Moncler: The Après Playbook - [Business Breakdowns, EP.218]

29:52So it's way, way, way behind where Montclair is, but it is moving in the right direction. So if you look at where it was at the end of 2021, for example, Ston Island's direct -to -consumer was only really 29%. So it's moved quite materially. The geographic exposure has moved as well. So again, going back to 2021, because that's the first year they've probably got their hands on this asset. You had, at that point, 77 % of revenues coming from in May. A third of that region was Italy. Asia was just 13%. Last year, in May, it was down to 67%, and Asia was up at 26%. So he's already making these pre -serious moves in the business.

30:40Yeah, it's quite interesting. Getting back to the outerwear market, specifically as a luxury market, you mentioned some of the brands that might be considered in this category, like a Canada Goose Arctarex. I would even think about people considering a Patagonia jacket for certain things. How do you define this segment, whether it's from a size perspective, from a competitive forces perspective, just thinking about where Montclair dominates or has significant amount of competition? I think both of those are actually really hard questions. I'm gonna have a go at answering them because I think it is important to really try to think about what Montclair is doing and why these growth rates might actually be sustainable over the long run.

31:27So if you were to look at the market at a high level and try to really define it, let's go right up to the highest level we can, the luxury market. I've heard estimates saying that that is maybe one and a half trillion dollars. That's huge. That covers everything. That's watches, it's jewelry, it's cars, it's yachts, it's spirits, it's leather goods, fashion, etc. That's useless. That tells us nothing. Even if you calculate what percentage of this market is Montclair, well, it's going to be tiny. That doesn't really tell you very much. So if you try and figure out what is a sensible estimate for what this market side is today, I have tried to dig around to find some reasonable estimates.

32:07And the best I've found is the company called Perfect Moment, which is a small luxury skiwear lifestyle brand founded in France in the 1980s. And I think they published some numbers same that they think that the global luxury out -of -way market is probably about $16 billion. And that was back in 2022, growing 6 or 7%. Now, I don't know if that's right. I guess if you were to look at some of the big names here, so look at Montclair brand, which is doing $3 billion of revenue last year roughly, you've got Canada Goose, which maybe was $960 million to the financial year at the end of March last year and you've got actorics which I think its owner actually claimed that it had surpassed about two billion dollars in sales for the brand last year.

33:00So let's call that maybe six billion between the three of them but that's not the whole market because there are a whole bunch of other players in there you will have other luxury brands which in some way participate in this market but maybe sixteen billion as a whole for that market It's not a ridiculous number. I'd make a couple of observations on this. First of all, you're trying to think about how big this market is going to be in the next five to 10 years. There's an element of these companies almost deciding the size of their own market. And that's a dynamic which is quite rare and quite unique to luxury business.

33:37It's because you have this really perverse set up whereby when you've established this brand with great heritage and credentials, you can put prices up. And that almost helps you grow the business regardless of what you're doing with volumes. Luxury, I guess, is also just much more visible than it used to be. Now, that's not necessarily a bad thing. I mean, if you control this, guess, the tip of your products really well. But it's arguably much easier than ever to create that gap between demand. I think back to that Shanghai event or the hype you can generate through social media and supply. exploiting that gap is really what you're doing when you're putting up prices.

34:20I think at a high level as well you basically got more consumers around the world, you can afford luxury than they used to be. Oh, that's a really simplistic argument, but if you had bet on people liking nicer things as they get wealthier over the last 30 years, you'd probably have done all rights, whether you invested in this brand or that brand that did a good job, you'd have made quite a lot of money. So I actually think that the growth rate and the size of the market is in Monclair's hands here. This is not like we're going out into the world and coming up with something basically trying to take share away from another player.

34:57This is something new, it's a new phenomenon and I think that's really underscored by the fact that they say I think it's 60 % or something all their customers are new customers. So they're still very much in this early phase of growth. And there's a foundation of quality in the product. What does that mean for outerwear, specifically mongclair? If I think about some of the other brands, there is both materials and process, sometimes weighted towards more materials or more process depending on what the brand is, how would you define that and just what makes up the quality of a mongclair jacket?

35:31Yeah, so I tend to think of the quality for most luxury brands in two ways really. So one is actually the quality of the product itself. And there are many different strengths about this, the history, the heritage, there's the actual craft that's gone into it, the touch, the feel, the smell, if you're dealing with fragrances. And then there's the experience. And that I think is a really crucial part of any luxury brand. You need people to feel like they're experiencing something. This is something that's really special and unique. Now, on the product quality side, Montclair has this really high standard when it comes to thinking about the down that goes into its jacket.

