Richemont in a Rut

Will a tough-love approach fix the luxury-goods maker?

It's not every day that a company chairman places a substantial bet that results will be worse than forecast. Yet that's exactly what Johann Rupert, the South African who heads Swiss luxury-goods giant Compagnie Financière Richemont, did last September. Because Rupert's predictions for sales of the group's Cartier watches, Mont Blanc pens, and Dunhill lighters were far gloomier than those of CEO Alain Dominique Perrin and CFO Jan du Plessis, the three men agreed to meet halfway on a profit forecast. For every $1 million above that figure, Rupert would have to pay the two executives $1,000 worth of vintage Bordeaux. For every $1 million less, the two men would have to cough up the same to their chairman. "Either way, I would come out ahead," recalls Rupert, whose family owns around 10% of Richemont's capital but controls just over 50% of voting rights.

Rupert won the bet handily. Bad news for the company, but excellent news for his wine cellar. Richemont's operating profits for the fiscal year ended in March plummeted 46%, to $306 million, on sales of $4.3 billion. Failure to control costs in softening markets meant the group's once-enviable margins fell to unprecedented single digits -- numbers better suited to heavy industry than high-flying luxury brands. "It's pretty obvious that among the big luxury groups, Richemont has been lagging," says Armando Branchini of brand consultants InterCorporate in Milan.

The $65 billion-plus luxury-goods industry, battered by a global slowdown, a drop in tourism, and the SARS epidemic, is waiting to see if Rupert can turn Richemont around. In early June, he announced that Perrin would be stepping aside, with Rupert himself taking on many of his duties. "I'm going to stay [acting chief executive] for however long it takes," he says.

Rupert is now applying the tough love the unwieldy group needs. Last spring, he approved plans to slash spending and shutter retail outlets of underperformers such as Dunhill and leather-products maker Lancel. In late June, he axed 200 jobs from Swiss watchmaking activities. And he has organized a thorough review of Richemont's extensive brand portfolio, which includes Van Cleef & Arpels, Piaget, and Shanghai Tang, purveyor of Asian-inspired goods. Any unit not holding its own in what Rupert calls "a meaningful way" could be sold off. "He is certainly getting involved in a much more hands-on way," says Morgan Stanley luxury-goods analyst Claire Kent.

Rupert admits that he had taken his eyes off the ball. In 2000, just as the market was beginning to soften, Cartier began a huge and costly push to reposition itself as a much more exclusive jewelry and watch brand, dumping less-expensive product lines in the $1,000 to $4,000 range. "The idea was good, but the timing was bad," says InterCorporate's Branchini.

Yet Rupert, who built up Richemont via a series of acquisitions starting in the mid-1980s, still has a keen eye for a deal. In 1997, he noticed an unusual timepiece, an Italian-made Panerai, on the wrist of a Richemont executive. Within weeks, Rupert had negotiated the purchase of the small Florence watchmaker, Officine Panerai, for around $1.8 million. This year, Panerai will throw off around $35 million in free cash flow. And in 1999, Rupert spun a risky holding in European pay-TV into a 3% stake in France's Vivendi Universal. Increasingly upset with the way then-CEO Jean-Marie Messier was running the company, Rupert cashed out of Vivendi for a cool $650 million in mid-2000, less than two years before the media company all but collapsed. With the proceeds from that sale, Rupert paid top dollar to pick up Switzerland's Jaeger-LeCoultre, IWC, and A. Lange & Söhne, a move that makes Richemont the world leader in top-end watches. "Johann is a fantastic merchant banker," says Rupert pal Ruggero Magnoni, Lehman Brothers Inc. Europe vice-chairman.

But it will take innovative products and marketing rather than savvy dealmaking to make Richemont sparkle again. Rupert notes that some of his brands have been around for generations: Geneva watchmaker Vacheron Constantin was founded in 1755. "If you get the right creativity and the right quality, you'll survive governments, monarchies, and revolutions," he says. "The only way to wreck it is to wreck it yourself." Rupert is betting that it's not too late to stop that from happening at Richemont.

By John Rossant in London

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