id="x_10_i42"> Figure 2.2 From Family Business to Multibrand Corporation
The cycle continues – Europe will look East either to benefit from acquiring new and exotic products such as silk and gemstones and ivory or, as is currently the case, they will look toward expanding to the East because that is where the growth is. Figure 2.3 depicts the circular path of luxury heritage. Globalization is an eternal subject, with maybe some changes of form through the centuries. As the saying goes, the more it changes, the more it remains the same.
Figure 2.3 The Circular Path of the Heritage of Luxury
How Has It Changed?
Plus ça change, plus c'est la même chose.
Two decades ago, the luxury industry model was almost completely dominated by the family businesses. However, the winds of change were felt in the 1990s, especially by one man – Bernard Arnault. The ensuing rivalry between Bernard Arnault, the owner of Dior Group, and Henry Racamier, husband of Mademoiselle Vuitton, owner of Louis Vuitton, created a historic structural shift within the industry as each selfishly fought for market control through growth and acquisition. Until then, luxury was about fashion. Within this struggle, Bernard Arnault came out the winner and went ahead for consolidation to create the luxury empire of today. He transformed the fashion into a business. Buying and selling companies with intricate financial maneuvers, he conquered the luxury space by making Louis Vuitton Moët Hennessy (LVMH) the largest luxury conglomerate in the world. The interesting point to note about this conglomerate is that each brand was allowed to carry on its own culture and know-how and to be managed separately. However, if it was felt that the brand needed a push, Arnault stood right behind it. Furthermore, he created the famous notion of “star brands” that were timeless, modern, fast-growing, and highly profitable. He would find new brands and mix and match a suitable designer and an apt management team for the brand. He would revamp the production, control, storage, distribution, to offer a completely new and unique package to the customer. Thus, it led to the development of the counterintuitive idea of “constrained freedom,” wherein the brands were allowed latitude; however, the latitude was limited to the lines that Arnault drew.
Some French companies, such as Hermès, which was owned by the families of Dumas, Puech, and Guerrand, and Chanel, which was owned by the Weirthemer family, could stay partially and fully independent. Hermès, the legendary leather-goods fashion house established in 1837, remained family owned. The Wertheimer family has owned Chanel since 1954. They never introduced Chanel to the stock market. The house is showing longevity in its independence, which is rare in the sector. Not listed on the stock market, the Maison Chanel continues to meticulously keep their financial data a top secret. Its aura of mystery is cultivated by the owners, Alain and Gérard Wertheimer, who drive the company firmly and discreetly.
In France, the Comité Colbert, founded in 1954 by Jean-Jacques Guerlain, consists today of 75 houses of French luxury that have different histories, cultures, sizes, and management. However, they share common governance rules and are willing to promote their values and know-how. The term “houses,” as opposed to the luxury company members of the Comité Colbert, illustrates their respective stories, the transmission of their know-how from one generation to another, which keeps their creation secrets. Indeed, most of the members or familial business, and the family CEOs of the Comité Colbert, call each other “chef de Maison.”
In Italy, Altagamma (Italian Association of Industries of Alta Gamma), founded in 1992, is an association whose purpose is to promote the work of several Italian companies on an international level and encourage their development. Currently the Foundation Altagamma brings together 76 Italian companies operating in the fields of fashion, design, transport, jewelry, shoes, perfume, and hospitality.
Despite these tectonic shifts in this industry, the family business remained a paramount and dominating factor in the Italian luxury enterprise until the last decade. Slowly but steadily some famous brands were acquired by the three multibrand conglomerates – LVMH, Richemont, and Kering Group. LVMH, after acquiring more than 60 luxury brands, acquired two of the largest Italian groups, Bulgari and Loro Piana, in 2011 and 2013 respectively. Gucci, Brioni, Bottega Veneta, and others were acquired by Kering in Italy and in France. The more recent crisis has spurred a desperate fight for survival, pushing the luxury industry further away from its historic structure as the key factors of success become finance instead of family, and the focus shifts from the small artisan businesses to the colossal conglomerates.
Luxury Industry Trends
Luxury is a cyclical industry. Given the continuing deterioration of the macroeconomic backdrop and the cyclical nature of the luxury market, 2009 was a very low year for luxury spending globally, though spending then peaked in 2010. However, spending in 2011 went back down to close to where it was in 2009. The 2012 Luxury Report by Unity Marketing reported that luxury spending grew by only 1.3 percent between 2009 and 2011. During this time, the highest spending was witnessed in luxury travel (up 40.8 percent), kitchenware and cooks' tools (up 37.5 percent), entertainment (up 33.6 percent), dining (up 26.5 percent), and fashion accessories (up 23.4 percent). The categories falling most from 2009 to 2011 were kitchen appliances (down 23.9 percent), watches (down 20.1 percent), jewelry (10.2 percent), and furniture, lamps, and floor coverings (down 7.3 percent). Analysts expect luxury goods markets will slow down in sequence, as the ripple effects from the global recession travel around the world. Pam Danzinger, president of Unity Marketing, noted, “Last year we were looking for the return of the HENRYs (high-earning, not rich yet) back into the luxury market and this year we can say they have returned and are more positive about spending in the future. For example, in 2009 only 18 percent of the luxury consumers surveyed expected to spend more on luxury in the next 12 months; by comparison 26 percent in 2011 predict greater spending on luxury throughout 2012.”15
Despite global macroeconomic headwinds, worldwide sales of personal luxury goods grew an estimated 10 percent in 2012 to 212 billion euros, led by an estimated 16 percent increase in the leather goods category. By region, sales rose an estimated 18 percent in Asia-Pacific, 13 percent in the Americas, 8 percent in Japan, and 5 percent in Europe. Bain & Company projects worldwide luxury goods sales to reach between 250 billion and 350 billion euros by 2015, supported by 4 percent to 6 percent annual growth.
Hard luxury players are expected to be particularly under pressure in this environment, as their underlying demand disadvantage is compounded by dependence on the wholesale channel. Big-ticket-item purchases like mechanical watches are likely to be delayed, especially by men, and retailers will be de-stocking.
There is no hiding place in the high end. The notion that the luxury market high-end segment may be immune to the cycle appears to be an investment myth, as it is not supported by evidence and analysis. In the current context, emerging markets exposure is seen to be the key short-term factor limiting adverse trends in more mature markets. In addition to better momentum in the future, markets like China will provide superior long-term structural growth opportunities. This will give a key advantage to first movers with the necessary resources to “make it big” in emerging markets.
In difficult times, investors should go back to fundamentals: mega brands. Scale rules in an industry where fixed costs have increasing importance. It is argued that “mega brands” will continue to dominate the luxury and fashion industry, enjoying faster top-line growth and superior profitability.
Scale pays, as mega brands can lead the advertising expenditure league, while committing a smaller portion of their sales. Besides, scale allows superior downstream integration into retail. Various data confirm that there exists a direct relationship between sales per square
