The new Tiffany Setting engagement ring in 18-karat rose gold.

It’s a tale of scale for survival. As the fashion industry enters a new decade, the future has already been drawn by the digital era — a future in which size matters more than ever.

“The strong performance of the sector masks different realities,” said Pierre Mallevays, managing partner of Savigny Partners. 

“Big luxury groups and digitally agile brands are doing very well whilst more traditional, middle market brands continue to struggle,” he added. 

Capping the last decade, which was characterized by an increasingly stark line between winners and losers, LVMH Moët Hennessy Louis Vuitton’s plan for a $16.2 billion purchase of Tiffany & Co. deepened the divide, according to some analysts, and raises the pressure on rivals to bulk up.

It’s a “leader takes all” environment, said analysts at HSBC, noting that the iconic U.S. jeweler has become a much bigger threat to competitors, now armed with backing by LVMH’s financial and management resources.

Not only does the deal symbolize added pressure on direct competitors in the jewelry business, like Compagnie Financière Richemont, which owns Cartier and Van Cleef & Arpels, but it also reduces the number of potential acquisitions for luxury conglomerates seeking to shore up their groups. 

“Complexity is exploding” in the luxury industry, meaning groups have to commit resources to an ever-growing number of fronts, Bernstein analyst Luca Solca observed in a note to clients, offering another reason why scale is important in the luxury sphere.

“The important thing is the power of the marketing budgets, the power to drive innovation and the evolution of digital and supply chain,” said Oliver Chen, an analyst at Cowen, listing some of the multiple areas calling for financial firepower. 

The rise of digital commerce has prompted the need to build higher-quality stores in choice locations, in order to draw in consumers who face many options — and often turn to their mobile phones for a purchase — on top of investments in infrastructure and technology to ship goods faster. 

LVMH dwarfs rivals in terms of market capitalization — which tops the 200 billion euro mark, compared to 73 billion for Kering, more than 70 billion for Hermès International and around 36 billion euros for Richemont.

LVMH’s move on Tiffany has reignited talk of large-scale mergers and acquisitions in the sector, including the idea that Kering could be interested in purchasing Moncler. That company’s chairman, chief executive officer and shareholder Remo Ruffini toned down such speculation last month, however, saying there was “not any concrete hypothesis under consideration.”

Kering, meanwhile, has said it is open to adding brands to the “backbone” that Gucci represents for the group.

Analysts at Morgan Stanley have said to expect more consolidation while borrowing costs are low and the leading luxury groups have strong balance sheets, but potential targets are limited while companies prefer larger acquisitions.  

In this context, higher-quality assets will fetch high prices, while laggards will struggle to meet expectations, predicted Mallevays.

“The M&A market will remain highly selective, with trophy assets or add-on acquisitions that provide an easy fit attracting top prices. However, brands that require some investment to prove their growth potential will find it hard to meet valuation expectations,” he said.

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