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Gruppo Florence, the luxury goods supplier aggregator backed by former Bulgari boss Francesco Trapani, aims to double its sales within a few years to more than €1 billion and list on the stock market. It is among a handful of Italian players gobbling up suppliers at record speed and building power and influence in the fashion and luxury ecosystem.

The strategy is clear: luxury goods groups are engaged in an arms race to secure their supply chains and invest in top-end suppliers as sustainability and craftsmanship become crucial points of value and differentiation. In France, Hermès, Chanel and Louis Vuitton have integrated dozens of their suppliers in the past three decades. Now, Italy’s network of hundreds of small and medium-sized suppliers are joining aggregators such as Gruppo Florence or being acquired by brands.

The trend has intensified in recent months because of concerns about profitability being hit by rising energy prices, climate change and inflation. For private equity firms, this is a golden opportunity: if they can turn around a luxury goods supplier, something luxury brands or groups do not have the will and management time to do, they can cash in on their investment by selling it to one of its main client luxury brands in a few years’ time. Or, in the case of Gruppo Florence, they can hold an IPO in Milan or elsewhere, market conditions permitting.

In the last week alone, both LVMH and Kering have invested in jewelry makers in the Piedmont region, in northern Italy, famous for its jewlery production clusters. On Friday, LVMH acquired the Pedemonte Group, a jewelry manufacturer with 350 staff operating in Valenza, Valmadonna and in Paris. The acquisition will expand the production capacity of LVMH’s jewlery brands which include Tiffany & Co., Bulgari, Chaumet, Fred and Repossi. The Pedemonte Group is itself the product of a merger between several independent workshops with many years of experience, put together in 2020 by private equity firm Equinox.

Last week, Kering’s jewelry brand Pomellato bought an undisclosed stake in one of its suppliers Costanzo & Rizzetto. The French group said the transaction helped it secure vital know-how in Valenza, Italy’s “jewelry city-state.” It is home to Bulgari’s Manifattura, Europe’s biggest jewelry manufacture. Kering said Costanzo & Rizzetto would continue to work for Bulgari, Richemont’s Cartier and others in addition to supplying Pomellato.

“I think we are just at the beginning of this consolidation process among suppliers,” Olivier Salomon, managing partner at the consultancy AlixPartners in Paris told Miss Tweed. “Private equity firms see that there are fewer and fewer brands on the market but there are skills and know-how that need to be developed and preserved and they can help suppliers better value these assets.”

In the space of two years, Gruppo Florence has acquired 22 suppliers, at times doing several deals a month. It has plans roughly to double that number, giving the holding company combined sales of more than €1 billion. The group has just closed two deals in the manufacture of high-end woolen and cashmere jumpers in Italy’s northern Veneto region and expects to make further acquisitions in leather goods and shoe manufacturing in the next six months. These are two categories that are seeing particularly aggressive dealmaking, and the focus extends to the acquisition of tanneries, industry executives and financiers say.

Last week, LVMH’s Christian Dior bought a renowned leather finishing workshop called Art Lab, specialized in digital printing, according to the Italian newspaper Il Sole 24 Ore. It is located inSanta Croce sull’Arno, part of Tuscany’s tannery and leather goods cluster, located between Pisa and Florence. LVMH did not confirm the acquisition.

Gruppo Florence, which has offices in Milan and Florence, plans to offer all the categories of manufacturing a brand may need: handbags, wallets, belts, sneakers, shoes, coats, jumpers, jersey, denim, lacemaking and also prints, embroideries and other textile embellishments.

Attila Kiss, Gruppo Florence chief executive, says the time has come to strengthen and defend Italy’s supply chain. “A brand can call me and say ‘I need help’, and I shall be able to resolve their problem,” Kiss told Miss Tweed.

The fashion and luxury industries have become matters of national pride for many Italians. About 80 per cent of the world’s high-end goods are made in Italy. As in many other parts of the world, nationalism is on the up there – a natural response to the growing chaos. Last month, Giorgia Meloni took office as the head of Italy’s most right-wing government since World War II.

DEAL MANIA

Since early 2021, luxury goods sales have enjoyed a stronger than expected rebound. Suppliers have struggled to meet pent-up demand and called for investment to increase their production capacity. The spike in sales has contributed to a post-pandemic deal mania. However, as the market heads into a downturn, forecasting how much needs to be produced is proving to be a headache for many fashion brands and suppliers. The good news is that valuations have fallen slightly in the current bearish environment. Hence deals should be made at lower prices, in theory.

The trend for buying suppliers spans every sector of the luxury industry and that dynamic is reminiscent of the race to acquire the most prized independent luxury labels a decade ago, industry insiders say.

“Now you need to have the best button maker, the best chain maker, the best sneaker maker to be able to say to your consumer you are selling a real luxury good,” says Andrea Morante, chairman of Milan-based private equity group QuattroR which has invested in Italian fashion brand Trussardi. “That is changing the rules of the game within the supply chain.”

Morante, a former Gucci executive and Credit Suisse banker, was CEO of Pomellato and chairman of shoe manufacturer Sergio Rossi, now controlled by China’s Fosun International.

