Luxury brands follow wealthy customers

November 8, 2013 9:04 pm

Luxury brands follow wealthy customers

By Rachel Sanderson

Call it the year of transition. A slowing in the Chinese luxury goods market, returning confidence among US buyers, the growing power of tourist shoppers and a relentless incursion from the digital world – from online shopping to smart watches – are all shaking up the industry of watches and jewellery. The cue for change came from Richemont, the industry’s bellwether. Johann Rupert, its billionaire tycoon owner, chose this year to take a sabbatical after a quarter of a century running the group whose other brands include Cartier and Van Cleef & Arpels.In his absence, co-chief executives Bernard Fornas, former head of Cartier, and Richard Lepeu have been entrusted to look at the sale of its underperforming apparel brands Lancel, Dunhill and Shanghai Tang in order to refocus on its hard luxury gems, according to two people familiar with the dossier.

The move, which the company has declined to comment on, is among the strongest indications of how the biggest players in the industry – from Richemont, to LVMH and Kering, are shifting their business models – through divestments, acquisitions and new investments – to capture the changing demands of the high-end consumer.

Mario Ortelli, an analyst at Bernstein, believes branded jewellery and high-end watches will remain among the fastest-growing luxury product categories, with Asian consumers as the main drivers of growth. He forecasts 8-9 per cent compound annual growth rate for the period 2012-17 compared with 6-7 per cent for the luxury industry as a whole.

“Richemont is well positioned to benefit from those trends thanks to its best-in-class brand portfolio, pricing power, exposure to Asia and retail expansion,” Mr Ortelli says. He also expects Richemont to “put to work” its €3bn in net cash for acquisitions.

Nonetheless, in the world of watches, Swiss exports to China fell in the first six months of 2013 causing ripples of concern across the industry. The latest data show that, overall, sales are starting to pick up but a slowing of business from China – the main driver for the past five years – has caused executives to consider their strategies to focus on new areas of growth, say analysts.

Demand from other emerging markets and North America is expected to hold up well as is demand from tourists travelling to Switzerland and other European capitals to shop, Deloitte reported in its annual Swiss Watches survey of 50 leading industry executives. Two-thirds of those polled have a positive outlook for the Swiss watch industry for the next 12 months. The change is not only coming from geography. Executives are also optimistic about the high-end watch market. Two-thirds expect growth in the sale of watches costing more than SFr5,000 ($5,500).

In the world of jewellery, the picture is brighter. Industry observers expect the category to continue to outperform watches in large part because of the rapid growth in demand for branded jewellery which still only accounts for an estimated 20 per cent of the segment. By comparison, high-end watches are fully branded. Thomas Chauvet, an analyst at Citi, says high-end watches are “possibly saturated in China” although he still sees an opportunity for specialist watch makers.

Jean-Christophe Babin, chief executive of Bulgari, told the Financial Times that he sees the outlook as “rosy” not least because of the growing opportunity in high-end jewellery. Bulgari is the only LVMH company to sell pieces that can cost upwards of €5m.

The success of Bulgari, which was bought by LVMH from the Bulgari heirs in 2011, shows how the industry is being reshaped by the tastes of high-end shoppers, who are nomadic in their lifestyles, and purchase even the most high-end goods while travelling for work and leisure. This has meant that brands need to have boutiques in every latest haunt for the global jet set.

“According to exchange rates, government regulation and taxes, you can have year-on-year swings in domestic purchases and travel retail purchases,” Mr Babin says. Competing in this global world, where brands need boutiques wherever Chinese or Brazilian tourists fancy shopping, is expensive. Executives at Bulgari and Pomellato, the Milanese jeweller bought by Kering, freely admit this was the reason that pushed them into buyouts by French conglomerates LVMH and Kering.

Still, there is a case for independents particularly among picky global elite shoppers who want to define themselves as not buying from brands owned by the big conglomerates. Erwan Rambourg, an analyst at HSBC, identifies precisely such an opportunity for the two last big independents Tiffany & Co and Chopard.

“Tiffany could be the last sizeable independent company – maybe alongside Chopard – to have developed credibility and global appeal in the fast-growing high-end jewellery category and should benefit from being in that sweet spot,” he says. “The recovery story is still not concluded.”

Amid the upheaval, pressure is also being applied by the digital world. Customer demand for online shopping is already pushing jewellery brands to put some of their wares online – breaking another long-held taboo.

Having dismissed the effect that online shopping could have on business, industry veterans are eyeing the arrival of smartwatches with a greater wariness.

Luca Solca, an analyst at Exane BNP Paribas, points out that the mobile phone is the latest sector to be reshaped by disruptive technologies. Once-mighty incumbents – Nokia, Motorola and BlackBerry – are being challenged by Apple, Samsung, Google and low-cost Chinese manufacturers. Could incumbents in watches such as Swatch and Richemont suffer the same fate?

Mr Solca believes the potential threat is greater for Swatch Group than for Richemont.

“It is not obvious that electronic watches – at least at their current level of development – provide exclusive functions sufficient to convince consumers to take on board another electronic gadget,” he says.

Given the rapid changes facing the industry, it seems improbable that will always be the case.