Will the Fashion Industry Have a Post-Pandemic Wave of Acquisitions?
I am sure I am not the only one that sometimes randomly finds out a brand I love belongs to another brand that belongs to a group that also owns that other brand I adore. Last week I even talked to a friend about how most surfwear brands belong to large groups nowadays. But this phenomenon is definitely not limited to fashion. Many other industries are owned by large corporations that buy every small player doing well in the sector. But now and then you have a big industry shift that shakes things up, brings many small players and then, slowly, it consolidates again and goes back to big corporations controlling the market. This usually happens in four stages, which I will explain further.
In fashion, the large group format is at its peak. In 2019, 97% of economic profits for public fashion companies were earned by just 20 corporations. Luxury is mostly owned by a few large groups, so is fast fashion, e-commerce, and other niche sectors you maybe thought were made of independent disruptive brands. There are some independent designers and brands resisting the large corporations’ pressure of constant growth, but many of those may be facing a hit on their values with the economic shook Covid-19 brought. Then you have large brands struggling and looking out to be bought by a group before they face bankruptcy. And for some, that moment already arrived and now they just want to be bought by someone that will keep the name alive. Coronavirus opened the sales for large groups to shop for smaller or struggling fashion players, and they are being smart about it.
The Four Stages of Consolidation
Before talking about the acquisitions themselves and the challenges of being independent against giant corporations, let’s understand why everything seems to be becoming a group. Consolidation of the market is not exclusive to the fashion world, it is natural in any industry. According to a Harvard Business Review article from 2002, industry consolidation happens in fours stages:
1) Opening: It all begins with a new segment or an innovation that changes the industry’s format. This stage starts with a single player or a monopoly emerging in a deregulated or privatized industry. However, soon this 100% industry concentration drops to the three largest players owning 10–30% of market share. To survive this stage, companies need to defend their first-mover advantage by establishing entry barriers to the industry, building scale, and creating a global footprint. To give a current example of this stage, the cosmetic brands created by “beauty gurus” from Youtube and Instagram are a recent shift in the beauty industry that made many small independent brands pop up and be successful around the world.
2) Scale: The following move is all about building scale. Major players begin to emerge and build empires by buying their competitors. In this stage, the top three companies will own from 15% to 45% of the market share. An example of a stage 2 industry is the fast fashion e-commerce in Europe and the US, with players such as Boohoo and Assos expanding fast and buying competitors.
3) Focus: This is the stage when, after a ferocious industry consolidation, companies start to aggressively outgrow their competition by focusing on expanding their core business. By this point, there are still around 12 major players with the top three of them controlling from 35% to 75% of the market. An example here would be the luxury fashion industry, where major powerhouses such as the groups LVMH, Kering, and Richemont, and the stand-alone Hermès and Chanel own most of the industry.
4) Balance and Alliance: Titans of the industry reign, with the top companies owning 75% to 90% of the market. With this, growth becomes more challenging and competitors start creating alliances to keep their leading positions. To grow their core business, sometimes they enter a new industry in the early stages of consolidation. In fashion, a great example would be sports brands industry, where Nike Inc., Adidas, Under Armour and Puma basically own the market — and even support each other in social media now and then. Just Nike Inc. and Adidas counted for 56% of sportswear market share worldwide in 2017. To expand their business, all started working with celebrities and designers to enter a different niche of the industry and grow.
Therefore, it’s possible to see how the consolidation of industries and major players is something natural and always on the move, especially when there is a wave of innovation. However, not everyone wants to be bought by a large group. This brings consequences to the business model of brands and is a complex decision making, especially when there are not many other options.
If It Can Be Hard With Them, It Could Be Even Harder Without Them
For 17 years, Stella McCartney was part of Kering Group, the owner of brands such as Gucci, Saint Laurent, and Balenciaga. In 2018, the designer decided to buy back her 50% part of the company to be independent again. The decision was made base on McCartney’s desire to recover control of her own brand and focus more on the sustainability side of it, without the high pressure of constant growth demanded from investors of the Kering group. But the designers quickly realized the difficulties of being an independent brand and, less than a year after breaking up with Kering, she sold a minority part of her brand to LVMH. As stated by BoF: “She needed the support that comes with being in a group — managing global distribution, IT, human resources and other functions — to seriously compete”.
Being an independent brand is a challenge and many have shared the obstacles of it. The French designer Jacquemus, who owns a brand under its name, shared his experience running an independent business in an industry of giants:
“It’s a lot of work and a lot of sacrifice, because I’m still independent (…) I’m going to stay independent. I’m never going to work for anyone (…) I enjoy a priceless luxury that no annual salary of 30 million euros could equate. It’s not always rosy, so I tell myself that all the time.”
