Ladies and gentlemen, welcome to the fiscal year 2020 interim results presentation, conference call and live webcast for Compagnie Financière Richemont. I'm Dino, your call operator. I would like to remind you that all participants will be in listen only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing Star and One on your telephone. For operator assistance, please press Star and Zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Sophie Cagnard, Group Corporate Communications Director. Please go ahead.
Thank you, Dino. Good morning. Good morning, everyone. Jérôme Lambert, CEO, Burkhart Grund, CFO, James Fraser, IR Executive and I, would like to thank you for joining the audio webcast today to review Richemont's results for the six months ended 30 September 2019. We would like to remind you that the company announcement and financial presentation can be downloaded from richemont.com, and that the replay of this audio webcast will be available on our website today at 3:00 P.M. Geneva time. Before we begin, may I draw your attention to the disclaimer on our presentation and company announcement regarding forward-looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. First, Burkhart will take you through the highlights before reviewing group sales. I will present some key developments at the Maisons and online distributors. Thereafter, Burkhart will walk you through the financials and conclude.
This presentation will be followed by a Q&A session. I will now hand you over to Burkhart.
Thank you, Sophie. Good morning to everyone listening. Thank you for your time. Before looking at the numbers, let me remind you that online distributors results for the prior year period included five months of YOOX Net-a-Porter Group and four months for Watchfinder & Co.. With this now clarified, let us look at the numbers. Sales for the first half of the current fiscal year increased by 9% at actual exchange rates and by 6% at constant exchange rates. Excluding online distributors, sales for the period increased by 5% at actual exchange rates and by 2% at constant exchange rates. Overall, we achieved growth across all regions, distribution channels and business areas at actual exchange rates, led by the Jewellery Maisons and online distributors. We will comment on each of those in more detail later in the presentation. Operating profit increased by 3% to EUR 1.17 billion.
The increase versus the first half of last year reflected higher sales and gross profit, partly offset by higher costs. There was a positive impact from the adoption of IFRS 16 when taking into account the same parameter of leases in each period. Excluding online distributors, operating margin increased by 70 basis points to 21.8%. Profit for the period at EUR 869 million was broadly stable when excluding the prior year period's post-tax non-cash gain of EUR 1.378 billion on the revaluation of the Yoox Net-a-Porter shares held prior to buyout. The net cash position was EUR 186 million higher than at September 2018 and now stands at EUR 1.77 billion. Let me now walk you through the group sales performance, first by region, then by distribution channel, and finally by product line. With changes versus last year, as always, expressed in constant currencies.
Let us start with Europe, our second largest region with 30% of group sales. First half sales increased by 7% overall. Excluding online distributors, sales were in line with the prior period. Growth was led by online distributors and the Jewelry Maisons. Performances by market were mixed, with notable strength in the U.K., our largest market in the region. Retail sales increased by mid-single digits on strength from the Jewelry Maisons and Watchfinder's retail stores. Online retail was strong, partly due to the comparison with last year, where YOOX Net-a-Porter and Watchfinder were consolidated for five and four months, respectively. The decline in wholesale sales reflected our continued efforts in channel inventory management and optimization of the wholesale network. Let us now move to Asia-Pacific, where sales increased by 5% overall and accounted for 37% of the group's total. If we exclude online distributors, sales growth was 4%.
China and Korea both have strong double-digit increases, partially offsetting declines in China's special administrative regions of Macau and Hong Kong. The latter, with strong double-digit sales decline, represented 8% of group sales, down from 11% a year ago. All distribution channels enjoyed growth, with online retail being particularly notable, albeit from a low base, while retail and wholesale posted single-digit growth. By business area, online distributors and Jewelry Maisons outperformed, showing strong growth. Let us now look at the Americas region, where sales overall increased by 6%, supported by strong double-digit growth at online distributors and high single-digit growth at the Fashion and Accessories Maisons. When excluding online distributors, sales were stable versus the prior year period. From a distribution channel perspective, online retail posted strong growth and retail sales were in line with the prior year period. The decline in wholesale sales reflected our continued initiatives mentioned earlier.
The region contributed 18% to group sales. Let us now turn to Japan, which represented 9% of group sales and increased by 13%, both including and excluding online distributors. Sales were positively impacted by advanced purchases ahead of the October increase in Japan's VAT. There was double-digit growth at the Jewellery Maisons, Specialist Watchmakers, and online distributors, and across all distribution channels. Finally, Middle East and Africa. Representing 6% of group sales in the period, overall sales were 1% lower than the prior-year period and 5% lower when excluding online distributors. Double-digit growth at online distributors was more than offset by declines in other business areas. Unfavorable currency movements compared to the prior-year period and wholesale network optimization, as well as continued regional and geopolitical uncertainties weighed on sales. Let us now turn to sales by distribution channel. First, the retail channel.
Sales in our directly operated boutiques were up by 4% compared with the prior year period. There was growth in almost all regions, led by double-digit growth in Japan. Other regions had softer rates of progression, while sales in the Americas were broadly stable. The positive performance was driven by growth at the jewelry Maisons and Specialist Watchmakers, as well as solid growth from Watchfinder's retail network. Retail sales benefited from 37 net store openings in the period, many concentrated in the Asia Pacific region. The contribution of our directly operated boutiques to group sales was 52% overall, in line with the prior year period. Second, online retail, which represents sales from YOOX Net-a-Porter and the online sales portion of both Watchfinder and the group's Maisons.
The current period benefited from a prior year comparison base that included only 5 months of sale for YOOX Net-a-Porter and 4 months of sales for Watchfinder. All regions posted significant growth, in particular in Europe and the Americas. This distribution channel increased its contribution from 14% of group sales a year ago to 17%. Third, wholesale. This channel includes sales to franchise partners and to multi-brand retail partners. Wholesale sales were 1% below the prior year period, as increases in Japan and Asia Pacific were more than offset by declines in the other regions. As we said during our results presentation in May, our watch wholesale network optimization continued in the first half of this financial year. Wholesale sales stood at 31% of group sales, compared to 33% a year ago. Finally, let us move to sales breakdown by product line. Almost all product lines showed growth.
Jewelry and watches remained the group's largest product lines, contributing 36% of group sales each, broadly in line with a year ago. Jewelry sales rose by 4%, with growth at both Cartier and Van Cleef & Arpels, in almost all regions. Watch sales equally increased by 4% overall, with increases in most regions and mixed performance by Maison. Clothing and leather goods benefited from the impact of the online distributors. Over to you, Sophie.
Thank you, Burkhart. Let me start with the Jewellery Maisons, which include Cartier and Van Cleef & Arpels, and since 30 September 2019, Buccellati. They reported an 8% increase in sales against strong year-on-year comparatives. Growth was broad-based across channels and regions, with particular strength in Asia Pacific and Japan. Strong increases in China and Korea helped offset a decline in Hong Kong SAR. Offline and online retail growth was spread across all regions, while wholesale growth was less balanced. The Jewellery Maisons operating results were 4% up to EUR 1.2 billion. Increased investments in store renovations and communication partially offset higher sales and a stable gross margin, resulting in an operating margin of 32.6%, 120 basis points lower than in the first half of last year. Let us look at the main development over the past six months.
The successful launch of Clash in April 2019, as well as positive developments of iconic collections such as LOVE and Juste un Clou at Cartier, and Perlée and Alhambra at Van Cleef & Arpels, supported a high single-digit jewelry sales growth. Below double-digit increase in watch sales reflected the appeal of Cartier's existing collections, notably Panthère and Santos, and of new references for Baignoire. Retail growth across regions benefited from newly renovated stores under the latest retail concept at Cartier, as well as from four net new stores openings. Online retail sales were strong across most markets, most notably in the Americas, albeit from a low base. Wholesale sales showed good growth driven by Asia Pacific and Japan. At the end of the period, we completed the acquisition of Buccellati. EUR 7 million of acquisition-related costs were expensed.
Due to the timing of acquisition, Buccellati has not contributed to group sales or results during the first half. Let us now review our Specialist Watchmakers business area, which consolidates the results of eight watch maisons. Sales rose by 1%, with varied performance by region, supported by growth in Japan, and to a lesser degree, in Asia Pacific, where sales were negatively impacted by a double-digit decline in Hong Kong SAR, which was affected by street protests and a relatively strong currency versus the renminbi. Retail sales increased mid-single digits, more than offsetting slightly lower wholesale sales. The decrease in operating results was contained to 1%, reflecting good cost control and improved gross margin from efficiency gains and a larger share of retail. Operating margin as a result was 40 basis point lower at 18.1%. Most maisons grew, with notable performances by A. Lange & Söhne, Panerai, and Vacheron Constantin.
