Slowing economic growth, hampered by stubborn inflation, has inhibited consumer confidence across the globe. The World Trade Organization recently halved its global trade growth forecast, citing persistently high interest rates and declining consumer spending power across the US, Europe and Asia.
This growing caution is reflected in consumer confidence ratings, with the latest indices for the US, Southeast Asia and Europe all regressing.
Aspirational buyers are tightening their purse strings as their spending power wanes, signaling an end to a three-year high in luxury spending. Luxury fashion players are seeing growth decelerate as a consequence, with industry powerhouse LVMH posting a sharp quarter-on-quarter slowdown in sales growth from 17 percent in Q2 to 9 percent in Q3.
These market dynamics have dented valuations of leading players in the industry, prompting a sell-off of shares as investors anticipate the end of the golden years of pandemic spending. Luxury businesses face the challenge of remaining competitive amid stagnating growth.
US brands look to catch European peers
The desire to safeguard growth prompted the largest consumer transaction of the year: New York-based fashion conglomerate Tapestry’s takeover of rival luxury firm Capri Holdings, parent company of Versace and Michael Kors. The US$8.5 billion deal will see the companies’ six fashion brands—Coach, Kate Spade, Stuart Weitzman, Versace, Jimmy Choo and Michael Kors—congregate under one roof.
Tapestry and Capri have been hit by weaker growth in recent months, with both companies citing a slowdown in US consumer spending in their quarterly reports. Their flagship brands, Coach and Michael Kors, both target aspirational buyers, a section of the luxury spending market that is in particular decline. The two companies hope the deal enables them to broaden their combined consumer base in terms of age and income, thereby appealing to a larger segment of US society, while simultaneously becoming more resilient to fluctuations in the global economy.
With combined revenues of more than US$12 billion and operations in over 75 countries, the Tapestry-Capri combination aims to better position the company to compete with the larger European players—particularly LVMH, Hermes, Kering and Richemont—that dominate the global luxury market.
Speaking of European giants, in July the French luxury group Kering announced the acquisition of a 30 percent stake in Italian fashion label Valentino from Qatari fund Mayhoola. As part of the €1.7 billion deal, the fashion powerhouse will have the option to take full ownership of Valentino by 2028. The day after the Kering-Valentino deal was made public, Swiss luxury rival Richemont announced the acquisition of a controlling stake in Italian shoemaker Gianvito Rossi.
Activist investors are become increasingly vocal in the luxury goods sector, targeting Richemont and Hugo Boss in 2022 amid underwhelming sales and stock market performances. If the stock performance of luxury companies continues to wane, further activist pressure may quickly materialize. At the same time, luxury companies are under pressure to show they are meeting high ESG standards on supply chains, product labelling and recyclable packaging.
Private players seek out innovation and talent
Private equity firms are increasingly eyeing innovation and growth opportunities in the luxury space. In the largest PE deal of the year targeting the luxury market, UK investment firm Permira acquired a majority stake in Italian luxury manufacturing hub Gruppo Florence for US$1.1 billion.
Gruppo Florence was founded in 2020 to consolidate the fragmented luxury production chain. Today, its manufacturing hub has grown to include 26 companies across Italy’s luxury goods sector.
In a show of confidence in Australia’s luxury sector, global PE firm Advent International acquired a majority stake in Australian luxury brand Zimmermann for US$980 million, according to Mergermarket. The deal, which values Zimmermann at US$1.5 billion to US$1.75 billion, represents the highest-ever valuation of an Australian fashion brand and is expected to help the company pursue growth in Asia and the Middle East.
Partnering for growth
As consumer confidence trends downward, luxury firms will need to become increasingly creative in order to safeguard future growth. In a challenging market, businesses will continue to seek out new partnerships to remain competitive with market leaders.
The Tapestry-Capri tie-up and Kering’s purchase of Valentino signal this intent and could mark the beginnings of a major shake-up in the industry. As such, dealmaking in the luxury sector will be an area to watch in the near term. In particular, LVMH—which has struck several smaller transactions this year, including deals for Spanish tannery Verdeveleno, French eyewear brand Vuarnet, and rosé vintner Château Minuty—seems likely to remain highly acquisitive.