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PARIS — When it comes to managing luxury fashion brands, is the more the merrier?
Ongoing troubles at Jil Sander, Givenchy, Helmut Lang and Yves Saint Laurent — to name but a few — have renewed debate over the viability of the multibrand strategy. A challenging climate for luxury after a strong 2004 also could put the business model under pressure.
But roughly five years after Prada, Gucci Group, LVMH Moët Hennessy, Louis Vuitton and Compagnie Financière Richemont went on their famous acquisitions sprees, industry experts argue the conglomerate approach may yet prove its mettle — even as others search for a new business model in the post-Tom Ford era.
Michael Zaoui, managing director and chairman of mergers and acquisitions for Morgan Stanley in Europe, said the “jury is still out” as to whether the multibrand formula is a winning one. The reason? There is no compelling evidence to date that the stocks of luxury groups trade at higher multiples than single-brand companies.
“[Conglomerates] don’t do worse,” Zaoui noted. “Still, there’s a long way to go before you have truly diversified luxury groups that can rely substantially on more than one brand for growth and profitability.”
Indeed, most conglomerates rely heavily on one cash cow.
According to market estimates, Louis Vuitton generates 66 percent of operating profits at LVMH, while Cartier delivers 77 percent of Richemont’s operating profits. And, reflecting the loss-making nature of many of its other brands, Gucci contributes 141 percent of Gucci Group’s operating profits, while Prada generates an estimated 136 percent of Prada Group’s profits.
Still, the multibrand approach remains attractive. Just last month, Tommy Hilfiger Corp. acquired Karl Lagerfeld’s trademarks as a first step toward building a portfolio, while Jones Apparel Group expanded into luxury retailing with the purchase of Barneys New York. Even Sean John has set out to build a miniconglomerate, backing Zac Posen.
Antoine Colonna, luxury analyst at Merrill Lynch in Paris, argued the multibrand model has merits. For example, a diversified group such as LVMH can rely on its champagne and cognac businesses if fashion or fragrance ebbs, and Richemont works because it owns various watch and jewelry brands with different positioning.
This story first appeared in the January 5, 2005 issue of WWD. Subscribe Today.
During his semiannual analysts’ meetings to discuss LVMH’s results, chairman Bernard Arnault routinely touts how the group is insulated against market fluctuations by having risk spread across geographic areas and diverse product categories in luxury. LVMH has some 50 brands in fashion, leather goods, perfume and cosmetics, watches, jewelry and retailing.
Last September, Arnault highlighted progress in wines and spirits in the first half of 2004, a “very strong” improvement in selective retailing and a return to profitability in jewelry and watches.
Within the industry, there’s clearly a tendency to remember poor acquisitions and not good ones. Colonna would put DFS and Sephora in the latter category for LVMH as he projects that 90 percent of the growth in the group’s operating income in 2004 will come from those two companies, which have recently been turned around thanks partly to tight cost controls.
“For me, it’s clear that diversification is not always negative,” he stressed.
Armando Branchini, vice president of consultancy Intercorporate, agreed the multibrand approach can work if groups make few and focused acquisitions or develop brands in-house to reach new customers rather than overextend their existing marquee names.
“Tod’s created Hogan and Fay and it became a multibrand company through internal generation. Prada created Miu Miu. If you choose the acquisition route, you should do it in a limited way. You buy a brand, but you completely relaunch it before you buy another one,” Branchini said. “What went wrong in the Nineties was buying too many brands and too quickly.”
Since luxury consolidation is a relatively recent phenomenon, Zaoui did not rule out the possibility that advantages could demonstrate themselves over time. Multibrand groups tout the benefits of diversified risk, synergies in real estate, advertising and production and consolidated management expertise, among other things.
Zaoui allowed that certain brands might be better off with different parents.
However, in his estimation, it’s also a question of brands having enough “scale” to guarantee financial success. “A small brand is a small brand is a small brand,” he quipped.
To be sure, the financial community is showing signs of impatience as few turnaround miracles surface. While investors cheered the acquisitions spree of the late Nineties as a vehicle to fuel growth, they are becoming increasingly frustrated by the dearth of public information about how much individual brands lose, he said.
“The market has been demanding a clarification [of brand portfolios],” Zaoui said. “It’s now more bottom line focussed.”
Marzotto, for example, has streamlined over the past few years, decreasing its dependence on the struggling textile business and closing minor Italian clothing lines such as Borgofiori and Arezia to focus efforts on its three biggest businesses — Valentino, Hugo Boss and Marlboro Classics.
“Only brands with worldwide brand recognition and a history can be global brands,” said Michele Norsa, chief executive officer of Valentino. “A group can focus on two or three brands, but not 15.”
IT Holding also has been pruning. Last year, it sold Romeo Gigli and Gentryportofino, its fragrance division and the eyewear company Allison to focus on Gianfranco Ferré, Malo, manufacturing company Ittierre and Exte.
“Rather than a change of strategy, we’re fine-tuning it,” said IT chairman Tonino Perna. “We’ve realized a few things in the meantime and are working on them — also because the market is much more selective today.”