New references within existing collections, such as IWC's Pilot's Watches, Panerai Submersible, and Overseas Vacheron Constantin, have been well received. Retail sales increased across almost all regions, with particularly strong growth in Japan. There was good momentum in online retail, benefiting from sales through our Maisons' own websites and through the MR PORTER and NET-A-PORTER websites. Lower wholesale sales were partly a result on the ongoing prudent channel inventory management and discontinuation of wholesale points of sales. Now let us talk about Online Distributors, which regroup YOOX Net-a-Porter and Watchfinder. Sales of Richemont's Maison products recorded by YOOX Net-a-Porter are shown under both the Maisons' respective business areas and Online Distributors. They are subsequently eliminated under intersegment eliminations. As Burkhart mentioned, the prior six-month period included five months of results for YOOX Net-a-Porter and four months for Watchfinder. Sales increased 32% to EUR 1.2 billion.
On a fully comparable period base, sales increased low double digits, with growth being broad-based across regions. The operating loss increased to EUR 194 million, reflecting a combination of lower gross margin and higher operating expenses. In line with plans, the lower gross margin reflected increased promotion and shipping costs. The higher expenses related to investments in technology and logistics, mostly for MR PORTER's technology and logistics platform migration, in marketing and commercial structures, and in the international expansion of Watchfinder. In addition, the full six months amortization of intangible assets resulted in an additional EUR 15 million charge compared with the prior period. Let us look at some developments during the six months period under review. At YOOX NET-A-PORTER, over 200 new brands were introduced. In addition, 90 exclusive capsules were launched across all sites and included Saint Laurent on NET-A-PORTER and Brunello Cucinelli on MR PORTER.
The quality of the personal shopping service was strengthened with the addition of more than 100 personal shoppers and client relations manager at NET-A-PORTER and MR PORTER, with the creation of two more personal shopping and client relation hubs in the U.S. The NET SUSTAIN platform was created to support innovative, sustainable fashion and already features 26 brands. On 30 September 2019, the NET-A-PORTER flagship stores was launched on Alibaba's Tmall Luxury Pavilion in China by Fengmao, a joint venture between Alibaba and YOOX NET-A-PORTER. At launch, the carefully curated selection amounted to more than 130 designer brands for women and men and 12 Richemont Maisons. Watchfinder's growth has benefited from international expansion with new operations in France, Germany, and Hong Kong SAR. Finally, let us move to the other businesses, which primarily include the group's fashion accessories businesses and its watch component manufacturing activities.
Sales were 1% up with a moderate increase in Japan and double-digit growth in the Americas. The increase was broad-based in online retail and most markets grew in offline retail. The operating results were positive. The improvement was primarily related to the non-recurrence of one-time items in the prior period. Let us look at the developments of some of the Maisons. It was mixed performance across the Maisons, with notable growth at Peter Millar. At Montblanc, leather goods sales increased with good performance of large and medium leather goods, notably the luggage MY 4810 collection displayed here in the slide. Higher retail sales were supported by Montblanc and dunhill, which benefited from new store openings, mainly in Asia Pacific. Online retail sales showed a solid increase across regions, most notably in the Americas and in Europe, as our maisons seek to increase their digital presence.
While wholesale sales declined overall, there was double-digit growth in the Americas, driven primarily by Peter Millar. I will now hand you back to Burkhart. Burkhart, over to you.
Thank you, Sophie. Let me walk you through the rest of the P&L, starting with gross profit. Gross profit increased by 8% overall, with currencies being broadly neutral. Gross margin was relatively stable at 62.3%, 20 basis points lower than the prior year period, reflecting the dilutive impact of online distributors. Excluding YOOX Net-a-Porter and Watchfinder, gross margins improved to 67.6%, an increase of 100 basis points compared with the prior year period. Let us now look at our net operating expenses, which rose by 10% at actual rates to EUR 3.44 billion. They included EUR 95 million of amortization of intangible assets on acquisitions, most of which relating to YOOX Net-a-Porter. Excluding online distributors, net operating expenses rose by 6% at actual exchange rates. I will now walk you through the expenses by category.
Selling and distribution expenses, which accounted for 50% of total operating expenses, rose by 6% at actual exchange rates and by 3% at constant exchange rates, slightly positively impacted by the adoption of IFRS 16. The increase was primarily due to higher depreciation linked to continuing upgrades to distribution networks and to further enhancement of retail and marketing capabilities. Communication expenses rose by 20% at actual exchange rates or by 17% at constant exchange rates, mainly due to planned initiatives at the Jewellery Maisons, Specialist Watchmakers, and online distributors, as well as the full six-month period effect for online distributors. Administration expenses grew by 15% or 13% at constant exchange rates. This growth principally reflected investments in IT, digital initiatives, and the inclusion of online distributors for the full six-month period.
Fulfillment expenses increased by 78%, primarily driven by an acceleration of online retail and the full period effect just mentioned. Other expenses amounted to €102 million and included the acquisition-related amortization of intangible assets previously mentioned. Net operating expenses as a percentage of group sales increased from 45.9% a year ago to 46.6%. This leads us to operating profit. The 3% increase in operating profit reflected higher sales and gross profit, partially offset by increases in operating expenses, as just discussed. The operating margin at 15.7% is down by 90 basis points compared to the prior year period. Excluding online distributors, operating profit increased by 9% and operating margin by 70 basis points to 21.8%. Let us now review the P&L items below operating profit, starting with finance costs. Net finance costs for the period amounted to €110 million compared to €47 million in the prior year period.
The EUR 63 million increase can be mostly explained by two items. First, the first-time adoption of IFRS 16 resulted in a lease liability interest expense of EUR 36 million. Second, a EUR 62 million loss was recorded on monetary items, an increase of EUR 24 million compared with the prior year period, mainly due to unfavorable movements in period end exchange rates on our cash position. As a reminder, cash investments are translated at balance sheet closing rates. Let us now turn to the profit for the period, which decreased to EUR 869 million, reflecting the EUR 1,378,000 billion post-tax non-cash accounting gain on the revaluation of Yoox Net-a-Porter shares held prior to buyout. Excluding this gain, profit for the period was broadly in line with the prior year period. Following the Swiss tax reform, our effective tax rate amounted to 19%, reflecting the projected rate for the full year.
Cash flow generated from operations increased by EUR 455 million to EUR 1,188 million. The increase reflects an increased operating profit, the effect of the adoption of IFRS 16, and the positive impact on working capital relating to the non-recurrence of prior year inventory buybacks. Let us now turn to our gross capital expenditure, which amounted to EUR 280 million, in line with the prior year period. As a percentage of group sales, it decreased slightly to 3.8%, compared with 4.1% in the prior year period. Looking at CapEx by nature, 44% of the gross expenditure was related to points of sale investments, including internal and franchise boutiques. Investments were focused primarily on store openings, renovations, and relocations. Notable projects included the new Van Cleef & Arpels store in Dubai Opera, Panerai at the Dubai Mall of the Emirates, eight stores at China World in Beijing, including Cartier, Panerai, and Chloé.
Lange & Söhne at Deji Plaza in Nanjing, the dunhill store at Lee Gardens in Hong Kong SAR, and the Roger Dubuis store in London, New Bond Street. Manufacturing investments increased from 7% of the gross capital expenditure to 12%, these being primarily related to research and development activities. Other investments accounted for the remaining 44%. They primarily reflected investments in information technology at YOOX Net-a-Porter. Let us now turn to free cash flow. Free cash inflow amounted to EUR 341 million, an increase of EUR 33 million compared to the prior year period. The increase mainly reflected higher cash generated from operations, which was partly offset by higher taxes paid. Now on to our balance sheet, which remained very strong, with shareholders' equity accounting for 55% of the total, in line with the prior year period.
Net cash decreased to €1.77 billion at 30 September 2019, from €2.53 billion at 31st of March 2019. The reduction mainly reflected the annual dividend payment, which amounted to €1.02 billion, and the acquisition of Buccellati. It is now time to wrap up the presentation by reiterating the highlights of the first six months of our 2020 financial year. The first half of our 2020 financial year was characterized by growth at actual rates across all regions, distribution channels, and business areas during these uncertain times, led by our Jewellery Maisons and online distributors. More specifically, there was strong growth in China, Korea, Japan, and the United Kingdom. The Jewellery Maisons delivered a high level of profitability, bearing in mind, first, the significant decrease in Hong Kong SAR, a market heavily exposed to jewelry and watches. Second, investments in marketing and communication to consolidate their leadership positions.
