How Business Model of Richemont looks like?

Richemont group is the second largest personal luxury goods company in the world by turnover. Dealing in jewellery, specialist watches, pens, accessories and fashions, Richemont repertoire includes Cartier, Van Cleef & Arpels luxury jewellers. Standing next to Swatch Group it has the large collection of luxury brand names in watches including Piaget, Baume & Mercier, and Officine Panerai. To conclude the troika Montblanc gives the company a flagship in the pen market. It must be pretty fantastic to have all these under its management. To make this venture run seamlessly Richemont needs equally game changing business model.

Business Model

I am following the framework introduced by John Mullins and Randy Komisar in their well-known book titled ”Getting to Plan B: Breaking Through to a Better Business Model” to illustrate how the business model of Richemont looks like. This framework has five elements: revenue model, gross profit model, operating profit model, working capital model and investment model.

1. Revenue Model

Richemont is short form name for “Compagnie Financière Richemont S.A”. The company was founded by Johann Rupert who functions as executive chairman and CEO. According to the latest financials ending 31 March 2012 about 18 individual companies scripted as “Maison” handle personal luxury goods sector of the group. In the jewellery segment, Cartier and Van Cleef & Arpels conduct 52% of the group business, followed by 9 Maisons involved in specialist watchmakers pumping in 26% of the group business. Montblanc Maison is the solitary company in the writing instruments sector with a contribution of 8% of group turnover. Others such as Alfred Dunhill amount to 6 Maisons in accessory, fashion and leather goods segment bringing 14% of sales.

Even though the company continues its concentration in Europe, Asia Pacific region including Japan dominates with 51% of the total sales amounting to a staggering Euro M 4,517. As a consequence customer segmentation is now fairly skewed towards emerging markets in Asia where some 72 boutiques were opened in China alone. Europe is still a big market with 35% of share followed by 14% in Americas. To satisfy the needs of growing and wealthy population in these three regions, Richemont purveys excellent pieces of jewellery, time pieces, and pens along with apt accessories.

Purchase patterns of the Richemont products show a rising trend in three main product lines. Euro M 4,590 of jewellery was bought by customers and Euro M 2,323 is garnered from specialist watches. Montblanc pens accounted for Euro M 723. Out of the total sales retail brought about 53%. Selling, distribution and communication cost of Euro M 2,821 was paid out to bring in sales. This works out as a soaring figure of 32% of the total turnover.

The company has embarked on a revitalization programme by leveraging on group’s shared resources, hiring and training skilled craftsmen and in investing in watch and jewellery manufacturing to respond to changes taking place in economy and consumer demand. Furthermore, retail sale through own in-site boutiques is encouraged with an offset of fewer but more productive franchise outlets on the wholesale side. Supply chain management is straightened up to enhance product availability and speedy and timely delivery. Autonomy for Maisons to manage their own brands and facilitating more internet sales are path breaking initiatives adopted to see, a sea change in operational and financial performance.

2. Gross Profit Model: Across the board, the product lines give a whopping 64% gross profit.

3. Operating Profit Model: Operating profit is as high as 32.9% in jewellery, reasonable at 23.2% in watches and low at 16.4% in writing instruments. Variable cost is Euro M 2,821 while fixed cost stood as Euro M 790. Selling, distribution and communication expenses are listed in variable cost of Euro M 2,821. The break-even point is in safe zone at 28% of the turnover.

4. Working Capital Model: An overblown working capital of Euro M 5,873 is turned only one and half times to bring the annual turnover of Euro M 8,867. About 43 % of the current assets are in inventory whereas cash and financial assets are higher at 47%. Management of current liability is satisfactory. An interesting phenomenon is how cash generation and cash held at the time of closing books got almost even. Cash generation from operations is said to be Euro M 1,789 while Cash held is Euro M 1,636. Much of what Richemont got in cash was never spent out perhaps.

5. Investment Model: The stated equity of Euro M 8,618 is slightly edged out by the turnover of Euro M 8,867 making a single rotation of the amount invested, leaving a sense of inadequacy. However, the return on equity is salutary. With a Net Profit After Tax of Euro M 1,540 Richemont group has lifted the investor sentiments. ROE works out a gleeful figure of 18%. A rousing applause is necessary and must be given gladly.

Muthu Ashraff

Business Adviser

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