Moncler：Après 玩法 - [商业拆解，EP.218]

Today, we're breaking down Moncler. You know their down jackets and stylized M logo. It's the mix of style and substance that blends into the brand history and evolution of Moncler. I was joined by Chris Davies, investment manager at Baillie Gifford, to cover Moncler's evolution, particularly in the hands of Remo Ruffini. We get into the push to define luxury outerwear, expand into other product categories, and keep that core DNA of fashion and function.

This is a particularly interesting episode for anybody interested in the luxury market generally and Moncler's push to carve out its own niche. All right, Chris, I'm excited to have you here to cover Moncler. It's a product and brand that I think most people would be familiar with, but maybe we can start with an introduction to the business itself. What does Moncler entail, and what is an overview of the business to kick off the conversation?

Thanks, Matt. It's a pleasure to be here. Moncler is a really interesting breakthrough brand, and I'm going to come back to that idea of a breakthrough brand a bit later on, but let's deal with the basics first.

It operates in the luxury outerwear market. What on earth is that? To put it really simply, it's a segment of the fashion industry that's focused on high-end outer garments. Think coats, jackets, and other things that we all wear outside. A lot of it is linked to the cold; that's generally where Moncler has made a name for itself.

There are plenty of other brands here as well, like Canada Goose and Arc'teryx, which people will probably have heard of before. But, like other parts of the luxury business generally, we're dealing with very high-quality products, high-quality customer experiences, and typically pretty high price points. So I maybe tried to situate Moncler in that context.

It was made famous by its puffer jackets. If you think of most luxury brands, they will typically have some kind of iconic product or collection that they're associated with. If you think of Hermès, you think of the Birkin bag or the Kelly bag. Equally, if you think of Cartier in jewelry, for example, you'd think of maybe the Trinity collection, with its three interlocking bands.

The Birkin bags can be priced at $10,000 to $100,000 and well above that. Trinity collection products can be priced as high as $20,000. Moncler has an iconic product. I would say it's their Maya puffer jacket, which was launched in 2009, although there had been iterations of it in the past.

Basically, it's a very loud, typically bright-colored jacket. It's usually made out of very shiny nylon, so it's very distinctive. You can tell when someone's wearing one of these things. Various colors have been released since the initial launch in 2009. Some of them are darker than others, and some are a bit more garish than others.

It's this really iconic product that they've come up with, and people think of it when they think of Moncler. It's around that core product that they've built other things. Like a lot of other brands that have these anchor products, they've built out knitwear, footwear, accessories, and other things, because people don't just wear jackets when they go outside; they wear other things as well. They very much established themselves in this luxury outerwear space via this really unique core product.

I think you tapped into a lot of what makes Moncler interesting to me as a luxury player. Their garments, or their coats and jackets, do have a little bit of loudness to them when someone is wearing them. I'm always interested in the DNA of luxury brands and their history. How did they emerge into this category? Maybe we can cover some of that past. I know it goes back before 2009, many decades, so perhaps you could cover some of the history and what went into Moncler becoming the brand that it is today.

That's right. The history does go back some ways. I won't go through every single year, but I tend to think of the history in 3 phases, if you like.

If you go back to the early 1950s, when Moncler was first established, it was founded in a village near Grenoble in France called Monestier-de-Clermont, and this is where the name comes from: Mon-Cler. So it is quite a young brand in that sense. You think of Chanel, which I think was founded in 1910, and Hermès, which maybe goes back to the 1830s. The origins of Moncler really were in making ski coats. I think they even made some sleeping bags and tents for people who worked in the mountains, but also for mountaineers.

In 1954, a famous French mountaineer called Lionel Terray discovered the brand and this line of products, was impressed by the quality, and began to collaborate with Moncler on a new line, the Lionel Terray line. That year, they also kitted out an Italian expedition to K2. I think that early stage in the '50s was really all about building those technical credentials.

It goes a bit further than that. If you go into the late 1960s, around 1968, when you have the Grenoble Winter Olympics, Moncler was actually kitting out the French downhill ski team. That's the first phase of the company's history that I tend to think about. It was really all about building these technical credentials, which it still very much has a right to claim today.

The next phase, which I think is really important, is basically the 1980s. This is when Moncler came down from the slopes to the streets, as they tend to put it. If you were in Milan around this time, you might have seen youngsters hanging out around sandwich shops and fast-food restaurants. They'd have been wearing some pretty loud designer clothing. They would have been wearing Timberland boots, Ray-Ban sunglasses, and Levi's jeans. They loved American pop culture, motor scooters, fast food, and pop music.

The original crew of these youngsters hung around a sandwich shop called Al Panino, I think, and this is basically where this subculture was born. It's called the Paninari subculture, and it's very much associated with enjoying life, expressing oneself, and luxury consumption. The cultural undercurrent was so strong that the Pet Shop Boys actually sang a song about it called “Paninaro,” which they released in 1986. It's worth a listen if anyone wants to get a flavor of that sort of cultural milieu.

We can dub it into the recording, perhaps.

