If you drive a Range Rover Evoque to Lidl to pick up a case of wine, you are what is officially known as an “hourglass consumer”.
This is a phenomenon in which, when hard times hit, shoppers maintain their spending on luxury items while making cuts elsewhere, for example, by shopping for groceries at the discounters.
It is why retailers in the “squeezed middle” (Marks & Spencer is a name that springs to mind) have found trading, particularly in general merchandise, so difficult.
And the top-end luxury sector has seemed recession-proof. While the wider retail sector has been struggling, fashion groups from Burberry to Richemont, owner of the Montblanc and Cartier brands, have continued to expand.
This expansion has not only been organic but has also, in large part, been led by mergers and acquisitions.
For example, the Kering Group, headed by Francois Pinault, entered the retail sector in 1990, taking over Au Printemps before spending the next two decades hoovering up brands including Gucci, Bottega Veneta and Balenciaga. More recently it has taken majority stakes in Christopher Kane, the UK luxury brand and Pomellato, the Italian jewellery group.
Its arch rival, LVMH, has also been built into a luxury empire by its billionaire dealmaker owner, Bernard Arnault, dubbed the “wolf in cashmere”. According to Bloomberg, Arnault has spent $11.6bn (£7.7bn) on acquisitions in the past decade, twice the amount of his nearest rival.
They are only a handful of the world’s top luxury groups whose corporate ambition has led to a flurry of deal making in order to grow, gain cost and revenue synergies and exercise greater control over the supply chain of their products.
There is no sign that this M&A hunger is abating either.
During the second half of this year, the Italian retailer Yoox snapped up Net-A Porter, the online retailer, for more than €1bn (£710m) while LVMH bought Luxola, the Singapore-based e-commerce group. Permira, the private equity group, found a host of willing buyers for its shares in Hugo Boss, netting at least 2.2 times its original investment. While at the end of last year a French court had to intervene to resolve a row over LVMH’s stake-building in rival Hermès.
According to Deloitte, the three main trends driving this M&A activity in the luxury sector are globalisation, integration and consolidation.
A fast-growing population of wealthy and upper middle class consumers in emerging markets means many US and European premium retailers have bought or entered into joint ventures with distributors to better access these regions.
Luxury goods companies’ desire to integrate and control all aspects of their business – from product manufacturing to real estate – has also led to M&A activity. This is why fashion houses are buying tanneries and crocodile skin producers and paying huge sums to secure their global flagship stores in hubs such as London, New York and Paris.
Sometimes M&A deals have simply been led by the desire to consolidate and unify a brand’s operations. Coach, the American designer of posh handbags, Burberry and Ferragamo, among others, have been taking direct control of their joint ventures, franchised and licenced operations for the past decade.
M&A deals come from all quarters with Europe’s old masters of fashion competing against new entrants such as Fung Brand, the Hong Kong-based luxury fund, which has bought stakes in Sonia Rykiel, the French fashion house, and Delvaux Createur, a Belgian leather maker. Mayhoola, the Qatari investor, and another new entrant, bought the Valentino Italian fashion group in 2012 for a reported $850m – 20 times earnings.
However, private equity groups from Blackstone to Lion Capital have been among the most active buyers, often providing early capital to help luxury retailers expand overseas.
Analysts and M&A bankers believe there is still plenty of fodder to feed the luxury
retail pipeline. The family-owned Clarins, which has revenues of more than €1bn, and the Italian-listed Ferragamo could be targets soon, as could Burberry or Tiffany & Co for buyers with very large cheque books.
