Direct sales and jewellery focus reshape Richemont’s future

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SIMON BROWN: I’m chatting with Tasneem Samodien. She is research analyst at Private Clients by Old Mutual. Tasneem, appreciate the time today.

Thinking about Richemont and going back a decade, I remember this. At the point there was a fair bit of pressure in the luxury goods market, a fair bit of turndown in the market. Richemont at the time responded quite decisively.

They bought inventory back from the wholesalers and fundamentally changed their business model, going from wholesale to more direct-to-consumer. It wasn’t an easy change, but it has really benefitted them.

TASNEEM SAMODIEN: Thank you for having me. Yes, Simon. I am giving away my age now, but I remember it like yesterday. Ahead of the AGM around 2017/2018, Richemont put out a notice to say its operating profit was going to be down about 50%, and obviously there was a sell-off in the market. We were investors at the time, so it was a very painful period for them.

They could have waited for the luxury market to turn because there was an overall slowdown. But I think management acted very decisively in saying, ‘We know that there is a downturn, but we also see these gaps and the issues in our business, and we are going to take action.

‘We’re going to buy back watches from the grey market. We’re going to take more control over distribution in order to take more control over pricing.’

It cost them. For two years there was this jewellery price overhang as management was instituting these actions. And so it’s so pleasing to see 10 years later that those changes made to the business are now placing them in such a strong position to outperform their peers and outperform the overall sector.

Read:
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SIMON BROWN: I’d forgotten about that collapse in the profits. I’d remembered the sort of luxury downturn. I’d forgotten just how bad it got. I was also at that point in time a shareholder, and it was nasty on the share price.

But it has worked. ‘Direct to consumer’ is now over three-quarters of group sales. A decade or so ago it was around half. It was a big move. It has absolutely paid off just in terms of the numbers.

TASNEEM SAMODIEN: Yes. I think we must also remember at the time – it’s easy to say now that everyone’s going direct to consumer – back in the day it was very traditional for luxury brands to focus on brand equity, building the brand, and for wholesalers to distribute the luxury products. That was very much the status quo.

It was kind of going against the grain to say, ‘As a luxury brand we are actually going to go into retail. We can own our stores with our own retail staff, have relationships with customers.’ That was going against the grain – building your own e-commerce platform. They kind of did what other peers weren’t willing to do.

And the peer group certainly followed after that.

Now they have much stronger relationships with their clients who have actually followed into how they design the product. If you go on the online site now, you can actually influence the design of your Cartier Love Bracelet, for example. So it’s placed them in a much stronger retail position, apart from just taking control over distribution.

There have been multiple ways that have made them much stronger and improved their brand equity as a result. But now the business is much more. Back in the day it was 50:50 wholesale, versus direct to retail. And now it’s predominantly direct to client.

Read:
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SIMON BROWN: I get your point. It gives them more control over that relationship, aside from pricing and inventories and all of that. It is that direct one-on-one relationship, which can go wrong. But in Richemont’s case it has really, really worked.

We’ve also seen jewellery become more important than watches. Way back in the day I remember the first smartwatches and concerns around Richemont. Because they were so reliant on watches, they have also leaned a lot more heavily into jewellery instead of the watch.

TASNEEM SAMODIEN: Yes, that’s true. Ten years ago this was a struggling luxury watch company. That was very much the narrative. But obviously management paid attention to the commentary and the concerns. So they’ve really leaned heavily into Cartier, into Van Cleef.

They have bought more luxury brands along the way, driving that brand equity and also being just better able to build a story, build a relationship with the customers around when you buy your Love Bracelet, the Alhambra design that is very popular with a younger luxury consumer.

So they have leaned into it, and it is a category much more able to influence pricing in their specialist watches or luxury watches.

There is a lot of nuance that goes into how watches are priced versus how the jewellery categories price.

I think it absolutely the right action to increase the contribution from jewellery in the business and decrease exposure to the overall luxury watch category.

Read:
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SIMON BROWN: And if you look across the sector – and there isn’t really a one-for-one comparison – there are other luxuries.

LVMH has everything from fancy whiskies onwards. Richemont really stands on its own as sort of proper, pure luxury, and it’s also made it a much more defensive luxury good company.

Companies often pivot and make changes. This is almost an MBA study in it going incredibly well and benefitting shareholders and the company itself.

TASNEEM SAMODIEN: You must say that while there was clear management to tilt the portfolio in the direction of jewellery and take back the relationship with the customer, there is also a bit of luck. The jewellery category in particular is benefitting from the precious metal price tailwind.

Richemont has not increased its prices significantly to compensate for what we’ve seen happen in the gold price and precious metals. Customers have this perception that they’re not just buying a piece of jewellery, they’re also buying an investment.

The item that they purchased a year ago is worth more today, just based on the gold content, on the precious metal content. And that is also supportive of demand.

We’ve seen that play into Richemont’s rating.

Read:
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Richemont sales surge on robust US demand for luxury jewelry
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SIMON BROWN: I hadn’t actually thought of that. Of course, just the good old-fashioned precious metal prices are helping significantly.

We’ll leave it there. Tasneen Samodien, research analyst, Private Clients by Old Mutual, appreciate the time.

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