Consolidation Continues In The Luxury Retail Industry

The fashion industry is finding it hard to adjust to a new world lived in by the millennial generation. This inability to cope has hit the earnings of the companies playing in this sector. A number of steps have been taken by them to shore up their defenses, such as cutting costs and innovating in the digital space. The aspirational luxury market seems to be the hardest hit, as the widespread availability of these products, particularly in department and off-price stores, have hampered their brand value, with customers unwilling to pay the luxury prices once commanded by these companies. In a move to protect their brand image, these companies have been cutting down on their presence in wholesale locations. The latest attempt in this space, to reach out to the millennial generation, seems to be acquisitions, a strategy followed by the likes of Coach (NYSE:COH) and Michael Kors. The younger generation may be key to the success of these companies in the future as millennials (born between 1980 and 1995) and Generation Z (born between 1996 and 2010) will form 45% of the global personal luxury goods market by 2025.

Acquisition Fever

After months of speculation, Coach in May announced it was buying Kate Spade for $18.50 per share, valuing the deal at $2.4 billion. The latter has had great success with the millennial customers, who have been the driving force behind the high growth rates the company has achieved, and which form roughly 60% of their clientele. Millennials being their target market, Kate Spade has adjusted its products to a more colorful and whimsical look, with subtle logos. Hence, this acquisition would give Coach access to a younger clientele. The company also acquired luxury shoe brand Stuart Weitzman in 2015.

Hot on the heels of the Coach-Kate Spade deal, recently, news has surfaced regarding Michael Kors’ purchase of luxury shoe company Jimmy Choo for nearly $1.2 billion. The primary aim of this deal seems to be the higher margins of the latter. Furthermore, brands are attempting to diversify their portfolio, and the purchase of footwear companies has become increasingly popular.

In the speculative luxury industry, rumors regarding acquisitions are constantly floating. Before the aforementioned deals were confirmed, a purchase of Kate Spade by Michael Kors, and of Burberry by Coach was also speculated upon. Moreover, a deal between Jimmy Choo and Coach was also conjectured, when the former announced that it was up for sale. The latest companies rumored to be targets now are Tory Burch, Furla, Longchamp, and Burberry. However, instead of creating bigger companies, the weaknesses should first be corrected. According to Luca Solca, analyst at Exane BNP Paribas, historically, mergers and acquisitions in the luxury sector have not particularly helped in regaining brand traction and desirability. The reasons for the mergers are also being questioned, with many speculating it could be for cost-cutting. This, however, has been the downfall for numerous deals, as many fail when the companies underestimate the complications associated with integration, while overestimating the benefits that can be derived from synergy. While the euro and pound are at historic lows, as a result of the Brexit, making certain acquisitions favorable, as was the case with the purchase of Jimmy Choo, there is no guarantee whether speculative mergers will prove to be successful.

Synergies Could Help Lower Costs

While a successful integration is no guarantee, some benefits do exist from a merger. A combined company results in better negotiating power, with both the suppliers and the vendors. Another opportunity that has arisen is the ability to merge the production facilities, the finance and marketing departments etc., in order to reduce the costs. Such a scenario even existed with the merger of Coach and Kate Spade, as they both operate in a similar market. Given the rise of the digital space, both companies were working on their direct-to-consumer (DTC) channel. However, a move towards a more focused DTC business is not easy. And hence, the merger of the two companies will help to fortify their online channels. Furthermore, the store closure program of Macy’s will put greater pressure on brands seeking to get prized department store space. For this as well, a combined company will benefit from its larger size, and will be able to leverage that to gain better pricing power with department stores.

While Michael Kors derives a majority of its revenues from the Americas, Jimmy Choo’s comes from Asia and Europe. Hence, the acquisition will also help to give the brand a greater international presence. The two companies can focus on a better distribution network, a more effective inventory management system, a better digital innovation strategy, and garnering valued department store space. For Jimmy Choo and Michael Kors, as the two companies operate largely at different price points, it would be better to let the Jimmy Choo brand remain independent, so as not to diffuse the brand aesthetics and value.

See our complete analysis for Coach here

Have more questions on Coach? See the links below:

• Is A Wave Of Consolidation About To Hit The Fashion Retail Industry?
• Cutback On Discounts Results In Bottom Line Improvement For Coach Inc.
• Coach Among M&A Speculation Yet Again
• Could Coach Inc. Be A Takeover Target?

See our complete analysis for Coach