Key Takeaways#
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- In last week's column, we established that scale was paramount in luxury and, as a consequence, M&A should be well supported.
- Short term, leaving aside the LVMH-Tiffany saga, don't expect much M&A to occur as bigger groups have other priorities and potential sellers are unlikely to act given their recent metrics.
- Long term expect M&A to be supported by strong cash generation, a willingness from larger groups to hedge investments, and the importance of having the most qualified managers.
In my recently published book, Future Luxe, I make the following prediction: “Bernard Arnault, the chairman and CEO of LVMH, will consistently top the list of the richest individuals in the world, ahead of Amazon’s Bezos, as was already the case briefly in late 2019. His group will hold ninety to one hundred brands, up from seventy-six at the time of writing.” When Amazon is committing to thrive by charging consumers less — and ironically is now trying to build a voice in the luxury sector — LVMH, Kering, Richemont, Chanel and many others have managed to build strong brands that consumers are so enthusiastic about that price is often no object. This week, the LVMH share price hit an all-time high.
Last week, I explained why scale matters so much in a sector that is essentially catering to first time purchasers, mostly female, mostly young and, incrementally, Chinese. Scale, of course, can come from strong organic growth of existing brands driven by competent teams, compelling designs, and superior experiences. But the reality is that scale over time has also been boosted by M&A. Whether LVMH ends up purchasing Tiffany or not — the biggest (theoretical) deal in the sector — I see three reasons why the luxury sector will see a lot of M&A in the next decade, aside from the scale benefits described previously, but two reasons you shouldn’t hope for much action in the next six months. In a post COVID-19 decade for luxury, the following elements will support further consolidation of the industry:
First, once the balance sheets of the companies are repaired, IT and CRM systems funded, cash generation will likely accelerate as, unlike in the previous decade, most luxury brands don’t need to build many more stores. They just need to improve their existing fleet, which is less costly. A company like Apple has a commitment to return cash to shareholders. Most luxury companies who are family controlled even when they are listed do not have such a commitment. Special dividends or share buybacks are not a big feature of theirs, cash accumulates and acquiring other brands is often the outcome.
Second, ever worked at a family office? I haven’t either but it is easy to imagine that if you are wealthy and thinking for the next generation, you would rather not have 100 percent of your investment in a single asset. M&A in that context is a logical hedging mechanism.
Finally, people are a factor. There are some synergies in luxury, but you essentially buy growth. Theoretically, smaller brands should grow at a faster pace than larger ones, and next you buy people: those who are running the target company if you believe they are doing a good job or your own people if you think you can run the asset better than the current owners.
Again, leaving aside the LVMH-Tiffany saga, I believe deals are unlikely in the near-term for one weak and one strong reason:
Potential predators are busy trying to figure out what hit them, renegotiating rents, repurposing staff, rethinking digital and e-commerce. Not sure this is the best time to add a layer of complexity and fixed costs.
More importantly, luxury remains a sellers’ market. Deals only happen if families are willing to sell out. Small independent brands are just coming out of a period of miserable sales, many were loss making in H1 this year. In short, as the French say, they need a bit of time, if they are willing to cash out, to make the bride more attractive.
Scale is paramount in luxury and M&A will be a booster. Looking out, you might be seeing just a little blur on the horizon and think nothing of it. That could be the wave that’s coming from next year onwards.
Erwan Rambourg has been a top-ranked analyst covering the luxury and sporting goods sectors. After eight years as a Marketing Manager in the luxury industry, notably for LVMH and Richemont, he is now a Managing Director and Global Head of Consumer & Retail equity research. He is also the author of Future Luxe: What’s Ahead for the Business of Luxury (2020) and The Bling Dynasty: Why the Reign of Chinese Luxury Shoppers Has Only Just Begun (2014).