Luxury Industry: as consolidation unravels, what will the end game be
Forty years ago, the luxury industry was a very small activity, focused on Europe and the US, and composed by a few small companies, selling expensive products to a few very affluent clients.
by Francesco Trapani, Executive Vice Chairman Tages Spa
The market has changed dramatically since then.
The big change started in the Eighties with the Japanese purchasing aggressively European brands at home and, even more abroad, taking advantage of big price differences.
Because of this opportunity, companies started developing more affordable products, fuelling an even greater growth.
The Japanese were only the start of a trend that over time has interested a huge area in Asia, starting with Hong Kong, Taiwan, Macao and Singapore, followed by South Korea and China.
Today the Chinese are the driving force behind the luxury industry, being avid purchasers at home and abroad, all over the world.
The Middle East (with the United Arab Emirates, Kuwait, Qatar and Bahrein), and Russia, have emerged as other big opportunities, both for the business generated locally, but also as a showcase for travelers.
Only South America and Africa are still playing a marginal role in luxury companies today.
While up and until a few years ago almost all the protagonists were Europe-based, more recently US companies are starting to play a more important role in the international arena.
In other words, what was a small and “local” industry a few decades ago, has become a huge and global industry with bright growth perspectives, significant complexity and aggressive competition.
In this environment, in order to prosper, companies need three main ingredients: information on consumer trends and competitor activities, highly skilled management able to interpret the above and to define and execute a winning strategy in a highly creative and international atmosphere, and capital to finance the big investments in communication and retail developments.
Who does have these ingredients today? Only the big luxury conglomerates, that have been avid aggregators in the last thirty years (i.e. LVMH, Kering, Swatch Group, Richmont), and a few independent brands that have reached a very large scale, with sales, say, in excess of 3.5/4.0 Billion US Dollars, like Chanel, Hermes, Tiffany, Michael Kors, Burberry.
Yes, also in the luxury industry, size matters a lot!
So, my view is that in the future, the main protagonists will be the two type of entities mentioned above, with the big Groups playing the growing role of aggregators of brands, whose growth, then, will be fuelled by the three ingredients (information, management and capital), that these large Groups have.
As a consequence, the other smaller independent brands will have a tougher life often becoming the prey of larger organizations.
The recent acquisition of Versace by Michael Kors is a good example, as well as the rumors on Ferragamo and TOD’S.
Of course, we have seen and we are going to see notable exceptions to this “rule”. Moncler is a good example: a small company in a niche market below the radar screen of the main players has been able to innovate and prosper. But now that it has become very visible and has attracted the attention of the big ones, its challenges will partially change.