Still, Zaoui said he did not detect any imminent turnaround in what has been a pronounced slowdown in acquisitions. The volume of luxury mergers and acquisitions in Europe, which stood at around $4 billion in 2000, dwindled to $1.3 billion in 2002 and further fell to only $600 million in 2003.
During the buying sprees, many groups acquired the wrong brands at the wrong time — and often overpaid. “If you don’t have the right brands, then multibrand won’t work,” Colonna said, citing the failed American conglomerate, Pegasus Apparel Group, as the ultimate example.
What’s more, it will be increasingly difficult for groups to make acquisitions that bring immediate value, and won’t cannibalize names already in their stables.
Colonna said groups often have spoiled their so-called “problem children,” lavishing them with cash to open stores, stage fashion shows and the like. In the future, he predicts a tougher stance: Underperforming brands will be given less money and more stringent break-even targets.
That seems to be the case at Gucci Group, where new ceo Robert Polet has given Alexander McQueen, Stella McCartney and Balenciaga three years to get out of the red.
When he presented his strategic plan to investors last month, Polet confessed that he harbored doubts about the multibrand strategy when he joined the fashion business from Unilever’s ice cream and frozen foods division.
He said the previous management was distracted from the core Gucci brand in a drive to create a multibrand conglomerate. What’s more, he confessed he was guilty of the same tendency during his first 10 weeks on the job. “I didn’t spend enough time on Gucci, YSL and Bottega Veneta,” he said during his presentation in London.
But, in a subsequent interview with WWD, Polet articulated why he changed his mind. “I came out being a firm believer in having multiple brands,” he said. “One of the compelling reasons is the talent management aspect: the opportunity to promote people within the group, giving them the opportunity to work on different brands. You can cross-fertilize skills. It creates more professionalism, more enthusiasm and, in the end, better products than if you were a monobrand.”
Ironically, independent fashion designers who once pined for the resources of a rich parent might now have second thoughts because “it’s going to be quite painful for a lot of those companies that are part of multibrand conglomerates,” Colonna said, adding that some unsuccessful brands ultimately could be shuttered.
Or, they might just be downsized and go quiet, since investors typically pay little attention to brands that neither make nor lose large amounts. “You don’t necessarily have to sell them; you just have to make them invisible,” Colonna said.
Illustrating his point, analysts rarely ask questions about Givenchy, Christian Lacroix or Thomas Pink during an LVMH conference call and instead pepper Arnault with questions about profit centers such as Vuitton, Hennessy and Moët & Chandon.
At Polet’s presentation, analysts were most interested in knowing more about the big profit machine, Gucci, and prominent money losers such as Yves Saint Laurent rather than smaller brands such as Sergio Rossi or Balenciaga.
Others agreed that the multibrand model simply needs to be improved, with more financial discipline and sharper management.
“Some big groups have taken the attitude that simply by investing money into ads and bigger, better stores, success will be imminent,” said Michael Boroian, managing partner of Sterling International, a Paris-based executive search firm. “They are learning the hard way as the market is oversaturated with more of the same and consumers are becoming increasingly sophisticated. They are tiring of the same method used for every brand.”
Some groups have a tendency to “overcontrol” due to their concern with maintaining the standards of quality, Boroian said. “What is required is a cultural shift in these companies — a higher tolerance of ambiguity and a better mix between allowing for individuality without imposing too much corporate restriction,” he said. “Being part of a multibrand group or not, a designer brand’s success will always result from the right mix of creativity and management.”
To be sure, promising brands can get a big boost from rich parents. Last fall, Richemont said it would invest tens of millions of euros in its fast-growing Chloé business, boosting the communication spend and expanding its retail network and product categories.
Stefania Saviolo, co-director of a fashion management program at Milan’s Bocconi University, said that more mature brands have benefited from a focused approach that shunned acquisitions and too much product diversification. She cited examples such as Dolce & Gabbana, Max Mara and Ermenegildo Zegna. She said the real question is how young, emerging designers can grow their businesses. Citing mixed results at Gucci’s Stella McCartney and Alexander McQueen, she said she thinks designers who have taken jobs at storied houses such as Antonio Marras at Kenzo have gotten more out of the experience, freshening up older brands and boosting their namesake lines at the same time.
And even if some designers have had trouble heating up old names — consider Julien Macdonald or Alexander McQueen, who both had rocky stints at Givenchy — Saviolo argues the mercenary route seems more dynamic.
“Young designers who are trying to grow in multibrand groups don’t seem to have grown all that much,” she said. “The most interesting things seem to be happening with young designers at established fashion houses.”
Meanwhile, others still favor the power of one name.
Francesco Trapani, ceo of Bulgari, said he is skeptical about the multibrand approach.
“In the end, the brands are managed separately and there are not many synergies that groups can really exploit in retail or production,” he said. “There are not many groups that can manage successfully many different brands at the same time. In the end, successful companies such as Chanel and Hermès are based on one brand, and even such a big group as LVMH revolves around the business of one brand, Louis Vuitton.”
— With contributions from Robert Murphy, Paris; Amanda Kaiser and Luisa Zargani, Milan