Byline: James Fallon

Is Johann Rupert the Sage of Luxury, or its Cassandra?
Rupert’s Compagnie Financiere Richemont AG is the second largest luxury goods company in the world, with some of the best brands in the business — Cartier, Chloe, Alfred Dunhill, Piaget, Baume & Mercier, Van Cleef & Arpels, Montblanc and Vaucheron Constantine — grouped under its Vendome subsidiary .
However, the Zug, Switzerland-based company has for the most part sat out the industry’s feeding frenzy of acquisitions and mergers over the last five years. As LVMH Moet Hennessy Louis Vuitton continues to snap up brands for spiraling amounts of money, and as Gucci NV digests Sanofi Beaute, Yves Saint Laurent and Sergio Rossi, Richemont has remained cautious and quiet, the same as always.
Rupert, 49, is also typically cautious and reticent — until now, he has not granted a major press interview since taking over as chief executive of the group’s luxury goods operations on Jan. 31. But he does have strong opinions about what is a prudent course in a luxury market that, in his view, can turn dark quickly.
“It’s not just about what you buy,” he says, sitting in his large office in central London. “It’s also a question of whether you can support the brands you have when times are bad.”
He’s cautious about criticizing any of his competitors by name or, for that matter, even detailing too much of Richemont’s strategy in the months and years ahead. However, articulating a philosophy that represents the antithesis of the strategy of Bernard Arnault of LVMH, Rupert adds, “In my view, you ultimately create shareholder value better by building good will, rather than buying good will.”
That said, there are indications that the slumbering giant of Richemont is about to stir. The group has made a series of management and structural changes over the last three months that analysts believe indicate a slight shift in strategy. Even Rupert admits he’s much more hands-on now when it comes to Vendome.
Certainly, Richemont has more than enough cash to make an acquisition and is accumulating more — the company plans to sell 50 percent of its 35 percent stake in British American Tobacco in June, a move that will raise more than $1 billion. The remaining 50 percent will be sold by June 2004, to raise another $1 billion or more. Richemont is also unloading its investment in satellite television in Europe, which will garner more cash. These gains will be in addition to Richemont’s steady cash flow of more than $500 million a year.
Rupert, however, insists that Richemont won’t be launching any spending spree or drastic recasting of its corporate philosophy.
What he thinks is more pressing is the challenge of leveling out the peaks and valleys of the luxury goods business. Sure, the Nineties have seen an unparalleled boom in demand for luxury goods. But he is convinced the good times won’t last forever.
“There is the potential of a lot of economic instability in the years ahead,” Rupert warns, offering a litany of evidence, including overcapacity in every major manufacturing industry; aging populations in France, Germany, Japan and the U.S., and continuing structural inefficiencies in the economies of France and Germany.
“Combine those with the shorter life cycles of fashion products, and perhaps another recession in Japan, and the problems the luxury goods business experienced in 1987 would be magnified two to three times,” he says.
“Do I really want to go out on a limb with lots of acquisitions? If a downturn happens, it won’t be a case of who buys what. It will be a case of survival. If I’m wrong, and the economies of the world continue to boom, then fine, we will make a fortune with the brands we have and I will be a very happy man. But if my worst fears are realized, at least we’ll survive.”
There’s a lot at stake. The Rupert family owns about 9 percent of Richemont’s public “A” shares, which are traded on the Swiss Stock Exchange, and controls 50 percent of its voting “B” shares through Compagnie Financiere Rupert. As a result, the Ruperts have been focused on a steady-as-she-goes strategy ever since they bought the disparate bits of the loss-making Cartier in the Seventies and molded them together again.
Cartier today is one of the world’s largest jewelry companies, with an estimated 18 percent share of a global market worth about $3.1 billion a year. It remains the engine of Richemont’s luxury holdings, and analysts estimate it contributes up to 70 percent of Vendome’s pretax profits and 60 percent of its sales. Vendome’s second-largest brand is Montblanc, which contributes only 8 percent of sales, according to a report on the company by Merrill Lynch & Co.
The family’s focus on the long term also is the main reason the company delisted its Vendome luxury goods group two years ago, after launching it on the stock exchanges in London and Switzerland in 1993. At the time of the delisting, Rupert said the stock market failed to appreciate the time horizons needed to build and maintain a luxury goods brand.
