Secrets behind Johann Rupert’s R1.8 trillion golden child

Johann Rupert’s Richemont has managed to triple its earnings in the past five years due to the outperformance of its jewellery maisons. 

These maisons, particularly Cartier and Van Cleef & Arpels, enjoy unrivalled heritage and desirability, with their sales consistently outpacing the broader jewellery market. 

This makes the company, founded in 1988 by Rupert as the holding company for the offshore assets of the Rupert family’s Rembrandt Group (Remgro), a compelling investment opportunity. 

While many recognise this opportunity and Richemont’s share price has run strongly in the past few years, Coronation’s Quinton Ivan said the asset manager remains bullish on the company. 

In a recent research note, Ivan explained that Richemont’s ability to compound revenue in euros, supported by structural tailwinds and management discipline, makes it a jewel in Coronation’s portfolios. 

The primary reason is the exceptionally wide moat that Richemont has through its ownership of historic jewellery brands. 

Its maisons, Cartier and Van Cleef & Arpels, have curated their brands and heritage over centuries, which ensures they cannot be replicated. 

This raises the barrier to entry for competitors and protects the company from technological disruption, making its earnings highly predictable over time. 

The strength of these brands gives Richemont significant pricing power and results in healthy margins for the company over time. 

Ivan explained that Richemont’s earnings are also extremely high quality, denominated mainly in US dollars or euros and supported by cash, with the company’s ten-year average free cash flow conversion being 92%. 

The company also boasts a fortress balance sheet with minimal debt and a cash pile that is 7% of its entire market capitalisation. 

Crucially, this is coupled with a stable ownership structure through the Rupert family, which ensures the business is managed for the long term. 

These strengths have positioned the company well to benefit from ongoing structural tailwinds in the jewellery market and from its peers’ missteps. 

The secret sauce

All of the elements that make Richemont an attractive investment in the typical sense are underpinned by the strength of its brands and the pricing power this gives the company. 

Ivan explained that Richemont is the best-positioned player in the global branded jewellery market, with Cartier and Van Cleef & Arpels having immense heritage and desirability. 

This has been curated over centuries, with various Cartier collections and Van Cleef & Arpels’ Alhambra line cementing the brands in jewellery history. 

Cartier’s Love and Trinity collection is among the world’s best-selling jewellery collections and has been consistently sold since 1924. 

The combination of these two brands has enabled Richemont to consistently outgrow the broader jewellery market. 

This has consistently allowed Richemont to gain market share within the branded jewellery segment, which, in turn, is gaining share from unbranded jewellery.

Richemont has consistently grown its revenue for the past 20 years, with the only blip being a slight negative turn in 2009 amid the Global Financial Crisis. 

Ivan explained that this is purely down to the appeal of its two main jewellery brands, with the strong recognition of Cartier and Van Cleef & Arpels ensuring that Richemont has full pricing control. 

As a result, the company has had the luxury of expanding these brands into the entry and mid-tier segments of the jewellery market with lines such as Love, Trinity, and Juste un Clou for Cartier, and Alhambra for Van Cleef & Arpels.

Crucially, this expansion has proven highly profitable for Richemont and is not solely about expanding the company’s total addressable market. 

Another key benefit of the strength of these brands is that customers do not buy their products purely because of the value of the materials used in the jewellery. 

Consumers generally cite jewellery design as the main reason for a purchase, with some also indicating that status is a strong driver. 

Both of these factors favour Richemont’s brands as they are recognisable, high-status, and have centuries of craftsmanship behind them. 

This generates higher gross and operating margins. This is a lot harder to do with more commoditised products, such as engagement rings and high-end jewellery, where the price of the precious stones often matters more than the brand. 

The result is that not only are Cartier and Van Cleef & Arpels two of the world’s largest jewellery brands.

Brands fight back 

Richemont’s brands are well positioned to capture value from the broader shift away from unbranded jewellery towards branded alternatives, with the broader jewellery market valued at €345 billion. 

Within this market, unbranded jewellery remains dominant, making up over half of all sales. This is coupled with a highly fragmented market, where the world’s biggest brand, Cartier, only has a 6.7% market share. 

Ivan explained that, relative to luxury watches, leather goods, and ready-to-wear clothing, the jewellery category is ripe for consolidation and is poised for a substantial shift towards brands. 

Within the branded jewellery segment, Cartier and Van Cleef & Arpels hold significant market share at 6.7% and 2.4% respectively. While this seems insignificant, Cartier has a larger market share than Tiffany, Bulgari, and Chopard combined. 

Ivan explained that Coronation’s research indicates several structural forces are driving the shift away from unbranded jewellery towards these megabrands. 

Among these forces, the most important for Richemont is brand desirability and origin, with consumers attracted towards the aspirational nature of heritage brands. 

Apart from this, they are also immensely valuable as status symbols and wealth signalling, particularly for Chinese consumers. 

These iconic brands also have an advantage in that consumers see their products as a store of value, so they are not merely bought to be worn. 

In this regard, branded jewellery has an advantage as it is not only about what the jewellery is made of, but also about the craftsmanship behind it. 

The pricing of branded jewellery is also transparent and comparable, providing evidence of the jewellery’s value on the market.