By and  on January 22, 2002

PARIS -- Will it disappear in a few seasons or is it destined to become a classic?

The multibrand luxury group is still in style, despite the rash of profit warnings from fashion giants, the collapse of the much-heralded Leiber Group and the increasingly dark climate for luxury goods.

But just how long the trend will last is spurring debate in fashion and financial circles.

Analysts, brand consultants and managers say the sour economic climate is actually spurring more players to enter the fray, given the bargain valuations. But they acknowledge the risks are great and success depends on scarce resources: creative talent, management skill and financial wherewithal.

Michael Zaoui, head of European mergers and acquisitions at Morgan Stanley International in London, cited a number of factors compelling new players to form multibrand luxury groups.

"There are still several brands available in the marketplace," he said. "Full consolidation has not occurred in this industry."

What's more, valuations of luxury and fashion properties have tumbled by roughly 20 to 25 percent because of the global economic slowdown, he added.

Despite intense competition among luxury giants LVMH Moet Hennessy Louis Vuitton, Compagnie Financiere Richemont and Gucci Group, Zaoui argued that smaller players gunning for rapid or external growth "have no choice" but to snatch up brands now. "You can't wait until everything is gone."

It's no surprise then, that over the past two years, the industry has witnessed the birth of Equinox Luxury Holdings Ltd., a private equity fund that last November bought Jimmy Choo and announced its intentions to buy up to four more family-owned fashion companies, and Cardington PLC, which was formed last summer to buy the English couturiers Hardy Amies and Norman Hartnell.

Opera, the Italian investment fund backed by the luxury jeweler Bulgari, has just bought Bruno Magli and has been in on-and-off talks about purchasing Valentino. Most recently, Mounir Moufarrige, the former Chloe and Montblanc executive, is said to be assembling a stable of old French labels including Jean Louis Scherrer and Jacques Fath.

Rita Clifton, chairman of Interbrand Corp. in London, said even "semi-forgotten" brands hold value because the luxury sector values authenticity."You can't invent a history," she said. "Authenticity is more important in the premium luxury sector and you've got to earn your reputation."

That's why she suggested that luxury groups -- once they've pillaged all existing brands from fashion-strong countries like France and Italy -- might turn to more exotic places, just as beauty firms have resurrected ancient treatment methods or those from far-flung places in Asia. "You excavate brand names and refresh them for today," she said.

Renato Preti, who manages the Opera fund, said he feels many traditional brands have reached the point of overexposure, and that the new luxury groups and their revived brands can take advantage of the moment. "I think the brands undergoing a relaunch can take advantage of consumers' tiredness with the brands they see every day. I also think that in moments of crisis -- like this one -- consumers are looking to the past and to the brand values embodied in older labels."

Nevertheless, the challenges for upstarts are considerable, analysts say. Antoine Colonna, luxury analyst at Merrill Lynch in Paris, said it is becoming "more and more difficult" to build a luxury fashion group, with The Leiber Group's woes emblematic of the risks upstarts face.

Several sources, who spoke on condition of anonymity, suggested that some of the brands now being eyed for revival are in dire financial straits. "The owners of all those businesses should give people money to take them off their hands," said one source.

Responding to suggestions that he will face an uphill climb in reviving names with limited resonance, Moufarrige said the houses he's targeting "have a lot of blood in their veins" and "pedigree." His wish list is also said to include Rochas, Courreges and Pierre Balmain.

"The risks in the fashion business are always there," he said. "But if the idea is right, the strategy is right and the product is right, small can grow. The consumer wants newness and differentiation."

Colonna summed up The Leiber Group's troubles as "moving too fast with mediocre brands." Also at issue is the multibrand strategy itself, which some consider still unproven."They have been created with a long-term aim to diversify risk imposed on one brand, find tomorrow's magic brands and reduce dependence on a single designer," Colonna said. "Over time, they may obtain significant cost savings and synergies, thanks to their superior critical mass and brand portfolios."

But, he said, "big is not necessarily beautiful. The word 'synergies' should be taken with a pinch of salt for luxury goods labels because, by definition, marketing budgets need to remain independent to avoid brand cannibalization and also because in relative terms, [synergies] are less important than for other sectors."

Jacques-Franck Dossin, luxury analyst at Goldman Sachs in London, agreed.

"Synergies are rather limited in this industry. Size is therefore not the most important criteria. Very few have actually managed it so far. Gucci could potentially succeed with YSL. Synergies are essentially for back-office operations, logistics, warehousing and central functions. Also, it allows best-practice sharing and a way out for excess cash flow."

Diego Della Valle has chosen not to build a luxury group on the back of his Tod's brand for precisely those reasons.

"For years now, the luxury market has been feeding into the idea that if you're not big, you don't count. But you don't need to be a finance specialist, buying and selling companies, to be successful in this industry," said Della Valle. "As far as I'm concerned, there are only two kinds of groups: healthy ones with a vision and unhealthy ones without a vision. Just look at Gucci and Bulgari: Two strategies -- one multibrand, one single brand -- two success stories."

Preti said the success of any group boils down to management. "I'm not a believer in conglomerates, or in any kind of centralized management for a stable of brands. I think you kill brands that way. The group should be at the service of each individual brand and provide services such as marketing, communication, contacts and know-how. After that, it's up to the brand manager to do his job, always keeping in mind that the brand is a delicate beast."

Ultimately, Colonna said success of upstart groups depends on the quality of the brands, the skills of management and the resources at hand."They can make it if they do luxury that nobody else among the big groups is interested in -- that is, niche markets," he said.

Dossin said the risk for luxury groups is diluting management and financial resources. "It's better to concentrate resources on only a few brands," he said. "The other risk is to buy brands with too young of a history, which are generally more cyclical and depend more on fashion trends."

Despite lingering doubts about the multibrand formula, the stock market has rarely penalized fashion and luxury concerns for their multibrand ambitions.

"The multibrand groups trade at valuation multiples which are very comparable to single-brand companies," said Zaoui at Morgan Stanley. "Gucci, LVMH and Richemont trade at multiples broadly comparable to Bulgari and Hermes." In fact, he said the market is more apt to penalize companies in other sectors when they "diversify away from core products."

Zaoui said upstart luxury groups, typically backed by private equity, are less compelled to expand their revenue base in the short term, unlike public companies, which report quarterly earnings and are subject to stock market pressure. Instead, what drives them is the possibility of substantial growth or turnaround of typically smaller, undeveloped brands.

Indeed, he said the fashion industry holds the promise of big success for new talent that doesn't exist in most other mature sectors -- today's unknown designer could be tomorrow's superstar.

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