It was the turn of Waterford Crystal to play nursery-maid to fine bone china group, Wedgwood, in the first half of 1996. This reversed the role of Wedgwood which, for many years, propped up the Waterford crystal manufacturer. Waterford Crystal went forward, Wedgwood went into reverse. While Wedgwood will reverse the decline in profits in the second six months, it needs to generate considerably more out of its sales .
The figures for the first half tell it all. Wedgwood's operating profit of £5.7 million (down from £6.3 million) represented an operating margin of only 5.4 per cent, well below the 9.5 per cent generated by Waterford Crystal. Wedgwood's decline in operating profits was due to adverse currency translations amounting to an estimated £1.1 million (£0.9 million was due to the weaker yen). Even if these are added to the published figures, the margin comes up to only 6.5 per cent - it rises to 8.6 per cent if extra marketing costs are excluded - and is still well below Waterford Crystal's margins which rise to 10.5 per cent when making a similar adjustment.
If Wedgwood were to come up to the crystal company's level, it would have to generate an operating profit of £9.9 million - £11 million without adverse currency movements. That would represent a 74 per cent increase on what was published. Is that an attainable target? And of more importance, will each operating company, Waterford Crystal and Wedgwood, reach the group operating margin target of 15 per cent, by the year 2000? Other international luxury branded goods companies appear to achieve a much higher target with little difficulty. Gucci, for example, works on a margin of 27.1 per cent, LVMH generates 22.5 per cent and Richemont achieves 18.5 per cent. Ralph Lauren, however, only manages 11.9 per cent.
The group target is within the reach of Waterford Crystal - it generated 11.8 per cent in 1996 - but it will be much more difficult for Wedgwood - it generated 9.5 per cent in 1996 - to achieve. When Waterford Crystal acquired Wedgwood, one of the potential benefits cited was the crystal company's strength in the US market, and Wedgwood's strength in the Japanese market. The amalgamation, promoters of the deal argued, would help Waterford's sales in Japan and aid Wedgwood's sales in the US. On this score, the amalgamation has, so far, only proved to be partly successful.
Waterford is having some success in Japan where sales rose by 33 per cent in the first half, albeit from a low base. In contrast, Wedgwood only managed a 1 per cent growth in US sales. But the real success of the operation has been through the cross fertilisation of marketing innovations - outsourcing of new products, new gift-ware using the Waterford and Wedgwood names, and joint marketing and distribution.
Indeed, last week's press conference displayed an almost infectious enthusiasm for the group's new products. It is clearly a marketing-led group, with clear goals of where it wants to go. Stuart Crystal, acquired in 1995, now back in profits, will help it get there but it is unlikely to generate an operating margin of 15 per cent. Rosenthal, the German porcelain maker, in which it has a 26.2 per cent stake (with a further option for 13.5 per cent), may return to profit by the end of the year. Restructuring involving some 600 redundancies will not be completed until 1999, so the main benefits from this company are down the road.
Provided Rosenthal is moving in the right direction, Waterford Wedgwood is likely to exercise the option - at a possible cost of some £10 million - to bring the stake up to 40 per cent. This can be brought up to 50 per cent, through the market, without making a bid for the remainder. Waterford Wedgwood is unique in not having a group chief executive (Mr Redmond O'Donoghue is chief executive of Waterford Crystal and Mr Brian Patterson is chief executive of Wedgwood) but that has not impeded the strong group recovery. Nevertheless, the core businesses may find it difficult to produce a group operating margin of 15 per cent by 2000, unless the group makes a good acquisition. It will have net borrowings of some £30 million by the end of the year. With borrowing facilities of £180 million, it could pay up to £150 million for acquisitions without recourse to shareholders. That must be a distinct possibility but possibly not this year.
