Luxury Brand Mergers And Acquisitions Ready To Multiply

The New York Times recently reported on “The Luxury Arms Race:  Michael Kors and Coach Target Takeovers.”  They wrote, “The global luxury market has long been dominated by three giants – LVMH Moët Hennessy Louis Vuitton, Kering and Richemont. Now, it has two hungry American players with which to contend.”  That is Coach and Michael Kors both of which recently acquired luxury-leaning brands, Kate Spade (Coach) and Jimmy Choo (Michael Kors), but more importantly, telegraphed their plans to do more strategic acquisitions in the future.

This has led many to speculate about the formation of an American luxury brand conglomerate along the lines of the big Euro-three, or as Greg Furman, founder and Chairman of the Luxury Marketing Council, said “LVMH-izing American luxury.”

I for one am cautious about the prospects of more European-style luxury conglomerates.  I believe that meeting investor demands for quarter-following-quarter growth are at odds with the very foundation of successfully managing a luxury brand, which can’t be pushed out too broadly in the name of growth. For any luxury brand, growth is always desirable, even essential, but not at the expense of the integrity and authenticity that made the brand great in the first place.

From my vantage point, many of the brands held by the Euro-three have sacrificed much of that in the name of growth and profits. Chris Ramey, founder of The Home Trust International, a consortium of brands serving the luxury home market, shares that view, “Consolidation is anathema to luxury. Public companies ultimately have a fiduciary responsibility to increase sales and profits, which means more commercialization. Yet scarcity and exclusivity will always be a pillar of luxury.”

But as Ramey so accurately notes, “Consolidation is the natural order of capitalism,” so I reached out to some prominent thinkers in luxury today to talk about this trend toward luxury brand consolidation.

Luxury consolidation is inevitable

One word – Inevitable — sums up the consensus of those I spoke with, largely due to the current sorry state of retail today. “More consolidation across retail is inevitable, owing to the lack of top-line growth, which puts pressure on finding cost efficiencies and leveraging scale and scope,” says Steven Dennis, President SageBerry Consulting. “With stagnant growth, like we are seeing today, it makes more sense to buy market share, rather than to invest a lot of time and dollars to try and steal it.”

Depending on the acquisition target, conglomerates can buy market share, or as Furman notes, they can buy growth by picking off an emerging luxury brand early as it starts its ascendency. It is easier today to take this early-stage strategy thanks to the internet where designers and entrepreneurs can build a global luxury consumer following faster and more cost-effectively than in the “old days when $300 million or more was needed to invest in advertising and marketing to launch a luxury brand,” Furman relates.

More M&A driven consolidation may prove the lifeline for both the acquiring and acquired. “The conglomerates are on an unprecedented early stage brand acquisition binge because they need to survive and thrive as their legacy brands fail to rejuvenate and stay relevant,” says Milton Pedraza, CEO Luxury Institute.

This need for legacy luxury players to rejuvenate and stay relevant means the emerging luxury players are ripe for the picking. “The long tail effect is starting to create opportunities for the upstarts in luxury, as millennials embrace more local and boutique offerings,” Pedraza says.

But the long tail opportunity in more niche offerings isn’t only happening among millennials, but as Ramey points out, “High-net-worth-individuals have the capacity to acquire anything they desire, which means they will look for even more sophisticated and rarer brands that are quiet, as opposed to loud and over-marketed.”

Luxury consolidation will be problematic

With the luxury brand M&A arms race on, also inevitable will be challenges to make those consolidations work. The Euro-three are more experienced at this, but as Pedraza points out, “They struggle with a command and control mindset that tends to stifle the young brands.” This could give the aspiring US-based groups an edge, but he also says, they “have yet to prove they can execute.” That said, Coach has more experience than Michael Kors, having successfully integrated Stuart Weitzman back in 2015.

“The strategic nexus on which it all depends isn’t the numbers on the balance sheet,” Furman believes, “But the companies being able to integrate radically different cultures with different value systems.” He goes on to point out that financially-driven buyers don’t dig deeply enough into these areas.

In addition, as the companies merge and eliminate duplicate functions, it is critical that the best senior leadership staff remains to guide the merged entity. “Maybe the acquired company has the best marketer, but they are thrown overboard because the one in the acquiring company is more vested,” Furman notes.

On the whole, all those I spoke to agree that a US-led luxury conglomerate will be best positioned to take advantage of the emerging market opportunities in the world’s largest luxury market: the USA. “The new American ‘LVMH’ has feet on the ground here and will be faster and smarter about making the good picks than the Europeans will be,” Furman predicts.  He continues, “They have a pan-European bias and have for too long believed that in the States the only luxury markets that mattered are New York and Los Angeles,” noting that the Euro-three are heavily skewed toward Euro-indigenous brands.

What’s next?

Looking to what the next 12-18-24 months hold, I think Coach is in the best position to pull off more strategic acquisitions, if that continues to be its plan after it integrates Kate Spade. In the NYT article, Michael Kors chairman and CEO, John Idol, is quoted as saying “Kors is not interested in emerging faces, but rather those with ‘some longevity’ that ‘may need to have a structure to accelerate their growth.’”

Given the rapidly shifting environment in which we live, that may mean Kors will be still be waiting on the sidelines, while the best emerging new-luxury brands get picked off by Coach or another company with capital to invest and willingness to take a risk in a younger brand.

“It’s a dynamic market,” as Pedraza says, and never more so than among the digitally-native brands with innovative new ideas about what luxury is and how the young consumers on the road to affluence want to interact with luxury brands (e.g. Everlane, Blue Nile, Glossier, Knot Standard, Naadam and the 300 other “New David” brands identified by Marvin Traub Associates).

In acquiring an emerging luxury brand, the company gains far more than a new brand to take to market. They will be acquiring much needed human capital who will bring new blood, new ideas and new approaches into a more established company where it is most needed.

As we have seen with Walmart’s recent acquisition of and Bonobos, it acquired more than new brands, but its next-generation business leaders. “Marc Lore from Jet is one of the most respected next-generation retail leaders and you can see how much authority they are giving him,” Dave Knox, author of Predicting the Turn, shared with me recently. “And Bonobos’ Andy Dunn is an even more prominent thought leader in the next generation of retail. So they have brought two amazing leaders into the fold that are now part of Walmart.”

The time is ripe for a US luxury conglomerate, but it will be based upon a digitally-savvy new world model, rather than an old world one. “The Europeans understand the importance of craft, sophistication and aesthetic in the luxury market, but Americans have the edge in understanding the new ways luxury consumers want to connect with brands,” Furman says.  Net/Net: “Americans will do it better,” he predicts.