The Specialist Watchmakers, equally impacted by the events in Hong Kong SAR, showed good cost control and limited the reduction operating margin to 40 basis points. They have transitioned from being supply-led to demand-led and will soon complete their program of discontinuing relationships with unhealthy multi-brand retailers. Our Fashion and Accessories Maisons, grouped under "other," registered limited growth and profitability and strengthened their organizations. The online distributors continued to invest in IT and communication in order to succeed in their migration to a new technology platform, finance their international expansion, and reinforce market leadership. These investments led to increased operating losses but will support future growth. Overall, our operating profit grew to EUR 1.16 billion, reflecting higher sales and gross profit. Growth in expenses was contained, although slightly exceeded sales growth as a result of the investments just mentioned. Excluding online distributors, operating margin progressed from 21.1% of sales to 21.8%.
We have continued to transform our business model as our organization adapts to an increasingly connected world. We have progressed well in our new direct approach to communication and client engagement, and are now focused on developing our omni-channel proposition. The long-term strategic approach we take in everything we do has led us to strengthen our portfolio and expand our reach. First, we acquired Buccellati, the renowned Italian jeweler, to benefit from the major potential of the largely unbranded jewelry market, capitalizing on the group's strength. Second, we signed a partnership with the talented and acclaimed designer, Alber Elbaz, to form a startup named AZ Fashion. It is too early to share more at this stage, but we are looking forward to seeing this partnership go live. Watchfinder is another long-term investment with a gradual expansion of both the territories it covers and the services it offers.
It now operates in four markets. We aim for it to become the world's easiest and most trusted place to sell or buy pre-owned luxury watches. At Richemont, as our chairman, Mr. Rupert, commented, "The agility, creativity, and skills of our teams and our strong balance sheet position us well to meet our long-term ambitions." This concludes our presentation. I would like to thank everyone at Richemont for their hard work. We will now open the floor to questions. Thank you.
Thank you, Burkhart. We will start the Q&A session shortly. Before raising your questions, please announce your name and your company name. Also do restrict yourself to two questions and not to multi-part questions, please. Thank you. The floor is now yours.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, please press star and two. Anyone who has a question may press star and one at this time. First question is from Jon Cox of Kepler. Please go ahead.
Yeah, good morning, Sophie. Good morning, Burkhart.
Good morning.
Two questions for you. Just on the online operating loss in H1, should we be expecting a similar loss in the second half of the year? I think previously you said you want to break even there over the next few years. I'm just wondering if you can give us an update on that, or whether there is anything one-off of nature in H1. Question on the jewelry product, which seemed to slow down quite materially in Q2. Are you worried about market share losses there in jewelry, or would you say it is really a reflection of what was happening in Hong Kong? Was there anything else going on in that jewelry product, in the second part of your first half, in the second quarter? Thank you.
Yeah. Jon, good morning. Burkhart here. Let me try to address your two questions or concerns. First one, online distributors, there's nothing one-off in there. What we're doing, and we've said it many times, is in the middle of several quite significant projects. They are first and foremost focused on the re-platforming, and that requires investment. That's what has happened in the first half of this year. Second, you have seen that we have opened the joint venture with Alibaba, Fengm ao, and we have started trading by the end of the first half of this year. The third project they're working on is actually preparing the omni-channel proposition, which will enable the Richemont Maisons to transition their operations over to YOOX Net-a-Porter. These three are ongoing.
This is investment that is ongoing, and that will continue for the foreseeable future until we're through with that period of intense projects. In addition, they have invested in communication. In addition, there is also the full period effect of these two businesses that are now in our six months numbers. On the full year, no guidance, this is where we stand. On the Jewellery Maisons, there is two things that you must bear in mind. One, yes, Q2 actually was a strong negative impact from Hong Kong, stronger than in Q1, very clearly. You know why. We all read the news. The second element, that's why we're, I'd say, not too worried about the jewelry business, is that there's two elements in the jewelry business. There is the jewelry, there's the high jewelry business.
The jewelry business has continued to motor on as strongly as we've seen in previous years, whereas the seasonal effect of high jewelry will play out more in the second half of this fiscal year. It goes from one year to the other. It materializes earlier or later in the year. We're not worried about that. The projections there are quite good as well.
Thank you, Jon. Next question, please.
Next question from Antoine Belge, HSBC. Please go ahead.
Yes. Good morning. It's Antoine at HSBC. Two questions.
Good morning, Antoine.
Yeah, good morning. On Tiffany, I think five or six years ago, Rupert gave me a hard time when I asked if Richemont could afford seeing Tiffany being acquired by a competitor. You've been focusing more on smaller acquisition like Buccellati. Can you just say a few words about the potential emergence of a stronger competitor in your key category? My second question relates to the cost. I think you explained the pockets of investment. Is it possible to say if those investments, I mean, there seems to be a structural, like not much, just H1. Maybe the communication spent could be, I don't know, more weighted towards H1 this year. Any comments or so a bit more comments about the timing of the renovation of stores?
Do you think that the bulk of it was done in H1, or it seems to be more like a multi-year renovation plan to me? Any insight there? Thank you.
Thank you, Antoine.
Listen, Antoine, if our chairman has given you a hard time on Tiffany, I could refer you back to him and ask you to ask him that question. Joke aside, what we focus on, clearly, is our Maisons, the names we have in that space. I think we have three of the best assets or Maisons brands in the jewelry space, who have very strong leadership positions there. Just look at what we did with Van Cleef over the last 15 years. I think we have shown with Van Cleef that we are able to turn a very small Maison into an industry leader. I think Cartier, the evolution of Cartier over the last 10, 15 years also speaks to that. Buccellati is another very strong asset, by the way. A Maison, which with its distinctive style and heritage, is very complementary to the portfolio we have.
We clearly focus on the maisons that are part of Richemont, that make absolute sense for us because they are luxury maisons. We do not entertain these thoughts. Second, you were talking about the timing of expenses. Nothing really to call out here. Online distributors, the investments we're calling out here is continued effort. We've always said that midterm, we want to progress to EBITA or to EBITA neutral position. We're on track for that. These investments were planned, these investments were executed as planned. We're on track to deliver on the technological side, if we talk about the online distributors, what we had planned for. Marketing spend, yes. Okay, this was strong in the first half of the year, but nothing special to call out around that. It depends on the plans of the maisons and the way they have structured their fiscal year.
Nothing I would call out here. This is as planned.
Okay.
Just maybe on communication, just to make sure I understand. It was planned, but does it mean that over the full year we could see a similar increase in the communications to sales ratio?
Well, if you talk from 9.1-9.2, that's a massive increase of the ratio on sales. I would not agree with that. You know, Antoine, that we don't guide on the full year, it is what it is.
Okay. Thank you.
Thank you, Antoine. Next question, please.
The next question is from Rogerio Fujimori of RBC. Please go ahead.
Oh, hi. Hi, Burkhart. Hi, Sophie.
Hi, Rogerio.
Two questions, please. Hello. First on Specialist Watchmakers. The division has gone through two years of transition. How should we think about wholesale rationalization, trade stock levels, and sell-in versus sell-out in the second half? This is my first question. The second question on the YNAP Alibaba JV that just went live. Should we expect a material incremental sales contribution in the second half? What are the next steps for the JV and potential investments required? Thank you.
Thank you, Rogerio.
Good morning, Jérôme Lambert speaking. When it comes to the Specialist Watchmakers, you indeed mentioned that the category has been focusing a lot on true demand. You will remember that we proceed to important buyback a few years ago, primarily with Cartier and then with [brevier]. Since when, and that's since the start of the year, we have been monitoring very closely our sell-in and sell-out. We can say again today that our sell-out is superior to our sell-in, which is showing the commitment and the disciplines that the category has in developing that new business model. It's also proven by the growth in retail that the category has been registering during that period. When it comes to the distribution and the quality of the distribution, the category has been reducing the number of wholesale door quite significantly over the period in certain market.
Surely we come slowly to the end of that reduction. When it come to Fengm ao, thank you for your question. A very important part of the agenda. I'm sure you noticed that it was only 12 months ago that Alibaba, YOOX Net-a-Porter, Richemont launched a project. You know that we are trading now for one good month. The result are very promising. I cannot disclose, you can imagine any direct number. I can just refer to the quality of the service. It's already reached a 4.9 out of 5 service rating ratio. The team is fully working on their 11.11 single day. It will become more and more a real active part of our business. Thank you.
Thank you.
Thank you. Next question, please.
The next question is from Edouard Aubin of Morgan Stanley. Please go ahead.
Good morning. Edouard Aubin, Morgan Stanley. Just two questions from me as well. Just to follow up, sorry, on Specialty Watchmaker. We talked about the top line, but just to come back on the bottom line. I guess if we exclude the impact of the inventory provision you had last year, your profits are down about 10%, 11%, I think in year-over-year in the first half. There's been some talks on the Geneva blogs about some cost-cutting activity initiatives launched by Richemont in the second half. I know, Burkhart, you don't give guidance, just a theoretical sensitivity. If sales were to more or less remain the same in the second half versus the first half, would the deleverage be relatively similar in percentage terms, or would that be offset by some of the proactive initiatives you're taking on costs?
