and promoting its IWC timepieces with Mr Porter, part of Yoox Net-a-porter Group, of which Richemont is part owner.
During a conference call, Rupert said he also wants to slim down the supply pipeline “and make sure that we don’t have excess fat. That’s not just me — everybody realizes this.”
Trimming the fat also refers to the company’s excess shops, especially those in China. “Like all of the other companies, we have excess boutiques in second and third-tier cities or non-productive areas in China,” said Rupert, adding the plan is to downsize or shut them.
Rupert said his long-term goal for Richemont is unchanged: “I’m interested in [customers] giving us their hard-earned money, so we’ve got to create demand for our products. Demand will create free cash flow with which we can pay dividends, and our goal is to grow our dividends by 15 percent per year.”
The changes come as Richemont reported falling sales in all categories and geographic regions. Sales growth was further dented by buybacks of underperforming watches, mostly Cartier gold designs. Earlier this year, Richemont had confirmed it was buying back watches, picking off the precious gems, and melting down the metal.
(According to Luca Solca, managing director at Exane BNP Paribas, Cartier has not been suffering more than the other Richemont watch brands. Instead it’s reacted more quickly to the slowdown, and it’s also far larger than its sister brands).
The buybacks were aimed at helping third-party retailers clear stock without resorting to promotions, and cost Richemont 249 million euros, or $279 million, in the period. A portion of that money also went toward making the Richemont stores more efficient.
On a separate conference call, Saage confirmed that the buyback program, which involves Richemont handing a credit note to wholesale customers in return for the goods, is complete.
Overall, the company is still looking at problems with watch overcapacity, and adapting its manufacturing structures to the level of demand.
While the company has ruled out layoffs in its watch division, Saage said Richemont would continue to invest in manufacturing while also “gaining efficiencies” in the process.
Excluding the buybacks, sales in the half decreased by 8 percent in constant terms, due mainly to a weak demand for watches in general, as well as historically high comparatives with the corresponding period last year, Richemont said. Back in September, Richemont said it was expecting profit to fall 45 percent, due to the slowdown in hard luxury sales, and of watches in particular.
The decline in watch sales was partly mitigated by demand for accessories and, to a lesser degree, for jewelry.
Looking ahead Saage talked about the “new normal” for the watch business.
“Before the gifting explosion in China we were seeing modest growth in watches. We don’t know where sales are going to be in the future, but we can no longer expect a return to growth of 20-odd percent. We’re looking at this — and all parts of the business — on an ongoing basis.”
Although Richemont saw sales growth in all regions deteriorate, the company said the rate of decline in Asia-Pacific has continued to soften, and was minus 8 percent compared to a 17 percent decrease in the prior period.
The overall decline was partly offset by continuing growth in mainland China and positive retail, jewelry and accessories sales in the region. “More and more Chinese are buying at home, so if you take the total sales of Chinese, that is going up. It’s just where they buy that’s different,” Rupert said.
In addition to mainland China, other markets that saw growth were the U.K., due to the weak pound, and South Korea, thanks to local Chinese tourists.
According to Rogerio Fujimori of RBC Europe, the first half should mark the low point in terms of sales decline and margin erosion for Richemont. “We now have a cleaner trade stock situation for Cartier (Richemont’s largest brand) and easier comparatives ahead,” he wrote.
Fujimori also said the recovery for watches should be gradual given the lagging nature in wholesale, but recent sell-out trends in greater China are more encouraging. “We also see growth for the jewelry category re-accelerating” in the second half, he said.
He believes Richemont offers the strongest balance sheet of all the luxury brands that RBC Europe covers. Richemont’s net cash as of Sept. 30 amounted to 4.55 billion euros, or $5.05 billion.