The fashion sector is similar to other industries in the sense that it is characterized by the emergence and rise of large corporations such as Kering and LVMH, to name a few. In the luxury segment, the majority of the conglomerates are highly diversified. For example, a company such as LVMH has a vast portfolio that includes high-end brands in categories like perfumes, leather products, cosmetics, jewelry, wines and spirits, and even take part in the media industry with the Group Les Echos-Le Parisien. The diversification in this context has played a central role in establishing large conglomerates as leaders in fashion and other sectors. In essence, they have set an example, which family-owned luxury brands are seeking to emulate and probably surpass, especially in the long-term.
In the beginning, they were all families
It might be hard to recall, but historically luxury products were mostly about craftsmanship and exclusivity. The clients belonged exclusively to the aristocratic and royal classes. These products were often bespoke, made on-demand or exclusively for one client by craftsmen and designers who controlled all aspects of their craft. After the second industrial revolution and mostly post-war, the rise of the haute bourgeoisie created a new demand for modernity and creativity particularly in fashion and jewelry. Young creators rose to fame and launched the haute couture houses, often owning their businesses or having very few financial backers. It was a time when middle-classes and mass-tourism didn’t exist yet.
But that was before the visionary and ambitious Bernard Arnault, profiting from a conflict between the Louis Vuitton and Moet Hennessy families, took hold in 1989 of the small alliance they built. Arnault, who already owned Christian Dior, predicted the growth of a global middle class eager for status symbols and he intended to answer this demand. After many acquisitions, often from family-owned businesses, the group now counts 75 brands across 6 luxury sectors in its portfolio and is the biggest luxury player in the world.
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Following this business success, others tried to imitate Bernard Arnault’ strategy and groups such as Kering, Richemont and Puig developed through mergers and acquisitions. The end-result is that nowadays few luxury brands are still purely family-owned, among them the biggest are certainly Chanel, Hermès, Armani and Ralph Lauren followed by smaller brands such as Prada, Moncler and Ermenegildo Zegna. Yet the trend towards consolidation is still strong as most of these family-owned brands end up being absorbed by the big groups or investment funds (Valentino and Versace are notable examples) or are trying to consolidate internally by undertaking M&A operations themselves. Two mains parameters motivate these moves: family disintegration through generations and trends shaping the global luxury market.
The family-owned conundrum
Family-run companies have some notable strengths when it comes to long-term survival. They are indeed known to be more long-term oriented, to be less focused on immediate return on investment and they offer consistency in their strategy while being less indebted. These faculties should also encourage them to invest more in new technologies. But in practice many family-run businesses see their fortunes reverse.
The major reason is succession planning especially : heirs might not be ready or willing to take over the company, and the risk of nepotism is tempting. Moreover, in some cases the heirs divide and fight. If this infighting last months or years, the company might not be able to attract talents and the strategy would become so fragile and uncertain in a fast-changing global environment that the business is doomed as no external investor would take such a risk. Another reason why family-owned might not be sustainable is when the family running the business is too conservative and risk averse.
This has happened even to major brands such as Ralph Lauren, Armani and Prada who have been late to innovate across all their brands’ functions from marketing to design and customer experiences. To sum-up, unless family-run brands have strong governance bodies with independent members preventing conflicts and manage to attract the best talents across all their divisions, they might be forced to accept being absorbed by a luxury conglomerate or see their brand name collapse in the face of a more complex global luxury market.
Family-owned are striking back …
Family-owned luxury brands such as Prada, Hermès, and Chanel are competing with big-name players through varying propositions and online strategies. For example, these companies are acquiring some of the companies within their supply chains, thus easing the process and costs associated with obtaining products like crocodile and python skins as well as merino wool. Moreover, these companies are noteworthy for the huge investments they are continually placing in different phases of their supply chains, which includes suppliers, farms, and raw materials. This strategy these brands are opting for not only allows them to control their costs but it also allows them to maintain and advocate for craftmanship. They are also embarking on efforts to acquire stakes in the retail segment of the supply chain. A case in point is the huge investments, Ermenegildo Zegna placed in Thom Browne which is cited as one of the largest emerging retailers. That is to say that controlling the whole production process as well as the retail sales of the products is what keeps these family-owned brands afloat.
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… But have to adopt conglomerates’ practices
Family-owned luxury brands are adopting the strategies that have cemented the success of established conglomerates for several reasons. The economy has grown increasingly volatile, which places a significant strain on the business and operations models employed by family-owned businesses. In this context, having the knowledge and understanding of a specific industry provides brands with leverage, especially when they are attempting to diversify in similar segments. This trend is particularly notable in the luxury segment where brands exploit the profitability associated with being conglomerates through advantages such as economies of scale, centralization capacity, exclusive supplier networks, and access to top talent and capital.
Yet , it is important to note that these luxury conglomerates always preserved craftmanship and they never abandoned the haute-couture and made-to-measure activities for short-term profit reasons. They indeed always emphasize that if most of their sales are made by cosmetics and accessories, they also allow an increased number of consumers all over the world to afford high quality products. Family-owned luxury fashion brands have realized that enhancing their size increases the control they can have over competitive advantage in the specific industries in which they operate.
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Are conglomerates a real example to follow?
Despite the advantages and success, they tend to boast of, corporations do not necessarily have the perfect synergies. A significant number of them tend to have established businesses that fuel their financial success. However, they also have startups in their vast portfolios, which implies that they face the challenge of dealing with different business and operations models. Equally challenging is the prospect of handling different growth rates and business needs. These aspects represented a large part of the reason companies like Stella McCartney and Puma parted ways with the Kering Group as lesser companies such as Coach acquired stakes in Kate Spade. These aspects point to lessened complexities, and thus, an enhanced potential of family-owned luxury brands to achieve the success attained by conglomerates.