Put it in the show notes, definitely.

So this is the second phase of the company's history. It's quite different from the first. It's much more fashion-oriented, and that brings us on to the third phase of the company. By this point, Moncler had established these technical credentials in performance, mountaineering, and outerwear, but it also had credentials in fashion.

That's an unusual combination, and it's something that was recognized by a guy called Remo Ruffini, who started working for them around the late 1990s or early 2000s, eventually bought the company, and over the course of the next 20-plus years basically took full advantage of this really unique amalgamation of the technical and the fashion. He built Moncler into this gigantic, successful fashion powerhouse.

It's amazing how often, when you look back at the history of luxury brands, it starts with earning the credentials in whatever space it may be: their leather actually being used with horses or in the field, and certainly with Rolex watches in the watch industry. There's some overlap here with Moncler.

When you think about the brand today, obviously that street style is what I see, at least on a day-to-day basis. Would you say that is the primary focus? Do they still keep their focus on the actual slopes in the mountains and that type of physical-exertion wear? When you think about the brand as a whole, how do you think they approach that?

There are 2 brands under the umbrella here. I'm going to get to the other one later on, but it's called Stone Island. For Moncler, they have these 3 pillars to the brand.

The first is what they call Collection, and this is the core brand. It's the core products, the Maya jackets; it's the bread and butter of the business. But you also have these 2 other pillars, which are really important as well. One is called Moncler Grenoble, and the other is Genius.

Moncler Grenoble is basically this strand of the Moncler identity that Remo Ruffini has pulled on. It was launched not as a separate identity by any means, but certainly as an extension and expansion of Moncler. This was back in 2010, and it very much harks back to the company's technical heritage. It actually launched in New York, I think, at a golf driving range on the Hudson River, on an old pier, with this massive scaffolding and 100 models standing on it wearing Moncler garments.

It was very much calling out the fact that, hang on, there's a technical heritage here, but this is still very much a fashion brand. What you've seen them do over the course of the last 10 or 15 years is gradually open some of these more technically leaning stores. I guess this culminated more recently, where they've actually started to open dedicated Moncler Grenoble boutiques. You take those technical products—and you can see these online, by the way; it's not just something you have to go to a store for—and you can have a look at the various products they have under that Grenoble range. It's very much this deliberate reclaiming of that technical heritage.

The other one is Genius. Genius is really quite interesting because, first of all, it's the newest of those 3 pillars. It was brought in back in 2018, and it's kind of a platform—a multidesigner platform. If you think of the typical way that a luxury fashion business would work, you would usually have 1 creative director. Gucci is a good example.

How many creative directors of Gucci could you name over the years? You've had people like Tom Ford, who did pretty well for himself. Frida Giannini, I think, came after him. More recently, you've had people like Alessandro Michele. But that model is very much dependent on 1 individual: how they think about the brand and how they imagine the brand. You'll have fashion shows that then reveal, on a periodic basis, what that designer has come up with.

Remo Ruffini is not that keen on industry standards and the usual way of doing things. Part of the reason for this is that when he bought Moncler back in the early 2000s, you already had some pretty big brands out there in the world. If you want to try to compete with these, you've got to do something that's really quite different. This really culminated in the launch of Genius in 2018.

The idea is that you collaborate with a whole bunch of different designers during the course of an individual year. I think so far they've probably collaborated with 80-plus different designers over the history of Genius. What it does is generate hype, excitement, and interest. These are limited-edition, time-limited collections that they develop with individual designers, and they've blown this up to a much larger scale.

If you go back to last year, they had this incredible extravaganza in Shanghai, where they took Genius and, in 1 go, had 10 different designers collaborating in an old shipyard that had been completely revamped. It was a bit like Disneyland for fashion designers, and they had 8,000 people attend. It was live-streamed by nearly 60 million people.

You had these 10 different areas where the different designers would interact with the Moncler brand, reimagine it, and reinterpret it. You had 1 section with Donald Glover and an agricultural theme. Another explored the intersection between fashion and AI. That was really interesting. To really understand how it works, you need to see it as part of a flywheel. It very much drives interest and excitement for the brand.

Those are the 3 pillars, I would say: the core Collection, Moncler Grenoble, and Genius.

I think you've covered a decent amount about what makes Ruffini different, but are there other things that you would point to in terms of him taking over this business, which was struggling at the time? He was opportunistic in terms of the time that he acquired it. You've described some of the ways that he's left his fingerprints on it, but is there anything else that would get into the ethos of Ruffini? He does seem like such a primary character within this business story.

Oh, yeah, he is the impresario in this case, for sure. He's the chairman and CEO. Moncler doesn't have a creative director, but he's the driving force on the creative side as well. He is restless. He is constantly innovating, looking for ways to reinvent Moncler.

I've heard him say in the past, “We should never compromise, never get bored, so we don't bore others.” This philosophy has worked pretty well. Moncler had about $45 million of revenue when Ruffini took over. He grew that tenfold by 2012, which was the year before the IPO.

