Richemont Radical Management Change Reflects Conservative View

(Bloomberg Gadfly) -- CEOs are so last season.

Compagnie Financier Richemont SA, the luxury group, is dispensing with the role altogether. For a company whose style is to manage for the long-term, and avoid knee-jerk reactions to market conditions, the significance of such a dramatic break with the past can't be overstated.

The announcement of the changes on Friday came as the company reported a 51 percent drop in profit in the first half. They indicate that it doesn't expect conditions to get any easier any time soon, so it needs a fresh approach.

It just might work. And it's not as radical an idea as it might seem.

The overhaul has been triggered by the retirement of Chief Executive Officer Richard Lepeu and Finance Director Gary Saage, both long-serving executives. Johann Rupert will continue to lead the board as executive chairman, but now he'll take over supervising a new suite of division directors.

Richemont will promote some existing senior managers to roles such as Head of Watchmaking or Head of Operations, and they'll also become members of the board. Other changes may come before the annual general meeting next year.

The new structure should enable Richemont to dedicate more attention to critical areas, such as tackling the overcapacity in watchmaking. It should also give the company more flexibility in what is likely to remain a volatile environment. That could even mean changes to the portfolio: the company needs to fix or sell underperforming brands. It also needs to control the cost base by addressing headcount, which it has already started to do, and slimming the store estate.

The danger is that the new management structure is cumbersome, lacking cohesion, and is ripe for internal power struggles. Rupert will remain the constant, and is likely to take greater control as a result of the radical revamp. He says his role is that of an arbiter of egos, akin to a soccer manager. 

Will Richemont replace its departing CEO?

No

His past performance suggests he could succeed. It's not the first time he has stepped in to see the group through difficult times. He returned for a third spell as chief executive in 2009 and steered Richemont through the financial crisis, with sales and profit more than doubling in the years after the downturn. 

He has his work cut out. For all the nascent signs of improvement in the luxury market, and Richemont's own report that October was positive and even demand in China is improving, it's still navigating very choppy waters. Rupert says the company is planning for a "secular" downturn, and shares are down 22 percent in the past year.

Richemont nevertheless deserves its premium to Swatch Group AG, and that's only partly due to the much bigger cash holdings on its balance sheet. The steps Richemont's taking to meet its dimmer outlook for luxury are a sharp contrast to Swatch, which has maintained headcount and expanded its watch-making capacity in anticipation of recovery next year.

It's two different views, but Richemont is right to be cautious. Any luxury recovery may be slower to reach it than Swatch and other companies that also offer lower price points. 

Despite the radical move of dispensing with a CEO, Richemont's actually digging much deeper into its historical conservatism. It's a sensible thing for it to do. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.