Morante was involved as a shareholder in the creation of the AMF Group, which is based in the fashion and luxury cluster of Bassano del Grappa near Venice. It has combined suppliers who produce metal and leather accessories for garments, shoes and bags, as well as small leather goods and custom jewelry. The AMF Group has spent tens of millions of euros to make its production more environmentally friendly and better meet the expectations of its clients, which are big luxury groups and brands.

Another aggregator is the Italian industry group Hind Holdings, whose fashion-focused arm HModa recently bought Bologna-based Rilievi Group specialized in high-end embroidery. The group, which works for brands including Celine, Fendi, Balenciaga and Prada, has invested in 10 suppliers and plans to expand its portfolio. For 2022, it expects combined sales of €185 million. “We are in the middle of negotiations with several companies and hope to announce acquisitions in the New Year,” Claudio Rovere, president of Hind Holdings, told Miss Tweed. HModa’s business model involves investing directly in the supplier, without the owners taking a stake in the holding company, as they do at Gruppo Florence.

In the world of Italian fashion suppliers, another high-profile player is Matteo Marzotto of the Marzotto textile dynasty. Marzotto was chairman of Valentino in the early 2000s before the brand was sold to Qatar’s Mayhoola. The Italian entrepreneur also tried to resuscitate the French fashion brand Vionnet a few years ago with little success. Last summer, Marzotto cofounded MinervaHub, a supplier aggregator specializing in finishes and materials for the luxury industry. It was created by the merger of two existing aggregators and is now controlled by the Luxembourg-based private equity firm Xenon. Last month, MinervaHub bought Jato 1991, a Bologna-based specialist in lacemaking for high fashion.

Like Gruppo Florence, AMF Group and others, MinervaHub describes sustainability and the welfare of employees as priorities. They know that LVMH, Kering, Chanel and others are keen to tick the sustainability box and ensure that they will not have to deal with any scandals about employees’ well-being or other ESG (environmental, social and governance) matters.

TRANSPARENCY

Transparency over where luxury goods are made, by whom and in what working conditions is another factor driving consolidation. Stefania Saviolo, a fashion expert at Milan’s Bocconi University, published The Branded Supply Chain (Bocconi University Press, 2021), a study examining the need for luxury companies to increase control over their supply chains to ensure the highest quality. Saviolo argues that we are entering an age when “the branded supply chain is the product,” he says. “For many global companies, the most challenging labor and human rights issues are likely to occur in the supply chain. Issues that were left behind the scenes are now moving up to the forefront.”

Luxury goods executives are haunted by the possibility of malpractice coming to light in a supply chain they use but do not own, by having their goods made via third parties. In other words, the rush to acquire suppliers is not just proactive but also defensive. “It’s not just a desire to protect your supply chain – but also to be protected from your supply chain,” one senior banker told Miss Tweed, on condition of anonymity given the sensitivity of the subject.

In an age when anyone with a smart phone can broadcast or report on perceived abuses in the supply chain – and instantly put a luxury brand’s reputation at risk – providing radical transparency is going to be as crucial, if not more so, as having the best-in-class artisans.

“Concerns about supply chain security are real,” says one veteran luxury goods executive. “All luxury goods firms are seeking to protect their suppliers. The pandemic has accelerated that trend. It can mean anything from providing them with low-interest loans to buying a majority stake in their business and helping them resolve a succession issue.”

COMPETITION WELCOMED

Like Hermès and Chanel, LVMH has invested in a range of suppliers in the past 30 years. Its Métiers d’Art division led by Matteo de Rosa is finalizing its acquisition of a majority stake in Nuti Ivo, one of the most important names in Italian tannery, bankers in Milan say. Nuti Ivo made a net profit of €8.65 million on turnover of €58.7m in 2021, according to the Italian media.

LVMH is keen to preserve the excellence of Italy’s manufacturing clusters for luxury goods, not only in Tuscany but also in the country’s south, in Puglia and Sicily, through the purchase of minority and majority stakes.

Kiss of Gruppo Florence welcomes more competition. “The space in the market is enormous for supply chain aggregators,” he argues. “There are hundreds of great small suppliers. The more aggregations there are, the more stable the manufacturing terrain becomes.”

Gruppo Florence’s ambition is to build a group of like-minded entrepreneurs who are co-shareholders in the holding company and have a say in day-to-day management and strategy, and keep control of their own businesses at the same time. Such a model also allows those companies to share investments in costly things such as sustainability and associated certification, on top of other back-office expenses.

“There is too much discontinuity in the luxury industry with suppliers, many of these companies are born and die too easily,” Kiss explains. “We are in a sector that is so dynamic, such work (such as becoming more sustainable) can only be done when there are stable relationships between suppliers.”

Johann Rupert, chairman of Cartier owner Richemont, has long been talking about the need to preserve and celebrate the work of artisan suppliers, even before the pandemic. In 2018, Rupert launched the biennial Homo Faber exhibition in Venice to highlight the important role they play in the European economy. He believes Europe will become the luxury “workshop for the world”. His argument is that in the coming age of robots and artificial intelligence, Europe’s artisan manufacturers will be more sought after than its luxury brands. The uniqueness of handmade skills will be perceived increasingly as the real luxury by the super wealthy, particularly those from the U.S. and China.