2011 Leadership in Retail and Consumer Products Forum (Chicago)
Thursday, May 12, 2011
President & CEO
Montblanc North America
Executive Vice President
GfK Custom Research North America
[Lisa Gudding]: Well Patrick, it’s a pleasure to be interviewing you today. We’ve had some great conversations leading up to the meeting, and when we talk about the title, A Timeless Brand of the 21st Century, Montblanc is surely a timeless brand. How do you keep that momentum going for 106 years?[Jan-Patrick Schmitz]: Thank you Lisa, and first of all, good morning to all of you. Montblanc, A Timeless Brand. It’s actually a title with a twist. On one side, the brand has a history of over 100 years and obviously everybody knows us for our writing instruments which we started in 1906. About twelve years ago, though, we started on timepieces and became one of the leading watch making groups in the world and one of the largest brands. If you look back on the history and the brand I’m often asked ‘how could a brand survive’? First of all, it’s a hundred years and second of all, if you produce and sell products, which are so much something from yesterday, so much analog. They are high priced, or at least that’s how it’s perceived by many, and we have modern technology which is so much more accurate, like the iPhone or BlackBerry. If you take messages, or if you write something, or if you measure time, or if you look at your cell phone, it’s so much more accurate than an analog watch. What we believe to be part of this success is the balance of the hi-tech and hi-touch. When you have things which go faster and are more complex in life, then people at the same time look at a balance. In order to maintain that, you have to be very careful in crafting your strategy in terms of distribution, in terms of advertisement as well as in terms of value creation and value maintenance. Many of you probably know our black Meisterstuck line, the Black Diplomat pen, that actually was designed in 1924 and was never changed. If you look at technology today, you’re launching any of the electronic gadgets, if you can get fifteen months of life spent out of it, you probably have done pretty good. That’s part of it as well. How do you create something where you create desire and people will enjoy it? We actually promote that heavily and it is often a received purchase that is a significant event in a person’s life and they hand it over to some external. So with that we have mastered a lot of storms including the recent, what I’d to call disruption; some people call it recession. I believe you know these kind of events in the mid- to long-term have been a disruption and in our case a clearing experience and a readjustment of the marketplace, which actually was very helpful.
[Lisa Gudding]: I’m sure many would have thought that the luxury industries would have been doomed during this period that we’ve experienced through the recession, as well as more recently.[Jan-Patrick Schmitz]: Right.
[Lisa Gudding]: Yet that isn’t the case for Montblanc, is it?[Jan-Patrick Schmitz]: It’s not the case for us or for anybody else. I must say, one of the most entertaining moments for me during the disruption was in the fall and spring of 2009. There was a lot of hype in the media that said luxury is dead. No more high priced things, we’ve all learned austerity. Now we have seen the true values in life and we just don’t need any more luxury. Now, I always like to say this with a little bit with a twinkle in the eye, since the homosapiens crawled out of the caves and we got off the trees a couple of million years ago, ever since that day our wives have told us they love diamonds and jewelry. Not just that, butthroughout this history of mankind, depending on where you were in the development stage, there were always things which defined the human being as a need and the finer things of life and value. So yes, if you look back at the worst moment and there was in the press and the luxury industry, for the first time in over a century has experienced double-digit drops in the top line was an effect on the bottom line. This is something we have not experienced in the 1991 recession, although in the 1997 currency prices and market collapse out in Asia, we had it for the first time. Now, if you look over the last twelve months and you read the news of any given luxury group in the world, most of them European, the growth rates are anywhere between 15 to 55% up. This means that what we’ve lost, we’ve gained back. So once again it was occasion. We are an unusual industry in that we really experienced disruption rather than a dysfunctional change in our business.
[Lisa Gudding]: Wow, that’s interesting. Now, you mention technology and your competitive set has changed. Surely the way people buy has changed as well. What words of wisdom or thoughts might you have for those that are leaning towards brick and mortar in terms of the way that they’re interacting with customers and all the social media and online channels.[Jan-Patrick Schmitz]: Actually as much as our business came back, in terms of customer behavior, a lot has changed. I believe this is not only a fact in the premium industry but virtually every industry. If you go back prior to the disruption, you had what I’d like to call a customer behavior which was unconscious spending. We all talked about the availability of the credit which really did nothing more than shifting. Every consumer falls into a discretional income and spending potential and it basically shifted one or two notches up. People tend to spend one or two categories above their natural spending ability and that was what we see today, which by the way only short-term corrected down to the natural spending pocket. We do see if you look at our consumers today, the availability of credit for discretionary spending is coming back strongly, which I think is a surprise for everybody when we’re asking what have we learned? What have we learned from that?
