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Ted Black: Baubles, Bangles and Beads – Richemont is a ‘jing linga’ machine

The likes of the world’s business software and employment structures are geared, in today’s capitalistic world, to maximise efficiency and output. But as Ted Black points out below, the highly successful Richemont may shine a light on how these systems can create another problem. He touches on how production people are measured by volume, but what if the supply chain gets to the point of “over exuberance” where it can’t sell the output stock anymore? Black goes on to question whether other retailers could share the same problem. An interesting problem, but as Black puts it, Richemont is still a cash jing linga machine, in reference to Frank Sinatra’s famous song. – Gareth van Zyl

By Ted Black*

To set the scene, “Baubles, bangles and beads, hear how they jing, jinga linga” would have been a good song to play at Richemont’s latest results presentation. Despite a setback in performance, this firm is a cash jing linga machine.

Johann Rupert opened the meeting by saying he’d make a few remarks to ensure the session would take half the time it usually does. He then spoke close to 80% of the time – all interesting stuff with some good insights for managers.

Johann Rupert, founder and chairman of Cie. Financiere Richemont SA. Photographer: Chris Ratcliffe/Bloomberg

He started by linking Taleb’s Black Swan thinking to running a business and becoming a victim of a fragile economy. He reminded everyone that the FT called him “Rupert the Bear” for his penchant for predicting problems – or “Black Swans” as he put it.

Of course, you don’t “predict” Black Swans. You look for them. In Karl Popper’s terms, the true scientific approach is not to prove your theory right – that all swans are white – but to falsify it by looking for a Black Swan. There seem to be many of those. It would be better to change from swans to crows.

Look for “White Crows” instead. Besides, something “white” is more PC. These days if there is incompetent performance the fall-back position worldwide seems to be a racist one – blame whites for it.

He then talked about SAP and how improved systems and “over exuberance” had led to an oversupply of watches. Could this tell us that Richemont’s management was not the victim of a “Black Swan” event but something much more mundane than that? A weakness that’s generic to most businesses and especially the marketing function?

Read also: Rupert bets big on travel in the robot age: “Man will have more downtime”

The presentation focused on sales, margins and the problems of overproduction and too much inventory but there was none on the sales productivity of the asset base – in this case, the sales productivity of inventory, or stock. Look at the chart:

Stock ATO (Asset Turnover) is Sales ÷ Inventory. Despite good revenue growth, the sales productivity of stock has declined since 2011. Maybe the trend would have been even worse but for pulling dead stock out of the system and taking a profit knock.

It doesn’t seem as if Richemont’s management was the victim of a “Black Swan” or “White Crow” event. All organisations are different, but share the same problems – especially the waste ones. Overproduction is waste. Too much inventory is waste. It is “the root of all evil”. What is more, as the trend line shows, the signals were there some time before but masked by great margins.

“Over exuberance” comes from marketing and sales people. By nature, they tend to be more bullish, and you must show growth every year, not so? It means if you give them space for stock, they’ll fill it. Then you have production people who are measured by volume and told the more they produce the lower the cost will be per unit will be. That’s until you can’t sell the output of course.

Read also: Ted Black on Steinhoff – Could low ATO upset the Applecart?

Early on Rupert stressed the value of SAP – presumably their ERP system. The hypothesis is that you put in an ERP system and productivity will follow. Isn’t that a premise worth testing? What evidence can they spell out for the truth of that?

Ask financial people and you’ll get one view. Ask the operating people – the ones the systems should help and support with the right information, measurement and feedback, rather than “control”, and you’ll get a different one.

Richemont shares the Stock ATO problem with another retailer but this one, unlike Richemont’s mouth-watering ones, has razor thin margins. Pick n Pay, also put in a SAP system and its Stock ATO has fallen from a height of 18.6 to 12.9. Is there some kind of correlation here? Have they both been “Sapped”?

Finally, Rupert ended with a golden rule for all who want to manage their bosses successfully. Whatever you do, keep this question front of mind and answer it truthfully: “Is there something that you know that’s important, that we haven’t discussed today, that you think is important for me to know?”

No surprises! Always put yourself in the shoes of the person above you. That way you reduce the costs of supervision.

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