My second question relates to IFRS 16. Is it fair to assume that the impact on EBIT in the first half was around a positive around EUR 50 million-EUR 60 million? If so, if you could give us a rough split by division in terms of impact, that would be quite helpful. Thank you.
Thank you. Edouard.
Edouard, good morning. Specialist watchmaker, listen, very simple. We wouldn't comment on blogs or on media speculation, because what we do, running our businesses, what is internal remains internal. I won't put that out in the public space. What I can say, and I refer to what we have been saying, what I have been saying for quite a while now, is that the specialist watchmakers, the operating contribution, the numbers, has dipped below 8, below 9%, and we said we are on a midterm trend to rebuild operating contribution, to rebuild profitability. This is the plan for this year, once again. I would not read too much into H1. H1 is a snapshot we take after six months. We don't manage the business for a half-year result or a full-year result, okay?
Investments are spread out through the year, the way they are spread out through the year. We've touched on communication expenses for the first half for the group. This has also played out like this at the specialist watchmakers. I would not read too much into it. What I have said before, what I have said in May, is that specialist watchmakers retail sales are expanding. The wholesale sales are still consolidating because we make them consolidate, because, as Jérôme mentioned, we are still in the process, and we're winding down, of closing distribution. In the background, we have a focus on margins, on retail margins. We have a focus on tight cost control. That is the plan. That has played out very well last year. This is the plan that still is in place for this current fiscal year.
IFRS 16, yeah, I think you're right with your numbers. I won't comment on the divisions, but if you just look at the, and I think it's very clear if you look at the spread out of the assets or the right of use assets. Obviously, the Jewellery Maisons, followed by Montblanc, followed by Yoox Net-a-Porter have the biggest portion of the right of use assets, and thus the remaining slightly positive impact on the operating contribution. Then, it's followed by Specialist Watchmakers, LVMH Maisons, and then the Richemont assets or Richemont structure-related assets and leases. It goes pretty much in line with where we have deployed the capital. It's on a division by division level, not really material if you look at the overall numbers.
Okay. Thank you, Edouard. Next question.
Okay. Thank you.
The next question is from Melanie Flouquet of JP Morgan. Please go ahead.
Yes, good morning. Thank you for taking my two questions. The first one is regarding the jewelry product category. Not Jewelry Maison by division, but by product category. If I look back, it sounds like this product category has actually decelerated for 12 months. I know that there is volatility in the high end of jewelry on a quarterly basis and on a monthly basis, but for 12 months we are now on mid-single digit again, strong double digit previously. Can you tell us what is happening to this division in comparison to other winning product category in comparison to other winning product categories in luxury? For instance, we are not seeing this kind of deceleration in trend in leather goods. I was wondering whether you could share with us what you think is happening there in the last 12 months.
Actually, as a backup to that, we've also seen in leather goods, a big gain in market share of the leading brands. This doesn't seem to be the case in jewelry. What is that attributed to as well, in your view? That's my first question.
That's the first question. That was already two questions, Melanie.
It's a multi-part question. It's all about jewelry.
Yeah, yeah.
Is much shorter. It's about your release says that your gross margin expanded at the group level because of a product mix positive impact. I am not seeing this in the gross margin of Jewellery Maisons, which is actually flat. I was wondering whether you meant a divisional positive impact, or what did you mean by product mix impact? Thank you.
Let me walk through your three or four questions here. Well, A, I'm not going to compare jewelry development to leather goods because I don't really see the bridge here. If you look at our numbers, if you look at the Maison side, meaning excluding the online distributors, right? The jewelry growth is at 7% at actual rates and the leather goods at 2% at actual rates. I'd say jewelry is still taking a lead here. If you look at the total group, the picture is slightly different because you have the trading through the online distributors. The jewelry category, it's a simple one here. The jewelry has continued to expand very strongly, and the high jewelry invoicing will happen in the second half of the year. That's where we see the difference or what you take as a slowdown in the growth rate.
That is in a nutshell, the way we view the world. We're pretty happy about the jewelry expansion, and we're pretty positive about the high jewelry expansion coming in the second half of the year. On top of that, yes, we have had in Q2, clearly, much stronger than in Q1, the impact of Hong Kong. Hong Kong is a market for us, which is very strongly exposed to jewelry and to watches. That obviously hit us in Q2 much stronger than in Q1. I think Q1, we flagged out that the market was down by about 10 percentage points, something like that. Then in Q2, the drop was quite severe in a very short period of time.
The gross margin.
What was the question on the gross margin?
The product mix impact, given that the gross margin is relatively flat at Jewellery Maisons.
Well, I can't go into those details because that would mean I would call out the development at Cartier and the development at Van Cleef. I can't really go into that level of detail.
Well, I'm sorry. I'm trying to understand the release. You talked about the product mix positive impact in your gross margin, which is on an underlying basis expanding, yet I don't see it in the jewelry maison. You don't need to expand. It's not visible in the jewelry maison. Something else is happening.
Well, it might probably come from a.
Could have been divisional mix.
It might come from a different division, in this case, from the Specialist Watchmakers.
Is it a product mix or it's rather a divisional mix impact? Indeed, Jewellery Maison is higher gross margin and expanded faster. Is this just a wording that wasn't quite right or Specialist Watchmakers had a huge extension?
Well, specialist watchmakers by definition is watches. That is where the expansion of the growth margin has come from. You might call it a product mix, or you might call it a business area mix. In this case, it's the same.
Okay. No, that's useful.
Specialist Watchmakers, the business area, obviously coming from watches.
Okay. That's useful.
If that was a confusion, I hope it's cleared up now.
Merci, Melanie. Thank you.
Thank you.
Next question, please.
The next question is from Thomas Chauvet of Citi. Please go ahead.
Hello, Thomas.
Good morning, Sophie and Burkhart. Two questions for me, please. The first one for Burkhart, were you surprised by the 120 basis points margin pressure in the jewelry Maison? How much do you attribute to the rising cost of doing business in branded jewelry? It's a competitive segment versus maybe some exceptional factor this half, the revenue slowdown in high-margin markets like Hong Kong, you mentioned it, the step-up in store renovation, the sharp increase in events within marketing. Secondly, a question for Jérôme Lambert on the fashion accessories Maison. Many changes there at the same time. You took over the division recently following the departure of Eric Vallat, the JV with Alber Elbaz. You reorganized manufacturing last year in Italy, relaunched handbags at Cartier, changed the CEO of Chloé, et cetera.
I know it's been the same question for the last 15 years, but do you really believe in your ability to succeed in fashion? What is different this time? Can you generate strong returns with that portfolio of brand in what is undoubtedly an attractive segment of the luxury market? Thank you.
Okay. Thomas, good morning. Let me start with the jewelry maisons. Are we surprised? Yes or no. We're surprised, obviously, by the Hong Kong development, I think as the rest of the industry and even across other industries. Of course, we are surprised about that. As you know, this is one of our most profitable markets because demand is very concentrated. We have a good network of boutiques there, but we don't have a huge territory to cover. From a cost-benefit relationship, that's a very positive and structurally, a strongly profitable market. That demand has shifted partly to mainland China, to Korea, to other tourist destinations. Yes, that fall and that severity, probably the fall has surprised us to a certain degree. The rest, I'd say, of the activities in the jewelry segment is not surprising for us because it was planned as such.
We've referred to that in the past. The jewelry maisons generate a very high level of profitability of operating contribution and a high level of cash contribution. These are very big businesses, as you know. They are leading brands in their space, we've added what we believe can be, against the background of its heritage, et cetera, and its strong designs, can be, in the future, one of the leading brands. We've added that brand, Buccellati. We've almost always said, well, these are businesses in which we continue to invest, so that we can keep their leadership position. Cartier, as we said, is in a multi-year investment phase into the retail network. They're in the middle of that. We have on the jewelry maison side, also invested in communication in the first half of the year. None of that comes as a surprise to us.
Just another word on that. We don't manage for quarters or half-year results or even full-year results. We try to focus on the long term, across business years or business periods. This is a snapshot at 30th of September. We don't manage for 30th of September. Investments have been deployed into the maisons in the jewelry space in the first half of the year, and over the years, we'll continue to do so because the contribution is still very high, as you can see.
