European luxury fashion M&A is in style

Tulle, neon and netting were among the fashion trends showcased by European luxury designers in 2018, but there is one more worth mentioning: consolidation. 

This year has seen a slew of acquisitions in the luxury retail space, totalling billions of euros, as the number of players in the industry becomes ever smaller. The most recent of these massive deals is Michael Kors' acquisition of Versace, which saw the American fashion label shell out $2.1 billion in a bid to fend off rival serial acquirers Kering and LVMH, which were also jockeying to bring the legendary Italian brand under their umbrella.

In a rare instance where Europe beat the US, Swiss-based Richemont's eye-watering €2.8 billion buyout of the remaining shares it did not own in Yoox Net-A-Porter tops the list of big deals in the industry, with the transaction valuing the entire group at €5.3 billion.

Consolidation is the new black

Even without including the Versace acquisition, which was announced in September but has yet to close, this year was well ahead of its predecessors in terms of the amount of capital being poured into M&A deals in the European luxury fashion industry. So far in 2018, nearly $5 billion has been spent acquiring 18 luxury fashion companies, more than the last four years combined, per the PitchBook Platform. Deal count remains slightly below last year's 20, but there is still time left to push it ahead.

The same can also be said on a global scale, with acquirers having spent $7.5 billion on businesses within this space, compared with around $5.1 billion in 2017. While there has been a smattering of deals across Asia and the US, Europe consistently comes out on top both in the number of transactions and their value, cementing the continent's position as the birthplace of luxury.

But what is driving this?

Empire building from overseas

To understand the M&A frenzy for European fashion, it's necessary to look elsewhere than the continent itself—most notably, to China. 

Consumers from the Asian powerhouse represent a high proportion of the global luxury market, one that is also getting bigger as the country's middle-class becomes more affluent, fueling luxury consumption. According to research from McKinsey, the Chinese upper-middle class—those earning between 106,000 Chinese yuan (around €13,500, or $15,200) and 229,000 yuan annually—will account for 54% of urban households, compared with just 14% in 2012.

However, due to a lack of homegrown brands with a long-standing luxury pedigree, Chinese consumers are happily splashing out on European brands. The allure of millions of fashion-conscious, high-net-worth individuals has proven to be too much of an opportunity for Asian investors, intent on claiming a piece of the luxury pie.

Two of these are emerging as future hegemons in luxury fashion: Shandong Ruyi and Fosun International. The former has spent more than $4 billion on overseas acquisitions in the last three years, including tailor Gieves & Hawkes and Swiss luxury brand Bally. Its chairman, Qiu Yafu, has recently expressed his desire to build China's first high-end fashion empire.

Fosun, meanwhile, has performed a much wider array of acquisitions in terms of industries but is still making a name for itself in luxury fashion. This has come from several high-profile deals, such as the takeover of France's oldest surviving couture label, Lanvin, and lingerie brand Wolford, which Fosun bought for €55 million.

It's not just Asia that is eyeing European businesses. As mentioned, Michael Kors has made its foray into true luxury with the Versace acquisition, as it follows in the footsteps of European fashion conglomerate. For the American business, it's not just about establishing a presence in Europe like some of its Asian counterparts, but also diversifying its product offering. MK is trying to shift away from clothes which appeal to the masses, a sector particularly under threat from fast-fashion companies and ecommerce, and into high-end retail, which is less vulnerable to the rise of internet shopping.

Despite the increased interest from overseas, European companies are still the most active acquirers, with the same names—LVMH, Kering and Richemont—popping up time and time again.

The price of luxury

It's clear that overseas investors have driven more M&A activity in luxury fashion, but the question remains as to why their interest is rising. The answer is quite simple: its growth potential.

The overall luxury market grew by 5% to reach €1.2 trillion in 2017, with personal luxury goods reaching a record high of €262 billion, according to research from Bain & Company. Within the next three years, this segment of the market is expected to rise at an estimated 5% CAGR, which would value the personal luxury goods industry at some €305 billion. The companies themselves have experienced an increasing amount of growth, with nearly two-thirds of luxury brands seeing a rise in revenues, such as LVMH, which saw revenues increase 13% in 2017 to stand at €42.6 billion. For conglomerates looking to spread their tentacles, these make for attractive acquisition propositions.

One could also ask if the industry and luxury companies are growing, what is the incentive to sell? Data from Bain's luxury report noted that while 65% of brands saw revenues swell, few managed profitable growth, partly driven by some of the smaller players' lack of scale.

Looking at the revenues of some of the remaining independent brands paints a dismal picture. Italian fashion house Salvatore Ferragamo, for instance, reported a drop in revenues in 1H 2018, falling to €673.7 million from €717.9 million in the same period the year before. On the other hand, when looking at the top 10 luxury goods companies in terms of revenue, all own multiple brands, per a ranking put together by Deloitte. This seems to suggest that those conglomerates which own a stable of brands are consistently more profitable.

In an industry faced with profitability issues and obstacles created by online shopping and changing consumer tastes, many companies might choose to cut their losses and sell, with an increasing number of acquirers to oblige them. And luxury's powerhouses will be happy to continue their quests to build empires.