Richemont, on the other hand, has a distinct sense of the value of time, and of everything in its own time. “We have a three-to-five-year plan in all our companies,” Rupert says. “We have the trust and confidence in the management to allow them to lose money for a time, as long as, in the process, they are building brand equity.”
The management of which he speaks has undergone a complete transformation in the last few months, following the retirement in January of its longtime chairman, Joseph Kanoui, who remains on the Richemont board and heads its investment committee. Rupert praises Kanoui as the man responsible for squiring Vendome as it grew into the world’s number-two luxury goods group.
Now, Rupert is ceo of Vendome in addition to his duties as ceo of Richemont. Alain Dominique Perrin, the man credited with turning Cartier into the largest and most successful jewelry company in the world, is senior executive director responsible for development and implementation of all its marketing, manufacturing and strategic operations, reporting to Rupert. Richemont has also reshuffled a string of executives throughout its operations.
“They have started to be much more aggressive now, which is linked to the nomination of Alain Dominique Perrin,” notes Karine Ohana of investment bank Media Invest SA. “And Perrin and Rupert are now both in London, where Vendome is based.”
Equal in importance to the revamped management is the refinement of Richemont’s emphasis, to focus solely on luxury goods after years of splitting its attention among tobacco, luxury products and even satellite television. The company last year folded its tobacco businesses into a joint venture with British American Tobacco PLC and plans to sell its remaining holdings in the French media group Vivendi SA by September.
“I and the company are now totally focused on luxury goods,” Rupert says. “My job is to make sure enough oxygen is given to the creative flair of the brands, so we can develop them to their full potential.”
Industry analysts believe Richemont’s concentration on luxury will boost its share price, which has lagged behind that of competitors LVMH and Gucci as a result of its tobacco holdings and the underperformance of some of its luxury goods brands.
“They are more exploratory than they were, and there is no question now that they know where they’re going — to becoming a pure luxury goods group,” said Antoine Colonna, a luxury goods analyst with Merrill Lynch in Paris.
Colonna and his London-based colleague, Jonathan Fell, praise Vendome as “a high-quality business with some of the best luxury goods brands in the world.” They predict Vendome will achieve sales growth of 13.5 percent a year over the next five years and annual growth in operating profits of 15.2 percent in that time.
“The group still has more to do in terms of integrating different brands, increasing control of the distribution network and, most importantly, boosting the performance of some currently underdeveloped or underperforming brands,” they say in a recent report. “Recent changes in the Richemont and Vendome management and board structures should aid these processes.”
Others aren’t quite so optimistic. Some analysts, consultants and competitors criticize Richemont for clinging to a risk-averse strategy and missing major opportunities to add to its brand portfolio. They also claim that many of Richemont’s brands languish as the Swiss-based company fails to keep up with the marketing savvy of Arnault, or of Domenico De Sole and Tom Ford at Gucci Group.
One consultant regularly approaches Richemont about possible acquisitions and is frustrated by the group’s persistent unwillingness to take a chance.
“They are always among the first to be contacted, and their attitude is always that they know everything about the market,” the consultant says. “They think they know the value of every brand and aren’t willing to pay more.”
Other observers and former Richemont employees say the company has been run too much by the numbers for the last decade and not enough by products and design.
“The financial guys controlled everything,” one former senior executive says. “They had no knowledge of the product area, which is why they’ve never done well on the fashion side. Anything that was nonconformist was vetoed.”
And despite the recent management reshuffle, some observers question whether Richemont has the depth of management still to steer its brands to greater things.
“Arnault is lucky in having a real team at LVMH, and he allows them to be strong,” one observer remarks. “The real problem at the end of the day with all these luxury companies is the management. It will be interesting to see, now that Johann Rupert is more involved, how the management of Richemont develops.”
Some analysts believe a lack of depth in management is one reason many of Richemont’s smaller holdings are either struggling or remain underdeveloped. Dunhill is still in turnaround mode; Chloe is minute compared with the likes of Gucci or Prada; the leather goods brand Lancel is little known outside its home country of France, and such brands as Hackett, Sulka and Purdey are small players on the global scene, analysts say.
“There are some good elements in Richemont, but they definitely haven’t expanded them as much as they could have,” says one London analyst. “Their recent moves indicate they realize a shakeup is needed.”