Yeah, thank you for your question for fashion and accessory activity, which is embedded into the other category. As it is embedded in the other category, sometimes it doesn't give all the time the capability to read completely the numbers. If I would take the last five years of that category evolution for the Maisons that are still in the portfolio, the growth rate will be at least at the rhythm of the rest of the group. In terms of absolute performance, maybe not enough, but at least there's not being a source of decreasing the top line performance of the groups here. A Maison like Chloé is being more than doubling its turnover in less than 5 years. A Maison like Peter Millar in the U.S. has been very significantly growing over the period and having a very high growth rate during the first semester.
There are some very interesting success in that category, as mentioned during the presentation. The change that you mentioned are indeed on top of that are very source of positive evolution of our business, was also meant to be necessary. We have appointed a new CEO for Alaïa with Myriam Serrano. We have a new CEO at Chloé, with Riccardo Bellini. Riccardo being a strong professional of the brand, being working at Margiela and Diesel during the last part of the period. We know that having professional in this maison is a key element of success. What change on top of that is that also one good year ago, the link between YNAP and the rest of our activity has been further reinforced.
We believe that working closer with YNAP will further help, particularly in the perspective of China, where with the launch of our JV, Feng Mao, we can build a strong bridge into a strong point of success for the future in luxury digital distribution.
Okay.
Thank you.
Next question, please.
Next question is from Luca Solca of Bernstein. Please go ahead.
Hello, Luca. Good morning to you.
Yes. Hello, good morning. A question on strategy. Could you help us understand the strategic goals you have in the second-hand business, and how you see this develop over the next three to five years? Your investment in Watchfinder seems to indicate that you have a toe in the water there. I wonder what opportunities and how you would expect to scale this business at the group level. I have a similar question on the acquisition of Buccellati. I'm not sure whether you stated and sized your ambitions in this case. If the answer is no, I would like to ask a reserve question, if I may.
Okay. Thank you for your question on circular economy. Indeed, we do believe that circular economy is important in the luxury landscape. For Watchfinder itself, you know Watchfinder being the leader of secondhand watches in the U.K., are excellent in its organization, excellent in its development, and it's very already omni-channel organization with a superb combination between the website, the showrooms, and the boutique. Since June, we started the internationalization of Watchfinder. We took the company first to France. Here we see a real success. That's largely over our expectation. We have opened Hong Kong in August, Germany in October. Switzerland is about to open now in the month of November. We'll go to another continent over next year. Our proof of concept was France. Here we see it's so far only the digital activity.
We have not yet launched the other frame of activity, meaning showrooms and boutique to complete that. Already the localizer digital activity is very strong. We see a very interesting development of the business itself, because that's how it developed through the internationalization. We don't see how or why, if it has been so successful in U.K., it cannot be repeated elsewhere. We see as well, very interesting combination with our core watch business as it extend new services, or new potential of services for Maison. There as well, we are launching a proof of concept to check and to see how it can combine with retail activities. That's indeed very promising, we do believe that it is part of, in the future, the so-called watch business.
Understood.
Buccellati? Yeah. Question on Buccellati. Listen, let me just put it like this. If you look at Cartier, if you look at Van Cleef & Arpels, and then if you look at Buccellati, I hope you would agree that it's a very natural addition to the other two jewelry Maisons, because they have very strong heritage, very strong patrimony, and very distinctive style. It's also positioned at the high end of the jewelry business. This is something that is very close to our core competence, I would say. This is something where we see a very clearly delineated playing field in jewelry, in this jewelry space. We're very happy with that acquisition. Now, we have not spelled out any ambitions. Internally we do, but we have not put that to the market. That means you have a follow-up question.
Wonderful. Thank you so much.
Where's the follow-up question, Luca?
Yes. Thank you very much for the bonus question. I was curious to get a bit more color on some of the brands that you haven't mentioned within the Specialty Watchmakers, Jaeger-LeCoultre, and the impact of the Polaris new products or Baume & Mercier. I also noticed that you had one winner in the Grand Prix d'Horlogerie de Genève that was carried out this week, out of 18 awards that were given, and Vacheron Constantin won that. Are you happy with the profile you're having in the watches business, or would you want to have a more prominent role in this area, in terms of innovation and ability to capture the scene?
That's a good follow-up question to Buccellati.
Yeah. Thank you, Luca. I would say, indeed, if you want to extend your collection in term of watches, there are still, I would say, a lot of very interesting watches to see right now. You probably saw that A. Lange & Söhne just introduced its first steel watch, which is very interesting in term of offer. You know that in Grand Prix Geneve, Richemont is not present with all the Maison, and that in that Grand Prix, if I'm not wrong, neither Rolex or Patek are present, for example. I guess you can draw somehow some conclusion out of there. No. If you see the models that have been launched with the Spitfire at IWC, if you see the new Odysseus at A.
Lange & Söhne, if you see the newer diving watches in Panerai, they are all showing that the success of this Maison are being very connected to recent new lines launch or extension. All that done in a very reasonable way because you have also noticed that the assortment are more focused than before, that the Maison are very consistent in managing their rhythm of innovation and their carryover collection. The success of the global of the watch Maison, if you read it in, I would say, again, the trend of Hong Kong, is in fact quite strong. You know well the importance of Hong Kong in terms of absolute business for the watch business. Achieving that kind of performance with that strong headwind, means you have very strong success.
One of the territory where the watch Maison has a huge success these days is China, mainland China. In mainland China, I would say the growth rate is quicker and is accelerating. Here we are more than happy with the development of the watch business. Burkhart was mentioning earlier in the talk, the improvement of the bottom line that is done in the same time, and I can repeat what I was saying, our sellout continue to be quicker than our sell-in. For all that element, the whole building of the category, to achieve as well, a stronger and stronger performance is continuing in a very strong way.
Okay. Thank you. Thank you, Luca.
Thanks very much. This is very helpful. Thank you.
Thank you. Next question, please.
The next question is from Francesca Di Pasquantonio of Deutsche Bank. Please go ahead.
Yes. Hi, good morning, Sophie and Burkhart.
Good morning, Francesca.
Thanks for taking my question.
We're all with you as well, Francesca, please.
Yes, that's right. Good morning as well. I have a couple of remaining questions. The first is about the renovation process of the store footprint at Cartier. It's a multi-year journey, but what I wanted to understand is more qualitatively, how you are seeing the process impacting the performance of Cartier on the positive or on the negative side, and your expectations going forward. The second question is going back to the online. Although we were, I would say, quite prepared to see that this business would continue to require significant investments and step up in costs, I was a bit surprised by the magnitude.
What I wanted to understand is whether you were surprised as well, or whether this was something that you had already envisaged, and how we should be thinking about expectations for the future, i.e., is this going to normalize over the next 12, 18 months? Thank you.
Okay. Thank you. Listen, Cartier, I guess you're referring to Cartier, right? We've been discussing this.
Yeah
for, I'd say a number of years, ever since Cyrille Vigneron, with his team, launched this program. Basically, we're talking about a project a week throughout the year. This is what we're talking about.
I'd say in general terms, obviously, CapEx and depreciation are negative, and sales uplift out of renovated stores are positive, right? Listen, we have to do this. Cartier management is convinced that they have to do this for the simple reason that if you want to be a leading brand or the leading brand in the jewelry space, you have to fulfill your customer expectations. I've said it before that when Cyrille Vigneron came in as CEO of Cartier, he made a very simple but structured assessment with his teams. One of the points that came up was that the Cartier boutique network needed a bit of refocusing, which he's done quite quickly in terms of closing some of the stores, because the number has come down step by step over the last two years.
Upgrading the customer experience in some of the stores, in most of the stores through a new boutique concept, but also focusing on the flagship footprint across the different regions. I'd say this has continued as planned, so nothing is surprising for us in this. When you renovate a boutique, what you want to have coming out of that's what we have been doing over many decades now, is an uplift in sales because you readapt, you readjust to what your current customer expectations are. There is a clear link. We just don't do this for having nicer stores, but they also have to produce the results that justify this investment. Obviously we added.
You wouldn't say that.
Hmm? Yes.
Go ahead, sorry. No, sorry, go ahead. I'll ask.
Yeah. Obviously, but for Cartier, that is more limited. We open new stores whenever there is a new opportunity. For example, now the timing might be off, but Hong Kong, there is a new development there, K11, where several of our brands have opened with great success. You have Hudson Yards in New York. It's a new development.
Yeah.
We had to shift distribution, if you stay with Hudson Yards. Cartier has closed the store on 59th Street, Madison.
Yeah.
Is now focusing on the Maison on Fifth Avenue and Hudson Yards. There's a constant shift in order to adapt. We've had that in other places of the world as well. We're focusing also not only on the flagship stores, but these are of prime importance, but also on renovating the rest of the network. As I said, it's about one project per week. That's quite a significant and heavy charge also for the teams.