To really get into his head, you need to go back and look at his history. His parents were involved in the fabric industry a long time ago. There are stories of him, aged 6 or 7, sitting around the kitchen table talking about fabrics and styles and the like. He said to us in a recent meeting that he used to have this light-blue Moncler jacket when he was a kid, and he loved this jacket. It really planted a seed for his career when he went to work for his father's business.

His father set up a business called Gianfranco Ruffini in the early 1980s. He moved out to the East Coast of the United States, and Remo Ruffini went to work for him for a while, traveling around. He explored the East Coast of the United States, and this was around a time in the 1980s when the preppy lifestyle was taking off. It was very much oriented around quality clothing, with lots of links to sailing and tennis and these sorts of things.

It's the sort of style that's really survived, and people even today can still figure out what “preppy” actually means. That inspired him, and he came back to Italy, went back home to Como, and basically set up 2 brands of his own. One of them was called New England. He describes this period as a bit like going back to school.

These 2 brands were pretty successful. He sold both of them to a private company called Stefanel. This was in about 2000. Stefanel specializes in knitwear, but this gave him some liquidity. I think I mentioned earlier that he was working as a creative consultant for the holding company that owned Moncler at the time, and they were really struggling with the fallout of the TMT crash. They were just looking to sell.

Remo Ruffini was basically in the right place at exactly the right time and acquired this brand for about $1 million in 2003, which was a real bargain. He acquired the operations in 2005 with the help of a private equity company. The operations were valued at about €1.2 billion, and you basically had this succession of private equity investors being involved, including the likes of Carlyle, for example.

The IPO was originally planned for around 2010 or 2011, but for those of you who remember what was happening around that time in Europe, the chat was all about PIGS—not Brexit, which people have been talking about so much since 2016. We had that referendum in the United Kingdom, and Europe felt at the time like it was falling apart. There were all sorts of problems in Portugal, Ireland, Italy, Greece, and Spain.

The private equity firm that was involved basically decided, “You know what? Actually, we're just going to sell to another private equity company.” So this was Eurazeo, and the IPO was pushed out, but it eventually happened in 2013. The share price popped, I think, 40% or something on the day. It was an incredibly successful IPO, and then private equity gradually sold down, and you got to fully listed Moncler.

Ruffini is still very much invested. Most of his wealth—and he's a multibillionaire by now—is tied up in the business. By the end of last year, his holding company actually held around 16% of the company. He's still around, and he's still really important. He's a driving force. He's only 63, so in the luxury world he's still a bit of a spring chicken.

If you go and look at Bernard Arnault over at LVMH, who's been incredibly successful in the luxury business, he's in his late 70s. He's just got an extension to stick around in his capacity as chairman into his 80s, and he's fit as a fiddle. Ruffini's still young. I don't think he's going anywhere anytime soon.

Yeah, Arnault's got his crop of the next generation of Arnaults getting prepared in the firm, but I don't see him leaving anytime soon. Can you get into some of the backstory we've covered, and the interesting history about how it's evolved? What does it look like today, just from a numbers perspective? If you can paint the picture about size and any relative data points, I think that would be really helpful.

Sure. Last year, if you look at the whole Moncler Group, it made €3.1 billion of revenue. That's quite a substantial growth rate from the $45 million I told you about at the outset of Ruffini's involvement. The lion's share of that is the Moncler brand. I mentioned earlier that they did that Stone Island acquisition, which I know we're going to talk about because it's so important for thinking about the future and capital allocation generally.

The lion's share of the revenues really goes to Moncler. That's about €2.7 billion. Stone Island is the rest, at just over €400 million—about 13% of group revenue. To put Moncler in context as a group, it's now bigger than Burberry and fast catching up to Gucci, which I think did just under €8 billion last year.

If you look at the longer-term performance over the decade to the end of last year, the top line compounded at just over 16%, roughly the same as operating profit and earnings per share. For the 5 years to the end of last year, top-line growth was about 14%, which is pretty incredible when you think about the fact that the pandemic happened in the middle of that. You basically had 2 ski seasons wiped out, and China, which is a really important market for Moncler, went through this horrible period of really extended lockdown. So, I think that's pretty impressive from a revenue-growth standpoint.

As far as margins are concerned, the operating margin of the business—the EBIT margin—is really hovering around 30%, and it's been there or thereabouts for the last 4 years. If you go back to 2012, they've been above 28% every year since then, apart from 2020, which obviously was a tough year for reasons we all know. They did just under 26% in that year, which was actually pretty decent.

When I look back at our internal meeting notes from discussing this company, which we've been following for the best part of a decade, one of the big doubts was really about margins. How do you maintain margins that are this high? You guys have interviewed one of my colleagues, Mark Urquhart, talking about Hermès, and if you look at Hermès's financial results, the operating margins have been in the low 40s. LVMH, if you look at its fashion and leather-goods business—that's where Louis Vuitton sits—has been in the high 30s and low 40s. So, Moncler is in pretty good company, I would say.