Another luxury goods analyst agrees. “There are two to four brands that weigh quite heavily in their portfolio and executed very well,” he says. “But it’s difficult to see them turning Sulka into a winner, and I remain skeptical about whether they can turn Chloe into a major brand. That takes a lot of investment.”
Some analysts call on Richemont to dispose of Chloe, Dunhill and some of its smaller brands. Suggests one consultant who knows Richemont well: “They’d unquestionably find a buyer for Chloe and Dunhill. Bertelli of Prada probably would love Dunhill because he likes English brands, having bought Church’s shoes.”
Others, though, say it’s unlikely Richemont will ever sell Chloe or Dunhill, because it simply is not a seller. “The only brand they ever sold was when they sold Karl Lagerfeld back to Lagerfeld,” notes the London analyst. “They buy the brands and hold onto them.”
Rupert agrees that some of these criticisms of Richemont are on target, and admits the group had allowed such brands as Dunhill to drift for too long. But he claims Dunhill is now on track to return to profit within the next 18 months. And he stresses that the other brands are performing to their targets.
Part of Richemont’s problem with fashion brands is that it remains wary of the business. While Chloe, Alfred Dunhill and other brands do offer ready-to-wear, Richemont has never seen itself as a fashion company. It is unlikely to snap up many other fashion labels, or to ever launch a Cartier rtw collection.
“I’ve always believed strongly in what Coco Chanel said: ‘Style stays, fashion goes,”‘ Rupert explains. “We have nothing against soft goods. It’s just that the fashion element of it makes it a very risky business in our view. It’s the same with the fragrance business, where the success ratios aren’t very high. Those risks are better borne by the Unilevers, L’Oreals and Estee Lauders of the world who understand that business.
“The kids today are much more sophisticated,” he adds. “The target market used to be ages 18 to 25, now it’s 15 to 30. The market is much more fickle, and product lifecycles have become incredibly short. By the time I think something is hot, my 16-year-old daughter thinks it’s dead.
“That’s what is so important with Stella McCartney. If you watch all the awards shows, people are able to immediately say that a particular dress is from Chloe. It’s about a style that is immediately identifiable. Stella is exceptionally talented.” Which is why Richemont is keen to keep McCartney at Chloe. Rupert won’t comment on the talks between Richemont and McCartney about renewing her contract, but sources said he’s been assiduous in courting her to get her to stay. A reported stumbling block is that Richemont wants to acquire the rights to McCartney’s name and has told her it’s willing to invest heavily in building up Stella McCartney as a brand as well as having her serve as Chloe’s designer. McCartney, though, isn’t sure she wants to sell.
Of course, Richemont has had plenty of chances to buy other fashion brands over the last few years, but Rupert only regrets missing one of them.
“We could have bought Gucci in the fall of 1994 for $350 million,” he recalls. “I was for it, but the combination of lawyers and accountants were so much against it that we decided not to proceed. Then in August 1995, they returned and we were told we could buy it for $800 million. I blocked that one because I wondered what made it such a great deal this time when we didn’t buy it at $350 million.
“That is the one I feel most sorry about. On the other hand, would we have been able to replicate the success of Domenico De Sole and Tom Ford?”
Rupert declines to identify other companies the group has passed on, but it’s known to have been approached about Tag Heuer, Ebel, Chaumet and Zenith. Each was promptly snapped up by LVMH, which in the process became a major player in the luxury watch sector, with an estimated 9 percent share of the market. This compares with Rolex’s 26 percent market share; Richemont’s 20 percent share with such brands as Baume & Mercier, Piaget, Vacheron Constantine and Officine Panerai, and the 20 percent share held by the Swatch Group and its brands.
The one brand Richemont immediately snapped up was the French jewelry company Van Cleef & Arpels. Richemont bought 60 percent of the company in May 1999 for an estimated $265 million. But some analysts claim Richemont overpaid.
“They spent 600 million French francs [about $90 million] more than LVMH or Chanel,” protests one analyst. “Why would they do that and pass on other possibilities that were offered to them?”
In Rupert’s view, the answer is simple: Van Cleef builds upon one of Richemont’s core businesses, fine jewelry. For that reason, the company wasn’t about to let any of its competitors get their hands on Van Cleef.
“Frankly — and I’ve said it to the other acquirers — we’re very glad they bought some of those other companies and not Van Cleef. If we had to choose again among what was sold last year, we’d again pick Van Cleef.