Jacquemus goes throw what many other independent brands do. Competing with large corporations with huge financial resources is not easy, but not everyone wants to be bought out by a major company. The majority of these groups have constant pressure from shareholders and investors to present growth and this pressure cascades to the brands under their umbrella. This pressure can sometimes take away the creative side and put the brand’s values to test.
Two giants that stand-alone doing just fine are Chanel and Hermès, mostly independent and family-owned houses. Longchamp and Furla are also independent brands are have been quietly rising by positioning themselves in the gap luxury left when it increased its prices.
This scenario also makes it very hard for new entrants in the industry. The more the market consolidates, the more entry barriers there are. It’s not easy to compete against multi-billion dollar corporations without yourself having a big capital to invest. At the same time, having new and smaller brands keeps the freshness of the market. LVMH recognizes that by sponsoring new brands with the LVMH Prize. As Antoine Arnault, the son of LVMH CEO that occupies high positions in the group, said:
“When we look at the industry as a whole, we need those younger, smaller brands to exist, to create interest into the market (…) If you only have three big TV channels, isn’t it going to be a little boring?”
Indeed, diversification is important to keep the industry interesting and that’s why, for these groups, independent competitor brands are important.
However, Jacquemus, Chanel, and Longchamp are part of the lucky ones doing well without the support and resources of a big group. Others are not as lucky, especially when a crisis such as the one we are living in now affects their business.
Who Is In the Shelf and Who Is Looking For Shopping Right Now?
The financial impact of lockdown measures in many countries due to the pandemic is hitting hard the fashion world and many companies already didn’t resist. Even before the crisis came, brands such as Victoria’s Secret and Tiffany & Co were looking forward to being bought by large conglomerates. But then lockdown happened and these groups, that have the means to survive better such a drop in sales, realised buying companies would not only be cheaper after the pandemic, but they would also have more options to choose from. J.C. Penney, Restoque, and J.Crew are some of the retailers that are renegotiating their debts. Less consolidated brands such as The Modist, the modest fashion e-commerce that opened two years ago, had to call it quits with the pandemic — and that’s everyone’s worst fear. No one wants to officially go out of business and fashion groups and private equity companies not only will but already are playing on that fear.
LVMH suspended, for now, it’s Tiffany & Co purchase, while the jewellery sector is one of the industries that most suffering from Covid-19 impact. The private equity firm Sycamore Partners decided to don’t by the troubled Victoria’s Secret, and just recently the lingerie brand’s UK arm collapsed into administration. All interested buyers of Brooks Brothers are patiently waiting to buy it in bankruptcy, and rumours are that’s exactly what the retailer is negotiating right now. There is a big chance all these brands’ worth will go down with the pandemic. These interested buyers played it smart, because, if they wait, they can pay less for them.
Boohoo, for example, raised £197.7 million for post-pandemic acquisitions — and they started by buying the remaining Pretty Little Thing shares they didn’t own yet. For the two giants LVMH and Kering, the crisis is not about survival, but about opportunistic acquisitions. These groups have an eye on independent brands or even smaller groups, as these grow tired of fighting this system of giants.
Italian brands are some of the main targets. Moncler and Salvatore Ferragamo, for example, are often considered by analysts and bankers as potential acquisitions. Even Prada, a brand far from being small and that has been around for longer than Chanel and Louis Vuitton, was present in a Kering acquisition speculation. The brand, however, denied the rumours. Kering didn’t comment on it, but the group did state that they are looking to diversify more their portfolio of brands with labels that won’t directly compete with their already owned ones. LVMH, on the other hand, is looking for big sharks. The largest fashion luxury group in the world left the days of purchasing US$200-million-revenue businesses to scale them to US$1 billion. Now they want to start at US$1-billion-revenues companies and scale it to US$10 billion.
Which Is the Next Consolidation Stage?
The Covid-19 pandemic may have brought opportunities for large groups to acquire brands for their portfolio, but it also showed some cracks in their structure. In luxury, Kering and LVMH were too far behind the e-commerce retailing. In fast fashion, the lack of control over inventory became a multi-million dollar burden (if not yet at a billion). The “new normal” also carried a new wave of buying from independent brands, to keep them alive. Having groups taking over is not necessarily bad or good; it is just an industry cycle, which from time to time is broke by innovation.
Entering a crisis is usually a door to bring this innovation and restart the consolidation of the industry. The pandemic will either make it more consolidated or bring it back to stage one (opening). Whatever happens, the reality is that, right now, the industry belongs to a few. My question to you is: do you know if the brands you buy from are independent or part of a group and would that change your perception of the brand?
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