Yeah, it's interesting. Another episode we did was on Gucci, where you've seen the volatility of the margins, at one point being at 40% and getting as low as into the teens. But it's interesting to see that type of durability specifically.

Before we move on too much further, I do want to touch on the Stone Island acquisition and the brand. I mentioned before we recorded, in one of our previous conversations, that I did not appreciate that they owned Stone Island. It's a brand that I've always had some affinity for, and I wondered if one day it would make this revival to the masses. I'm just curious what went into that deal. How does it fit into the broader Moncler strategy, and is there anything else you think is relevant to that piece, albeit small as a percentage of the whole, but to your point, a potential growth engine?

It's a much younger brand than Moncler. If you go back to 1982, that's when it was founded by a guy called Massimo Osti. It's based in Ravarino, which is just north of Bologna. He made a name for himself as an experimentalist. He experimented with lots of different types of dye and different fabrics, and he sold the business to an Italian businessman called Carlo Rivetti. This was in the early 1990s.

Rivetti's family roots are very much in the textile industry in Italy, tracing back to the second half of the 19th century. He's got deep expertise here. He knows the industry and he knows the business, so he owned the business from then on.

To get to your question about how this all came about, it was actually their sons who struck up a conversation and suggested that their fathers get together and start talking about the possibility of an acquisition at some point. Ruffini had known Rivetti for 40 years or so. He'd been an admirer of Stone Island, and he knew the business well. They got together and eventually agreed that it would make sense for Moncler to buy Stone Island.

There was this 2-stage process, which began in December 2020 and was finished by February or March 2021. Moncler announced that it was going to buy Sportswear Company, the parent company of Stone Island, valued at €1.15 billion. That's roughly just under 5 times sales and just under 14 times expected EBITDA for 2021. Seventy percent was bought from Carlo Rivetti and his family's holding company. Moncler paid 50% in cash and 50% in stock for that.

The other 30% was bought from Temasek, Singapore's sovereign wealth fund, for €345 million in cash. So now Moncler owns the whole thing. Rivetti stuck around for a few years and was on the board. He has since departed the company and is no longer involved, although he did actually appear in a recent Stone Island advertising campaign, so he hasn't gone very far.

To put some context around Stone Island, as I mentioned earlier, it's around €400 million of revenue, which is a big increase from the €240 million it did in 2020. Around that time, Ruffini said he was aiming to really double sales within 5 years, so they're getting there.

To revisit the point I made earlier about Stone Island being a bit of a diamond in the rough, average selling prices are probably 30% to 35% below Moncler's. It had a big exposure to wholesale—maybe 80% of the business at the time. That's where you basically have an intermediary buying the stuff from you, and you have to sacrifice some of your margin for that. So, the retail exposure, the direct-to-consumer exposure, is pretty low.

Moncler had been there, by the way. They'd been there when Ruffini took over. He went on this long journey, really tilting the business away from wholesale and towards retail, towards that direct-to-consumer channel.

The other main difference with Stone Island is that its demographic is quite different. It really skews towards the male demographic, and it's also a younger demographic. So Ruffini sees this as a way to speak to a different segment of the population, maybe a younger segment of the population. But it's also massively exposed to Europe, so Ruffini sees this as a huge opportunity because it under-indexes to Asia and the US.

He's basically bought this thinking, “I have turned Moncler into this incredible brand, but I can see some things in Stone Island that might actually mean I can do the same thing again.”

Yeah, it's interesting when you see a playbook emerge for Moncler—that wholesale versus direct-to-consumer split. Has that shifted over time? And if you compare it to the 80%-ish wholesale for Stone Island, what does that look like for the Moncler brand specifically?

Yeah. Today they're almost the opposite, which is interesting. Moncler's been on a bit of a journey here. If you look at last year—this is 2024—basically 80% of group revenues were direct-to-consumer. But if you look at the Moncler brand itself, that's more advanced at 86%. Stone Island is at 52%, so it's way, way, way behind where Moncler is, but it is moving in the right direction.

If you look at where it was at the end of 2021, for example, Stone Island's direct-to-consumer share was only really 29%, so it's moved quite materially. The geographic exposure has moved as well. Going back to 2021, because that's the first year that they probably got their hands on this asset, 77% of revenues were coming from EMEA, and a third of that region was Italy. Asia was just 13%. Last year, EMEA was down to 67% and Asia was up to 26%, so Ruffini is already making these pretty serious moves in the business.

Yeah, it's quite interesting. Getting back to the outerwear market, specifically as a luxury market, you mentioned some of the brands that might be considered in this category, like Canada Goose and Arc'teryx. I would even think about people considering a Patagonia jacket for certain things. How do you define the segment, whether it's from a size perspective or from a competitive-forces perspective, just thinking about where Moncler dominates or has a significant amount of competition?

I think both of those are actually really hard questions. I'm going to have a go at answering them because I think it is important to really try to think about what Moncler is doing and why these growth rates might actually be sustainable over the long run.

