Luxury goods sector something of a rare find in the M&A market in 2016
- 23 luxury cross-border deals in the first nine months of 2016, worth a total of US$3.6bn. The number of deals is already 10% up on 2015
- Value of transactions in the first nine months of the year is 21% down on the same period in 2015
- Over half of all deals targeted EU-based companies, with the UK, the US and Italy the most targeted countries by volume.
- Most targeted country by value was Germany with three deals worth US$3.3bn
In a climate of political and macroeconomic uncertainty in which the deal market has failed to compare to the blockbuster standards of the past two years, luxury cross-border deals have seen a 53% rise in volume in the first nine months of 2016 compared with the same period in 2015.
And despite a 21% drop in value year-on-year, the sector is up 27% compared with the first nine months of 2014.
Consolidation as strategy for market growth
The top 5% of the luxury industry was not as materially affected by the economic downturn as was the rest of the industry. And there is a major drive among those big luxury companies to build up or round out their portfolios.
Marc Levey, co-chair of the Firm's Luxury & Fashion Industry Group
Consolidation has been a key factor in strengthening the luxury M&A market in 2016.
The largest deal of 2016 saw luggage maker Samsonite purchase premium bag maker Tumi for US$1.8bn in March. The deal will give Samsonite the foothold in the luxury market that it previously lacked.
In the same month, US cosmetics company Estée Lauder acquired the French prestige fragrance brand By Kilian for an undisclosed fee. Not only does this consolidate a number of high-end fragrances under the company’s umbrella but it also expands Estée Lauder’s geographic reach – another contributing factor to the growth in cross-border M&A.
“There are a number of key acquisitions being executed because companies want to grow in certain geographic areas,” says Levey. One such deal, despite not being cross-border, was US cosmetics giant Revlon’s acquisition of rival Elizabeth Arden for US$870m in June. “Revlon did the deal, presumably, because of its international network. Elizabeth Arden has a tremendous infrastructure there for its brands,” says Levey.
Equity and elegance
Buyout firms have also been particularly active in the luxury M&A market in 2016. Three of this year’s five highest-value cross-border deals have involved private equity firms including the sale of UK company Signet Jewellers, the world’s largest retailer of diamond jewelry, to US firm Leonard Green in August for US$625m.
And according to Paris-based Alyssa Gallot-Auberger, Baker McKenzie M&A and private equity partner, as well as a Steering Committee member of the firm's Luxury & Fashion Industry Group, the two sectors complement each other perfectly.
"There are a lot of good luxury brands that need capital to fund expansion, for example, which tends to be capital expenditure intensive, and private equity has that capital,” she says. “Private equity is also known for successfully building on synergies and making things lean and mean, which is a help to brands looking to expand.” And for private equity firms, the association with luxury brands brings a certain cachet.
There is certainly an appeal to invest in the luxury sector [for private equity], particularly in fashion, because of the immediate brand recognition it provides. It turns a private equity fund into a name overnight thanks to its investment in a well-known brand.
Alyssa Gallot-Auberger, Baker McKenzie M&A and private equity partner
However, not all is rosy in the luxury market – the slowdown in the Chinese market and a drop in tourism after the recent terror attacks in Europe mean that brands can no longer rely on China’s label-conscious consumers to provide growth.
Companies are also facing a world where younger demographics and faster digitization and consumption are changing the way business works and how brands are perceived. And it is the latter factors that will drive inorganic growth in the years ahead.
Boomers and Millennials: Different strokes
Luxury brands need to appeal to the millennial generation or risk losing relevancy. A study by the US Census Bureau in April of this year found that the number of Millennials (18-34 year olds) had surpassed Baby Boomers (51-69) for the first time. And they are a very different consumer group from their more mature peers – more driven by sustainability and authenticity than previous generations.
“Millennials still want to spend their money on luxury but in ways that they feel are more appropriate [than previous generations],” says Gallot-Auberger. “They are changing the definition of luxury, focusing on experiences, not possessions – which means there is room for the luxury industry to develop high-end travel, offering unique and exclusive experiences, those that are not available to everyone. Millennials are more socially-aware, looking for products that are sustainable and brands that correspond to their values. Most large brands already have corporate social responsibility initiatives and, in terms of M&A, you're going to see them looking at acquiring niche brands with a clear social agenda and offering a more 'sustainable' product line.”
Even more importantly, luxury brands will need to up their digital game: "Millennials would much rather have an experience looking at their mobiles and buying online than waste their time going into a store and being oversold by a salesperson,” cautions Levey.
Digital growth and opportunities
Big luxury brands need to seize digital opportunities to gain competitive advantage. It is imperative that these companies construct an online experience to match the physical footprint that has traditionally served them well.
“Companies need to create an experience online where the consumer gets the same kind of luxury sensation as they do when walking into a prominent Fifth Avenue high-end luxury brand's store in New York,” says Levey.
Companies are also looking toward a major shift to a “see now/buy now” model – in which catwalk fashions are immediately available in stores and online – and this will require a heavy investment in technology.
“Brands are starting to rethink the definition of seasonality. Brands are broadcasting a show live in the morning and you can buy the looks from the show that afternoon,” says Gallot-Auberger.
“There is a huge logistical issue getting the product from the catwalk to the purchase point – either online or in-store. It will be hard for brands to put in place the necessary technology organically, which may well translate into JVs or acquisitions of tech companies that will give them the ability to meet the technological challenges quickly.”
The luxury sector is at a crossroads. It is still a hugely lucrative industry – worth €250bn (US$281bn) in 2015, according to consultancy Bain – however, it needs to evolve to maximize reach and value.
Brands that reach into new geographies and sectors, tailor to Millennials and tame their technology with smart inorganic growth will be the ones that thrive.