Introduction:
Richemont was created in 1988 when the Rembrandt Group Limited of South Africa spun-off of its international assets. The Rembrandt Group was established by Dr Anton Rupert in the 1940s, and owned significant interests in the tobacco, financial services, wines and spirits, gold and diamond mining industries, in addition to the luxury goods investments that combined with investments in Rothmans International, would later form Richemont.
Over the years, Richemont has built an impressive business conglomerate of high-end luxury brands including Cartier, Van Cleef & Arpels, Piaget, and Montblanc. In 2010, it acquired the majority of the shares in NET-A-PORTER.COM, an online fashion retailer. This entity operates as an independent entity, selling third party products in addition to the principal luxury goods from Richemont. The crux of the matter is however, that with the online business alone, gross margins are well below the group’s average.
Richemont’s products are sold around the globe in about 1,700 stores. Around 42% of the business is Asian based, 36% out of Europe, 15% from the Americas and 9% from Japan. In recent years an excellent sales increase in Asia (ex Japan) has been observed: in 2009, Asia represented about 27% of the group’s total sales while today it represents 42%. And this trend is expected to continue; by about 2020 the Asian middle class will comprise about 600 million individuals. The company’s product diversity will more than match Asian consumer demand and preference for European based products.
The recent Swiss-Chinese free trade agreement, which includes a 60% reduction of the import tax rate for a 10 year period, will also serve to reinforce Richemont’s market position in the coming decade.
The strongest business driver in Richemont at present is the jewelry division; while the timepiece division figures have remained steady in recent years. In contrast, the fashion (including on-line) and fashion accessory divisions are performing well below average, EBIT margins fell from €50 million to €23 million last financial year. The company has extremely sound balance sheets; it is expected that by the end of 2013, cash and cash equivalents will reach a level of about CHF 4 billion.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- The company has some of the best known brand names in its portfolio,
- Richemont’s business model has enabled ongoing sales growth during the past years and across the globe. This trend is expected to continue,
- The spin-off of BAT in 2008 enables greater focus on the core business,
- Given the cash on hand, the company can secure the best locations for its shops.
Weaknesses:
- The fashion (including on-line) and fashion accessory divisions have been in a turn-around situation for several years and the company appears to be unable to unlock their effective value,
- The company has not yet proven its capacity to generate organic growth,
- Some of the timepiece brands (Baume & Mercier and Roger Dubois) do not meet the company’s present momentum in generating new business,
- Affluent individuals from Asia may potentially demand more product innovation than the company can immediately deliver,
- The recent sales rate growth is not sustainable. As the economic crisis evaporates, the demand for heritage related products, e.g. high value jewelry and jewelry watches, which have been viewed as perfect stores of value, will diminish.