Gadfly

Michael Kors, You're No Louis Vuitton

A matter of finding the right brands, and preserving their cachet.
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Photographer: Edward Berthelot

The must-have item this season isn't Saint Laurent's crystal boots or Balenciaga's triangle duffle bag, it’s a conglomerate structure.

Luxury houses with multiple brands are winning. That's prompting other groups to bulk up, the most recent being Michael Kors Holdings Ltd., which splashed out $1.4 billion on upmarket shoe maker Jimmy Choo.

But a shopping spree worthy of Carrie Bradshaw doesn't guarantee success. Those companies set on being the next LVMH have a tough road ahead.

When it comes to bling, bigger certainly seems better. LVMH and Kering have been among the fastest-growing luxury goods groups.

That's no accident. Each has a broad stable of labels that helps offset weakness in any one division. They have large geographic footprints and stores in all the main shopping destinations, which is useful given travelling luxury consumers' propensity to fall in and out of love with different regions. 

For LVMH in particular, having a presence in markets such as spirits and travel retail can provide early warnings of shifts in shoppers' sentiment before they hit fashion and leather goods. 

Its little wonder, then, that mono-brand businesses want in on the act.

Take Michael Kors. Its business is heavily concentrated in North America right now, but adding Jimmy Choo to its closet helps temper that.

The deal also lessens Kors' dependency on handbags, and may lift the share of sales from footwear to 17 percent from 11 percent.

Although synergies in luxury can be hard to come by, there are scale advantages, such as buying advertising and securing stores in the best locations. 

There is also scope for critical knowledge-sharing, which may be an advantage for Kate Spade after its recent acquisition by Coach Inc. The parent knows a thing or two about how to restore an overexposed name, so has the experience to help its new line manage its excessive availability.

That adds to the benefits for Kate Spade from the purchase -- according to Simeon Siegel, a retail analyst at Instinet LLC, its wholesale business is $100 million larger than Coach's, even though Coach dwarfs it in total revenue. That suggests it's significantly exposed to the troubled department store business and that there's an opportunity to pull back from this channel to protect the health of the brand. 

But bulking up is not without risk. 

To make it work, big groups need to have a cash cow at the center, such as LVMH's Louis Vuitton, Kering's Gucci or Cartier at Richemont. It's not clear whether the namesake labels at Coach and Kors are as robust as they need to be to weather shifts in shoppers' tastes and continue generating cash even during trickier times.

Multiple brands haven't protected either Richemont or Swatch Group AG from the pernicious downturn in the high-end watch market. And while Richemont has built scale in watches and jewelry, its experience in fashion and leather goods has been more mixed. Chloe is firing on all cylinders, but Dunhill has been restructured and Shanghai Tang sold off. 

As Gadfly has argued, Coach and Kors' strategy of becoming multi-brand retailers is the right one. But, it will be no easy task. Indeed, all that pulling Kate Spade from department stores will weigh on Coach's earnings this year. Both companies' valuations are below that of the Bloomberg Intelligence luxury peer group, although Coach is nearer to the average. That is justified given that it has more acquisition experience, having already added Stuart Weitzman. Indeed, it was seen as a more natural buyer of Jimmy Choo than Kors.

These aspiring U.S. luxury powerhouses do seem to be aware of the risks. Kors executives have said they expect to significantly raise the operating margin at Jimmy Choo, and will look for efficiencies in areas such as distribution and information technology. But they are also committed to Jimmy Choo maintaining a good bit of independence and wouldn't give much consideration to things like combining sales forces or relying on the same factories.

That underlines the delicate balancing act when it comes to building luxury behemoths: exploiting scale without damaging the identity of individual brands.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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