36:19So this is white goose down that Montclair uses. And these standards are really, really strict. So it has this special down integrity system and traceability protocol, which sounds very complicated and very scientific. In some ways it actually is, for example, to have a third party audit that's basically testing the DNA of some of the downed, make sure that the species is right. But to go at maybe a level deeper on the quality of the down itself. So you've got various standards around fill power. So if you think about the way in which the down is clumped together, the way it's put into a jacket, there's various high standards around ensuring that you've got the right amount of down occupying a cubic inch after it's been compressed.

37:08There's actually a lot of detail about this online. Yes, we had a very cold winter here in the New York area and I went down the rabbit hole of researching the different types of down insulation, duck down, goose. There are rabbit holes to go down, so I would agree with you there. There definitely are. I'm desperately trying to avoid going down one, but basically with fill power, it's how many cubic inches one ounce of down occupied is after it's been comprised. So a higher fill power basically means better insulation and better a loft, which is basically how much space one acts of down -occupied when it's expanded.

37:44So higher loft means better warmth to weight ratio, so basically more effective at trapping warm air. And you can measure fill power 300 to 500 is generally seen as lower quality, 700 plus is higher quality. That's the down that usually comes from warmer toer birds. It's got excellent warmth to weight ratio. And that's the down that Monclair is really focused on getting into its jackets. They will go to extreme lengths to make sure that the jackets are perfect. So avoiding clumping, trying to avoid cold spots, all this kind of stuff, which is incredible. But you also got this product quality notion of extending beyond materials.

38:24It's relevant for the animals themselves as well. So they've got very strict standards around how you treat the geese who's down, you are harvesting. So there's a complete ban here on what they call live plucking that is just completely unacceptable here. So they use this protocol they've got a third party auditor which makes sure that they're following these standards so that I think is really integral to thinking about the down and again it speaks to that technical heritage and then all the customer experience side which is the other really important aspect of the quality here. Think of some of the other great brands out there one example be Panerai which is a famous watch brand, which is owned by Swiss Group Regional.

39:06If you're a top client there, you'll get invited to private factory tours in Switzerland, you'll get the chance to buy maybe limited edition watches with engraving options. It makes you feel like you're part of the brand narrative. All of you go to Louis Vuitton, if you happen to be a regular customer, you'll have a sales associate that remembers your birthday, that knows your past purchases, this sort of thing. So it's really feeling like you're actually quite special as a client, not a consumer. I've been to a few Montclair stores now, and I'm visiting their gallery store in Milan. Last time I was out there meeting Montclair and they've got this really special secluded area upstairs, which is for their special clients.

39:48They'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. I also went walking around the store and we were 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 attention to detail. They're obsessed with the presentation side of things as well. And also, I mentioned Shanghai event last year, but the stores are also quite unique.

40:26Particularly 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, Montclair does incredibly well. I love hearing about the experience examples. Those are just always so interesting to me.

41:01You 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 under supply of materials or anything else that would be but risk from the cross side of the spectrum? Yeah, so I think with a lot of luxury brands in Italy, also in France, as one you've seen in Hermès do this over time, you've seen them vertically integrated. They've started to buy a local supply to ensure that they've got that access when they need it. So I mean, Montclair does have a very strong relationship with its suppliers.

41:46I 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. 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.

42:28Last 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 under like. So I think for Montclair, 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. 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.

43:07And I guess that answers my other question just thinking through the financial model 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? The management on the inventory of 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.

43:45So if you look over the long term these guys have been making free cash flow margins from 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, 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 a really, really important. If you're putting prices up or you're changing the mix of your collection slightly, so it favors that be higher price point products.

44:29That is just free money from a profit perspective. It doesn't require any more fiddling around with the inventory or anything like that. The 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 Rishmol, which owns Cartier, owns Van Cleef, is a two 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.

45:10And 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. Monkler 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 on what is really an on -the -channel 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. I think back to Adidas and Kanye you west and how that relationship completely fell apart and how I did as was left with an enormous pile of unsolved 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.

46:06So yeah, it can be a risk. It's an interesting dynamic and then reach out 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 in your own interpretation?

46:42The priority at the moment really is investing in the business they have today. So it's so early on still, there's so much left to do. And we'll maybe get on to talk about some of those growth opportunities that they've got in the future. But there are still lots of them and they're still generating very attractive returns on capital. So if you're sitting there with a business that's able to do that and the runway is long, It's absolutely right that your top priority is really reinvesting into the business. What does that mean? That means opening new stores, it means you are cultivating your brand, it means you're investing in marketing, it means you're investing in these crazy off -the -wall events that Rufini is trying to bring in all over the place to make sure that Montclair and Stolen Island are right at the cutting edge.

