SIHH 2014 - RICHEMONT TO INVEST 300 million Swiss francs this year

February 2014

The following interview with Richard Lepeu and Bernard Fornas, co-CEOs of Richemont, by Bastien Buss was published in French in the Swiss newspaper Le Temps on 25th January 2014.

Bastien Buss: How did the SIHH go for your brands? Are orders up?
Bernard Fornas: There were no surprises in that we continue to see a lot of interest from our customers, the retailers. They have the opportunity to admire, in the space of a few days, all the explosive creativity of our maisons, to meet the management of our brands and to have their respective strategies explained or re-explained. This level of proximity is unique and gives them chance to cover a major part of the watch industry.
Richard Lepeu: Add to this all the meetings with the journalists. At 1,300, there were 10 per cent more of them this year. The SIHH really is the unmissable annual event for the brands present and all our customers, just as BaselWorld is for the others. It’s the 24th edition but we still feel the same energy and the same enthusiasm.

Bernard Fornas
Bernard Fornas

Richard Lepeu
Richard Lepeu

What does the SIHH mean for the fourth quarter of your 2013-2014 non-calendar fiscal year and beyond?
RL: We have just published sound results for the third quarter, so we won’t go back over those. Holding this exhibition in January is fundamental to our planning and organisation of the year. [Editor’s note: it was previously held at the same time as BaselWorld, in the spring].

BF: Moving the exhibition forward by four months has forced our maisons to deliver earlier in the year.
RL: Furthermore, the SIHH strengthens the image of Geneva as the capital of high-end watchmaking and, in the minds of foreign visitors, as a key city for the country.

What is the commercial importance of this exhibition for the Richemont Group?
BF: Since many of our brands have to deal with demand that is higher than supply, the exhibition gives them a better overview for the year ahead. They can therefore adjust their production plans based on the orders placed by retailers. This applies less to the brands who are more active with their own stores.
RL: It is above all important for high-end watchmaking, especially for limited series production. More specifically, the general mood in the sector is very positive, at least as far as our maisons are concerned. Most macroeconomic factors suggest that things will improve further but we won’t be drawn into making any specific forecasts.

Will 2014 be another record year for the Swiss watchmaking industry as some observers think?
RL: At the moment, specialists and economists are saying that 2014 will be better than last year. But how can we be sure? The world economy remains very volatile and can react to the slightest economic or political news.
BF: At Richemont we can only ever control half of the reality, of the situation or, in short, of the business. But we do this part very well. We create new products, manage the marketing, distribution and communication. But we have no control over the macroeconomic situation. Our role is to put ourselves in the best possible position and to do better than the others.

How does the year ahead look for the luxury industry and for Richemont in particular?
RL: This will depend a lot on developments in exchange rates, since they can have a significant impact on business. The dollar remains the predominant currency in terms of demand, like in the USA, China and Asia in general. So its impact could be huge. A less strong Swiss franc would also be welcome!

You sound very cautious. Are the years of crazy growth in the luxury sector a thing of the past?
BF: This caution is a necessity. I repeat, we do not have control over all the elements in the equation. Why talk of single or double-digit growth? There is no point. It is up to us to put ourselves in the best possible position. What we can see is the exceptional nature of the products of our maisons, which are better than ever. Based on this, we are in the best possible position to capitalise on what might happen in the global economy.
RL: What is the point of just making predictions? We are more interested in the substantive trends that will have a more long-term effect. Here, of course, the prospects are good for the luxury industry and therefore for Richemont. Several analyses have shown that they are even better for “hard products”. And since we are world leaders in this field...

Experts say that the jewellery sector, which is your main business area and generates half of your turnover, should grow quicker than the watch business. Do you agree with this?
BF: We share this view. There is less competition than in the watch industry, where it is really exacerbated. There are not as many jewellery brands. It is a widely held belief that 90 to 95 per cent of the jewellery market is not in the hands of the big established brands like Cartier, Van Cleef & Arpels or Piaget.

“Stability pervades the entire group, the management, the employees and the brands. It is this stability that allows us to develop the family feeling and the brand culture, which is why each of our companies has become a maison.” Richard Lepeu

Could China be a risk factor for Richemont? What is the real impact on your business of the anti-corruption campaign, with its effect on gift-giving and watches in particular?
BF: It has definitely had a negative impact, but it is limited. But we often forget that the middle class is booming and has more money available to buy luxury products, regardless of what people say. The blip you refer to is therefore compensated for by new customers entering the luxury market. And they are above all compensated by Chinese tourists abroad. Some 150 million Chinese will be travelling all over the world in the next few years. Having said that, the majority of purchases in China are not linked to business gifts.
RL: I think this anti-corruption campaign is probably a good thing. This custom could not continue. Even if there is a short-term impact on sales, the influence over the long term will be positive. But the fundamental element is the demographic factor and the confirmation of the country’s more or less liberal approach to private enterprise. So unless there is a big upset the creation of value and wealth will continue. GDP growth of 8 per cent, 7 per cent or 6 per cent in China is still phenomenal. How can you not be optimistic in these circumstances if they last for several years?!