Now that went from an unconscious spending to very cautious spending during the disruption to a conscious spending today; the level of research consumers are doing, no matter whether its a piece of jewelry or a car or an electronics, is driven to a great extent by the technology, by the Internet, by mobile devices. I’m always amazed when any given retailer is more and more see consumers with their iPhones and BlackBerrys scanning the little code on the packaging trying to find out A) does my friend like it or not, B) what is the review about the product and C) is it a good price that’s offered? Technology has thus in terms of research changed a lot of behavior.
Second, there is of course the ability to shop online. Once again the luxury industry was very different than everybody else. If you went into a boardroom of any of the leading luxury groups eight years ago, we all believed the Internet was also only disruption, so we should just sit it through. Just give it a good ten years and it would disappear. That was a bold mistake and I think we all realized that it’s here to stay and the industry’s now embracing it, which changes our entire brick and mortar landscape. Not only for us, but I believe for retail at large. If you go back prior to the Internet, in particular in North America, the malls became more and more a convenient and standardized shopping experience. You could go in virtually any given mall anywhere in this country or most strip malls and look at the first three or four retailers and predict with 80% likelihood or who the other 60% were. You could do this to a point where you could tell upfront what would be the adjacency and who would be next to who because it all became convenient shopping. What I like to call clerking. You go into a store, most of the sales associates have a job. They’re paid only moderately. Many of them are commission driven and they are clerking and they’re distributing products. This can now be done so much more efficiently on the Internet. If you’re a retailer with a set of stores out there, the question becomes how do you create a desire and the business to afford the cost base, which you have in [inaudible] people and inventory and all of that. Again, if you’re on the Internet, you have a central warehouse; if you’re brick and mortar based, you have an inventory in every single of your stores. I believe that will have a substantial impact on the retail industry at large where brands and retailers have to think, how can I go back a little bit to the old school of retail to A) create an experience, and B) give value beyond the price point, because if you operate a brick and mortar store you will never be able to be as efficient, even though you could say that the cost of doing business in the digital space is increasingly astronomical as well. So it’s not true to state that doing business on the Internet is a cheap exercise, but it is certainly much cheaper than operating a network of stores on a national level.
With that in effect was a recession and a technology. We all have to think very carefully about not only retaining the right stuff but creating an experience because shopping in a mall in the store is predominantly about investing your free time to have an experience. As a result, you bring something home which you will enjoy and which you might need, while if it’s just about getting the good which you need, we are better off shopping digitally today. So that’s a big change.
[Lisa Gudding]: It’s interesting that you say that. As a researcher, I was recently reviewing some research and I was somewhat surprised to see that consumers were actually finding the online buying experience to be more enjoyable, more relaxing, more informative. So you’re right. The experience in the brick and mortar arena needs to be adjusted. Are there any things that your group is doing in that arena?[Jan-Patrick Schmitz]: That’s where I’m saying is the cost of doing business digital is increasing exponentially. When it started years ago, it was the simple three click experience. Half your products lined up as a soldier, have an efficient search engine and then three clicks, you’re there; you open the shopping bag; you get it shipped home. That is by far not enough these days and the ability you have as a brand and as a retailer to create an experience digitally is just amazing. Think for instance of one example, timepieces. A Chronograph watch. If you use it to engage a customer in the print media, most of the time you have a one dimensional ad, a beautiful product shot, you say I like the aesthetics but this is a $7,000 timepiece. Why should I buy that? You only have so much space to actually write about it, to both romance the product and give you facts and benefits and features is virtually impossible. We have done an advertisement where you can access a 2- to 3-D world and dive into the movement of a watch and explain how it works. You’re actually entering into a virtual world of learning in an entertaining and fun way at a very high aesthetic level about the product, about the history, about the watch making, about the fact that it is to the greatest extent still made by hand which explains if you have a watch it takes four weeks of human resources time to create one product. You understand why it has a certain value versus a timepiece or a product which comes every fraction of a second out of the end of a production line.
