Business Breakdowns
· Chris Davies
I remember visiting their Galleria store in Milan last time I was out there meeting Moncler, and they've got this really special secluded area upstairs which is for their special clients. They've got all modern technologies that help you trace customers so you can try to create one identity and match that up across the footprint. And I also went walking around the store, just picking things up, having a look, feeling different products, and there was a really diligent employee following behind me who was just putting everything back neat and tidy. If I were to do that in another bog-standard retailer here in the UK, that just would not happen. So there's this attention to detail. They're obsessed with the presentation side of things as well. And also I mentioned the Shanghai event last year. But the stores are also quite unique, particularly the flagship stores where the architecture tends to be really quite special. But also the inside of these stores is different wherever you go. I mean, the Galleria store in Milan, it feels a bit like an art gallery, whereas there's another in Tokyo which has this LED facade that mimics snowfall. So it's a bit like being in this giant snow globe. So it's very experiential. Those two strands I think are really, really important, and those two things I think Moncler does incredibly well.
· Matt Reustle
[00:00:00] S0: I love hearing about the experience examples, those are just always so interesting to me. You covered the financial overview quite well previously, but on that point of something like the down supply and the cost associated with that, is there anything that they do to manage the risk of having an undersupply of materials or anything else that would be a risk from the cost side of the spectrum?
· Chris Davies
[00:00:00] S1: Yeah. So I think with a lot of luxury brands in Italy and also in France as well, you've seen Hermès do this over time, you've seen them vertically integrate. They started to buy up local supply to ensure that they've got that access when they need it. So, I mean, Moncler does have a very strong relationship with its suppliers. I don't think they're quite as vertically integrated as some of these other Italian brands. As it stands today, they have got very strict rules about the supply side, particularly on quality. But in terms of access, they haven't actually had any problems to date with any luxury brand. You've got to manage the demand side of the equation very carefully. So, I don't know, let's think of an example. Think of Ferrari. The founder of Ferrari used to talk about the idea of providing one less car than demand. So you're never quite meeting that demand. If you look at the number of units that Ferrari have sold, in 2019, it was just over 10,000. Last year it was just under 14,000. They've grown a bit, but not that much. They found other ways to grow. It's been through price and mix and selling special editions and the like. So I think for Moncler, you're never going to get this situation where they are really going to flood the market with lots and lots of inventory. They're really carefully trying to manage how much they're selling. So the whole commercial strategy is based on the principle of scarcity. That's basically how they think.
· Matt Reustle
[00:00:00] S0: It's such a fun economic equation for the luxury market to think about in terms of just being appropriate about the amount of scarcity that you have within the business. And I guess that answers my other question, just thinking through the financial model and where risks might exist from the inventory management side, I think when you're managing to demand, you probably have a limitation on that. But are there other things like inventory management, turnover, things that get cash caught up inside the business that you would point to as either a risk or something that they manage particularly well?
· Chris Davies
[00:00:00] S1: The management on the inventory, the working capital side of things, has actually been really very impressive over time. 2020 was a tough year for pretty much everyone, but not many people saw the pandemic coming. So, I mean, if you look over the long term, these guys have been making free cash flow margins in the mid-20s, and if you look at free cash flow to EBITDA conversion over the past five years, they've averaged about 61%, which is pretty impressive. So there haven't really been any signs that they've been struggling to manage all of this. This comes back to the whole commercial strategy of really carefully managing supply so that you're not overstocking the market. Because for luxury companies, volume can be a driver of growth, and it is in lots of cases. But price is also really, really important. If you're putting prices up or you're changing the mix of your collection slightly so it favors slightly higher price-point products, that is just free money from a profit perspective. It doesn't require any more fiddling around with the inventory or anything like that. But companies can be quite extreme when it comes to managing those rare situations where you do find that you end up with too much inventory. So I remember going back to Richemont, which owns Cartier, it owns Van Cleef, so two of the most famous jewelry brands in the world, but also has all these watches of the traditional variety. We're not talking Apple Watches here, we're talking the timeless pieces that get passed on from one generation to the next. They went through a bit of trouble in their watches business back in 2016, 2017, and between 2016 and 2018, they basically went out and bought back, I think it was half a billion euros worth of inventory from the retail channel and destroyed or recycled it. Moncler hasn't had to do that at all yet. I like to think that these days, with all the software that you can get that helps you manage what is really an omnichannel business, that it's much easier to figure out what needs to be in each location in order to satisfy demand, rather than sitting on huge piles of inventory all over the place. But you're right, it's a risk and you can never completely rule it out.
· Chris Davies, Matt Reustle
I think back to Adidas and Kanye West and how that relationship completely fell apart and how Adidas was left with an enormous pile of unsold inventory, which ended up looking pretty toxic because Kanye West had these increasingly strange moments and it was damaging the brand and so on and so forth. So yeah, it can be a risk. [00:00:00] S0: It's an interesting dynamic. And then Richemont proving the extreme of how you can manage that dynamic in the case that something does go wrong. Having that all in mind, impressive management of the cash flow conversion. When you think about capital allocation broadly, you have an example of acquiring Stone Island. Maybe there's an opportunity to be a luxury house over time with multiple more brands versus reinvesting back into the business or allocating to shareholders. How do you think about their capital allocation framework based on what they've said and your own interpretation?