You wouldn't say that this has created disruptions and negative repercussions on overall top line? There hasn't been anything which has gone differently from your expectations?
No.
In terms of the execution. Okay.
No. Okay. You know how it is when we renovated the Maison, okay, that's a big store, and then you have the effect of closing the Maison and then reopening the Maison. These are really, I would say, more technical effects. What would be more worrying, and that I cannot confirm at all, is that once you close down a major store for three to six months to renovate it, and then when you reopen, the traffic doesn't come back. You have an increase in traffic. That's what we see in our businesses when you renovate a store, not the other way around.
Okay. Thank you.
On the online distributors, was it surprising for us? No, it was not surprising for us. It was planned as such. They're going through the three projects, or major projects that we called out. The re-platforming that is progressing, the online, the JV with Alibaba that has opened, and then the preparation to receive the operations from the Richemont Maisons. That requires investment. We're not worried, we're not surprised because it was planned as such, and that is the nature of the game when you're in a business that, or in a distribution space of the market that is dominated by technology. You have to invest into technology. Not only technology, but also logistics and fulfillment capabilities behind, to be able to preserve your leading edge, and that's what's happening there.
Okay. Thank you.
Thank you, Francesca. Next question, please.
The next question is from Louise Singlehurst of Goldman Sachs. Please go ahead.
Hello, Louise.
Good morning to all. I'll obviously start off by saying good morning to Jérôme and Burkhart and Sophie. Thanks for taking my questions.
Brought the smile back on his face.
Well, sadly, my questions are going to be on YNAP rather than the pure fashion. Just to think about the progress, and I know you've touched on a couple of these comments already. In the context of the reminder about the long-term objectives for the group and not really focused on the quarterly numbers, can you just help us think about how you're balancing the delivery of the top line in the online distributors with the operating profit question? We've obviously had quite a promotional environment in the last few months, and I suppose just circling back on the gross margin comments, can you give us any color between the gross profit, and the OpEx component within the online distributors? My second question, just following up from that. I'm not after any longer term guidance. I know we're not going to get it.
In terms of color on the progress at YNAP in terms of that EBIT evolution. This obviously follows on from comments on the prior question. Is this year the trough that we should expect, given the fact you've got the benefits of China coming through, but you've obviously also got a little bit more IT spend going through the OpEx line? If you can help us understand the shape of the EBIT profile over the medium term, that would be incredibly helpful. Thank you.
Thank you for the questions. Here they are describing big time the agenda of the Maison. First, that's about having YNAP being more global. That's an important part of the agenda. You remember, long time ago, we said the announcement of the JV for Middle East. This one is to come. Last year we announced the JV in China and this one is happening just now. We see there a very promising success. What we can see already is that the strong level of operation excellence in execution, excellence in service. That's where we see one big part of the agenda. A second part of the agenda is enhancing the quality of the service. The technical platforms that we were using before were not, I would say, making possible localization. That's why, for example, in Japan today, you still have only YOOX being operating in Japan.
With the new technical platform, we'll be capable to have our major digital Maison to operate in Japan next to the other territories. The new technical platform will also allow a larger spectrum of payment possibilities, and much more capability to serve our clients at large and our VIC in particular. All that triggers new conditions of trading or so-called cost of trading, cost of doing business. That's what our margin evolution is introducing them any other particular aspects of it or more there. On top of that in YNAP, you have the combination of NAP, Mr. P, The Outnet and YOOX, and then two of them being active in full price, the other one not only in full price. You have to read these numbers as well as a combination, as a four-factor, more than being a traditional of a more promotional rhythm of activity.
Do we believe in the business? Yes. What is indeed to be noticed in 12 months? If you remember 12 months ago, the question was, is that business model relevant or not? Could there other format of business, meaning a platform, being the future and acquiring goods, managing inventory, creation being part of the future? Last 12 months, they showed that creation, acquiring goods, managing inventory, offering rare products are in a qualitative way, as a strong future. Has been winning over the last 12 months, which is very important if we speak strategy and further development. Finally, what is also for is very important, and then YOOX Net-a-Porter have been working a lot as well with most of their brand partners since developing omni-channel capacities and capabilities.
Already one major brand, not Richemont, is experiencing a new format called a New Era Light, which are advanced omni-channel capacities and possibilities. We see in this combination of digital and brick-and-mortar, a very strong source of business development. We do believe that with the evolution that we see of the world of wholesale, and we're experiencing it over the past within the watch business, it's very important to reinvent the relation with the clients. That relation is very digital, is very one client-focused. In that constellation of world where channel are disappearing, and that more direct relationship between client and maison, that we see a bright and very stronger source of value between the traditional maison of Richemont and the historical partner of YNAP and YNAP itself.
Jérôme, thank you very much.
Thank you.
Thank you. Next question, please.
The next question is from Zuzanna Pusz of UBS. Please go ahead.
Hello, good morning.
Thank you for taking my question.
We don't hear you very well.
Can you hear me now better?
A bit better, but it's still low.
Can you hear me now? Yes.
Yeah.
Okay, perfect.
Thank you.
I'll try to be louder. First of all, on online distributions, I was just wondering if you could share with us your thinking regarding the whole, I guess, luxury online business going forward. I presume it's not only my impression, it has become incredibly promotional, and it feels a little bit like it's getting worse and worse because one retailer does 10% off, the next one does 15%, and the next one does 20%. Do you have any plans to respond to that? Are you planning to focus more on the top line so we can expect to see more discounting, or which will come obviously at the expense of your profits? Are you planning to maybe prioritize the profitability of the business going forward? Just even high-level thinking would be interesting because it does feel a little bit like a race to the bottom.
Secondly, on the outlook. I do understand you don't really guide, but I think it has been commented before that you were expecting OpEx to grow slower than sales. I was wondering if this is still your expectation going forward, and especially when it comes to jewelry maison. The reality is that margins have been really impressive, resilience staying above 40% in the last couple of years. We are seeing more inflation in the market. Your peers in luxury goods are spending more on A&P. Should one of your big competitors become part of a rather large group, I think we could see also bigger A&P spend in jewelry.
I'm trying to understand if you have any specific targets, meaning you want the profitability in jewelry maison to stay at at least 30%, or will you be willing to give that up if this is needed to defend your position in the category? Thank you.
Yeah, Zuzanna, Burkhart here . Let me just answer the second question first, because at my age, you start to forget questions. The jewelry maisons have a very high level of profitability. It's our area of expertise. We have leading brands. Two things to that. One, we have always said, and we will continue to say that and do that, is that we will continue to invest into these maisons. As they're retail businesses, as they're worldwide businesses, they have a strong need of capital investment, and they have a very high level of capital return. As you can see, that equation really works out very well for us. It means that we will have done that over decades now. We will continue to invest into these maisons, and we have built them into the industry-leading assets, if I can say it in financial terms.
We will continue to do that in the future, irrespective of what the competitive environment is. We believe that with Buccellati now, it's not really significant today, but when you reflect back on Van Cleef, it was not really significant when it was acquired by the group, and it's one of the references in the industry now, and we intend to give all the means for this Buccellati Maison, all the means to Buccellati to be able to grow. We'll continue to invest also in that space. We're not too worried about that because we're leading that space with Maisons which are clearly positioned on the luxury side, on the high-end side of that market. Second point I wanted to mention, don't read too much into three months, six months, half-year results, whatever, because we don't manage like that. We don't manage for Q1, Q2.
We don't manage for first semester, second semester. We've always spelled out that the view of Richemont is that we want to create long-term value for shareholders through the creation of and the continued investment to create brand equity, because brand equity will then translate into long-term value for the shareholders. Semester one, semester two, Q1, Q2, these are all valid questions. I understand that there are models behind, we don't manage the business like that. I don't want to lecture you, I'm just saying this is not the way we manage the business.
When it
Sorry, just to follow up, because I also tend to forget questions at my age. Maybe to put it differently, would you say that the margins at Jewellery Maisons are probably at their peak, and it means that if the environment gets a bit more competitive and if the cycle, we are probably going to see some sequential slowdown generally globally. Would you say the margins have peaked at Jewellery Maisons or, and you are willing to invest, so we could expect a bit more pressure going forward, or can they still go higher? I guess maybe that is a better way of asking the question.
To be honest, I would not qualify that at all, because I simply do not know. I simply do not know, and we simply do not know how the competitive environment is going to play out. If you would have asked that question 10 years ago, we probably would have said, "Yeah, they probably have peaked." The boom with the Chinese customers came. It has brought not only our Maisons, but I'd say the entire industry to a different size. I will not be able to answer that question.
Okay, fine.