You have all of these abilities in a digital environment, and that’s really the cost of driving today because people find it entertaining as it became an entertaining medium where shopping is the end result, and it’s very similar to in the store. You have a competition of multimedia entertainment in terms of shopping experience to personalized entertainment and engagement and service levels in the store. Plus a lot of people and a lot of brands speak about customer relationship programs and knowing about your customer. The ultimate thing, which obviously is so much more difficult in a big box retailer than it is in a specialty retailer like ours, is that we try to know everything which we can on a customer and we are driven by a very different business module. The ultimate training of what we want a consumer to think is that I’m not going to the Montblanc boutique or the so-and-so mall, but I’m going to see Lisa, who is the boutique manager at the mall and she’s creating a personal relationship. We have the ability to call our customers and say that I know that your spouse’s birthday is coming up. He or she was in our store four months ago. She or he loved this and I think that would be a wonderful gift. Let me have somebody come over to your office and show it to you, etc., etc.
Creating these totally personalized experiences and trust creates something that I think we’re all craving for irrespectively and what retail we know we’re operating in and that is customer loyalty. It’s not about that one transaction I can do with you today, it is about the twenty-five transactions which I will do with you over the next couple of years. That’s where true customer relationship management exists. The thing that many companies do is bombard you with mailings, e-mails, catalogues and all of that. We don’t do that. We try to know as much and be truly personalized as possible, not to the hundred of thousands but to the thousands of letters which are hand written or hand sent. We invest in a lot of personal time of our employees to make actually certain it’s real, which you can justify the experience and at a price point which is surely above most other retailers and brands.
[Lisa Gudding]: Now, who is the luxury consumer? Clearly, there’s an income element that at some point but beyond that, there must be aspirations or needs? Who is that?[Jan-Patrick Schmitz]: You have the top 1, 2% of the VVR. The very, very rich and, and they have unbelievable discretional income. That’s a very different customer base. They’re looking for unique things and there’s actually a very growing market where we more and more craft unique products. For them it’s not about having something which is expensive. You want to have another gold stream jet? Well, call them up and if you have the money, they’ll deliver it to you at ten tomorrow. That’s what you need. You want another Bentley, just call them; you will have a car in your driveway within the hour. They’re looking for something that nobody else has. We’re thus creating a lot of product and once again, this is about personal relationships, one of a kind jewelry or timepieces, quarter of a million dollars; one of a kind made for you. So that’s on that level and that’s the icing on the cake. Obviously the biggest group is the affluent consumer which has a meaningful disposable income and this is where the credit issue comes in, when they have been spending a little bit outside of their bracket. They are the biggest pool. They are the ones who were mostly scaling back during the disruption and they’re the ones enough who are coming back strongly, not yet to the level that they’ve used to be, but there was recently a study amongst the affluent American consumer base that asked them, do you believe America is still in a recession? Seventy percent answered, yes. At the same time, their spending pattern is somewhere between 15 to 55% up to last year. So you actually see the disparity between a rational statement that we’re in a recession. There’s still risk for me personally as well as the economy at large, but we still go out and have a good time, which is quite an interesting observation and shows how strong the psychology of shopping is over the rational act of spending money and investing money.
[Lisa Gudding]: Thank you. When you think about the future and think about the globe, where do you see opportunity? Where do you see yourself going?[Jan-Patrick Schmitz]: Well, I think for many of us, we’re looking at the fastest growing regions in the economy. China is one which comes to our mind. India and Brazil. The latter is similar to China and gets their arms around the question on import duties and how you can actually maximize consumption like in the United States, where 70% of the economy is driven by consumption and actually keep the dollars or the local currency inside the country and make money on the sales tax, and on the spending rather than on duties. I think that would be very well advised. China for us, as with everybody else, is an amazing market. I think a lot of companies underestimate the fact that China is the biggest consumer market and the fact that it has been the workbench of the world will in my eyes change significantly. This is something most companies don’t see. Prices are going up, not only for raw materials, but also due to the fact that the domestic demand in China is exploding so fast that national production resources will increasingly be shifted to meet the local demand rather than meeting the demand of other economies. I believe that we will see for the ones that produce for China, a shift to other regions in terms of manufacturing. In terms of consumption, two years ago, China became our biggest market. The United States has been the number one market; consumer selling since we exported out of Germany. A lot of people don’t know we are a German-based company, despite the French name. China is developing vastly, though, and at the same time it’s one of the biggest risks. You have to be very careful if you see that. I do not believe that China will be a bubble like Japan was. For that the true demand and the size of consumption and the fact that there is so much to catch up. Truly the middle class, which is growing exponentially by the hour in China, has so much more demand compared to Japan, especially if you go back to the ’80s and ’90s where we already had a highly industrialized country at a high spending ability and power would finally collapse. Nevertheless, we always believe that keeping your risks well balanced across the territories and today we must accept the fact that if China would get a cold that will have a significant impact on the health of the economies around the world, hence we’d better balance and diversify our risks, which we have done having reasonably. Europe is still our biggest market, but we’re getting more and more to a balanced level between the U.S. and Asia.
