The grit behind the glitter

Every path leads to the Alps. The capital of Austria’s Tyrol, Innsbruck, is a charming town, but its streets confuse me. I’ve already lost my way to the hotel several times, and I stop a passer-by to ask for directions. He’s wearing a sleeveless cotton T-shirt despite the cold, and when he gestures, I notice it glints in the sun. His name is Jonas, and he wants to know what I’m doing in his town. (I definitely don’t look like an Alpinist, and why else would one come here? Well, one could also want to visit the town that inspired Douglas Adams to write the Hitchhiker’s Guide to the Galaxy.)

I simply say “Swarovski”. That’s enough. Jonas walks me to my hotel, a good half an hour away, and tells me all he knows about the region’s star company. There’s little that happens in Innsbruck that doesn’t have something to do with Swarovski, he says chattily. On cue, a bus lumbers past, with Swarovski ads emblazoned on the sides. Jonas is still talking about Swarovski’s factory at Wattens, an hour’s drive uphill from Innsbruck, when we reach my hotel. He waves a casual goodbye, but not before telling me he loves crystals on his T-shirts, but only the “dulled out” kind.

Rather than risk getting lost again, I head to a neighbouring deli to grab a bite. Andreas, the friendly owner of the deli, can’t stop talking of the Swarovski family when he hears why I’m in town. “They are very good employers,” he assures me. “They take care of people and don’t make the place dirty. The person who started Swarovski used to like the waters in the springs a lot; he used to organise picnics for his staff in the forests.”

For all this, Innsbruck is not even where Swarovski is headquartered. That honour goes to Wattens, which is truly Swarovski town. The Swarovski crystal museum at Wattens, Kristallwelten, is one of Austria’s top tourist attractions (along with the likes of the Schönbrunn and Hofburg palaces, and Mozart’s home).

They say it is the first generation that grows the business, the second generation that stabilises it, and the third destroys it. Swarovski is run by the fifth generation in that most complicated of corporate formats—collective responsibility. And it shows no signs of being destroyed. There are unprecedented pressures on this set of managers, what with Chinese, Egyptian, and Czech companies producing fine crystal at a fraction of Swarovski’s cost. This story is about how the family is responding to those threats, even while trying to keep intact its ethos.

In 1891, Daniel Swarovski, a jeweller from Bohemia (today’s Czech Republic) and son of a glass cutter there, invented an electric cutter that cut crystals way more accurately than by hand. A few years later, he visited the Tyrolean Alps on a family holiday, and discovered Wattens and its alpine streams. The clear, mineral-rich water was perfect to wash crystals as well as to power the cutter. In 1895, Daniel Swarovski set up his factory in Wattens.

What started with fine crystals has now expanded into a giant company that makes everything from jewellery to perfumes to traffic lights and feature films. It’s now a transcontinental giant that prices some of its products 10-20 times higher than its nearest competition. And the family is still in charge, making it almost an anomaly in the world of big luxury business.

Over several days of watching the family at work, and in getting an insider’s understanding of the workings of Swarovski, I am convinced that this company is in perhaps the most exciting stage of its history. It’s making the transition from a storied family-run firm into a cutting-edge luxury and technology conglomerate.

Even as Swarovski has expanded into one of the biggest and most powerful luxury companies in the world, the “family” of Daniel Swarovski has grown. The company of 31,000 employees is run by an executive board of five fifth-generation family members (all direct descendants of Daniel Swarovski)—Markus Langes-Swarovski, Nadja Swarovski, Robert Buchbauer, Mathias Margreiter, and Daniel Cohen. There are around 100 Swarovski family members who have stakes in the company but the largest (around 21%) is with the great-grandson of Daniel Swarovski, Markus Langes-Swarovski’s father, Gernot.

There is no group CEO, and the chairman of the board is nominated on rotation (Buchbauer is chairman now). Markus, the board’s official spokesperson, tells me that the board has more than just an advisory role. “It has other important tasks like portfolio management and figuring out the constitution of the group.” Individual businesses are run as separate companies, but the big decisions are taken collectively.

The board oversees the working of the three divisions of the Swarovski Group—the crystal business (nearly $3 billion, or Rs 18,951 crore, in revenue last year) spread across 170 countries and more than 2,600 stores (of which 1,335 are operated by the brand and the rest by partners) with 26,000 employees; Tyrolit, the precision cutting tools division (revenue of around $700 million) with 29 facilities in 12 countries and 4,500 employees; and the optical tools division, which makes mirrors for microscopes and binoculars among other things, with sales across 89 countries, bringing in $150 million.

