Johann Rupert’s golden child

Richemont is well-positioned to continue its strong growth in the years to come as the business has been restructured over the past decade to capitalise on growing demand for jewellery, particularly in Asia and the USA. 

The Swiss luxury goods giant is expected to benefit from increased demand for its ultra-premium brands, high barriers to entry, direct-to-consumer model, and healthy margins. 

This is feedback from Allan Gray’s portfolio manager, Jithen Pillay, who outlined why luxury brands will continue to grow strongly in the next few years and why Richemont, in particular, will outperform. 

Johann Rupert-owned Richemont has had a strong start to 2025, reporting double-digit sales growth for the holiday shopping season. 

This was on the back of an exceptional performance from its Cartier brand, which offset declining sales in China with strong growth in Europe and the Americas. 

Recent growth has capped a decades-long demand for luxury goods from high-net-worth individuals and an emergent Chinese market. 

Spending on luxury goods has grown from €116 billion in 2000 to €369 billion in 2023 – a compound annual growth rate of above 5%. 

While the demand for luxury goods has endured, the companies serving these customers vastly differ from just 30 years ago. 

Largely through acquisition, the branded luxury industry has consolidated, creating a few mega-owners.

Most notable among these is LVMH, created out of the merger of Louis Vuitton and Moët Hennessy and led by the world’s fifth-richest man, Bernard Arnault. 

These luxury companies have yielded strong returns. From January 2001 to the peak in March 2024, the MSCI Europe Textiles, Apparel and Luxury Goods Index compounded total returns at 12% per annum in euros. 

The COVID-19 pandemic turbocharged this growth – in the four years from March 2020 to March 2024, the index yielded a total CAGR of 27% in euros. 

Richemont leading the charge

Pillay explained that as the luxury market shifts towards jewellery and away from leather goods, Richemont should benefit.

It is also a much better business than a decade ago, thanks to strategic acquisitions and its direct-to-consumer model. 

These are among the five key factors that make Richemont an attractive long-term investment. While cautious, Pillay said Alan Gray finds the company’s investment proposition particularly interesting at present. 

The first factor that sets Richemont apart is the continued growth of the jewellery market, to which it is uniquely exposed. 

Currently, more than 50% of Richemont’s revenue comes from selling jewellery through its Cartier and Van Cleef & Arpels brands. 

The total luxury jewellery market grew at 9% CAGR in euros from 2008 to 2023, and growth here should continue through the cycle.

This growth will be driven by gifting, which makes up most of jewellery purchases, and a growing trend of self-purchases by women, supported by rising labour force participation in senior roles.

Branded players should fare even better as jewellery is the only large luxury category where unbranded fabricators still command a high market share (60-70%). 

Unbranded jewellery is structurally losing share to branded jewellery, which is likely to continue as customers gravitate towards globally recognised designs, such as those by Cartier. 

Another tailwind for Richemont is the ongoing premiumisation of the luxury goods market, which should see ultra-premium brands outperform. 

Once again, Richemont is uniquely exposed to this type of brand, with Cartier and Van Cleef & Arpels best-placed to reap the rewards of this trend as they are positioned at the top end of the desirability pyramid. 

The brands are small enough to maintain exclusivity and premium pricing, but large enough to invest more than peers in client experience and marketing.

Thirdly, the barriers to entry in the jewellery industry are extremely high, with most of the successful brands being established over a century ago. 

The high barriers to entry are largely driven by the reliance of consumers on recognisable designs rather than logo placement. 

This means that iconic jewellery lines take decades to cement themselves into the psyche of consumers and are difficult to displace thereafter.

Crucially, Richemont’s distribution model also sets it apart from many of its competitors and has led to improved margins and enhanced customer experience. 

Of Richemont’s sales, 75% are made directly to the end-customer, either via its own stores or online – up from 46% in 2010.

The move to take greater control of how its products are sold is a wise long-term strategy as it improves gross margins by cutting out the middleman and increases operating margins by driving traffic to an already-established direct retail network. 

Most importantly, it gives Richemont better control of its inventory, Pillay said. The latter is especially relevant in weak trading environments to prevent wholesalers from flooding the market. 

Finally, Richemont is a well-run business that exploits the economics of luxury goods with high margins and increasing vertical integration. 

Returns are extremely strong despite expensive store fit-out costs, given premises that are mostly leased, Pillay said.  

Working capital cycles, however, are much longer than those of typical apparel retail and balance sheets are also mostly run very conservatively, with Richemont having nearly €8 billion in cash.