New York–The world’s 75 largest luxury goods companies generated luxury goods sales of $171.8 billion through the end of last fiscal year (fiscal years ended through June 2013) despite a slowdown in the global economy. The average size of the Top 75 companies was $2.3 billion in luxurygoods sales.
This is according to Deloitte’s first Global Powers of Luxury Goods report.
The Deloitte report identifies the largest luxurygoods companies around the world as well as an outlook for the leading luxurygoods economies, insights for mergers and acquisitions (M&A) activity in the sector.
“Despite operating in a troubled economic environment, luxurygoods companies fared better than consumer product companies and global economies generally. For the remainder of this year, we expect growth in developed economies to pick up speed while significant risks in emerging markets remain,” said Antoine de Riedmatten, Deloitte Global Industry Leader. “Overall performance of the luxury sector will depend not only on economic growth, but on factors such as volume of travel, protection of intellectual property, consumer propensity to save, and changing income distribution.”
The report focuses on the high concentration of luxury goods companies headquartered in France, Italy, Spain, Switzerland, the United Kingdom and the United States. These six countries represented nearly 87% of the Top 75 luxurygoods companies and accounted for more than 90% of global luxury goods sales in 2012.
“As the global economy recovers, the global luxury industry is generally expected to grow but in the Middle East, the luxury sector will remain strong this year as we continue to experience a robust consumer market and economic growth,” said Herve Ballantyne, Consumer business and transportation leader in Deloitte Middle East.
“We are set to see a growing number of luxury goods conglomerates seek to boost growth and market share through consolidation in the second half of 2014. Luxury goods sales growth and ecommerce growth will remain strong this year in emerging markets in Asia Pacific, Latin America, the Middle East and Africa, with tourists shopping in destinations such as France, Italy, the United Kingdom and the United States a significant contributor,” he added.
Growth of wealthy and upper middle class consumers in emerging markets has been the biggest driver of mergers and acquisitions activity in the luxury and premium goods space in recent years. The Middle East and Africa, Asia Pacific, and Latin America accounted for a combined 19% of the luxury market in 2013 and the regions are projected to grow to 25% in 2025, according to Euromonitor.
“The appetite for European and American brands remains strong in emerging markets, so these companies are bolstering their presence in these regions,” said de Riedmatten.
Value Chain Integration
Luxurygoods companies keep tight control over all aspects of business from product design and sourcing of raw materials to manufacturing, marketing, and distribution. Ownership of all aspects of the value chain for the company’s product(s) helps ensure that quality and service can be maintained, thus protecting brand heritage. As a result, vertical integration has become another important driver of M&A activity in the luxury goods sector.
Consolidation as a Growth Strategy
Industry consolidation is another factor driving M&A activity, with the consolidators taking a number of different forms. The large luxury conglomerates operate in diverse subsectors, the common denominator being a broad expertise in luxury including an intimate understanding of the luxury consumer. Seasoned investment firms are also contributing to the greater consolidation of luxury brands into a smaller number of holding companies or groups. All of these consolidators are seeking scalable brands, including distressed or underperforming businesses that simply do not have the experience, knowledge, or resources to manage ever-expanding operations.
A review of the largest transactions during the past two years reinforces the three key driver of deal making in the luxury and premium goods markets discussed above. In 2013, 12 deals were completed with a deal value of at least $100 million. In 2012, there were nine deals of $ 100+million. In 2012, 2 M&A transactions in the Middle East made it to the top 2 deals globally, namely the acquisition of the Jewelry & watches sector of Damas International Limited which is located in the UAE by the Qatari Manal Corporation Q.S.C. for a deal worth US$ 991 million. The second largest acquisition was made by the Qatari Mayhoola for Investments S.P.C, which acquired the apparel & accessories sector of the Valentino Fashion Group SpA/Permira which is based in Italy for a deal with $889 million.
Declan Hayes, managing director, Transaction Services at Deloitte, summed up: “The luxury and premium goods markets continue to grow significantly in the region with Middle East customers being some of the highest spenders worldwide. Our large Family Groups and Financial Investment clients are seeing the opportunity for acquisition, expansion and consolidation in these categories both regionally and internationally and we expect this trend to accelerate further.”