Bernard Arnault, Chairman of LVMH
As at June 30 2013, there had already been deals exceeding $1 billion globally in the luxury sector, as compared to $1.6 billion worth of deals in the whole of 2012 (Mergermarket). This is without taking into consideration LVMH’s $2.6 billion takeover of Loro Piana (July), nor the $6 billion acquisition of Neiman Marcus (September).
M&A activity in the luxury industry has been nothing short of rampant over the past two years. On top of the landmark Loro Piana acquisition, LVMH spent €3.7 billion to add Bulgari to its stable in 2011. Assuming control of exotic skin supplier Heng Long – a supplier to Hermès – for €92 million the very same year.
Kering, (formerly PPR) purchased Brioni for a reported €300 million, followed by majority stakes in Qeelin and Pomellato. More recently the French conglomerate has shifted its attention to young designers such as Christopher Kane and Joseph Altuzarra, taking majority stakes. LVMH has followed suit with investments in Nicholas Kirkwood and JW Anderson.
“ Kering has shifted its attention to young designers such as Christopher Kane & Joseph Altuzarra ”
Fragmented is perhaps the least appropriate word to describe the industrialised market for luxury. Four conglomerates – Moet Hennessy Louis Vuitton, Kering, Swatch Group and Richemont – now control over 115 luxury brands between them, including names such as Gucci, Cartier, Yves Saint Laurent, Bulgari, Jaeger LeCoultre and Christian Dior.
Even brands that have remained free of conglomerate-control have begun to swallow up suppliers – and suppliers to competitors – to ensure the future of key materials in an increasingly competitive marketplace. Particularly in the timepiece sector, after Swatch Group threatened to cut components supply to competing brands, sending watch manufacturers into a frenzy of acquisition.
LVMH acquired Céline in 1988
The Argument For
At its core, acquisition as a growth strategy generally facilitates economies of scale. Luxury brands cut from the same cloth can share technical know-how, marketing strategies, production facilities, operating systems, technology and talent. Conglomerates can leverage their stable of brands when it comes to retail development, real estate, media buying, distribution, and publicity. The list goes on.
Acquisition also gives revenue an instantaneous boost and increases market share, giving the impression of growth, thus pleasing demanding shareholders. Acquisition can also lead to the strategic addition of knowledge or savoir-faire to a business, perhaps a manufacturing capability, access to specific suppliers, new technology or networks of distribution.
There is also the aspect of brand preservation. Conglomerates such as LVMH and Kering have been instrumental – for lack of a better expression – in ‘rescuing’ heritage brands from the brink of demise or bankruptcy.
“ Conglomerates such as LVMH and Kering have been instrumental in ‘rescuing’ heritage brands ”
Luxury rapidly evolved from a family owned métier into big business, and many independently owned brands simply did not have the experience or knowledge to run these ever expanding operations. Take the example of Christian Dior.
In 1984, and a group of investors led by Bernard Arnault purchased Dior’s parent company for ‘one symbolic franc’ after its parent group filed for bankruptcy. Under Arnault’s leadership, Christian Dior grew to turnover €1.29 billion for the fiscal year from May 1, 2012 to April 30, 2013.
Conglomerate ownership also gives under-capitalised brands time and resources by which to evolve and prosper, supported by the revenues of star-performers. Nestled within a luxury conglomerate, flailing or dormant brands are given far longer periods of time to turn profit, than would be allowed under private equity ownership. Strategically they also benefit from the experiences of similar brands.
“ Conglomerate ownership gives under-capitalised brands time to evolve and prosper ”
Take the case of Céline. LVMH acquired the brand in 1988 – 25 years ago – for approximately $540 million from founder Céline Vipiana, who remained creative director until 1997. Following Vipiana’s departure, the brand went through three further creative directors who ‘failed to transform this second league brand into an essential flagship of worldwide prêt-à-porter.’
That was until the appointment of Pheobe Philo in 2008, who has overseen a dramatic shift in the brands position and indeed revenues. Though LVMH do not disclose individual sales figures for its brands, Céline was described as showing ‘excellent performance in all its products and in all geographic areas’ in the 2012 annual report.