If you were to look at the market at a high level and try to really define it, let's go right up to the highest level we can: the luxury market. I've heard estimates saying that it's maybe $1.5 trillion. Now, that's huge. That covers everything: watches, jewelry, cars, yachts, spirits, leather goods, fashion, and so on. That's useless. It tells us nothing. Even if you calculate what percentage of this market is Moncler, it's going to be tiny. That doesn't really tell you very much.

If you're trying to figure out what a sensible estimate for the size of this market is today, I've tried to dig around to find some reasonable estimates. The best I've found is a company called Perfect Moment, which is a small luxury skiwear and lifestyle brand founded in France in the 1980s. I think they published some numbers saying that the global luxury outerwear market is probably about $16 billion. That was back in 2022, growing at 6% or 7%.

Now, I don't know if that's right. I guess if you were to look at some of the big names here, Moncler's brand was doing roughly $3 billion of revenue last year. You've got Canada Goose, which was maybe $960 million in the financial year ending in March last year. Then you've got Arc'teryx, whose owner claimed that it had surpassed about $2 billion in sales for the brand last year. So, let's call that maybe $6 billion between the 3 of them.

But that's not the whole market because there are a whole bunch of other players in there. You'll have other luxury brands that in some way participate in this market. Maybe $16 billion as a whole for that market is not a ridiculous number.

I make a couple of observations on this. First of all, you're trying to think about how big this market is going to be in the next 5 to 10 years.

There's an element of these companies almost deciding the size of their own market. That's a dynamic which is quite rare and quite unique to luxury businesses because you have this really perverse setup whereby, when you've established this brand with great heritage and credentials, you can put prices up, and that almost helps you grow the business regardless of what you're doing with volumes.

Luxury, I guess, is also just much more visible than it used to be. That's not necessarily a bad thing. If you control the scarcity of your products really well, it's arguably much easier than ever to create that gap between demand and supply. Think back to that Shanghai event. All the hype you can generate through social media and supply helps create that gap. Exploiting that gap is really what you're doing when you're putting up prices.

I think, on a high level as well, you've basically got more consumers around the world who can afford luxury than they used to be. I know that's a really simplistic argument, but if you had bet on people liking nicer things as they get wealthier over the last 30 years, you'd probably have done all right. Whether you'd invested in this brand or that brand that did a good job, you'd have made quite a lot of money.

So I actually think that the growth rate and the size of the market are in Moncler's hands here. This is not like we're going out into the world and coming up with something, basically trying to take share away from another player. This is something new. It's a new phenomenon. I think that's really underscored by the fact that they say—I think it's 60% or something—of their customers are new customers. So they're still very much in this early phase of growth.

There's a foundation of quality in the product. What does that mean for outerwear, specifically Moncler? If I think about some of the other brands, there are both materials and process, sometimes weighted toward more materials or more process depending on what the brand is. How would you define that, and what makes up the quality of a Moncler jacket?

I tend to think of the quality for most luxury brands in 2 ways, really. One is the quality of the product itself, and there are many different strands to that. There's the history, the heritage, the actual craft that's gone into it, the touch, the feel, and the smell if you're dealing with fragrances.

Then there's the experience, and that, I think, is a really crucial part of any luxury brand. You need people to feel like they're experiencing something that's really special and unique.

On the product-quality side, Moncler has this really high standard when it comes to thinking about the down that goes into its jackets. This is white goose down that Moncler uses, and these standards are really strict. It has this special Down Integrity System and Traceability Protocol, which sounds very complicated and very scientific, and in some ways it actually is. For example, they have a third-party audit that's basically testing the DNA of some of the down to make sure that the species is right.

To go maybe a level deeper on the quality of the down itself, you've got various standards around fill power. If you think about the way in which the down is clumped together and the way it's put into a jacket, there are various high standards around ensuring that you've got the right amount of down occupying a cubic inch after it's been compressed. There's actually a lot of detail about this online.

Yes, we had a very cold winter here in the New York area, and I went down the rabbit hole of researching the different types of down insulation—duck down, goose down. There are rabbit holes to go down. So I would agree with you there.

There definitely are. I'm desperately trying to avoid going down one.

Basically, with fill power, it's how many cubic inches 1 oz of down occupies after it's been compressed. Higher fill power basically means better insulation and better loft, which is how much space 1 oz of down occupies when it's expanded. Higher loft means a better warmth-to-weight ratio, so it's more effective at trapping warm air.

You can measure fill power. 300 to 500 is generally seen as lower quality, while 700-plus is higher quality. That's the down that usually comes from more mature birds. It has an excellent warmth-to-weight ratio, and that's the down that Moncler is really focused on getting into its jackets.

They will go to extreme lengths to make sure that the jackets are perfect—avoiding clumping, trying to avoid cold spots, all this kind of stuff, which is incredible. But you've also got this notion of product quality extending beyond materials. It's relevant for the animals themselves as well. They've got very strict standards around how you treat the geese whose down you are harvesting.

There's a complete ban here on what they call live plucking. That is just completely unacceptable. They use this protocol, and they've got a third-party auditor that makes sure they're following these standards. That, I think, is really integral to thinking about the down, and again, it speaks to that technical heritage.

