Will 2021 Drive Game-Changing Luxury Deals?
The pandemic has increased the possibility of transformative M&A in the European luxury sector, from a Kering-Richemont mega-merger to an ‘Italian fashion project.’
Last week, Richemont chair Johann Rupert for the first time publicly acknowledged a proposal made by French rival Kering “more than a year ago” to join forces but said that the Swiss group he controls was not for sale, according to The Financial Times.
The logic for a Kering-Richemont merger has long made sense.
The two companies are highly complementary, Kering with its strengths in soft luxury and Richemont with its hard-luxury prowess. And though they are both successful, they remain far smaller than French sector leader LVMH, whose chairman Bernard Arnault momentarily surpassed Amazon founder Jeff Bezos to become the world’s richest person earlier this week. Their best shot at building a genuine multi-category rival to the luxury goliath is a merger.
In luxury, scale matters hugely. The heft of its portfolio gives LVMH a significant edge over competitors in distribution and media, where it enjoys leverage with multi-brand retailers, mall owners, real estate developers, magazines, influencers and other key players in the fashion ecosystem. LVMH also has an advantage in attracting and retaining top talent, who it can offer better compensation, more interesting career opportunities and larger budgets.
Scale benefits are by no means unique to luxury. Across industries, from cars to technology, the bigger you are the easier it is to stay on top. But in recent years, luxury has become a winner-takes-all business increasingly dominated by the biggest players as the landscape has become more complex, unpredictable and difficult to navigate for smaller companies.
Digital has upended once dependable distribution channels, giving rise to new competitors, but online upstarts face rising customer acquisition costs and rarely have the time and capital it takes to build luxury brands. Meanwhile, the proliferation of digital communications channels has favoured bigger players that can not only master the growing number of platforms but keep pace with consumer expectations for product innovation at the speed of social media. The rise of China, now the world’s largest fashion market, has added further complexity to the equation.
Then came the shock of Covid-19, which not only disrupted supply chains and forced store closures, but also recentred the fashion market from the United States and Europe to Asia and pushed more consumers to blue-chip brands, deepening the divide between the biggest companies and everyone else. The latest round of luxury results saw luxury megabrands like Hermès and LVMH’s Louis Vuitton and Dior far ahead of the pack, while smaller labels have struggled to bounce back from lockdown lows with anything near the same velocity.
“Performance is driven by a few elements that are typically linked to scale,” explained Bernstein analyst Luca Solca. “The need to capture consumers at the four corners of the world (as they are not travelling to Europe as much) favours the biggest brands that have both a global retail network and global digital distribution,” he said. “Then, there is the ability of brands to be compelling to Chinese consumers in terms of traction and innovation, and their ability to connect with customers by using a multitude of different communication and CRM channels.”
Today, even Kering and Richemont could benefit more than ever from greater scale.
Whether they ever tie the knot remains to be seen. Price could be one obstacle, though Rupert’s willingness to relinquish control (his family holds the majority of Richemont voting rights but only 9 percent of its capital) may be the real stumbling block. But 2021 may yet prove a catalyst for a transformative deal for Kering. If not the Richemont megamerger Pinault is said to have proposed, the group could make a move for a smaller but still significant player like Burberry.
The need for scale in a complex world is driving talk of game-changing consolidation in Italy, too. Renzo Rosso — founder and president of Diesel-owner OTB, which recently acquired Jil Sander — told La Repubblica last week that he was seeking a “significant acquisition” in “high-end prêt-à-porter” and seems to be on a mission to unite Italy’s fragmented luxury sector, which has long been populated with smaller, family-run firms and lacks a large-scale leader.
Smaller firms “won’t be able to sustain the costs of digital development, won’t get a deal with big online platforms,” Rosso told Bloomberg this month. “Some fashion companies will need to accept partnerships, and these alliances will give them the visibility they never had before.”
After years of fiercely asserting his independence, Giorgio Armani may be ready for a deal. Covid-19 “made us open our eyes a bit” the 86-year-old designer told American Vogue in an interview published in its May issue. “One could think of a liaison with an important Italian company,” he added, prompting speculation of a tie-up with Agnelli family holding Exor, which has the scale to pursue such a deal and may have a growing interest in fashion. (The company is pushing its Ferrari fashion line and recently acquired Shang Xia from Hermès).
Soon after the Armani interview was published, Dolce & Gabbana joined the chorus, quashing rumours of a deal with Kering, but leaving the door open to a “broader Italian project.”
And yet Moncler’s Remo Ruffini, who last December acquired Stone Island in a transformative move that signalled the company’s ambitions to build its own group, said Thursday he did not expect to see consolidation in Italy’s fashion sector, citing the culture of its controlling families.
“I do not see consolidation in Italy,” he said. “In Italy everyone wants to hold the majority. Most companies have a long history — four, five generations long — and it’s hard to let go,” he continued, before adding that he himself was not constrained by such thinking