With much fanfare, the New York Times reported “Chanel publishes annual results for first time in 108 years.” In it Chanel announced it reached just shy of $10 billion in sales in 2017. However, while that headline is strictly accurate, it is not precisely correct.
Enterprising investigative reporters at French newspaper Le Monde and Swiss business magazine Bilan, gained access last year to a 91-page legal document prepared by Deloitte and filed by Chanel International BV, the brand’s Dutch holding company, with the Amsterdam Chamber of Commerce.
The news went viral and it wasn’t very good. “Year-on-year loss of 9% with a turnover of $5.67 billion in 2016,” resulting in 22.5% decline in profitability,” following a “25.7% decline a year earlier,” was reported for the company.
That $5.67 billion revenue figure in 2016 stands in sharp contrast to the company’s June 21, 2018 official release of $8.63 billion in sales during 2016. The discrepancy between the two may be because in last year’s legal filing, much of the decline in revenues was attributed to the sale of the Chanel UK subsidiary to “another entity,” which reportedly accounted for 11% of sales, though it said “which is also under its [i.e. Chanel] control.”
Further, the filing was reported to state,“On an equivalent benchmark, at constant exchange rates, the results are stable compared to 2015.” Confused? I am, but the differences in last year’s bad news and this year’s good might be explained by those Chanel UK results being added back into the company’s latest official reporting.
Chanel sets the record straight
Perhaps it was embarrassment by last year’s leaked report that led the company to come clean this year. “We recognize we are often a subject of much speculation and that people don’t have factors to hand, leading to the circulation of false or misleading information,” Phillippe Blondiaux, Chanel’s CFO, said in an interview quoted by the NYT. “We realized it was time to put the facts on the table as to exactly who we are: a $10 billion company with very strong financials, plus all the means and ammunition at our disposal to remain independent.”
With sales reported of $9.623 billion, Chanel boasts an 11% rise in revenues on a constant-currency basis. Operating profit was $2.692 billion, which was up 22.5% year-over-year. It further claims net debt at only $18 million, down from $1.6 billion in 2016.
Chanel also revealed that sales growth was strongest in its Asia-Pacific markets, up 16.5% and accounting for 38.9% of sales in 2017, though Europe remains its largest market with 40.6% of sales, posting a 10.2% increase. The Americas, by contrast, were its weakest performer in 2017, with a 5.3% increase and 20.4% of total sales.
Much of the company’s success was attributed to new products which looked to the past and its founder Gabrielle “Coco” Chanel for inspiration. A Gabrielle Chanel fragrance was added, along with a new Gabrielle handbag. In high jewelry two new collections, Coco Avant Chanel and Flying Cloud, drove “record performance,” the company stated.
The brand continued to raise its profile at an energetic pace, releasing eight new fashion collections last year and investing $1.457 billion in “brand support activities,” including marketing, advertising, fashion shows and consumer events.
In related news, the company has established a new London-based holding company, Chanel Limited, to unite all of its activities and employees, from fashion to fragrance, and to simplify its legal and organizational structure with Blondiaux as director for Britain.
Rising in the luxury ranks
Thanks to its official release, Chanel now joins its more public competitors as a real contender. “The release of the numbers is a debutante move to let its second-guessing peers, such as Louis Vuitton, Hermès and Gucci, know that Chanel’s in the same dance as them,” Mickey Alam Khan, editor in chief of Luxury Daily, shared with me. “What these numbers clearly prove is that Chanel is among the leading luxury conglomerates worldwide including LVMH, Kering, Richemont, Hermès, Swatch Group and Rolex.”
Chanel currently stands No. 87 on Forbes’ list of the World’s Most Valuable Brands, well behind other leading luxury brands it aspires to rank among, like Louis Vuitton at No. 15, the highest listed luxury brand with a reported $12.9 billion in sales and an estimated $33.6 billion brand value. Hermès and Gucci follow, ranked No. 35 and 36, respectively, with Cartier at No. 59 and Rolex at No. 71, all ahead of Chanel on that list and all with lower sales revenues now.
“Chanel has elevated itself to equal status among its primary competitors,” Christopher P. Ramey, founder of Affluent Insights, says, adding that to the financial community and luxury segment, “Chanel’s immense size was a surprise.”
Chanel comes into the light
In pulling back the curtain Chanel now recognizes that success in the rapidly evolving luxury market requires a new transparency regarding its once secretive operations. “Transparency is the coin of the realm these days,” says Alam Khan. “It’s a move that combines PR, boast, talent attraction and a nod to the times – customers and employees will rely on rumors in the absence of fact and clarity.”
This transparency is required as Chanel starts to reach out to other companies to partner, as it is doing with Farfetch to deploy its “augmented reality programme” in its boutiques. It also now holds approximately a 4.2% stake in Coty, worth an estimated $240 million, through sale of its Bourjois make-up line. And the two companies successfully just filed a trademark infringement suit together against Bargello, a Dutch perfume producer, for marketing smell-alike fragrances.
“Every business is in transition,” Ramey says. “The discretion of privacy is not necessarily an asset in a transparent world,” Ramey says.
Who’s on deck?
That need to attract and retain talent that Alam Kahn alludes to can’t be underestimated. In a recent survey among 600 luxury industry insiders, conducted by Unity Marketing in association with Luxury Daily, finding and retaining well-qualified employees was rated the third most significant drag on growth for luxury companies, behind only macro factors like political instability and monetary policies.
This need will become critical for Chanel soon at its highest leadership levels, as Karl Lagerfeld, creative director since 1982 and reportedly born in 1933 in Hamburg, Germany, can’t maintain his frenetic pace forever.
Considerably younger, but still not young, CEO Alain Wertheimer, born 1948, who owns the company with brother Gerard (born 1951), and both billionaires in their own right, can’t be expected to continue hands-on, day-to-day oversight forever either.
Succession planning must be a priority for the brand, though Blondiaux said, “Who might come next is not on the agenda.” A luxury brand at its heart is the physical realization of its creative vision. Good managers will be easier for Chanel to find than creative talent of Lagerfeld’s caliber.
“This message of confidence is a strong positive reinforcement message to luxury consumers [and I add, potential luxury talent] that Chanel, is, and intends to remain, one of the most resilient and relevant brands in the 21st century. It not only has the adaptability and dynamism, but also the financial fortitude to drive high performance,” Milton Pedraza of the Luxury Institute says.
Never say never
Of course, we can be forgiven for speculating that Chanel’s sudden transparency is a sign that financial moves are afoot. The company vigorously disputes that, as Blondiaux told Reuters, a future stock market listing is “absolutely not” on the table.
Nor is the idea of a potential sale of the company. “It’s exactly the opposite — this financial statement shows that we are amazingly solid financially and we can keep our status as a private, independent company for the next few centuries,” Blondiaux is quoted as saying.
Such reassurances aside, the rapidly changing global luxury market may make it impossible for Chanel to go it alone in “an unforgiving luxury landscape that has been cruel to many luxury brands,” Pedraza notes.
While Pedraza sees Chanel’s release as “a message to discourage potential suitors,” I think it might be more to encourage the right suitors with pocketbooks to match. “Financially it may presage an IPO should the next generation of Wertheimers after brothers Alain and Gerard choose not to lead or stay invested in the company,” Alam Kahn comments.
Or conversely, it might be intended as a signal other companies that it may come calling ready to make a deal, since it also revealed its debt load is greatly diminished.
Either way, I agree with Ramey, that this corporate news is not intended for the brand’s customers, but the financial community at large. “Customers don’t care. This is strictly a business decision. There is a natural order; we should assume an IPO or M&A is under consideration,” he concludes.