On the customer-experience side, which is the other really important aspect of the quality here, think of some of the other great brands out there. One example would be Panerai, which is a famous watch brand owned by the Swiss group Richemont. If you're a top client there, you'll get invited to private factory tours in Switzerland. You'll get the chance to buy perhaps limited-edition watches with engraving options. It makes you feel like you're part of the brand narrative.

Or if you go to Louis Vuitton, if you happen to be a regular customer, you'll have a sales associate who remembers your birthday, knows your past purchases, and this sort of thing. So it's really feeling like you're actually quite special as a client, not a consumer.

I've been to a few Moncler stores now. I remember visiting their Galleria store in Milan the last time I was out there meeting Moncler, and they've got this really special, secluded area upstairs for their special clients. They've got all these modern technologies that help you trace customers, so you can try to create 1 identity and match that up across the footprint.

I also went walking around the store, picking things up, having a look, and feeling different products, and there was a really diligent employee following behind me who was just putting everything back neat and tidy. If I were to do that in another bog-standard retailer here in the UK, that just would not happen.

So there's this attention to detail. They're obsessed with the presentation side of things as well. I also mentioned the Shanghai event last year, but the stores are quite unique. Particularly the flagship stores, where the architecture tends to be really quite special, but also the inside of these stores is different wherever you go.

The Galleria store in Milan feels a bit like an art gallery, whereas there's another in Tokyo which has an LED facade that mimics snowfall. So it's a bit like being in this giant snow globe. It's very experiential. Those 2 strands are really important, and those 2 things are what I think Moncler does incredibly well.

I love hearing about the experience examples. Those are always so interesting to me. You covered the financial overview quite well previously, but on that point of something like the down supply and the cost associated with that, is there anything that they do to manage the risk of having an undersupply of materials or anything else that would be a risk from the cost side of the spectrum?

With a lot of luxury brands in Italy, and also in France, you've seen Hermès do this over time. You've seen them vertically integrate. They've started to buy up local supply to ensure that they've got that access when they need it.

Moncler does have a very strong relationship with its suppliers. I don't think they're quite as vertically integrated as some of these other Italian brands. As it stands today, they have very strict rules about the supply side, particularly on quality. But in terms of access, they haven't actually had any problems to date.

With any luxury brand, you've got to manage the demand side of the equation very carefully. Think of Ferrari. The founder of Ferrari used to talk about the idea of providing 1 less car than demand, so you're never quite meeting that demand.

If you look at the number of units that Ferrari has sold, in 2019 it was just over 10,000, and last year it was just under 14,000. They've grown a bit, but not that much. They've found other ways to grow. It's been through price and mix, selling special editions, and the like.

So I think for Moncler, you're never going to get this situation where they're really going to flood the market with lots and lots of inventory. They're carefully trying to manage how much they're selling. The whole commercial strategy is based on the principle of scarcity. That's basically how they think.

It's such a fun economic equation for the luxury market to think about in terms of having the appropriate amount of scarcity within the business.

I guess that answers my other question, just thinking through the financial model and where risks might exist from the inventory-management side. When you're managing to demand, you probably have a limitation on that. But are there other things, like inventory management, turnover, or things that get cash caught up inside the business, that you would point to as either a risk or something that they manage particularly well?

The management on the inventory and working-capital side of things has actually been very impressive over time. 2020 was a tough year for pretty much everyone, but not many people saw the pandemic coming.

So, if you look over the long term, these guys have been making free cash flow margins in the mid-20s. If you look at free cash flow to EBITDA conversion over the past 5 years, they've averaged about 61%, which is pretty impressive. There haven't really been any signs that they've been struggling to manage all of this.

This comes back to the whole commercial strategy of really carefully managing supply so that you're not overstocking the market. For luxury companies, volume can be a driver of growth, and it is in lots of cases, but price is also really important. If you're putting prices up or changing the mix of your collection slightly so it favors higher-price-point products, that's just free money from a profit perspective. It doesn't require any more fiddling around with the inventory or anything like that.

But companies can be quite extreme when it comes to managing those rare situations where you do find that you end up with too much inventory. I remember, going back to Richemont, which owns Cartier and Van Cleef & Arpels—two of the most famous jewelry brands in the world—but also has all these watches of the traditional variety. We're not talking Apple Watches here; we're talking about the timeless pieces that get passed on from one generation to the next.

They went through a bit of trouble in their watches business back in 2016 and 2017. Between 2016 and 2018, they basically went out and bought back, I think, half a billion euros' worth of inventory from the retail channel and destroyed it or recycled it. Moncler hasn't had to do that at all yet.

I like to think that these days, with all the software that you can get that helps you manage what is really an omnichannel business, it's much easier to figure out what needs to be in each location in order to satisfy demand, rather than sitting on huge piles of inventory all over the place. But you're right: it's a risk, and you can never completely rule it out.