If I may on the digital distribution, you point something which is very interesting, which is the relationship between digital distributors and the products and the clients. At YNAP, we see our point of differentiation in three key dimensions. First, YNAP, and even more now with Feng Mao, has the largest number of clients. We are the best in introducing new Maison and new capsule. As it was mentioned now, we introduced 200 new brands since April within the environment of YOOX NET-A-PORTER, and we launched a 90 exclusive capsule. All that bringing the opportunity to have exclusive and specific offer. The second one, which is also linked to our position of leader in that dimension is that with very strong relationship with our brand partners, and we are working with the key players to offer the best product, and then I would say at the right time.
We buy the inventory, and thanks to that, we can offer the best inventory and the best time when it comes to that. Along that, we already have a big chance to have very competitive value creation and not to fall into only a promotional business approach, which is for today and for tomorrow, we do believe that, and that what we experiment with New Era Light, we do believe that the one-stock omni-channel solution will create a further competitive advantage. Today we have a competitive advantage because we have more clients, so we can introduce better and a more efficient way as a Maison. The team is good in correlation, so we can help the Maison to create and to have the best capsule offers that can meet the best success.
Tomorrow, further in the journey of technology, with the omni-channel, we'll be capable to offer the one-stock solution. That one-stock solution will offer, I would say, a very strong optimization of which stock to which client, in which geographic dimension. All these combination are making us very confident in the capability of that business to have a strong current.
Sorry, just to follow up, because I don't think I understood. This has a positive impact on your ability not to discount more, or it means your profitability will be higher from operational perspective. I think I agree you're one of the stronger players, but you are still discounting. Is it that you're going to be discounting less because you think your position will be getting better, or you think that operationally you'll be more efficient, and that will be able to offset probably some pressure at gross margin level?
I think that the answer is not only into the question itself, because, again, being a multi-billion company in that field gives you the opportunity to have more and more categories and more and more specific offer. I do believe that the more we expand the categories, carry over categories that are a new hard luxury goods are one of them. You have the chance to have a product with very, very low discount rate. On the other side, the more specific products you have, the better you create then, or the less you have to discount. It takes energy and probably even more intelligence into the business game. I don't consider discounting and reduction of commercial margin as a fatality for that activity.
Okay, thank you.
Can I just add one thought to that? There's two ways of looking at the online distributors. One is, well, it's a distribution platform, and you focus on operational results and margin and discount, and that was the sense of, I think, the discussion you just had with Jérôme. The other point is, if you step back and you think about what the future of the luxury distribution will be or could be. If you come to the conclusion as we have, that we at Richemont have, that the future is all about new retail, meaning the online and offline retail, which will first be linked and then will blend, then you need assets in that space. We have the very strong and very focused offline retail distribution network around the world, about 1,100 stores.
We have a very, very strong, if not the strongest asset in the luxury online distribution, which is called YOOX Net-a-Porter. We have started a joint venture or a partnership with Alibaba in the online space in one of the biggest, if not the biggest luxury markets around the world. If you take all these together, we believe that we have the building blocks to actually create new retail going forward, alone with partners, with the assets we have. The discussion shifts to different areas. This could then mean that, well, having an asset like YOOX Net-a-Porter is part of doing business, is the cost of doing the business, because it will enable us to build the new retail infrastructure around the world.
If you tend to believe that, well, online is just an additional channel, and it will remain meaningless or not so relevant for our customers, then you will focus more on the physical distribution network. We tend to have a belief that new retail is the future, we have backed these beliefs with an acquisition or with several acquisitions. By the way, you have to look at it also that we are financing the investments not only into our maisons, but also into YOOX Net-a-Porter through free cash flow that we generate. In that aspect, we are actually quite relaxed. We know it's a business because it's technology-driven, where we will have to continue to invest in technology and fulfillment capabilities. We have the unique opportunity to leverage these investments to hook it up with our physical retail network, because that's where our belief lies.
Thank you, Zuzanna. We'll have to jump to the next questions because time is running out, and I would like some other analysts to be given the opportunity to ask questions.
The next question, Patrik Schwendimann of ZKB, please go ahead.
Hi, Patrik.
Good morning, Jérôme. Good morning, Sophie. Good morning, Jérôme. Good morning, Burkhart.
Good morning, Patrik. How are you?
What is the situation in Europe? Do you see an improved environment because there is more tourism? That's my first question. Second question, maybe for Jérôme, what is your strategy regarding the watch mechanical movements? Will you still order from Swatch Group next year? Thank you.
Thank you for the questions. I will answer the second part of the question. I leave Burkhart to comment on the development in Europe. You know that Richemont and Swatch Group have been, let me say, historical partner in terms of industrial supply. Richemont is buying from Swatch Group numerous products. You spoke of the movement, we also buy spirals or other components for our watches. We'll continue to buy from Swatch Group various elements. When it comes to specifically the movement, I cannot comment where our Swatch Group and the COMCO are. There I leave you to ask them where they are with that dimension. I like your question as well to give me the opportunity to comment where we are globally with the supply chain for our watches.
You know that Richemont has been building its industrial base, means its own capacity to develop movement. First, within the Maisons that historically has been always building and producing movements. It's the case with Jaeger, for example. It's also the case with Vacheron, that are internally integrated and producing for themselves the movement. Also true now for components and kits of spare parts that are used by various Maisons of the group. Today, when it come to movement, the first supplier of movement for Richemont is Richemont. Give us, I would say, the way to project ourself into the future with a lot of serenity in that context and environment. Then, like all the industry, we have to see and to hear how our Swatch Group will adapt its strategy for the future, given the new regulatory environment.
As said, we have the tools to adapt ourselves to whatever will be the situation next year.
Okay. Thank you, Jérôme.
Patrik, on Europe, listen, I think I've been saying this for a while. With all the things that are being thrown at our industry, but also other industries in Europe, actually, we're quite happy with the business. You have Brexit, but it's not only that. Remember what was happening in France. I'd say on the political environment in many of the major markets for us in Europe are difficult. Just a trip down memory lane, in the past, we've had a big part of Chinese business or tourist business, which was very volatile. Now, we have, since two to three years, focused very strongly on building, redeveloping our business with local clientele and local clients, and that year after year after year is increasing, that sales portion. I think that gives more stability to us or to our business in Europe.
If we look a bit more into the trends, obviously, probably counterintuitively, the business in the U.K. has been very strong. It's become our biggest market in Europe now. Other markets have been either slightly up, slightly down. There is a bit of tourism going on. We know part of it is, or most of it is linked to exchange rates or exchange rate-driven buying, be it in the U.K. from Asians, be it also from Americans. In general terms, jewelry and retail are up across the region. In general terms, watches and wholesale are down across the region because there is a link, because we continue to work on all the elements that we already discussed, sell-in lower than sell-out. We're at the end of closing down of wholesale relationships. It's still visible in the first half of this year.
I'd say in general terms, we are satisfied with the business given the circumstances, put it that way.
To complete as well the landscape with the strategic view as well here, for us, an investment in YOOX Net-a-Porter, in Watchfinder, in Buccellati or even, I would say, the newer AZ Factory. All these dimensions are also to make Richemont into developing its anti-fragile strategy for the future. Maybe four or five years ago, the importance of tourism was so high in our business in Europe that we were building and developing our business with a high rate of fragility. The development of the locals now with this new initiative give us the opportunity to be more and more local-driven and to have a direct product offer marketing initiative that are driven by the local needs. That very specifically in the different market. Again, Richemont has been investing for a long time in service center.
Richemont has more than 26 service center around the world to take care of the product. You remember that we launched extension of guarantee earlier this year. Extension of guarantee means that Jaeger has been offering six years of extension of guarantee. This month, we'll have further news of other Maison of Richemont that will offer extension of guarantee. We do believe that offering these additional services, offering new initiative in marketing, new point of contact with the digital is anchoring Richemont very deeper with the local clientele and is embedding anti-fragile element for the future development of the group and for our Maison.
Okay. Thank you, Jérôme. Burkhart?
Thanks.
Thank you.
Thank you, Patrik. Next question, please.
The next question is from Rey Wium of SBG Securities. Please go ahead.
Hi, Rey.
Hi, good day everyone. Just two quick questions. I'm just curious about the general trend in Chinese spending, where you can measure them around the world, because if I look at your organic numbers, in Europe and America, it was basically flat, and China or Asia overall just up 4%. Is it fair to assume that the spending trends have weakened over the past year? Also considering that the renminbi has weakened in recent times. That's my first question, and then the second one, just on the online distributor side, you did mention about the gross margin pressure due to promotional spending as well as free delivery. Is it fair for us to assume that these lower margins will remain in place for the foreseeable future? Thank you.
