Pierre Mallevays looks at the decade to come, foretelling a tough time for department stores, more vertical integration and new distribution models. The managing partner of the London-based boutique advisory firm Savigny Partners LLP and former head of M&A; at LVMH also highlights the lessons we can learn from the Noughties.
Private equity muscles its way in
The Noughties saw an unprecedented level of interest by private equity players in the sector. Size definitely mattered: Tommy Hilfiger ($1.5 billion), Barneys, ($942 million), Neiman Marcus ($2.6 billion), Valentino Fashion Group (€2.6 billion) were amongst the biggest deals of the decade and all ended up in private equity portfolios. One of the most talked about success stories of the period, Jimmy Choo, changed private equity hands three times. The record multiples paid on some of these transactions were underpinned by the willingness of private equity owners to leverage their investments to the hilt, driven by benign debt market conditions and the expectation of endless growth potential.
Signs that things had gone too far emerged in 2007, when industry buyers effectively withdrew from the M&A; game, stating that they could not compete with the multiples paid by the private equity world. The credit crunch robbed the private equity market of its financial muscle and the bigger players’ interest in luxury goods deflated faster than a bodybuilder coming off steroids. Smaller, specialist players are still active in the sector although more on the hunt for bargains or financial distress situations. A less crowded market is also making room for family-backed investment vehicles, generally with longer term investment horizons and an appetite for luxury and brand assets.
Watchmania: consolidation and roller-coaster ride
The beginning of the Noughties witnessed a goldrush for watch brands by the larger players in the sector. LVMH started the trend at the end of 1999 with the quasi-simultaneous acquisitions of Tag Heuer, Ebel, Chaumet and Zenith and the creation of a Watch & Jewellery division. Prowling from the sidelines, Swatch Group snatched Breguet and its famed manufacture, Lémania. Gucci Group also invested in the sector, buying back its watch license and investing successively in Boucheron and Bedat in 2000. Sector consolidation hit fever pitch that same year when LM H (the Mannesman-owned holding company of Jaeger-LeCoultre, IWC and A. Lange & Söhne) was sold for a reported 9x sales to Richemont, who attributed the record-breaking multiple to LMHs manufacturing capabilities and the potential. of its brands, but who in reality was paying for the leadership of the premium segment in the industry.
Most of these brands received significant investment in the lean couple of years after 9/11, and when optimism returned to the luxury goods market the watch sector benefitted disproportionately relative to other product categories. It embarked on its wildest bull run in recent history, fuelled by the boom in the financial services industry and the rise of emerging markets such as China and Russia. Watches grew in size and started to showcase ever more numerous complications. This made for a particularly harsh landing when the sub-prime crisis unfolded. Retailers, petrified at being caught with too much inventory, stopped buying altogether and the watch market went into a painful. eighteen-month apnea. There are however signs of life at the turn of the decade with trade inventories being reconstituted, a sure sign of market confidence.
Turn of fortune for designers?
The Noughties started out with Tom Ford embodying the star designer, the all-powerful. sun king of the luxury sector, whose creative talents had propelled Gucci from an also-ran to the hottest and sexiest brand in the world. Throughout the sector, designers shared in the limelight, their exploits having outgrown specialist trade magazines and now being played out by mainstream media. Their compensation packages started to outshine even Wall Street, as industry bosses, having taken on board the need to empower the creative forces in their businesses, competed to attract and retain talent. Every top designer demanded their own brand, and the investment to go with it, alongside their role as the creative director of a large established luxury brand.
Then something gradually happened that changed the mood of the market. Tom Ford left Gucci, his absolute requests for control, power and money having proven too much for his PPR bosses. Star designers’ own brands, backed by considerable investment with the promise of great things to come, somehow failed to deliver. Alexander McQueen and Stella McCartney’s eponymous businesses were the last two to receive significant investment before the industry started to question the model. The list is impressive. Liz Claiborne gave back to Narcisco Rodriguez the business it had bought from him a few years earlier. Hedi Slimane, having walked out of Dior Homme with a view to launch his own brand, failed to find a backer. Phoebe Philo joined LVMH-owned Céline despite having initially set her sights on building her own brand. Even Puma recently “sold” back Hussein Chalayan his own business.