I think back to Adidas and Kanye West, and how that relationship completely fell apart. Adidas was left with an enormous pile of unsold inventory, which ended up looking pretty toxic because Kanye West was having these increasingly strange moments, and it was damaging the brand, and so on and so forth. So, yeah, it can be a risk. It's an interesting dynamic, with Richemont proving the extreme of how you can manage that dynamic in the case that something does go wrong.

Having all that in mind, and considering the impressive management of cash flow conversion, when you think about capital allocation broadly, you have the example of acquiring Stone Island. Maybe there's an opportunity to be a luxury house over time with multiple more brands versus reinvesting back into the business or allocating to shareholders. How do you think about their capital allocation framework based on what they've said and your own interpretation?

The priority at the moment really is investing in the business they have today. It's still so early on. There's so much left to do, and we'll maybe get on to talk about some of those growth opportunities that they've got in the future, but there are still lots of them, and they're still generating very attractive returns on capital.

If you're sitting there with a business that's able to do that and the runway is long, it's absolutely right that your top priority is really reinvesting into the business. What does that mean? That means opening new stores. It means cultivating your brand. It means investing in marketing. It means investing in these crazy, off-the-wall events that Ruffini is trying to bring in all over the place to make sure that Moncler and Stone Island are right at the cutting edge.

I think they're going to keep doing that for years and years and years to come. I don't think we're anywhere near the end of that reinvestment story. For any company, really, if you're a long-term investor, the best ones to find are the ones that can just keep reinvesting capital at high rates of return, well above your cost of capital, for a long, long time.

Baillie Gifford has been very fortunate to find a few of these companies. We've already talked about Hermès a few times. That's been owned by some of my colleagues for over 20 years, and it's been an incredible success story.

On the acquisition side of things, I tend to see Stone Island as a bit of a one-off. I'm not going to say that they'll never do another acquisition ever again, but they've played it down somewhat. I don't think Ruffini is hugely keen on the idea of building a big Italian luxury conglomerate to stare down the French—the likes of Kering and LVMH.

Never say never, though. I think for now his priority really is going to be reinvesting in the business. They pay dividends as well, but they're pretty modest. I wouldn't say it's a big part of the story. Maybe there will be acquisitions at some point in the future. Stone Island, remember, was the only deal they've ever done; it was the only acquisition.

And you mentioned growth opportunities from here. What would you point to as the main levers of growth?

I mentioned earlier that you've got these strands of the Moncler brand. You've got the Grenoble collection and Genius. I think the opportunity there is more of the same. Grenoble, however, is a bit earlier on. I think there's a really interesting opportunity there to start building out more and more of these stores.

For example, there was this big show in Courchevel back in March. This is a luxury ski resort town. It was the second big showcase of the Grenoble brand. I think that's got legs, so I suspect they're probably going to be doing more of the Grenoble stuff.

Genius is that really powerful flywheel. Again, they'll keep on collaborating and keep coming up with these new and innovative ways of reimagining the Moncler brand. That will drive lots of interest in the collection.

It's interesting, actually, when you look at some of those periods where Genius has been a bit quieter: the core business has grown a little bit slower. So you can see that it is an important thing to keep pressing on with.

There's a big opportunity in the US. Moncler is really underindexed there. Roughly 14% of sales come from the US, which is quite a bit lower than most of the other big luxury houses, which tend to be north of 20%.

They're actually working on this right now. There are various things going on here. They've probably been a bit slow to move to the direct-to-consumer retail model. I think they're trying to speed up that reduction in reliance on wholesale partners like Nordstrom and Saks, and so on, which have tended to dominate the US business.

So there's definitely a shift going on there. They're opening more stores. They've got this really big flagship store that's about to open on New York's Fifth Avenue, which is home to lots of other famous flagship stores: Armani, Cartier, Harry Winston, and Louis Vuitton. Again, they'll be in very good company there.

That's going to be their biggest flagship store, I think, in the world, and that's going to open in the US. But I think if you look at the East Coast and the West Coast, they're probably more penetrated than everywhere in the middle.

It's interesting to me that they only recently, a couple of years ago, opened their first dedicated boutique in Dallas. There is a big gap, I think, that they need to address in terms of growing brand awareness in a lot of these states in the middle of the US. I think they're only just getting going there, really. There's a long, long runway to explore.

It's worth touching on Asia and China because this is a really important part of the business. Asia was about half of the group's revenues last year. China has been a bit of a difficult market recently for lots of brands, but we're starting to see some real signs of recovery coming through for Moncler.

The long term is really what matters to us, and what we see from Moncler is a huge commitment to that market. Obviously, the Shanghai event was one event, but it was massive. Every year, they have this Genius presentation, and they actually moved it out to China for the first time, again breaking the mold somewhat.

So they're going to be doing a lot more of that. They're going to invest heavily in China, but we're still in the foothills of growth there. They've got a really interesting organization in China, which is really digital-first and client-oriented. They actually see it internally as being run in quite a unique way. They've got somebody representing that business on the executive committee as well.

