It can be tricky pairing creative types with rational, demanding investors. But sometimes the need for shareholder cash means sticking to the bigger picture, especially when you need to expand. Look no further than the designer brand names Prada, Versace and Salvatore Ferragamo, all tipped to swish and flounce toward investors in the next 12 months.
The last big luxury goods buying binge was in the late 1990s when French multi-brand conglomerates Pinault-Printemps-Redoute, now rebranded PPR, and Moët Hennessy Louis Vuitton (LVMH) bought a stack of such eye-watering labels as Gucci, Yves Saint Laurent and Balenciaga, creating two mega multi-brand luxury goods groups.
But some superstar labels – Prada, Armani and Versace, to name but three – have remained independent. For now. Giorgio Armani, it’s said, still can’t make up his mind whether to list. Yet the pressure to give up some equity must entice many. Luxury goods players need huge shots of cash if they are to launch themselves in the new markets of China and Russia; high-end retail space in prime locations, distribution investment and marketing sprees don’t come cheap.
‘In purely competitive terms, you’re seeing fashion and luxury goods players consolidating, so medium-sized companies get to grow and benefit from the global resources an IPO would bring – or they fall by the wayside and are acquired,’ explains Bernstein analyst Luca Solca. ‘Listing also presents an opportunity to have their assets valued by the market as a driver and motivator. The other part of the story is that the luxury and fashion cycles are both very strong.’
Sale prices
Not all fashion companies are equal, however, and there are many reasons why some companies would decide to give up part of their equity, according to one highly placed European luxury goods company IRO.
‘Luxury goods and lifestyle all contain very different categories that have different life cycles and different valuations for each product,’ he explains. ‘Then you have a company like Armani, which is constantly mentioned as being put up for sale. Yes, it will be sold some day. Giorgio Armani is not eternal. Armani is a business that’s difficult to buy and value, however, because the company rests on one man. Giorgio is everything: the designer, the boss, the major shareholder. It’s his show.’
But aren’t brands bigger than the person who founded them? What about Versace, whose founder Gianni Versace was murdered in 1997? This international fashion house has hardly withered since. ‘Yes, it has survived okay, but I don’t think it has the same buzz around it, certainly not compared with Armani,’ adds the European luxury goods IRO.
The alternative to floating stock is selling to private equity. But the jitters in the US sub-prime mortgage market have tightened belts and generated worry about leveraged buyouts, despite the potential for a higher ticket price. ‘If you were selling shares on the open market, you’d be pricing at a discount of possibly 25 percent,’ says one luxury goods insider. ‘But if you were selling to private equity, that discount could be just 10 percent, or even less.’
Emanuele Pedrotti, a director at business restructuring consultancy AlixPartners, thinks a listing for certain fashion houses would be a very good thing indeed. ‘If you have a company that is all creativity, even if you have a genius for design, you waste value,’ he points out. ‘If you also have good management and rationality, however, floating could be an opportunity to find that balance. Look at Gucci: it’s a very well-managed company, and there’s a proper balance between creativity and management. It took years to find that balance.’
There’s also the matter of control. Most fashion companies, particularly family-run concerns, are unlikely to give up meaningful control to investors. Is this such a bad thing? Not necessarily, says Solca. ‘Even if shareholders don’t have direct control, they still have an influence and they may find the controlling shareholders are excellent people they can have confidence in,’ he maintains. ‘Look at Inditex, the owner of Zara: two thirds of the company is owned by the founder, but it remains a very good company.’
Swings and roundabouts
For investors meanwhile, the luxury goods market continues to evolve. Traditionally it has been a highly cyclical industry, doing well in good times and suffering with everyone else during bad. But luxury goods players are increasingly making themselves recession-proof by cleverly mixing and blending their product range, particularly accessories.
Handbags, for example, can cost a few hundred dollars, or even several thousand. ‘A lot of companies have done incredible work in producing many different price categories,’ says one luxury goods analyst. ‘Some are still outrageously expensive. Some people will say, Why are you doing this? You will dilute the brand. But these companies know how to market themselves, and they know where to stop. They’ll continue to be exclusive.’
Davina Curling, fund manager of the F&C European Dynamic Fund, says luxury goods players are also increasingly gearing themselves to a recently evolved category: the uber-wealthy. ‘You’re seeing a polarization, a structural shift from luxury to superluxury,’ she notes. ‘In Japan, older consumers are demanding super-luxury. Look at the high-end watch market, which is a similar market to fashion. We’re seeing amazing numbers there.
‘In July, sales of the very top-end watches rose 38 percent. I think there’s significant long-term growth likely to come from wealth in emerging markets like Russia and China. Luxury goods players can probably still exploit supply chain inefficiencies; most of them manufacture in Europe and can probably get away with manufacturing elsewhere. The only real risks are of global contagion and currency fluctuations. A 10 percent move in the Japanese yen – which we saw recently – will make imports more expensive.’