47:33So I think they're going to keep doing that for years and years and years to come. I don't think we're anywhere near the end of that reinvestment story. And I think for any company really, if you're a long -term investor, the best ones to find are the ones that can just keep reinvesting capital, that high rates of return well above your cost of capital for a long, long time. And Bailey Gifford has been very fortunate to find a few of these companies that we've already talked about, Hermé as a few times. I mean, that's been owned by some of my colleagues for over 20 years. And it's been an incredible success story.

48:06The acquisition side of things, I tend to see Stone Island as a bit of a one -off. Now, I'm not going to say that they'll never do another acquisition ever again. They've played it down somewhat. I don't think Rufini is that hugely keen on the idea of building a big Italian luxury conglomerate to stay down the French, the likes of Kering and LVMH. Never say never though. I think for now his priority really is going to be reinvesting in the business. They pay dividends as well. They're pretty modest. I wouldn't say it's a big part of the story. Maybe acquisitions at some point in the future. And in Stolen Island, remember, was the only deal they've ever done?

48:47Was the only acquisition? And you mentioned growth opportunities from here. What would you point to as those main levers of growth? I mentioned earlier that you've got these strands of the Monclair brand. You've got Grenoble, Collection and Genius. So I think the opportunity there is more of the same. Grenoble, however, I think is a bit earlier on. I think there's a really interesting opportunity there to start building out more and more of these stores. For example, this big show in Kurshavel back in March. It was a selectuary ski resort town. It was the second big showcase of the Grenoble brand.

49:26I think that's got legs, so I suspect they're probably going to be doing more of the Grenoble stuff. Genius is that really powerful flywheel. Again, they'll keep on collaborating, keep coming up with these new and innovative ways of reimagining the Montclair brand, and that will drive lots of interest in the collection. It's interesting actually when you look at some of those periods where genius has been bit quieter, actually the core business has grown a little bit slower. So you can see that it is an important thing to keep pressing on with. There's a big opportunity in the US. Monclair is really under indexed there, so roughly 14 % sales come from the US.

50:06That is quite a bit lower than most of the other big luxury houses which tend to be north of 20%. So they're actually working on this right now. Various things going on here, they've probably been a bit slow to move to the Director Consumer Retail Model. I think they're trying to speed up that reduction in reliance on wholesale partners like Nordstrom and Sachs and so on, which are tended to dominate the US business. So there's a shift definitely going on there. They're opening more stores. They've got this really big flagship store that's about to open on New York's Fifth Avenue, which is home to lots of other famous flagship stores, Amani, Cartier, Harry Winston, Louis Vuitton, again they'll be in very good company there.

50:51That's going to be their biggest flagship store, I think in the world, and that's going to open in the US. But I think if you look at the East Coast and the West Coast, they're probably more penetrated, I would say than everything in the middle. So it's been interesting to me that they only recently a couple of years ago opened their first dedicated boutique in Dallas. There is a big gap I think they need to address in terms of growing brand awareness in a lot of the states in the middle of the US. So I think they're only just getting going there really. There's a long, long runway to explore there.

51:26It's worth touching on Asia and China because this is a really important part of the business. In Asia was about half of the groups of revenues last year. China's been a bit of a difficult market recently for lots of brands, we start to see some real signs of recovery coming through from Uncleared, but the long term is really what matters to us and what we see from Uncleared is a huge commitment to that market. Obviously the Shanghai event was one event, but it was massive. Every year they have this genius presentation where they put out the hint of what we're doing, that they actually moved that to China for the first time.

51:59Again, breaking mold somewhat. So they're going to be doing a lot more of that, they're going to invest heavily in China, but we're still in the foot hills of growth there. And they've got a really interesting organization in China, which is really digital. First, it's really client oriented. They actually see it internally as run in quite a unique way. They've got somebody representing that business on the exec committee as well. And one thing they said to me was we could learn something from what we do in China in our other businesses. So China and the Asia -Mort Brodie I think is going to be really interesting.

52:35And Stone Island, this is possibly the second act, it's the what comes next. And we talked about a lot of the growth drivers there, the growing direct consumer. The price points could be growing over time. I can see how that brand possibly splits into different pillars itself. So for example, they've got a range called Ghost, which is more of a subtle quieter version of the brand, which is not a quiet brand, Stolen Island by any means. So I think there's room there and you're starting to see some of that come through. So if you look at last year, for example, for Stolen Island as a whole, the top line actually shrank 1%.

