Last month, The Business of Fashion hosted a webinar with a panel of leading experts including Gary Wassner (CEO of Hilldun Corp), Elsa Berry (managing director and founder of Vendome Global Partners), and Pierre Mallevays (co-head of Stanhope Capital), to discuss the current position of fashion’s M&A market.
The Perseverance of Luxury
Pre-pandemic, the luxury market was a somewhat stable place to land as an investor. Growth was more important than profit, and it was understood that brands take time to grow. Yet Covid challenged, and in some cases even obliterated, brands that simply were not strong or agile enough.
The luxury market slowly started seeing a rebound in 2021 and this is a trend that we’re still seeing today despite the multitude of global uncertainties. You can only keep key players and consumers away from their instinctive habits in doing what they do best for so long. For luxury brands, it’s about creating immaculate pieces that get snapped up. For consumers, it’s about snapping up said immaculate pieces. Those that survived Covid are thriving, and for many brands, Covid encouraged out of the box thinking.
The fashion and luxury M&A market is entering a new phase. Investors are looking for profits, not just growth. Those who feared wholesale must now embrace it. So many factors are at play – fear, consumer confidence, and whether historically dominating markets will continue to take the lead. We don’t know if China will ever bounce back (the Chinese luxury market had reached up to $123 billion prior to Covid), and Europeans also seem to be slowing down. Brands have had to really look at their target consumers. Millennials aren’t enough – Gen Z is now important too and they are consuming at a rapid speed.
Investor trends are not unique to this industry but those trends have a unique impact on brands. So, where does this place fashion brands on the attractive acquisition scale?
To Invest or Not to Invest
Fashion and luxury have historically been industries that corporate finance are nervous of. You need to understand what makes the brand work in order to invest in it. At the end of the day however, fashion is not frivolous. It’s a need. Nudists aside, everyone gets up and gets dressed. Clothing is a necessity. And as much as anti-fashionists want to object to it, everyone has a certain style. Fashion is expression, self-reflection, and empowerment. It will never become obsolete as an industry.
It’s currently a buyer’s market, without many buyers. Investors and their financial advisors need to start jumping on the fashion bandwagon, but first they must take the time to understand the products and brands in order to make an educated assessment. Management and talent in a fashion business are two completely different things, and this is what differentiates it from businesses in many other industries. The power of the brand is what translates into resilience and agility. But this power needs to be supported by management heads that understand how to wield and develop it.
Price wars
Historically, exorbitant prices were paid for brands that didn’t necessarily have the fundamentals in place. It was all based on future expectations and projections rather than current performance. In today’s market, every brand under the sun has been put up for sale at some point or another. It begs the question though – how are these sales actually measured? Why are brands currently rushing to sell? Did the Covid shake up scare them or are they looking for investment to innovate? How does a brand or an investor even judge current performance in this new landscape?
Investor Strategy – What’s on The Menu?
There isn’t a current appetite for distressed heritage brands that are dormant and need to be resurrected. Investors are now assessing growth and current profitability at the same time. Creative directors and general management are also being dissected. Lost leaders won’t be able to carry a brand, and this won’t necessarily need an expert to analyse.
For example, anyone with an insight into fashion could tell that Riccardo Tisci felt quite mismatched as Chief Creative Officer at Burberry, while he was making magic happen as creative director of Givenchy before that. While Tisci did re-energise the brand image towards a younger, streetwear styled demographic, there was a clear disconnect between Tisci’s designs and Burberry’s British heritage history. Tisci has just been succeeded by Daniel Lee, so it will be interesting to see the growth trajectory Burberry takes following this leadership change.
Future growth is also at the front of buyers’ minds. Taking Burberry as an example, if you were to buy a brand of that size, where do you expect to build it to? How would you grow a brand that is already large and in a saturated market? This of course is a challenge for the investor, but it’s enough of a factor to deter some buyers from going after these larger brands. Key emphasis on some, as bigger can be better and size isn’t necessarily the issue, as we’ve seen through the recent growth of mega brands like Chanel and Dior.
Distribution channels are one of the key metrics by which success is measured at the moment. Following Covid, there has been a diversification of distribution. E-commerce, digital, wholesale, you name it. If you haven’t already diversified your distribution channels, you’re probably not doing well. Dior made £4million online alone recently. However, this isn’t true for all brands. Chanel, for example, continues to be a heritage brand that refuses to create an online digital distribution channel.
Flavours of Available Buyers
Given the state of the market, what kind of buyers are out there? Pre-pandemic investors from China were generally interested in legacy companies and recently this activity is re-emerging. For example, Alexander Wang has recently secured his first ever external investment, a significant move for the family-owned brand. A minority stake of the company was taken up by two China-based entities, venture capital fund Challenjers Capital and institutional investor Youngor Group.
The family office buyer is also still an active participant and still strategic. For example, sustainable French contemporary fashion brand Sézane recently secured investment from the L’Oréal founding family’s fund Téthys Invest. Ultimately, you want a strategic buyer who has an existing understanding of the fashion industry. A buyer who isn’t just undertaking an accounting process but is fuelled by both passion and intuition for the business.
A strategic potential purchase on the horizon is Estée Lauder Cos. in talks to acquire Tom Ford in what could be a $3 billion deal. Tom Ford’s biggest asset is its beauty business, not fashion, which Estée Lauder specifically has its eye on. If this deal were to proceed, it could create pricing competitions for large and midsize luxury fashion brands weighing sales of their own, such as Georgio Armani.
Deal or No Deal
Since there are fewer buyers with hefty appetites now, there are fewer deals. However, the lack of saturation means the right deals will happen. It will be successful for those in tune to the industry.
The Business of Fashion’s expert panel predicts that the market will improve to see a higher frequency of transactions as valuation adjustments become acceptable to all parties. There was a large disconnect between what sellers want, and what buyers are willing to pay, but this is now slowly regulating. An imminent recession indicates continued volatility and uncertainty, and so price adjustments will continue to happen, with a larger need for price justifications. The market won’t go crazy, but it will certainly pick up. Luxury-goods sales will continue to prove resilient in the eye of a global recession, as we witnessed during the pandemic.
Ultimately, it’s a large cost to go to market and fail. Gearing up your resources to publicly announce you’re up for sale, without anyone catching the bait, can severely harm a brand’s image. M&A in fashion, like with any other industry, can make or break the trajectory of a company. With the right strategic buyer, the appropriate injection of cash, the availability of adequate resources, and all at the right time, luxury brands can punch to new heights. As with anything, a successful investment and merger requires severe analysis into multiple facets. With fashion however, it does require that extra whimsical touch – that feel of pure, luxurious, gold-mine magic.
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