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Fashion is the largest value creator by sector when looked at through the lens of a mergers- and-acquisitions deal or an initial public offering — but how do companies get there?

This story first appeared in the October 29, 2014 issue of WWD. Subscribe Today.

Nathalie Remy and Jennifer Schmidt, both partners at McKinsey & Co., sought to address that question, first by dispelling some industry myths:

• Large companies create more value than smaller companies (not true).

• A focused strategy is better where all the energy is on a single brand (in reality, a diversified approach is better rewarded).

• Luxury is the sweet spot (mass creates tremendous value too).

• The wholesale model performs better (mixed distribution is more rewarded than a wholesale distribution model).

According to Remy, “Fashion is the single sector that creates the most value,” explaining that the sector is still mainly privately held and that the value creation in fashion and retail is primarily through mergers and acquisitions and initial public offerings. According to the Forbes billionaires list, leading the pack is the $6.6 trillion generated in the fashion and retail sector by 15 individuals, compared with just 11 individuals who made their money in technology and five in finance.

Schmidt spoke about how companies can be value creators, rather than ending up being at the end of the chain where value destroyers sit.

According to Schmidt, “Value equals performance and perception.” Performance then equals good strategies and execution, while perception involves the intangibles in a business, such as the narrative and storytelling.

Each component contributes 50 percent to the value proposition, and while growth via sales over margin has been a key driver of performance, intangibles such as the narrative are more focused on the future and in particular the potential of what one believes in.

Schmidt divided businesses into four categories: infants, brands that do less than $100 million in volume; adolescents, brands that plateau at $300 million in volume and then grow in fits and starts until they hit $1 billion; grown-ups, brands past the $1 billion mark that hold steady at that volume range, and mature brands, firms that manage to grow even bigger to the $3 billion and $5 billion range.

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“Size does matter,” Schmidt said, emphasizing that bigger firms tend to have a broader diversification range in their business models. They also have a healthier mix of distribution channels, which helps on the performance side of the equation. When it comes to perception, the need is greater on the storytelling side, which will likely involve having a strong investor relations team.

Remy concluded by providing key thoughts on what companies can do to create more value as they move up the fashion food chain:

• Set high aspirations grounded in your DNA.

• Design a strategic road map.

• Ensure excellent execution.

• Build solid fundamentals for the long term.

• Overinvest in communications.

As for the last point, Remy said overinvestment in communications is not necessarily about spending dollars, but on having “quality communications.” That means do not overpromise, but it’s okay to overdeliver, Remy concluded.

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