Alexander Lacik, CEO of Pandora, Interview in "Ett Rikare Liv" Podcast

Last March, Alexander Lacik (CEO of Pandora) joined the Swedish podcast Ett Rikare Liv (A Richer Life in English), where he was asked about plenty of topics regarding the business and the current economic environment and its impact on the company performance.

Although this podcast was recorded nearly four months ago, the topics discussed over its almost 90-minute duration remain highly relevant today. For this reason, I've generated and translated the transcripts from Swedish to English, summarizing the key insights in today's newsletter. You'll also find the full transcripts included at the end.

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CEO Investing Philosophy

Alexander Lacik strongly advocates for a CEO to invest significantly in their own company, leading by example for other investors. This philosophy, in my view, aligns closely with the concept of proximity bias, emphasizing the importance of long-term investment within one's circle of competence.

He personally owns about 250,000 shares, plus another 100,000 in various option packages. He believes it's crucial for a CEO of a listed company to lead by example and invest, as it sends a strong signal to potential investors. He states that asking others to invest in the company while not having one's own "hand in the fire" would make it harder to convince them.

Silver Price Forecast

Pandora purchases around 350 tons of silver and one ton of gold annually. Historically, from 2012 until 2019 when Alexander started, the silver price remained remarkably stable at approximately $16 per ounce, functioning almost as a fixed cost. The company employs a hedging strategy, buying 12 months out to maintain price control, despite the premium associated with hedging during stable periods.

However, a significant issue has emerged as silver prices have recently doubled to about $32.5 per ounce, with gold prices experiencing a similar surge to nearly $3,000 per ounce. The CEO attributes this price increase not to traditional supply and demand dynamics, as silver demand has been consistent and supply has actually increased (being a byproduct of copper mining, which is in higher demand due to electrification). Instead, he identifies macroeconomic unrest, including the pandemic, war, and inflation, as the primary driver. Investors, seeking safe harbors during these turbulent times, have flocked to assets like the dollar, gold, silver, and palladium, consequently inflating their prices.

Regarding the forecast, the CEO initially believed that silver prices would logically revert to the $16 level, given the lack of fundamental economic drivers for the increase. However, after persistent increases, he has abandoned this position, acknowledging the possibility of continued rising prices in the future.

To counter these rising raw material costs while upholding its "affordable luxury" positioning, Pandora is implementing several countermeasures. Alexander's least favored option is significantly raising prices, as this would contradict their brand identity, which aims to be accessible to a wide range of customers. The primary focus of their countermeasures is on cost savings in production and design. This includes re-evaluating product design for greater efficiency and exploring the introduction of alternative materials or alloys.

Return to Shareholders

Pandora's strategy involves distributing 100% of its free cash flow annually to shareholders. This is primarily done through share buybacks, though a traditional dividend of around 2% is also maintained. Since its IPO in 2010 with 130 million shares, Pandora has significantly reduced its outstanding shares to around 80 million through buybacks, a practice that continues. This high distribution is possible because the jewelry business is not highly capital intensive, generating sufficient working capital and surplus funds that can be returned to shareholders, positively impacting the share price.

Moreover, he confirmed that there is no plan on engaging in active M&A activity but he doesn’t close the door to attrative acquisitions of competitors.

Traffic is the Key

The CEO of Pandora clearly identifies traffic as the paramount factor for the company's growth, stating that Pandora's "growth algorithm is almost exclusively dependent on whether I can generate more traffic."

In the past, when the business began to decline, consumer research revealed customers perceived Pandora as "too expensive" despite no price increases. This was attributed to stores trying to compensate for a "traffic loss" by pushing higher-priced items, a strategy that the CEO deemed unsustainable in the long term. This experience highlighted that "if you have a traffic drop, you can't compensate with more expensive products." The CEO emphasizes that other key metrics in the jewelry business are static and difficult to influence significantly. E.g. purchase frequency (around 1.7 times per year), in-store conversion rates (around 25%), online conversion rates (around 2%), and average basket size (around 1000 SEK). Therefore, increasing traffic is the primary lever for growth.

To affect traffic, the CEO outlines a clear strategy: clear brand positioning and investing substantial capital in media to keep the brand "top of mind". Furthermore, it's crucial to offer products and prices that are well-suited for the target customer group. A key initiative implemented was prominently displaying affordable, entry-level products (e.g., 200 SEK items) in store windows and displays to counter the perception of being too expensive and to attract more customers.

This focused approach on traffic has yielded significant results. Since the CEO started, annual visits to Pandora have increased from approximately 500 million to 850 million, and this growth is directly attributed to the increase in traffic.

Growth Potential

Alexander Lacik outlines two main perspectives on this potential:

1. Category Perspective: Currently, 60-70% of Pandora's turnover comes from bracelets with charms, which constitute only 17% of the total jewelry market. Pandora holds a 6% global market share within this segment. This implies Pandora has less than half a percent market share in the remaining 83% of the broader jewelry market (non-bracelet categories). The CEO argues that even if Pandora only achieves a modest 1.5-2% market share in these other segments, the overall sales figures could be significantly higher.

2. Geographical Perspective: Pandora is a clear market leader in 4-5 countries (like England, Italy, Spain, Australia), holding over 10% market share. However, more than 70% of Pandora's total volume comes from markets where its market share is 5% or less. The CEO suggests that elevating these underperforming markets towards a 10% share, even if it takes a decade, presents substantial growth. For instance, Pandora's market share in the USA is 2% compared to 14% in England. Doubling the US market share to just 4% would represent significant growth, especially considering it has already doubled from 1% to 2% since he joined.

Market Segmentation & Competition

Pandora was founded by a goldsmith without a strong marketing strategy or segmentation, which paradoxically led to a brand that appeals to all women, rather than a specific age group. The median age of a Pandora customer is 37 years old. The brand focuses on jewelry that holds personal meaning or is used for styling.

The jewelry industry is highly fragmented with low barriers to entry, allowing many small, unbranded local players. Globally, Swarovski (privately owned by the 5^th generation) is the only other significant player in the mid-price/affordable luxury segment, though they are trying to elevate their brand. Pandora differentiates itself through its unique positioning, especially with its bracelets and charms, and its significant investment in marketing (4 billion Danish Kroner) and a large global sales network (7,000 points of sale). When buying durable items like jewelry, consumers tend to have a conservative taste, meaning overly "funky" designs are not popular, and differentiation comes more from brand positioning than product uniqueness, especially for more expensive items.

Complete Transcripts

You can find the full translated transcripts file below for your download.