Think big: How luxury houses are expanding their portfolios

The world’s luxury houses rely on wealthy consumers to shop. And over the past few years they have been doing just that. The luxury sector grew by five per cent in 2017 to reach a total value of €1.2tn, according to research from management consultants Bain & Co.

But now it’s the luxury companies themselves that are going shopping — and they’re spending more than even their wealthiest customers. After years of occasional mergers and acquisitions (M&A) the luxury market has entered a new period of activity. Michael Kors, for instance, has agreed to buy Versace for €1.83bn, having recently also acquired Jimmy Choo. 

Meanwhile, a private equity house has bought a chunk of Missoni, ending years of exclusive family ownership, while Trussardi has sold a majority of its shares to asset management company QuattroR, Dries van Noten has sold a majority stake to Puig and Ermenegildo Zegna has acquired 85 per cent of preppy US brand Thom Browne.

And there’s more. Recently Richemont has acquired Yoox Net-A-Porter Group and Japanese group Onward has snapped up UK footwear and accessories brand Charlotte Olympia. Continuing the east “eats” west theme, last year the Chinese conglomerate Fosun took a majority stake in Lanvin, France’s oldest surviving couture house.

Last year saw around $5bn spent on the acquisition of some 18 luxury fashion companies across Europe, more than the past four years combined, according to financial data and software company Pitchbook. Worldwide, the figure was $7.5bn, compared with just $5.1bn in 2017, the company reports.

“The current unstable global trading environment provides a major challenge for fashion and luxury players — global political tensions, taxation reforms and new trade policies are deeply influencing the industry,” says Elio Milantoni, partner & EMEA consumer business CFA leader at professional services network Deloitte.

“The effects of this global landscape, together with the increasing presence of disruptive technologies and the digitalisation of the F&L [fashion and luxury] industry, are now paving the way for deep changes in the market trends, affecting its key players and their business models,” he says.

Cyndi Fulk Lago, vice president, Capgemini consumer products and distribution leader, attributes the increase to demographic changes. “Luxury retailers are re-examining their portfolios to align them around evolving spending habits,” she says. “Baby boomers and boomers are saving for retirement and current generations spend less, but are willing to spend more on a few luxury items.”

Milton Pedraza, CEO of consultancy The Luxury Institute, also believes that disruption and change are key motivations for those at the head of large luxury companies. “Leaders feel that they can better defend, as well as take advantage of opportunities, with a critical size and multiple brands, size and diversity do matter for resilience and sharing of resources,” he says.

Risk management and a hedging of bets in the fickle world of fashion are key drivers, according to Erwan Rambourg, managing director, global co-head of consumer & retail equity research, HSBC Securities (USA). “They’re hoping to hedge out fashion risk — if you’re in soft luxury and only own one brand and by definition fashion comes and goes, your sales will be volatile,” he says. “M&A is structurally more important in soft luxury as this is a sector where trends can be more volatile and portfolio diversity helps mitigate that [risk].”

It was around three decades ago that Bernard Arnault began acquiring small luxury houses to create LVMH, in effect the first luxury conglomerate. As Kering (formerly PPR) and Richemont followed suit, LVMH’s appetite for acquisitions continues with the purchase last year of Belmond, owner of the Venice Simplon-Orient-Express. With LVMH’s Cheval Blanc hotel brand one of the most desirable in the world, it will be interesting to see what it does with Belmond.

Although Arnault’s acquisition of independent houses with proud heritages to create a vast consortium was controversial at the time, they have suffered little damage to their brand. How many fans of Loro Piana, for instance, know that the label is one of 70 other prestigious brands, including TAG Heuer and Marc Jacobs Beauty, that form a business colossus with sales of over €40bn? These houses have seen increased sales, investment and the recruitment of new talent.

According to research from Bain & Company, although around two thirds of luxury brands surveyed have seen their revenues increase, achieving profitable growth has been more of a challenge. Thanks to economies of scale, luxury brands that are part of a larger group tend to be more profitable.

