For all the glamour that goes with being the world's second-largest luxury-goods group, Richemont is still subject to economic forces as they affect consumer spending on durable goods. Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC, Dunhill and Montblanc, Richemont's formidable array of goodies for the well heeled, could not protect it from the reality of world recession.
The consumer spending spree that brought Richemont headline EPS growth averaging 21,5% in its two financial years to March 2001 was followed by an economic chill. Down went Richemont's operating margins, from 27,8% of turnover in 2001 to 12,2% in 2003.
EPS were not far behind, falling by a third. Luxury-goods operating profit in euros (before interest and tax) plunged 32% in 2002 and 46% in 2003. Return on equity (RoE), not a strong point for Richemont at the best of times, also fell from a peak of 14,5% in 2000 to 9,9% in 2003.
In 2003 it was left to income from Richemont's 19,4% stake in the world's second-largest tobacco company, BAT, to produce 75% of total group income. But there are signs that the worst is over. Shareholders, including the 68 SA unit trusts with more than R6bn in total invested in Richemont, will be hoping that an upturn in demand for luxury goods evident in late 2003 and early 2004 will continue.
Many may still believe that furniture is a safer bet than luxury goods, if the record of Steinhoff, the sector's second-biggest company, is anything to go by. Since its listing on the JSE in 1998, Steinhoff's turnover has more than trebled , headline EPS growth has averaged 30%/year and RoE has held at around 21%.
One of the messages that emerges from comparing the two sector heavyweights is that being a dominant market player can have its dangers. While Richemont's scope to expand market share is limited, Steinhoff has room to grow.
Being small in global terms can also be a drawback, though, as Seardel, SA's largest clothing and textile company, has found. Seardel faces a competitive onslaught from China's clothing and textile industry.
The rand's strength and SA's low levels of tariff protection have added to the competitive pressure. Excluding significant illegal imports, clothing and textile imports from China increased by 80% in volume terms in 2003 and the trend continued in the first half of 2004.
Seardel faces similar challenges in its bid to lessen dependency on the domestic market. Apparel exports were down 3% and textile exports down 48% in the six months to December 2003, sending headline EPS tumbling 55%.
But while Seardel suffers from rand strength and cheap Chinese manufactured goods, Amalgamated Appliances (Amap) and NuWorld have turned the situation to their advantage. Though both groups have strong domestic manufacturing and export capabilities, imported consumer electronic appliances are their mainstay.
Prices of electronics goods fell by 20%-50% in 2003 and this, combined with lower interest rates, gave consumer demand a kickstart. "The market was extremely buoyant, with the public responding rapidly to the rand-driven decline in prices," says Amap chairman Jack Cohen.