53:13Now, if you look under the bonnet or the hood as you North Americans say, Asia grew 23%. And again, Stolen Island's barely got going there. It's much, much earlier than Montclair is. Direct to consumer across the board, grew 23%, wholesale fell 19%. So that shift is ongoing and it's still in the midst of that unfolding, but it's going to end at some point and the baton will be very much passed to retail and then it'll be over to them to really drive growth. So it'll be interesting to see how that works, but I can see that really starting to come through as they build up their business in Asia, they build out a business in North America, I think that's going to be really interesting as well.

53:54And within that context, I mean, what risks stand out to you when you think about main risks that exist within the business, what stands out for my Claire? Yeah, I think with any fashion business, you have to have a healthy skepticism about the long -term sustainability of the business. Fashion can be quite violently cyclical. So we mentioned Goonschi a few times. They had some incredible years under Alessandra McAley as creative director that came to an end a couple of years ago. So they've had a really really difficult period. I think there's that cyclical element to it. Now I've got quite a lot of faith in Monclair because they've got genius because they're constantly staying relevant and fresh that you can actually fend that off.

54:44The obsession with avoiding the boredom of your clients, I think that's really quite powerful. And nothing that worries me is when you are, as a lot of these genius collaborators are operating at the edges of experimental fashion, there are dangers. We've seen various examples of this over the years. I don't want to pick on Gucci all the time, but it's one that comes to mind. If you go back to 2019, they introduced used a sweater that was criticized for basically resembling blackface. So this sweater which came up over the mouth and it almost had this gap for your mouth and these red lines where your lips would be and they did this during black history month which in hindsight of course was an extraordinarily silly thing to do.

55:31I'm sure they wouldn't do that again if they had their time over. You could actually look at Montclair itself. There was quite a controversial collection back in 2016 when Tom Brown was a designer that they were working with at the time, basically had these models wearing what looked like military or camouflage inspired clothes at a fashion show not long after the terrorist attacks in Paris in November of that year, which were absolutely terrible, people died, it was awful. So that was regarded by some people, a lot of French people is really very distasteful. So that's a risk as well. I'll give you two more.

56:07One would be the supply chain. We've talked about this, but there is huge risk here. If you get this wrong, and there's been lots of scrutiny in the press recently, particularly companies like Dior getting into hot water because their manufacturing arm was implicated in labor exploitation, and it became clear that there were big flaws in their audit, no -versight process. That's a big risk. And the other one I guess would be Rufini. He is so important to this story. Now we've met a number of people around him over the years. There's some very impressive people like Luciana Santel who is like his right hand man Roberto Egs, Gino Fiza Norte.

56:51There are lots of really impressive people who've come to Montclair from other really big brands over the years. It's a really deep bench, it's an experienced bench. But there is a kind of magic star dust to Rufi and he is important and I think if he got hit by a bus tomorrow I'd probably be quite worried. Fingers crossed of course he is in great health for many many years to come. The question for us would be around succession. I think he said at the end of last year I would love it if my sons would take over the business and I think one of his sons actually does work at Stone Island so it might happen at some point but it's clearly a risk.

57:30He's important, he matters, he's a massive driving force. Key man. Yeah exactly. It's key man risk. Exactly. Well, this has been fascinating diving into a new niche of the luxury market. We finished the conversations with the key lessons that you can take away. What stands out for Montclair as a key lesson that you might be able to apply elsewhere? That's a great question. I think protect your brand. The brand should be basically at the center of everything you do. Every decision you make should be forcing you to ask yourself, what does this do to my brand? And this is what Rufini is obsessed with.

58:06I remember seeing an adverb actually in an airport recently, a different brand, it was a watch brand, Patek, Philippe, and the tagline was something like, you merely look after it for the next generation. You never actually own it. I think that's true for all luxury brands. The stewardship is so important because you're passing this on to either the next generation of the family or at some point may be professional management and you've got to be absolutely sure that you've done everything to strengthen that brand, to avoid it being caught up in scandals, besmirched in some way. So that to me is one of the vital lessons here.

58:43It's being obsessed with the quality of the brand and being willing to actually not do things. What are the things that we willing to give up in order to maintain the brand equity. To give you the example of the original buying back all that infantry, they described it as an investment in the brand, not a loss. I love it. It's a great lesson that certainly applies here and to the broader luxury market. This has been fascinating, Chris. Thank you very much for joining us. Thank you, Matt. Cheers. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna or to sign up for our weekly summary.

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