According to the latest Global Fashion and Luxury Private Equity and Investors Survey 2021 conducted by Deloitte, the appetite for luxury companies in the personal goods, and experiential luxury sectors — the latter including luxury cars, hospitality and furniture, among others — showed no signs of abating in 2020.
The report presented on Thursday during a virtual press conference surveyed 277 deals last year, up 6 percent compared to 2019, particularly in the personal luxury goods arena.
The Asia-Pacific region was the most resilient, with the number of deals increasing by 33 in 2020 compared to the previous years.
Elio Milantoni, partner at Deloitte, noted that the size of the deals has significantly increased, with 68 percent of the 277 deals based on company valuations at an earnings before interest, taxes, depreciation and amortization multiple of 11-times and more.
“Despite the crisis and the difficulty in picking the right deals, the M&A activity is healthy and the deals are big, sometimes with the valuations at an EBITDA multiple of 18- to 20-times,” concurred Massimiliano Caraffa, managing director, sector head consumer and retail Europe at private equity fund The Carlyle Group.
“There are a lot of investors chasing few assets. The fashion and luxury sector is an interesting one but it’s not always easy to decipher and invest in it. Even if online operations, the exposure to the Chinese and U.S. markets as well as innovative distribution models are seen as pivotal [to attract investments], the assets fitting into this description are not that many, and as a result deal prices skyrocketed,” he said.
Caraffa stressed that investors are still largely driven by the strong unique value proposition a company can offer. “The COVID-19 crisis has had many companies perform very well thanks in part to e-commerce, but if they lack a solid value proposition they are not desirable,” he offered.
This brisk M&A activity is unlikely to slow down.
In addition to surveying corporate data from some 100 businesses in the sector, Deloitte interviewed investors and executives to gather their sentiments. The totality of respondents said they are evaluating at least one investment in the fashion and luxury categories this year, especially in the apparel and accessories and cosmetics and fragrance sectors. This trend is in line with the better-than-expected resilience of personal luxury goods compared to other luxury industries.
Respondents forecast sales for the sector to decrease no more than 20 percent in 2021 and they all agreed that by the end of 2022 the negative trend experienced in the past 14 months will make a U-turn.
In the 2020 to 2025 period Deloitte expects sales of personal luxury goods will post a compound annual growth rate of between 5 and 6 percent. This would translate in revenues of between 265 billion euros and 295 billion euros in 2022, in line with the latest Bain & Co. Luxury Study 2021 Spring Update released in collaboration with Fondazione Altagamma, as reported.
Tommaso Nastasi, partner at Deloitte, observed that the APAC region will grow at a faster speed than pre-COVID-19, driving the rebound of personal luxury goods sales. “The business levers to support growth in the future will be the digital transformation, which impacts the back and front end, as well as customer-centricity and sustainability as a premium factor,” he explained.
A strong technological backbone will be key for companies looking for investors, echoed Milantoni. “Luxury companies that are strongly branded and recognizable were not so technologically advanced, there had been a resistance to modernization,” he said.
When it comes to sustainability, Caraffa was straightforward: “To say that sustainability is already at the core of luxury companies’ agendas would be exaggerated, we can say it is starting to percolate and become central, thanks in part to a top-down lobbying activity from public opinion.”
But when it comes to investors’ perception, sustainability — which in his view includes other brand values such as diversity, equity and inclusion — is a diligence item to tick but not a game changer yet. “If a company completely disregards sustainability it’s a value detraction but if it ticks the box it’s unlikely the company valuation increases significantly because of it,” Caraffa said.
Elaborating on the relationship luxury brands were able to forge with clients over the past year, Loro Piana’s chief executive officer Fabio D’Angelantonio said technology has enabled luxury brands to enhance their customer-centric approach as “the opportunities our clients provided us with in terms of touch points are much broader than they were 12 months ago, so we had to adapt quickly.”
“The upcoming 12 to 24 months will be very enjoyable, we will experience a new normality with a formidable geographic shift as China, the Middle East and South Korea that have grown exponentially will continue to represent the bulk of luxury goods sales,” D’Angelantonio noted, adding that the customers’ generational shift is also happening.
In order to tap into new regions and target customers, he anticipated a reconsideration of distribution models, with multichannel strategies becoming the norm. “The growth wave that’s upon us is exciting, but we need to be able to implement a new and different marketing and communication mix to succeed.
“The companies that are quick and nimble will win in the coming years,” he noted.