[Lisa Gudding]: Interesting, do the tastes in the different parts of the globe differ?[Jan-Patrick Schmitz]: Absolutely. We actually do create a global brand image. If you go into any of our stores, and I would venture to say about 80% of the products which we offer are universal, so a lot of our affluent customer is traveling, if they go into a store in Paris and Hong Kong and London and New York and Los Angeles, they will have the same experience both in terms of service and in terms of products. You then have clear taste levels. If you look at branding in particular in Asia, and in China it’s all about extremely strong branding. They’re buying the products to show their personal achievements and that they’ve made it into the middle class. It’s also all about others. In the West, let’s face it. There’s a little bit of vanity in all of us. We’re not buying the watches, cars, handbags and beautiful Ferrogamo shoes because we need to walk around or carry goods. There is a part as well which is personal vanity, but to a lesser and much more refined extent, and finally there’s some very practical difference if you look at leather products in terms of size and functionalities. But this is minor. It’s more about branding which is really one of the issues.
[Lisa Gudding]: Great, well I think we have just a few minutes left. This might be a good time to take some questions from the audience, if there are any?[Jan-Patrick Schmitz]: Wow, we have been good.
[Lisa Gudding]: I’ve got more questions if we don’t have any more from the audience.
[Question]: You mentioned that Japan was a bubble. Why would you attribute Japan as a bubble? Is it the demographics, aging country and if that’s true, then thirty years from now China is also aging so why do you say …?[Jan-Patrick Schmitz]: Well, first of all, as I said, with Japan, and we all remember the books of the Japan-ing and the Japan-tics all of America and all of that, which was in the ’80s and early ’90s, a lot was driven by exaggerated balance sheet values. It was about real estate. There were a lot of similarities in terms of what we have seen and bringing us to a crash recently. The country was already at a very high level of consumption relative to income levels and relative to the wealth of the nation. If you look at China, China is still creating wealth. I believe that China first of all will show a clear slowdown, because these growth rates they experience will not be sustainable. If you look at it, though, in terms of consumer spending and consumption, they come from virtually nothing and having been the workbench of the world for the last fifteen years. Where at the capital influx, the creation of jobs, the creation of a middle class, has created a new wealth and there will be a factor of self propelling. As I said, I think China will be more and more a self-propelling economy where growth comes from within rather than from the need of the West of producing goods effectively in China. If you look at the scope and the scale, I always like to remember people; 137 cities in China have more than one million people and the migration from the countryside into the cities, which are exploding by the minute, is mind-boggling. For the foreseeable future we will see sustainable growth, which then will level off. One of the biggest risks, and I think we have seen it now with the crisis in the Middle East, is the political system. By creating wealth and well-being, you are coming to a state where the consumer is opening up and traveling around the world and will not accept any longer that opinions and information is contained by the government. They are very frightened by the possibility of their population uprising. Probably of all risks that I see in China, one of the biggest is that the political system as they have it will not be sustainable, which will disrupt global product flow as well as domestic consumption.
We have forty-five seconds to close; one forty-five second question?
[Question]: Okay, I’ll talk fast. I was very interested in your comment about online matters and the ability to create an entertaining and richer experience. It prompted a thought I’d like your comment or reaction. Do you think that the technology is going to enable mass retailers to create more of a luxury experience with non-luxury goods because the focus will be less on the product and more on the experience?[Jan-Patrick Schmitz]: Yes, by and large, the luxury world is at the highest end, but this is true for electronics as well as for any other category. The biggest trend we need to correct is that retail goods became a commodity. If you go into a Banana Republic store or a Gap at the end of the day, the product they offer and the experience they give is all commodity. The Internet is in my eyes the first and best platform to create that experience, irrespectively of whether it is a $39 product or a $10,000 product. It’s not about price points. It is about actually differentiating and giving you as a consumer a reason why you really like it and want that product. Let’s face it, a Louis Vuitton handbag for $2,000 is canvas. That’s the same material your sneakers are made of, which you buy at $49. It is about creating that experience, and I believe the digital world, as well as the mobile platform, the iPads and the other digital devices, will become much bigger than the PC and Mac based.
I think we’re done. Is that it? Are you smiling at me? Yeah, I thank you very much for listening to the two of us.
[Lisa Gudding]: Very interesting.[Jan-Patrick Schmitz]: And I’m looking forward to the next 100 years of Montblanc growth.