The rise of the contemporary designer
Whilst the traditional high fashion main line business was getting the equivalent of the industry cold shoulder – with the remarkable exception of Lanvin, where the creative and commercial talents of Alber Elbaz were performing miracles – some new designers turned up who were happy to design to a price point and to a margin while still fully expressing themselves. What had happened in bags earlier in the decade with the rise of the contemporary category (Isabella Fiore, Kooba, Botkier) was now taking place in fashion with the likes of Philip Lim and Alexander Wang. The size of contemporary floors grew along with the offering and became more mainstream, offering customers new and interesting “designer-feel” brands which were significantly cheaper than established designer brands. This was also reflected at retail level with the successful development, at price points below traditional designer level, of brands with a broad enough offering to justify their own retail, often across several categories, like Tory Burch. This in turn lead top designers to focus on the category; none more successfully so than Marc Jacobs with his Marc by Marc line.
The blurring of boundaries between luxury and lifestyle through design
One of the defining stories of the decade was the transformation of PPR from a builders merchant and retail group to a luxury and lifestyle group. First came the contentious battle for Gucci Group, which saw PPR commit to launch a fully-priced takeover offer on the eve of the 9/11 attacks. A few years later, having not been able – or willing – to buy a large enough target in luxury goods to challenge the leadership of LVMH and Richemont, it surprised the market by announcing the acquisition of sports and lifestyle group Puma, having spent the best part of €10 billion between the two deals.
The notion that the boundaries between luxury and lifestyle were starting to blur was further augmented by the multitude of collaborations between designers and high street chains over the decade (H&M; collaborations with Lagerfeld, Victor & Rolf, Stella McCartney & Matthew Willhamson; Target with an endless list of American designers, and more recently Jil Sander for Uniqlo).
We think that this blurring of boundaries between luxury and lifestyle has occurred through, simply put, the growing importance of design in every consumer business, across price points and categories.
The same importance of design is now prevalent at the volume end of the market. If speciality chains were a product of the 80s and 90’s, there is no doubt that the Noughties saw an astonishing rise in the development and success of accessibly-priced models: Zara, H&M;, Uniqlo or, in a different category, Coach. Be they different concepts, they all offer fun and interesting products at a very accessible price point, some with their own design ethos and some by riding the mood and ideas of the moment and bringing constant newness.
Death of a marketing manager
Whereas marketing had traditionally been the favoured career track for consumer businesses, the growing importance of design and creativity changed things there too. Luxury goods companies began to cultivate and reward those of their employees and associates who were able to bridge the gap and work intelligently with the design and production teams on the one hand, and the commercial. people on the other hand. Such associates had to be nimble and sensitive enough to understand and harness creative emotions and to work with products. Budgets and market forecasts, while necessary, started to take a back seat in the discussions. Marketing became lumped in together with sales. No more “designing to a brief from the marketing team”, but in its place successful. brands have a more collaborative process, with a merchandising type interfacing with a tripod consisting of the design, production and marketing sales functions. The marketing king is dead, long live the merchandising king!
What lies ahead
The luxury sector is embarking on a new decade with an assured yet uneasy footing. It has cut costs and restructured, but while there are rich pickings in the East, traditional developed markets are flatish. The need to offer real value to customers, either in the form of reduced pricing or outstanding quality, is a driving force.
Yet traditional models of doing business are cracking up. The high-end fashion designers model has been left by the side of the road. Once offering the promise of rapid, capital-free wholesale growth, department stores are moribund and make no-one happy: not the customers who are bored, not the brands who now find it very hard to make money in such an environment. New ways of doing business for luxury brands, new business models, will be formed in the next decade.
What will they entail? Creativity, for sure. Some vertical integration for the brands who want to protect the integrity of their supply chain. We have already witnessed this trend in watches, specialist skills for couture and high fashion, and the sourcing of exotic skins. Some will go local (like Hermes with Shang Xia). But we think fortunes will be built on rethinking distribution in the sector. It has to happen – current models don’t really work anymore. The web hasn’t played to its full strength in the sector. That will be one key. The search is on for the others…