“What is a brand? Van Cleef to me has fabulous brand equity and wonderfully rich archives. There is no reason Van Cleef could not be a very, very, very big success.”
As big as Cartier? “Well, I don’t want to say. But in five to 10 years’ time, it will turn out to be a good acquisition.”
Recent speculation has Richemont eager to get its hands on more brands that are core to its existing business. In particular, it might be eyeing the watch companies owned by Mannesmann AG, which recently was bought by the mobile phone company Vodafone AirTouch PLC.
Mannesmann announced plans prior to the takeover to spin off the watch brands and its other industrial holdings into a separately listed company. Vodafone AirTouch has said it will stick to that plan, although analysts expect it to sell the watch companies instead. These include Jaeger-LeCoultre, IWC and A. Lange & Sohne, and the likely acquirers are LVMH, Swatch or Richemont. The three brands had sales last year of about $220 million.
Rupert declines to comment on the Mannesmann brands, other than to say he has good relationships with the German group’s senior management. He also points out that he knows the Vodafone AirTouch board very well, since the Rupert family has the Vodafone franchise in South Africa.
Analysts and consultants believe any future acquisition Richemont makes will be aimed at building up its core operations of jewelry, watches, leather goods and writing instruments. Even Rupert admits the group is loath to diversify beyond its existing sectors. He points to the watch brand Panerai as the perfect Richemont acquisition.
“We bought it for almost nothing, and now could sell 10 times our production,” he says, pointing out the brand has become a cult item among such collectors as Sylvester Stallone. “It’s small, but it’s a great brand.”
Rupert believes the trick in managing any luxury brand is finding out what additional products it can support and then introducing them. No more, no less.
“There is a natural umbrella for every brand and its authenticity. The easiest thing for management is brand extension, but in the end, too much of that undermines the integrity of the parent brand.”
The difficulty for groups such as Richemont and Vendome, he admits, is determining how far to push the umbrella. It’s also determining what luxury is, in an era when mass airline travel, rising incomes and the Internet make almost anything available to anyone.
Richemont, like many luxury goods companies, has been slow to move into the Internet as it tries to figure out what it will mean for the sector. So far, its main investment has been the acquisition in December of a 20 percent stake in the luxury site for $5 million. But Richemont executives stress they have no plans in the near term to sell the group’s products on the Web.
What the Internet does offer is a major opportunity for the group’s brands to bolster their images of luxury, Rupert suggests. The main differentiator for luxury brands in the years ahead will be their level of service. The better the service, the better the brand. Individual communication with customers via e-mail and the Internet is one way for Richemont to maintain and build its customer loyalty.
“When you’re young, you have lots of time but little money,” Rupert says. “As you grow older, time becomes worth more than money. We have to find ways to save our customers time.”
Rupert questions the new luxury business gospel of building up a group of brands in order to gain synergies in properties, back-office functions and advertising. While Vendome might serve as a model for such companies, Rupert points out that each of the brands within its portfolio remains individually managed.
“Product integrity has to be more important than synergies,” Rupert stresses. “What are the synergies? Yes, you can do joint distribution, but that is troublesome. Joint warehousing? Even then, you need a neutral party to manage the different brands and maintain their integrity. You can buy properties together, but then each store has to be on its own. Advertising? Yes, there you can get synergies.
“But otherwise, the brands have to remain separate. We duplicate a lot of functions to ensure that. Montblanc makes only Montblanc pens, not any of the other brands in the company. Piaget makes only Piaget. You can source raw materials together to get a better price, but then the designers have to be different and the manufacturing has to be different. Our brands compete totally — and they’re encouraged to.
“David Ogilvy [the advertising executive] used to say, ‘The consumer’s not a bloody fool; she’s your wife.’ The consumer wants to know that Piaget watches are made in the Piaget factory and what makes it special. Otherwise, it’s just another brand.”
And that’s the last thing Rupert wants his portfolio to become. His competitors might be more aggressive in some respects and might generate more headlines, but that’s fine with him. He’ll just keep managing for the long haul.
“If you look at people in luxury goods, there are very few who were around in 1976 and are still around today as independent companies. Giorgio Armani is one, Chanel is another and we’re a third. No one else is still around. We want to be around for a long time yet.”