One thing they said to me was, “We could learn something from what we do in China in our other businesses.” So China and Asia more broadly, I think, are going to be really interesting.

And Stone Island—this is possibly the second act. It's what comes next. We talked about a lot of the growth drivers there: growing direct-to-consumer sales and your price points growing over time. I can see how that brand possibly splits into different pillars itself.

For example, they've got a range called Ghost, which is a more subtle, quieter version of the brand—not that Stone Island is a quiet brand by any means. So I think there's room there, and you're starting to see some of that come through.

If you look at last year, for example, for Stone Island as a whole, the top line actually shrank 1%. Now, if you look under the bonnet—or the hood, as you North Americans say—Asia grew 23%. Again, Stone Island has barely got going there. It's much, much earlier than Moncler is.

Direct-to-consumer sales across the board grew 23%, while wholesale fell 19%. That shift is ongoing, and it's still in the midst of unfolding, but it's going to end at some point. The baton will be very much passed to retail, and then it'll be over to them to really drive growth. So it'll be interesting to see how that works.

I can see that really starting to come through as they build out their business in Asia and build out a business in North America.

I think that's going to be really interesting as well.

Within that context, what risks stand out to you when you think about the main risks that exist within the business? What stands out for Moncler?

With any fashion business, you have to have a healthy skepticism about the long-term sustainability of the business. Fashion can be quite violently cyclical. We mentioned Gucci a few times. They had some incredible years under Alessandro Michele as creative director that came to an end a couple of years ago, so they've had a really, really difficult period.

I think there's that cyclical element to it. Now, I've got quite a lot of faith in Moncler because they've got Genius, because they're constantly staying relevant and fresh, so you can actually fend that off. The obsession with avoiding the boredom of your clients, I think that's really quite powerful.

Another thing that worries me is when you are operating at the edges of experimental fashion, as a lot of these Genius collaborators are, there are dangers. We've seen various examples of this over the years. I don't want to pick on Gucci all the time, but it's one that comes to mind.

If you go back to 2019, they introduced a sweater that was criticized for basically resembling blackface. This sweater came up over the mouth and almost had this gap for your mouth, with these red lines where your lips would be. They did this during Black History Month, which, in hindsight, of course, was an extraordinarily silly thing to do. I'm sure they wouldn't do that again if they had their time over.

You could actually look at Moncler itself. There was quite a controversial collection back in 2016 when Thom Browne, who was a designer they were working with at the time, basically had these models wearing what looked like military- or camouflage-inspired clothes at a fashion show not long after the terrorist attacks in Paris in November of that year, which were absolutely terrible. People died. It was awful.

So that was regarded by some people—a lot of French people—as really distasteful. That's a risk as well. I'll give you 2 more. One would be the supply chain. We've talked about this, but there is huge risk here if you get this wrong.

There has been lots of scrutiny in the press recently, particularly with companies like Dior getting into hot water because their manufacturing arm was implicated in labor exploitation, and it became clear that there were big flaws in their audit and oversight process. That's a big risk.

The other one, I guess, would be Ruffini. He is so important to this story. We've met a number of people around him over the years—some very impressive people like Luciano Santel, who is like his right-hand man, Roberto Eggs, and Gino Fisanotti. There are lots of really impressive people who've come to Moncler from other really big brands over the years.

It's a really deep bench. It's an experienced bench, but there is a kind of magic stardust to Ruffini, and he is important. I think if he got hit by a bus tomorrow, I'd probably be quite worried. Fingers crossed, of course, that he is in great health for many, many years to come.

The question for us would be around succession. I think he said at the end of last year, “I would love it if my sons would take over the business.” One of his sons actually does work at Stone Island, so it might happen at some point, but it's clearly a risk. He's important. He matters. He's a massive driving force.

Key-man risk.

Yeah, exactly. It's key-man risk.

This has been fascinating, diving into a new niche of the luxury market. We finish the conversation with the key lessons that you can take away. What stands out from Moncler as a key lesson that you might be able to apply elsewhere?

That's a great question. I think: protect your brand. The brand should be basically at the center of everything you do. Every decision you make should force you to ask yourself, “What does this do to my brand?”

This is what Ruffini is obsessed with. I remember seeing an advertisement at an airport recently for a different brand. It was a watch brand, Patek Philippe, and the tagline was something like, “You merely look after it for the next generation. You never actually own it.”

I think that's true for all luxury brands. The stewardship is so important because you're passing this on to either the next generation of the family or, at some point, maybe professional management, and you've got to be absolutely sure that you've done everything to strengthen that brand, to avoid it being caught up in scandals or besmirched in some way.

So that, to me, is one of the vital lessons here. It's being obsessed with the quality of the brand and being willing to actually not do things. What are the things that we are willing to give up in order to maintain the brand equity?

They give you the example earlier of Richemont buying back all of that inventory. They described it as an investment in the brand, not a loss.

I love it. It's a great lesson that certainly applies here and to the broader luxury market. This has been fascinating, Chris. Thank you very much for joining us.

Thank you, Matt. Cheers.