Will democracy in the boardroom really help run such diverse businesses? “It’s a northern continental European style of doing business, that is the best way I can explain it,” says Markus. “There is always an intensive need to discuss everything in great detail. We sometimes take [board] decisions through a simple majority but we do strive for consensus. If we have consensus, we have [a] harmonious family. This is the principle. The downside is obviously that some decisions may take much longer.”

The harmony of the board, and the evident close ties between them, have helped the five cousins safeguard the company from distant family members who share the name. The name I hear most often is that of Fiona Swarovski, a distant cousin married to a controversial, corruption-accused former Austrian finance minister. Among other things, she has been accused of raising money for charity and then not giving it to the charities concerned. Her controversial remarks have been pounced upon by the gleeful tabloids. The Daily Mail says she “once suggested poor people get through the credit crisis by growing salad on their balconies”. This is not a face the cousins want associated with Daniel Swarovski’s legacy.

Two of the board members, Markus and his cousin Nadja, have taken the lead in buffering the company from competition and other forces ready to batter it. They don’t tell me whether it was planned as such, but Markus is the face of the legendary crystals business while Nadja is pushing what could be called Swarovski 2.0. It’s a strategy that’s working well for the company, as it begins to be seen not just as mammoth backend operator but as a front-facing consumer luxury company on the lines of, say, Gucci or Prada.

“It is the natural expectation of the market from Swarovski to take risks and push new boundaries in our segment,” Nadja tells me. “We are [here] to sell and make profits, yes, but we also need to show the limitlessness of possibilities.”

The dichotomy of Swarovski is that it is a gigantic backend company, making industrial tools and components and supplying crystals to designers, with a relatively small retail face selling wearable crystals, bric-a-brac, and jewellery. Nadja is focussing on giving the business side a more relatable face, while Markus is turning his energies to making the retail side of things as profitable as possible. Of course, both their interests intersect in several areas, notably in wearable technology.

A fan of technology, Nadja suggests that Swarovski has an almost Google-like role in experimenting untried ideas with crystals. In their conversations with me, both cousins speak of the Fourth Industrial Revolution, referring to the idea of a fusion of the physical, digital, and biological worlds. “We are moving to a world of wearable and even integrated technology, and crystals would be a fundamental part of this,” says Nadja.

Last year saw the launch of Swarovski Shine, a range of activity tracking jewellery—wearable technology for the fashionista, if you will. More is being planned along these lines, which will see Markus and Nadja working closely together, since a lot of her futuristic ideas are based on the classic Swarovski crystal.

Meanwhile, Nadja is focussing on an area that Swarovski has dabbled in for years: films. Some time in the 1970s, a Swarovski designer made a tiny silver and crystal Mickey Mouse figurine on a whim. Its huge figurines and collectibles business grew from there. Then, there are all those celebrities who sparkled in Swarovski on and off the screen, from Marilyn Monroe (when she sang happy birthday to then U.S. President John F. Kennedy) to Audrey Hepburn’s tiara worn in Breakfast at Tiffany’s, to Michael Jackson’s glittering glove.

Nadja has taken that involvement to a whole new level—instead of providing props for stars, Swarovski is now putting money into producing films. In 2011, Swarovski Entertainment was launched, a company that Nadja heads; that was the year Gucci announced its Women in Cinema Prize at the Venice International Film Festival. Clearly, Nadja does not intend Swarovski to miss any chance to explore new frontiers.

The biggest change that Nadja is bringing to Swarovski is to make it a brand in itself. So far, Swarovski has always been seen as a supplier of iconic bling to everyone from Coco Chanel to Elsa Schiaparelli. While the crystals themselves are works of art, they have almost always been known because of the designer. For instance, in 1956, Manfred, Daniel Swarovski’s grandson, had created a new coating that made crystals gleam in different colours. Called Aurora Borealis after the famous Northern Lights, these crystals had been made specifically for Christian Dior, as the French fashion maestro wanted something special for his gowns. Dior’s gowns featuring Aurora Borealis crystals have gone down in fashion history as the master designer’s greatest work. Manfred is known to few outside the industry.

Manfred himself was only taking cues from his grandfather, says Nadja. Daniel Swarovski had supplied crystals to the man who started the global fashion industry, couturier Charles Frederick Worth, the ‘Father of Haute Couture’, who sewed Swarovski crystals on gowns worn by the A-listers of his time, including Queen Victoria.

Here’s the thing Nadja is trying to change: In all its earlier relationships with designers, Swarovski was the supplier, the implement maker, the material provider—never the brand. She has been working on co-branded tie-ups with design names like Jean Paul Gaultier, Christopher Kane, Hussein Chalayan, and Viktor & Rolf.

