In the world of European luxury brands, the business model of many family-controlled firms could make mergers and acquisitions inevitable over the long haul.
That’s the conclusion of HSBC luxury analyst Erwan Rambourg. In a presentation Wednesday at HSBC’s Manhattan offices, the analyst explained that family-controlled businesses aren’t in the habit of returning cash. Instead, money piles up and valuations rise. “Very few invest in their stores,” he said.
Rambourg explained that, with the exception of Tiffany & Co., which is embarking on the renovation of its Fifth Avenue flagship, most family-controlled businesses will open a new store location or make a few tweaks at existing store sites. That results in cash building up “rather than giving cash back to investors,” he said.
Compounding the problem is the rising cost of doing business, as well as management issues. For those reasons, Rambourg said, “Monobrands in fashion, at some point, will go out of fashion.” His rationale is based on the changing tastes of fashion, which by its nature come and go.
For the analyst, multibrand models can make a lot of sense in the fashion sector. First, a multibrand model represents a hedging risk so a company “won’t be putting all its eggs in one basket.” He said that if one brand isn’t doing so well in one category, another brand in a different sector that’s doing well can provide some balance to the portfolio. And having multiple brands can help solve some management issues that can come up. One is the ability for executives to consult with each other and provide a “sounding board.” He explained that the multibrand group can also help with talent retention, as it would be easier for executives to rise up the ranks by moving back and forth between the brands.
There are a few exceptions to the multibrand approach, such as Hermès, where some categories see demand exceeding supply. And then there’s Moncler, where growth, particularly in China, is less about having a repeat shopper and more about casting a wider net to expand the customer base.
On the American luxury side, Rambourg told WWD that Tapestry Inc. and Michael Kors Holdings Ltd. are likely to do more deals, but not because they are in competition with each other to see which one becomes the bigger American conglomerate.
According to the analyst, the two operate with different mind-sets. Tapestry, the owner of the Coach, Stuart Weitzman and Kate Spade brands, is focused on affordable luxury, even though over the longer term that market represents lower growth. And Kors, which bought Jimmy Choo last year and just signed an agreement to acquire the Versace fashion house, is eyeing premium European luxury brands — even if it means paying higher premiums — to build out its platform. Following the closing of the Versace deal, Kors will change its name to Capri Holdings.
Rambourg said one model is not necessarily better than the other, and HSBC has a buy rating on the stock of Tapestry and Kors.