The brand has also undergone rapid retail expansion in key European and Asian markets, as well as the opening of landmark stores in the United States. It is not difficult to wonder whether any independent backer or private equity firm would have – or could have afforded to wait – 25 years for such a turnaround.
“ The conglomerate model can help to protect the longevity of key suppliers to the luxury industry ”
The conglomerate model can help to protect the longevity of key suppliers to the luxury industry. As fast retailing changes the way the world consumes goods and perceives value, there is less and less demand for the historical crafts associated with manufacturing haute couture, joallerie or horlogerie. Small ateliers and artisans risk closure or bankruptcy should demand for their skills effectively die out.
Yet groups such as Chanel, LVMH and Hermès are investing to ensure that centuries-old savoir-faire is not lost, by investing in or outright purchasing ateliers. Chanel even goes so far to dedicate an annual collection – Métiers d’Arts – to showcasing the work of the ateliers it controls, thus ensuring them on-going business. Under its Paraffection program, Chanel now controls ten artisan suppliers of everything from lace to cashmere to fabric flowers.
Kering has taken a 51% stake in Christopher Kane
The Case Against
One of the biggest challenges of brands under the conglomerate model is the risk of homogenisation. When the success of luxury brands and luxury products is so heavily based on differentiation and uniqueness, what happens when they begin to source fabrics from the same suppliers? move executives from one brand to another? use the same agencies to develop campaigns?
Another challenge these conglomerates face, is balancing the need for growth and shareholder value with the need to respect the constraints of luxury itself. And to expand without damaging the value of the brand or compromising one’s position for the sake of increasing revenue.
And no matter which way marketing departments spin vertical acquisition, it is clear that one conglomerate controlling too many key industry suppliers threatens competition. As the market becomes increasingly saturated, competitive products must be increasingly differentiated, which in most cases comes down to manufacturing and materials.
“ One of the biggest challenges of brands under the conglomerate model is the risk of homogenisation ”
Watch industry consolidation is crimping creativity and making it harder for independent watchmakers to compete, explains Pascal Ravessoud, marketing and development director of the Fondation de la Haute Horlogerie, to Bloomberg.
Large luxury companies have more bargaining power with subcontractors and retailers as they buy brands and component makers. As demand slows, independent watchmakers’ survival is threatened as they face higher costs. Luxury groups also leverage collective power when it comes to prime retail locations, making it difficult for independents to secure key stores.
Chanel is one of the last remaining privately held luxury goods brands
The Final Word
Evidently, there are advantages and disadvantages of consolidation, for consumers, brands and suppliers, and even the conglomerates themselves. As is the case in most discussions regarding luxury brand strategy, the success of consolidation depends heavily on the stable of brands and the management structure of the group.
LVMH and Kering have both proven the success of decentralized management structures, whereby brands are managed by their own internal teams. Of course brands are able to leverage the collective wisdom, systems and resources of their parent, but largely their design direction, marketing strategy and indeed, staff, are separated from that of internal competing brands.
The real issue with consolidation as a growth strategy is the ever-decreasing pool for brands to be acquired. What happens when the industry runs out of hot new designers to invest in or dormant heritage brands to revive?
“ What happens when the industry runs out of dormant heritage brands to revive? ”
In a quest for continuous growth, will conglomerates force the bastardisation of luxury brands into unrealistic territories or product categories? Thus threatening their position as ‘luxury’?
When the success of a luxury brand depends heavily on its individuality and creativity, is the conglomerate ownership model necessarily the most sustainable for the industry? Or do we risk a future market flooded with homogenized products far beyond the core competencies that established the brand in the first place?
And if conglomerates continue to snap up suppliers, does the industry risk a complete lack of innovation or competition? Of losing key independent brands who can no longer compete? Or a lack of new players as the barriers to entry become too high?
It’s the age-old adage of time will tell. But if M&A in the luxury industry continues at such a break-neck pace, it shouldn’t be too long before we begin to see more clearly the effects of consolidation.
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