Acquisitions 101

Everything You Need to Know About Brand Mergers & Acquisitions

Key Takeaways

  1. Independent brand creators seeking to transition into their growth phase can benefit from incorporation into a fashion conglomerate given its vast resources.
  2. The long term outlook for independent brands is challenging in today’s climate without the steep cash reserves, expensive advertising campaigns, and global reach fashion groups can provide.
  3. The 6 major fashion companies within the luxe sector have historically acquired heritage brands but changing consumer behavior has made unconventional disruptors into prime targets for acquisition.

High fashion’s move towards an absolute monopoly has been accelerated due to the global pandemic. The changes in consumer behavior and shrinking revenues have irrevocably tipped the scales towards this mass consolidation. In recent years, the luxury sector has seen many independent brands snatched up by only 6 key players (LVMH, Kering, Richemont, Capri, PUIG, and OTB). Young brands are forced to reckon with a marketplace that’s been notoriously adversarial for newcomers without deep pockets. Their limited marketing resources, less efficient supply chains, and proportionately smaller brand recognition (as compared to established heritage brands) puts them at a marked disadvantage. There’s no question that clothing lines that have been acquired by fashion conglomerates have become household names due in part to their solid financial backing and access to resources. Yet when a small brand is incorporated by a bigger group, there is the inherent danger of a brand losing its core values. Creators must learn how to best navigate this tension between keeping their brand’s ethos intact versus pursuing growth ambitions in order to find enduring success.

Independent luxury brands have struggled to remain profitable in a cutthroat market that favors “economies of scale, centralization of capabilities, access to capital as well as access to an exclusive network of suppliers,” according to Glossy. While most independent brands like Mulberry and Salvatore Ferragamo have had to lay off staff and lost millions of dollars during the pandemic, fashion conglomerates have primarily been able to weather the storm. Kering’s runaway hit brand Bottega Veneta has seen its sales increase by 9%, during a time when many other brands have had excess inventory that they’ve been unable to unload. Another fashion conglomerate LVMH has a current valuation of $200 billion, says The New York Times.

Much like these fashion groups, large brands such as Moncler which is set to acquire Stone Island at a valuation of $1.4 billion, are similarly insulated from the current recession. These two brands will continue to operate independently, yet they will “share information on how to best capture the American and Asian markets, as well as [amplify] their DTC (direct-to-consumer) channels for the new luxury consumer.” (Highsnobiety) By pooling their knowledge, both brands will arguably boost revenue. These fashion behemoths and large brand mergers are able to survive several bad seasons or an economic crisis because of their access to large cash reserves. Most mid-sized businesses do not operate in this way, so the pandemic has decimated them. With a second lockdown already imposed on areas of Europe and now looming over the United States, the ability of an independent brand to survive on its own becomes much harder. The Business of Fashion and McKinsey & Company’s 2020 report predicted that if stores closed for two months, upwards of 80 percent of publicly listed fashion companies in Europe and North America would find themselves in financial distress. Thus independent brands that are acquired by these fashion powerhouses, will have better odds of surviving what could be years of economic uncertainty. Furthermore, independent brands will be able to piggyback off of these groups’ operational support systems such as their supply chains or digital platforms (BoF).

Mergers and acquisitions are changing the fashion landscape but at what cost? The concentration of wealth amongst only a handful of conglomerates is “suffocating smaller brands at the bottom,” according to Glossy. A focus on numbers and productivity by these large fashion groups has arguably led to less visibility for independent brands in the marketplace. Small emerging brands such as Kwaidan Editions, Charlotte Knowles, and Chopova Lowena have expressed distress after many of their retailers have canceled orders (Vogue Business). Without the marketing budget available to brands within large fashion groups, smaller labels are adrift with no strategy for this period. These small lines aren’t an acquisition mark for most fashion conglomerates, as emerging brands often need years of growth and expansion, and do not meet the stringent criteria for long term investment by these companies. Yet their existence is necessary to create interest in a market that has become increasingly inhospitable to them. We see this with Kering selling back its majority stake in Christopher Kane in 2018, for example. Kering’s Chief Financial Officer Jean-Marc Duplaix questioned the role of a small brand in a fashion group stating: “I’m not sure that the recipe could really work.” (BoF) For brand creators that are looking to one day sell, this could make that reality improbable.

Disruptors within the fashion world have now become prime targets for acquisition because of their healthy annual revenues and devoted following. In a move that surprised no one, VF corporation has acquired Supreme in a deal that’s valued the streetwear brand at $2.1 billion, according to Business of Fashion. While it’s too soon to tell whether this incorporation will hurt the brand, Supreme’s cachet based on skate culture and limited-run collaborations could be jeopardized if the company expands past its current 12 retail locations worldwide. VF’s investment could mean changes to Supreme’s culture. The brand has historically been resistant to conventional advertising strategies and changes may alienate current customers. Supreme’s fanbase has long identified with the brand’s celebration of pop culture figures and modern guerilla marketing. Since 1994 the label has relied on sponsorships with skateboarders and word of mouth to reach its current status as the pinnacle of American luxury streetwear. It’s important for brand creators to be cognizant of what an acquisition may mean for their brand’s vision.

For every success story like Coach’s 2015 acquisition of footwear brand Stuart Weitzman or LVMH’s acquisition of Stella McCartney (she retains majority ownership), there are countless examples of deals that never happen such as Victoria’s Secret’s acquisition by L Brands. Other mergers do not bring significant synergy to either party, since the brands are no longer considered viable like the acquisition between American Apparel and Gildan Activewear. “After going bankrupt twice, the company was bought by Canadian retailer Gildan Activewear, in early 2017...American Apparel’s journey is a prime example of what happens when a failing brand is sold for parts and restarted by new owners.” (Vox) Many acquired brands no longer have the promise they once had, so they’re restructured and added to a company’s portfolio often to increase the purchaser’s brand influence. In the case of American Apparel, Gildan primarily purchased the brand in order to gain ownership over the company’s name which still had significant consumer awareness. Gildan has completely changed the company’s ethos by offering products that are not made in the United States, so while it resurrected American Apparel, today the brand is something completely different.

The current economic climate has shown that consumers are more cautious about their spending on fashion, with even wealthy buyers holding off on purchases.(CNBC) While many independent brands are increasingly being forced to find new avenues to sell their wares, luxury brands that are part of fashion conglomerates are thriving due to their access to considerable assets. For independent brands that are hoping to expand their financial and strategic positioning it’s easy to see why joining a fashion conglomerate can spell long-term solvency. Still, brand creators must be aware that these investments can change internal company culture and create a monotonous marketplace. Finding an optimal path will likely depend on the fiscal health of the brand and the state of the industry.