GENEVA, Switzerland — Watch industry veteran Georges Kern was once shortlisted to be the next chief executive of Richemont, the Swiss luxury conglomerate that owns everything from A. Lange & Söhne to Cartier. But after 17 years at the company, Kern — who most recently led the group's watchmaking division as well as its marketing and digital strategy — is departing to become the chief executive of Breitling, which sold a majority stake worth an estimated $870 million to private equity firm CVC Capital Partners in April.

Kern was no doubt enticed away by the potential financial upside of joining the rival watchmaker, where he will not only be chief executive but also an equity shareholder. His exit from Richemont was a major blow to the business, which is facing malaise. “It was a big surprise — morale has been knocked,” according to a former Richemont executive who still does business with the conglomerate.

Indeed, Kern's defection marks something of a tipping point for the luxury group, which is suffering from a crisis of confidence amongst senior ranking executives concerned with the management structure first proposed in November 2016 by chairman and founder Johann Rupert.

Instead of appointing a new group CEO to replace retiring chief executive Richard Lepeu, who left at the end of March 2017, Rupert announced a manage-by-committee approach, meaning the company’s chief executives and the board of directors’ executive officers would collectively make decisions regarding the group as a whole. At the time, the strategy was welcomed by shareholders.

But the change in leadership structure arrived at a time of senior-level turnover that extends far beyond Lepeu and his former co-CEO Bernard Fornas, who retired in March 2016. Longtime chief financial officer Gary Saage retires at the end of July. Hans-Peter Bichelmeier, former chief operating officer, exited in April.

In previous iterations, Richemont's success was contingent on a “tight management structure” that called for senior executives to oversee the “back of house” — i.e., business and operations — while Rupert led the “front of house” as a brand steward. “It worked because those people centrally were competent to manage,” explains a former executive. “You have to know and understand Johann to run the business well.”

Kern’s exit from Richemont is also cause for concern for those who relied on him to challenge Rupert, who owns just 9.1 percent of equity of the group but 50 percent of board voting rights. One of the few executives willing to voice his opinion in a sea of what one source called “yes men,” Kern’s leadership and insight was valued across the company, which is suffering due to the “China correction,” an overall slowdown in sales of hard luxury and the rise of smartwatches like the Apple Watch — not to mention its profound reticence to employ e-commerce as a growth lever.

In Richemont’s 2017 fiscal year ending March 31, group sales were €10.7 billion ($12.4 billion at current exchange), a four percent decline from the year previous. Profits were down nearly 46 percent to €1.2 billion ($1.4 billion). The majority of that revenue decline came from watches — down roughly 15 percent year-over-over to €4.3 billion ($5 billion) — but also apparel (down 6 percent). Jewellery — up seven percent — and leather goods — up 11 percent — were bright spots.

Kern's defection marks a tipping point for Richemont, which is suffering from a crisis of confidence amongst senior executives.

"Watches are durable goods: they last a lifetime. As the huge tide of rich Chinese new consumers have bought aplenty, selling high-end watches is proving more difficult," explains Luca Solca, head of the luxury goods sector at Exane BNP Paribas. "Faced with middle-class consumer demand, it seems that the correct move is to create more compelling value for money and more aggressive entry price models. More innovation is also an imperative."

Earlier this year, in what appeared to be a move meant to address some of these concerns, Rupert invited his 29-year-old son, Anton, to join the board of directors. Nikesh Arora — a longtime Google executive who briefly served as president of SoftBank Group — will also join the board in September. According to insiders, Anton Rupert possesses the same aptitude for brand as his father: “Don't discount him.”

In the short term, Richemont might fare well by finally divesting itself of its fashion brands, which have long been considered to be outside the group’s area of expertise. In early July, it sold middling Chinese label Shanghai Tang to Italian entrepreneur Alessandro Bastagli for an undisclosed sum. But finding takers for the weaker brands — in particular Lancel, which sources say Richemont has been attempting to dispose of for years — is not that easy.

“It would be more difficult, but it would also be very well received by the market,” Solca says. “Especially if it was Dunhill or Lancel, which have been losing money and seem to struggle to find a viable position in the soft luxury market.” Chloé and Alaïa, on the other hand, have retained or increased their value, largely thanks to strong leather goods.

“At this stage, it’s about maintaining the business and managing costs,” says a former executive. “They have some highly successful businesses but also failures. They’ve got big questions to answer, which they’ve just refused to address for years. They’ll address them.”

But even if Richemont is able to create shareholder value by shedding underperforming brands, improving its performance in China — which is said to be picking up in the 2018 fiscal year — and putting more efforts toward digital innovation, the fact remains that there is no clear succession plan in place.

Along with Kern, Jérôme Lambert, head of operations since April 2017, was also thought to be in the running to be the next group CEO, as was Cartier chief executive Cyrille Vigneron, who has been with Richemont since the late 1980s, save for a two-year stint at LVMH running the rival conglomerate's Japan business.

For now, senior executives are busy angling for Kern’s position, which will likely be filled internally. Whether they will eventually get their chance at the top job is unclear. Longer term, analysts believe that the company will be pushed to bring someone in as a group CEO in order to more clearly implement the changes that need to be made to bolster the business, from pricing to digital strategy.

What’s more certain is that “nobody wants to go against” the 67-year-old Rupert, whose power over the organisation remains absolute. For now. “There is one person that flies all the airplanes on the planet and that’s Johann,” says a former executive. “One of the greatest things about Johann is that he is very loyal. But that can work against you sometimes, too. It’s a family business. That’s how he runs it.”

Additional reporting by Sarah Shannon.

Related Articles:

[ For Richemont, There Can Be Such a Thing as Too Many Luxury WatchesOpens in new window ]

[ Richemont Executive Once Seen as Future Chief ExitsOpens in new window ]