So there is no cause for concern? RL: There is still an appetite and desire for luxury products designed and made in Europe. And there will be for some time to come, especially from tourism, just as there was from the Japanese back in the day. The only difference is that this time its impact is bigger by a factor of ten.

Luxury does not yet have a real presence in Africa. Why is that?
RL: The continent is starting to enjoy explosive economic growth and has the biggest short-term potential. A lot is happening in this region, which has a population of one billion that will soon be two billion.
BF: This continent is starting to wake up and we need to keep an eye on it. This does not necessarily mean that we are going to open a Cartier store tomorrow morning in Nigeria or Angola. But the time when we will is not that far away. There is always a risk for pioneers like us, especially on new markets, but also a bonus for the first to market.

“Distribution should reach a level of excellence, whether for our own stores or for our retailers. They need to become closer partners and help us to build up our brands and project this image at the point of sale.” Bernard Fornas

What is your strategy for this Year of the Horse in the Chinese horoscope? What are your priorities?
BF: To continue to manage our maisons with a perspective on eternity. In other words to continue to build them up, develop them, respect them and above all to keep innovating. So we will stay on the same track. It’s a business model that we like and that has been rather successful so far.

BF: Distribution should reach a level of excellence, whether for our own stores or for our retailers. They need to become closer partners and help us to build up our brands and project this image at the point of sale. I’m choosing my words carefully when I say that we have become a lot stricter with regard to the quality of our partners.

So some are not yet at the right level?
BF: Yes, this is true.
RL: It’s an on-going process of adjustment. Some retailers have stopped investing and we need to correct this. Others, on the other hand, are improving. But overall we are satisfied. As proof, our network is very stable. In fact stability pervades the entire group, the management, the employees and the brands. It is this stability that allows us to develop the family feeling and the brand culture, which is why each of our companies has become a maison.
BF: Furthermore, we tend to favour hiring and promoting internally for our key positions, as we have recently done at Jaeger-LeCoultre, Van Cleef & Arpels and Montblanc.

Stability is fine but there have been a lot of rumours over the past few weeks that you may sell off some brands. What is the situation?
RL: Our principal shareholder Johann Rupert has been very clear about this. Richemont will not be selling any of its brands. We have no plans to do this.
BF: To be more specific, it’s true that some brands that were not doing as well have been reorganised and repositioned to give them a boost.

And do you plan to acquire any new brands?
RL: The management is paid to create value, or goodwill. Why spend money to buy it elsewhere? Why, for example, pay a price that already includes a large share of goodwill for a jewellery brand when we already have so much expertise in-house at Cartier, Piaget or Van Cleef & Arpels?
BF: In all of Richemont’s maisons the potential for growth is still very high, enormous even.
RL: A policy of paying inflated prices for acquisitions also runs counter to the interests of the shareholders, unless there is a strategic interest. By definition it involves a dilution of value. Our priority is really to concentrate on organic growth of our brands when you already have such a high-quality portfolio as Richemont.

Some of your maisons, like Lancel or Baume & Mercier, seem to be still in the red. Is that really the case?
BF: We do not communicate results by brand.

Last year you created 800 jobs in Switzerland. Do you still need to recruit more and increase your production capacity?
BF: It is always a positive signal.
RL: Our investments will continue, with 300 million planned this year in Switzerland, in particular to increase production capacity at each of our maisons and insource new professions. A large number of projects are either under way or have just been completed, like in Neuchâtel for Panerai, Plan-les-Ouates for Vacheron Constantin and Piaget, Meyrin for Stern and Van Cleef & Arpels and for Cartier in Couvet and Le Locle.

And jobs?
RL: If we are building factories, then we will need people to work in them! At the end of 2013 we had 8,252 employees in Switzerland, which represents 30 per cent of our global workforce. This is huge for a Swiss-based multinational. So the added value is created in this country. To give you an idea of the development, from 2009 to 2013 our workforce in Switzerland grew by 30 per cent.
BF: We have even strengthened our jewellery activities in Switzerland, even though it is really the spiritual home of watchmaking. Our project with Cartier in Le Locle, where we have finally found suitable land, is proof of this.

What are you going to do with the mountain of cash that the group has, which was 4.3 billion euros at the end of 2013? A major share buy-back?
BF: Isn’t it better to have a lot than none at all?
RL: This decision is up to the board and the shareholders. But we can say that the dividend was increased considerably last year and that this policy will probably continue given Richemont’s performance and its financial stability.

Europa Star February - March 2014 Magazine Issue