M&A can offer “a short cut to growth,” according to Timothy Galpin, a senior lecturer in strategy and innovation at Saïd Business School, University of Oxford, and author of The Complete Guide to Mergers and Acquisitions. “It can remove inefficiencies and enable companies to leverage distribution and sales networks as well as consolidating back office costs such as IT and HR,” he explains.

“There are also economies of scale,” adds Galpin. “Smaller operators — unless they’re super-small boutiques, for instance — suffer by being caught in the middle. As they grow into mid-sized companies they take on the increased costs of a large company, but they don’t yet enjoy the efficiencies and economies of scale that those larger companies that are selling in larger volumes enjoy.”

“[M&A offers] the ability to have diversification in addressing various customer segments and product categories across geographies, and to grow each brand accordingly,” says The Luxury Institute’s Pedraza. “There is also the opportunity to create cost savings, such as in procurement and supply chain and distribution.”

Elio Milantoni of Deloitte points to findings from the firm’s Fashion & Luxury Private Equity and Investors Survey 2018. “Even though internationalisation retains its position as the main strategic lever adopted by F&L investors to grow their asset value at 44 per cent of respondents, the improvement of performance and the development of management practices are becoming important drivers of F&L portfolio companies growth strategies as well,” he says. “Indeed, frequently investors acquire under-performing companies, aiming to bring sales growth and margins up to the average sector performance.”

Another key factor for this flurry of M&A activity is that it facilitates a move to e-commerce — hence Richemont’s £4.64 bn acquisition of YOOX Net-A-Porter, which was completed last year. Investors from outside the luxury sector have woken up to the fact that having been suspicious of selling their products on the internet, luxury houses are now embracing it. Private equity house Apax Partners has, for instance, acquired a majority stake in luxury fashion e-tailer Matchesfashion.

“Groups understand that scale counts more today than ever as digital, data analytics and consumer insights favour larger firms with the means to invest,” says HSBC’s Rambourg.

The other driver of luxury M&A is regional and cultural as much as it is economic. The existing three luxury conglomerates are all European and now the other largest markets for luxury goods — China and the US — want their own versions. Currently leading the US race to create the first is Michael Kors, with the completion of its purchase in January this year of Versace and the creation of Capri Holdings.

Talking to the media about the deal, John Idol, CEO of Michael Kors, said: “Our focus is on international fashion luxury brands that are industry leaders,” adding, “we have created one of the leading global fashion luxury groups in the world.” Capri announced that it will focus on Donatella Versace’s achievements while expanding accessories and footwear from 35 per cent to 60 per cent of brand revenues. Market watchers expect more US stores and an expanded e-commerce operation.

Having beaten off European groups including Kering, another emerging US luxury empire, Coach — now known as Tapestry — bought Kate Spade and Stuart Weitzman, three years ago.

Over in China, as well as purchasing a stake in Lanvin, Fosun International has also invested in Wolford and up-market French confectionary group St Hubert. It will increasingly find itself competing with textile giant Shandong Ruyi, which recently agreed to buy a controlling stake in Swiss luxury shoe and accessories label Bally.

Rambourg predicts further M&A activity this year. “Remember, this is a seller’s market, as transactions happen only when privately held companies — usually family controlled — decide that it’s the right time to sell. I can’t really predict who will sell, but I think that potential predators will look at anything that moves and the deal flow will continue to be solid.

M&A presents risks as well as opportunities for luxury companies, as it does in any other sector, according to Timothy Galpin. “The brand must fit with the strategy of the purchaser,” he says. “There’s also a danger in these days of high valuations of the purchaser paying too much. The more you pay for a company, the more you need to make out of it. You also need to be able to integrate what you’ve bought successfully.”

That said, Galpin also predicts further M&A this year. “A slowing world economy could drive more consolidation as a way of cutting costs,” he says. “But in difficult times, it is definitely safer to be part of a larger group.”

As the saying goes, when the going gets tough, the tough go shopping.