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The real reason why luxury brands are merging so much right now

Written by Scott Clarke on Wednesday, 14 November 2018. Posted in Insight, Analysis

The changing market is forcing the luxury sector to consolidate. But getting it right is far from easy

The real reason why luxury brands are merging so much right now

To be successful in today’s competitive retail industry, luxury brands need to grow and scale. But opening stores internationally is no longer enough. As a result, we are seeing more and more well-known labels merging, most recently when Michael Kors purchased Versace for $2bn.

Brands are now required to have significant infrastructure and distribution networks and, with the retail market currently suffering from a period of stagnant growth, mergers are providing a route for scaling more effectively. As such, the number of mergers and acquisitions in the retail sector has jumped 15% in the past year.

Balancing exclusivity and growth

Looking to luxury retail in particular, one of the great paradoxes is that public companies have a fiduciary responsibility to increase sales and profits, which ultimately leads to more commercialisation. Nonetheless, scarcity and exclusivity always has and will always be a pillar of luxury. The prevailing question for retailers in the luxury market is how they can drive growth without compromising on their exclusivity in the process.

That’s where the consolidation of luxury brands comes in and there are several factors in particular that are driving its popularity. 

The first factor is bifurcation. Affordable luxury is a diminishing segment, which means that more luxury brands are now competing for the top 20% of the income demographic. 

The second factor is globalisation. The possibility of expanding into places like China is critical for retail growth, but one that is extremely difficult for smaller brands that lack sufficient financial resources. 

The third factor why the the sector is consolidating is digitisation. With an increasing focus on e-commerce and direct sales, luxury companies are placing greater emphasis on improving retail productivity. As such, most are concentrating on e-commerce and social media marketing, which allow for much easier access to products.

There are already numerous examples of brand consolidation across the luxury market, for example, Louis Vuitton and YSL are both now owned by LVMH and Kering. The Chinese groups Fosun International and Shandong Ruyi are currently dominating the market having bolstered significantly their luxury fashion portfolios by acquiring European brands like Lanvin and Bally. 

But these groups already have an increasing number of rivals on their competitor lists, including the likes of US-based Tapestry, which now owns Coach, Kate Spade and Stuart Weitzman and, most recently, Michael Kors, which, as mentioned earlier, has now merged with Versace and Jimmy Choo.

Evolving versus maintaining the brand

Consolidation will help to provide easier access to products, greater experiences through digitisation and better product guidance through brand integration for consumers. For example, since Sainsbury’s acquisition of Argos’ parent company, customers are able to gain easier access to a wider variety of products under one roof.

Nevertheless, these new conglomerates need to be careful when communicating the integrated brand vision to avoid compromising the authenticity and integrity that made the original brands successful in the first place. It’s essential to strike the right balance between growth and brand integrity – particularly exclusivity and uncompromising quality. Design and customer experience are the essential ingredients of luxury brands - not the price point. 

Establishing a balance

Consolidation has benefits for both the acquiring and the acquired. For the acquiring, there is often a need to rejuvenate and increase relevancy through new brands, whether they are emerging luxury players or more established and iconic luxury brands. For the acquired, there is frequent pressure to grow and scale, including expanding their footprint and penetrating new markets, which is not possible when given finite resources, distribution channels and supply chain.

As retailers are consistently struggling to stay afloat, these benefits, therefore, make the choice a lot easier for brands like Michael Kors, and other luxury retailers, to buy market share rather than investing time and pounds into trying to capture it.

Though, as with anything, consolidation is not without its problems. Striking the right balance between growth, exclusivity and brand integrity will be a major challenge for those brands embarking on the consolidation road. So will the inevitable challenges of trying to integrate different cultures, fashion principles and value systems. 

About the Author

Scott Clarke

Scott Clarke

Scott Clarke is the chief digital officer and global consulting leader for retail, consumer goods, travel and hospitality at Cognizant, the multi-national IT services company.

 

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