Why Isn’t There an Italian LVMH?

LONDON, United Kingdom — Gucci, Pucci, Armani, Versace — list a few of the world-famous brands that Italy has produced and, while sounding like a Kanye West song, you are reminded just how much the country contributes to global fashion and luxury. The southern European state has nine brands that report over €1 billion in revenue. That figure is set to jump to 12 when Valentino, Versace and Salvatore Ferragamo cross that revenue threshold, as expected.

Despite this high density of billion-euro brands, Italy is yet to produce a conglomerate of the scale of LVMH, which reported revenues of €30.6 billion (about $34.7 billion) — €10.8 billion of which derives from fashion and leather goods — while Richemont and Kering reported €10.4 billion and €10 billion respectively in 2014.

While all four of the Italian analysts and executives interviewed for this article raised the national psyche as a factor, the primary reason Italy lacks a conglomerate of scale is far more prosaic. “The French are over-weighted on accessories; Italian brands are more focused on ready-to-wear. Accessories was the part of the market that increased the most in the last years, and the product with the higher gross margin, which gives a significant competitive advantage to the French companies,” says Mario Ortelli, a senior analyst at Bernstein.

“When you look at conglomerates in the luxury goods industry, they were built either in hard luxury like Cartier, or in soft luxury like Vuitton, but in accessories. [To build a group] I think you really need one core business and one core brand that is very profitable, very healthy and very robust. At the heart of any of those groups, you find one mega brand: Gucci at the heart of Kering, Vuitton at LVMH and Cartier at Richemont,” says Luca Solca, head of luxury goods at Exane BNP Paribas. The two French conglomerates now own four of Italy’s nine billion-euro brands arguably big enough to act as a “core” brand. LVMH owns Bulgari and Fendi; Kering: Gucci and Bottega Veneta.

Businesses of the necessary scale to constitute a "core brand" are few and far between, a fact illustrated by Prada in 1999. With revenues just below €700 million, Prada began a brief but ambitious acquisition strategy, which saw it buy Jil Sander, Church's and Helmut Lang, while taking interests in Gucci and Fendi.

“Building a conglomerate with smaller brands, or weak-ish brands, is not really a successful proposition. If your core business is not very robust, you risk taking your eye off the ball, without adding value through your acquisitions. The attempt of Prada to diversify was carried out at time when Prada was not strong enough as a brand — it would be possibly a different kettle of fish today,” says Solca. “If it’s a $20 million business or if its $200 million — it takes the same amount of time, on the creative, on the commercial.’

For a conglomerate in a fixed cost industry such as fashion, advantages of scale are significant in making efficiencies. “The most important synergies come from the location and rental costs negotiations, as well as [negotiations] with publishers and organisations on advertising. Another [advantage] is having all of the brands [synced] to your digital presence — and a deeper bench when it comes to talent along with better access to the financial markets. Today you probably start to make a difference when you get closer to the €5 to €10 billion in revenue,” says Solca.

The advantages are also compound. Bolt-on acquisitions available to €5 to €10 billion businesses distort the playing field considerably. “If you look at LVMH, it was almost an afterthought for it to acquire a company like Loro Piana, because it doesn’t take much when you look at their cash flow. A company can use scale as a spring board to consolidate the industry and buy up smaller players of value and promise,” continues Solca.

Since many Italian companies are still comparatively young — the majority were created after WWII, most after 1975 — they are still led by their founders, or their founder’s relatives. Founding designers tend to be more rigid in their practices and far less prone to group integration. “On the other hand, if you manage a leather goods brand, or a jewellery brand, you are typically more of a business-mind, and as a consequence, I think you have more of the preparation and adaptability to build a business rather than a single brand,” says Solca.

“Companies like Prada, Max Mara or Diesel could potentially aspire to be aggregators in their own right,” Solca continues. “It is going to be an uphill struggle though, because the delay that has accumulated against European players is very significant and it is very difficult to catch up at this point,” says Solca.

Having chosen organic growth strategies, Armani, Salvatore Ferragamo, Dolce & Gabbana and Ermenegildo Zegna seemingly do not have the ambition to drive the expansion of an Italian group. Even Prada is now focused on its remaining portfolio: “sister-brand” Miu Miu and shoemaker Church's. The Tods Group, consisting of Hogan, Fay and Roger Vivier, “can make probably just a limited acquisition in footwear,” believes Ortelli.

"The only attempt we are seeing right now, of a company that has an appeal for acquisition, which is still on a scale that is by far smaller than French competitors, is OTB, the group of Mr Renzo Rosso, who owns Diesel, and has, for example, recently bought Marni along with other brands," says Ortelli. OTB also owns Maison Margiela, Viktor & Rolf and Staff International, a manufacturer of garments for Marc Jacobs, DSquared2 and Just Cavalli.

“We don't want to become another LVMH or Kering — our goal is not to be the biggest, but to become the coolest. The size of Marni was around €120 million [when we bought it] so it was not a small company, but had the scale and opportunity to grow up to [become] one of the big players in the luxury industry. That is where it’s easy for us to play. It is a size that is achievable for our strengths and finances,” says Stefano Rosso, chief executive of OTB, the private group, founded by his father Renzo, which generated revenues of €1.6 billion in 2013.

“At the stage where we are, we are not thinking of IPOs. If there were other opportunities for acquisitions, we would probably go after them. However, we do not have an urge to buy; it has to make sense with the development strategy of the group. We think we can double our size without crazy investments that will make us go to the market for financial resources. For us, it’s not as easy as for the big French groups. The financial strength they have is much bigger, but not needing to have a nice number every quarter for the public and your investors is a big relief and allows us to do what we believe in,” says Rosso.

The financial might of LVMH is a massive advantage. In 2011, in a move that enabled it to move into the jewellery market, the French luxury conglomerate bought Bulgari for €3.7 billion —paying a 60 percent premium on its closing share price of the previous day.

According to analysts, the opportunity to create an Italian conglomerate of scale is dwindling. In the next few years, instead of being consolidators within the market, Italian brands will be targets from the big global groups outside of it. "We expect an M&A wave. The luxury conglomerates will be the first agents of consolidation, and mainly focused on the big brands, because they can extract the synergies and the financial investment," says Ortelli. These synergies in HR, legal, accounts, digital and logistics are significant. Pierre Godé, LVMH Chairman Bernard Arnault's "right hand man," gave up his role as vice-chairman of LVMH to take up an operational role overseeing these synergies in the group's Italian businesses: Bulgari, Acqua di Parma, Fendi and Pucci.

What's more, any aspiring Italian aggregator group must compete with private equity funds, which have been increasingly active in the Italian market. The Carlyle Group recouped six times their initial investment when Moncler went public in 2013. Mayhoola's buyout of Valentino ushered in a period of dramatic growth for the Roman house, with revenues rising from $230 million in 2009 to $700 million in 2014. Versace has hit its stride since Blackrock bought 20 percent of the company in 2014. "And earlier this year, Clessidra acquired Cavalli, in a deal valuing the business just below €1 billion." The absence of an Italian group of consequentially enough scale to offer some form of protection from the French and private equity is being felt.

Solca believes the formation of such a group has never been harder: “The delay in building scale is now significant — the disparity [in scale with conglomerates] staggering,” However, Rosso, arguably Italy’s only realistic hope of a champion is more positive: “I truly believe is there is space for an Italian group to emerge, and Italian buying Italian companies culturally makes sense — for sure.”