Her most exciting collaboration was with the late British fashion designer Alexander McQueen, and the stylist Isabella Blow, to create the Swarovski Collective, giving free crystals (or sometimes crystals on credit) to designers.

McQueen had a major role in propelling Swarovski to the forefront of 21st century fashion. In fact, innovations such as Jennifer Lopez’s collection of outfits, featuring 260,000 crystals, owe a lot to McQueen. This sort of thing has led to a reinvention of the Swarovski brand. And boosted business. Revenue from its branded jewellery has grown to over $2 billion in the last two decades, a growth of over 60%.

The idea is to work with designers instead of just selling crystals. “Swarovski is not a company looking to get customers,” says fashion researcher and theorist Anshu Khanna. “Swarovski seeks to change consumer behaviour. Buyers today are almost less important to them than changing consumer behaviour in the long run.”

In India, this strategy of engaging fashion designers helped Swarovski become the preeminent player in the multi-billion dollar bridal market; every major designer upgraded from sequins to crystals.

Crystals, the company’s heritage business, hasn’t been ignored in Swarovski 2.0. In the last five years, this business has come up with the toughest challenges for the company. Between 2008 and 2010, competition suddenly escalated from Egypt, China, and other Asian countries. “We were almost at an oligopoly situation with barely five important crystal manufacturers in the world. But then all of a sudden there were 3,000 or more crystal makers; it was like the mobile phone industry!” says Markus.

As a result, prices of loose crystals crashed 60%. Swarovski faced two choices: Either bring down prices or pitch only to high-paying customers. For a while, it tried the first option and cut prices, even going to the extent of setting up a factory in China to open up to the mass market. “But we realised that no matter how much we try, if we have to maintain the Swarovski principles of employee benefits and environmental hygiene, we cannot fight just on price,” says Markus. And so Swarovski went back to its “quality-only” approach.

Step one was to shut the factory in China. The focus moved back to “customers who understand the high value we bring and the processes we follow to achieve that”. For instance, Markus points out that France’s $12 billion Kering Group which owns brands including Gucci and Boucheron, prefers to deal with Swarovski because of its environment-friendly processes. (Swarovski takes pride in having dropped energy consumption by 24%, and emissions at the Wattens plant by 34%, since 2010; and 55% of energy comes from renewable sources.) A couple of years ago, Kering’s owner, François-Henri Pinault, told Fortune India that environmental activism is one of the key parameters of his group.

Listening to Markus discuss the ‘quality at all costs’ strategy, I am reminded of how Ermenegildo Zegna is managed. The $1.5 billion Italian company makes some of the finest fabrics in the world, which are used by almost every luxury clothing brand that matters. But Zegna also has its own full range of branded clothes and accessories. I ask Markus if this is a valid comparison. “Zegna is a beautiful example,” says Markus. “The people who use Zegna proudly advertise that they are doing so, just like the people who use Swarovski crystals.”

Has this strategy paid off, I wonder. “While we are not [back to] square one, there has been a settling down,” says Markus, explaining that competitive pressures have reduced somewhat. “Many manufacturers in China who came into the business [between 2008 and 2010] have exited.” That’s good news, but Markus isn’t easing up now. He has spearheaded a line of fine jewellery in China (available only there); this line uses not just crystals but also other gemstones, including cultured diamonds that sell between $1,000 and $6,500. (Swarovski’s stone-cutting work now spans across almost all precious stones except natural diamonds.) Why China in such a big way? “The business is highly dependent on the Chinese customer and traveller around the world, so we thought why not offer special products to that market?” is his answer.

Markus is not just looking at global markets. The focus continues to be on customers, and the challenge is not about creating new products but helping their customers sell these better. “We see ourselves as solution makers, not just product suppliers. So we have a massive platform for sales and we have created on it a Swarovski Crystal Hub where anyone using our crystals can get support and promotion for sales for anyone who uses our crystal.”

What is happening, in essence, is the re-imagining of Swarovski, led by Nadja and Markus with the other cousins’ support. With products like Shine, the move to technology is clear. In this too, the Zegna example comes to mind: the fabric maker has experimented with everything from Bluetooth-enabled jackets to thermo-regulating ‘Techmerino’ wool and ‘whisper window technology’ on its shop windows at Harrods.

It’s not just Shine. In the course of my conversations with Nadja and Markus, there are references to all sorts of cutting-edge future ideas. Touch-sensitive crystal technology, innovative crystal lighting solutions, and zany glass engineering are just a few.