Deloitte recently released its first annual Global Powers of Luxury Goodsreport (the Report). The Report, which focuses on designer apparel (ready-to-wear), handbags and accessories, fine jewelry and watches, and cosmetics and fragrances, looks at the top 75 luxury goods companies – a mix of both public and private players. Deloitte reports that mergers and acquisitions (M&A) activity in the luxury goods sector has been strong in the past year, and highlights three key factors which explain why: (i) the globalization of luxury, (ii) value chain integration, and (iii) company consolidation.
The Globalization of Luxury
There is an ever increasing population of wealthy and upper middle class consumers in emerging markets that have an appetite for western luxury brands. This has prompted many luxury goods companies to expand their presence into new markets, particularly in Asia and the Middle East.
Spurred on by the success luxury brands are having, or are poised to have, in emerging markets, private equity players have become serious about investing in luxury goods companies. Emerging market investment groups are looking to acquire western luxury brands, a move that serves to both increase the profile of those brands in emerging markets as well as facilitate growth of the brand. Conversely, established European private equity firms are looking to focus their funds on aspirational Asian brands, particularly in China and India, with a view of helping smaller, local luxury brands grow into global luxury labels. The involvement of private equity firms has been very beneficial to the luxury goods industry, as private equity firms offer both capital and expertise to aide in the complex process of international growth for luxury goods company.
Value Chain Integration
Luxury goods companies must maintain control over all aspects of their business, from design to sourcing raw materials, from manufacturing to marketing and distribution. The ownership of successive stages of the luxury brand’s value chain can ensure that brand-appropriate levels of quality and service are maintained at all times, and will ultimately serve to protect the heritage of the luxury brand. Accordingly, vertical integration of the value chain has become an important for luxury goods companies, and has become a driver of M&A activity in the luxury goods sector.
In order to gain access to top suppliers and their technical expertise, luxury goods companies are increasingly looking to acquire suppliers in order to ensure control of key raw materials. For example, several luxury handbag and footwear brands have acquired majority stakes in tanning and leather processing companies. Similarly there have been recent mergers between mining companies and luxury jewelry makers, bringing about the ‘mine to market’ concept.
At the other end of the value chain, luxury companies are seeking greater control at the point of sale. Luxury brands looking to establish a presence in emerging markets are looking to joint-ventures or partnerships with local distributors to ensure that the brand is able to maintains a certain level of control over retail operations. Similarly, luxury brands are looking to involve themselves in the e-commerce side of retail. This has fueled deal activity between luxury brands and online retail specialists.
Operating a successful luxury goods company, especially on a global scale, requires significant experience, knowledge and resources. Consolidation, whereby smaller luxury brands come under the umbrella of a larger luxury conglomerate, is therefore not only a way for smaller companies to stay afloat in a competitive marketplace, but one way to take a take a smaller luxury brand global.
In a consolidation scenario, large luxury conglomerates bring broad expertise in the luxury goods industry, additional capital resources, and the option to share production facilities, operating systems, and real estate, among other things. Smaller luxury brands are given the benefit of being able to grow and become global luxury labels. The large luxury conglomerates in turn are able to grow their successful luxury empire with the addition of new, successful brands under their wing. The process of consolidation has therefore fueled M&A activity in the luxury goods industry, with the acquisition of many smaller luxury brands by large luxury conglomerates.