Okay, Rey, I'll take the first question. If you look at our business, or if you look at Chinese spend, put it that way, it was for a long time, it's about a quarter of the roughly EUR 80 billion market with Chinese customers. About a quarter of that was in mainland China and three quarters of it outside of mainland China, meaning with the traveling Chinese. These numbers are changing because there is, since about two years, a very strong trend to onshore Chinese purchases onto mainland China. We've said that for quite a while. That's why we see, and not only us, but many other of our peers, we see the strong and consistent growth of sales in mainland China. The rest of, let's say, the tourism business very much depends on exchange rates, or exchange rate-driven purchases.
The renminbi has weakened. That clearly has an impact on the tourist business. We've always called that out because we just don't know how the exchange rates are going to move. Very strong business in China and continued very strong business in China.
On the margin element, I can say again what I said before, we do believe for the online distributor, that there is a mid to long term, a very strong capability to maintain or to develop margin, thanks to a very specific offer. In here, again, it's linked to the number of Maison we can host within YOOX Net-a-Porter. If you see what is happening with the JV in China is a good example. We have, for example, 15 new brand joining Feng Mao just in this month of November, and that trend will continue at the same rate. We recruited 200 new Maison on YOOX Net-a-Porter since the start of the year. That's one aspect. The second aspect is definitely the dynamic of the categories. Some categories are less exposed than others to discount because they have a high rate of carryover.
With higher rate of carryover within our offer, we'll have a good way and a good solution to approach this potential erosion of margin resulting from the pressure that brick and mortar will sell primarily as on its today's business.
Okay. Thank you, Dino. Thank you, Rey. We're really running out of time. We'll take questions from two more analysts and then we'll close the call.
Great.
Next question, please.
The next question is from Charmaine Yap of Redburn. Please go ahead.
Hi, Charmaine.
Hi there. Good morning. I have a question on the retail network, please. If I look at the increase, especially in the franchise stores, there's been a large increase in Specialist Watchmakers. I know some of these were in the Middle East, what is the rationale, or is there a strategy behind these franchise openings? The second question is on Cartier and in jewelry in general. Do you think there is enough innovation in the brand? I know you spoke about a lot of communication spend, but can you maybe please explain a little bit if there's any changes in your marketing strategy, how much is on digital? Any color there will be helpful. Thank you.
I will leave to Burkhart to comment the second part on jewelry. I will tackle the subject of external boutique. To be clear, we had a little bit of reclassification and putting, as you say, in good Swiss German of our classification of external boutique so that it could be homogeneous between the different brands. That's true and that's part of our strategy to extend the external boutique. Why do we think that it is important for Maisons? We think that there is still a future for brick and mortar, and there is still a future for wholesale and for traditional distributor of watches, in relation with our Richemont Maisons, along with the capability to offer superior stock, superior experience. For the stock inventory here, we have been working along around the concept of true demand.
We monitor the sell-out of more than 90% or 95% of our distribution, for all our Maison. To manage the risk of a stock, but also to have the right stock at the right place. We are not only monitoring what is the total turnover done. We're monitoring with our partner which watches, that we can ensure a better assortment in better place. Better place means, for most of the time, capability to have more service. When it come to more service, that it can be along with offering a more prominent location to go shopping, to having director after sales service activity in the boutique itself. That superior service, that superior stock availability, that superior advice capabilities on site, we do believe that it is with external boutiques that we can do it at best.
It has been expanding, for sure, in Europe. It's now moving as well, quickly, in the U.S. It will further follow in the rest of Asia. We do believe that a big and better way to work together in the future. At the end of the day, it's about aggregation of clients. Here are, with this external boutique in the brick-and-mortar way, we can create with our partner a very efficient way to aggregate the clients.
If I might step in on the jewelry side. If I understand, there were two questions. One is about product innovation and my feeling about it. Second, the nature of marketing spend. Let me just try to qualify what I think about the inventory. Excuse me, about the product innovation. It's a jewelry business and the nature of a jewelry business is that, I'd say the evolution of the collections, meaning the creativity that you're touching upon, is very much linked to a mid to long-term cycle. If you launch a jewelry collection today, and if you look at what our brands, Cartier, Van Cleef, what they have today on offer, these are collections that in many instances have been built over 10, 20 years. Some even much longer because they are of constant appeal to our customers.
Why are they of constant appeal to our customers? Because they are being animated constantly, each and every year. Why is it different from fashion? Because the inventory investment is significantly higher. You won't go into markdown or discount cycles as you do with fashion products. The nature of it is very much different. Now, if you look at what has happened at Cartier under the new management, they first and foremost, focused both on the watch and on the jewelry side on the existing collections. When I'm saying the new management, meaning when Cyrille Vigneron came back into the group and took over Cartier as a CEO. They focused on relaunching the watch offer. They focused on extending the existing jewelry lines. Now, this year, they have come out with a new collection, Clash.
Sophie mentioned it a bit earlier in the presentation, that actually has gained very quickly a lot of traction with, and is very relevant, as are many of the other collections, for today's customers. Yes, we believe there is innovation. There is enough innovation. It's just the cycles are much longer. This is not a fashion business. This is a business which is mid to long-term. Also because the jewelry items you acquire or watch items you acquire have the promise of long-term value preservation or long-term value appreciation. Once again, this very much influences my answer to your question. On the marketing side, the marketing spend, it's been a trend since five years that obviously marketing spend has more and more shifted from the traditional to the more digital media. The mix is somewhere between 30% and 40% digital.
We've said it before, it's a trend that is ongoing between the Maisons.
Thank you.
Okay, thank you.
Thank you. That will be the next and the last question.
The final question for today is from Thierry Cota of Société Générale. Please go ahead.
Bonjour, Thierry.
Yes, good morning. This is Thierry Cota.
Bonjour.
Well, it's going to be actually two very short questions regarding watches. The first question was, would you say when you look at H1 that the sell-out of your retail partners in terms of growth was similar to what you've seen in your own retail stores? Number one. Number two, in terms of selling versus sellout, my understanding was that as of this summer, the strategic selling below sellout would be finishing. Would you expect now in the second semester, one would be more or less equal to the other? Given what's happening in the market and of monitoring selling versus sellout on a more tactical basis, still selling is likely to remain below sellout until the end of the year? Thank you for the two questions.
The first element about selling sellout retail. I had a very interesting question about external retail. Internal retail is growing with the Specialist Watchmakers, which is good news. When it comes to external boutique, it's also growing. It's even growing quicker than our internal retail, because that's new opportunities that create on the market. Traditional wholesale is below the trend of retail being internal and external. It's still a little bit the end of the long tail of qualitative adjustment of our distribution. You know that. It's not a thing when you have been working long times that you do in the night. When it comes to stock management for the months to come, we adjust monthly. Every month, we adjust our volume of production in total.
More than anything, we adjust where we put our inventory, because that's indeed not only very important to have the right level of production in front of the right level of demand, but also to have it in the right location. Today, it's not a big surprise if I tell you that we are focusing a lot on China, mainland China. If we are not only focusing a lot on mainland China, but also on our digital activation program. Here, that's a very quick learning phase. There are 12 Maisons of Richemont that are active on Feng Mao, on the joint venture. It's excellent also in term of learning and developing best practice, when it comes to a supply chain and agile supply chain system to be aligned with the demand and the standards of e-commerce, the way Alibaba organize it and make it happen.
These elements make us being very confident in the capability of our Maison to engage very much in the digital dimension. After reconstructing, which has been part of what we did during two years, we are now tackling more a business development approach. External boutique is definitely one. Digital is definitely the second one in our program.
When will you align?
The alignment between sell-in
sell-in, yeah.
Is constant. Today, we are happy with our level of stock. I would say we reduce the level of stock because we have less doors. Basically, when we have less doors, we anyhow have less stock in the market. It tends to go down in absolute term, because there are less doors. For the partners that we have and the doors where we are, we have stabilized now the level of stock. Said that, there are a few Maison of which we've spoken, that have a quick growth this year. This one are anyhow not answering the demand of today. This Maison are even reducing their stock because they cannot meet exactly the demand of today. I would say, globally speaking, we have still reduction of stock.
That's more a collateral effect of success of Maison and then of closure of doors than a real decision to have a quicker and a stronger rotation even.
The closure of doors, a big step was done until this summer, and if I understand well, it carries on until Christmas, but on a lesser scale. Is it correct?
Yeah. We are very much at the end of this long tail of activity. Very true. Correct.
Okay.
Okay. Basically, sell-in. Thank you. Thank you very much.
Thank you very much. Bye-bye.
Thank you. This concludes today's call. Many thanks for your participation and all the many questions you raised. If there are some more, James or myself are happy to answer them later on today. In the meantime, we look forward to reading your papers. Have a good day.