Appunti esame Luxury and fashion management

Forward Integration of Luxury Companies

• stores fully owned by the parent company, under the company’s DOS (directly operated stores): direct control (examples: mono brand stores, official stores). There is a trend of luxury companies to follow forward integration strategy, in order to gain more control on the retail system. In order to be present at international level, brands need financial resources which can arrive from a specific holding buying the brand. After the acquisition of brands from foreign companies, the number of DOS doubled (example: Gucci and Bottega Veneta. LV is the only luxury brand in the world that sells brand products only at DOS, no franchising).

• CONGLOMERAL DIVERSIFICATION/CONGLOMERAL PURE DIVERSIFICATION/PURE DIVERSIFICATION: a company enters a new sector that doesn’t have any synergies with the company’s original sector both in marketing terms and in technological/productive terms. Expanding into unrelated industries (no synergies).

Example: Benetton and Autogrill.

Advantages of CONGLOMERAL DIVERSIFICATION: in this case the value for shareholders comes from the fact that the power of the brand is increasing by enlarging the boundaries and by applying a specific brand to other sectors. Shareholders can gain because we are adding a new profitable activity to the previous one. Another advantage of this diversification strategy is the fact that the new activity is completely separated from the other one in terms of demand, partners etc etc so risks can be fragmented (for example in case of failure/strategic errors, the reputation and image of the first activity won't be affected in a dramatic way because the other activity has its own identity. The losses of one activity cannot be applied to the other activity).

• CORRELATED DIVERSIFICATION: in this case we can observe marketing synergies or productive synergies. For example: Armani Casa (Armani is entering a new sector but using the same brand. No productive

Advantages of CORRELATED DIVERSIFICATION:

Increased value for shareholders through the exploitation of strategic links between businesses:

1. Capacity transfer between businesses (example: presence of external supplier to produce furniture Armani company's but marketing capabilities);
2. Sharing facilities or resources to reduce costs;
3. (Generally) adoption of a single brand name. For example, in the case of Armani, Armani is the umbrella brand, and the diversification activity (furniture) is represented by the sub-brand Armani Casa.

Correlated diversification is one of the most used diversification strategies within luxury and fashion industry. This strategy is related to the phenomenon of MASSTIGE (luxury brands have to trade down. How can they trade down? Through correlated diversification. For example, the case of Armani Exchange is not an example of correlated diversification because it is still in the core business of the brand but if Armani invest

toinvest with its own capital in new activities creating new branches (very common in correlateddiversification but not for luxury). Just one company.

External expansion: there’s a partner, another company. The firm decides to invest in externalactivities through different processes:

• Merger: the merger is an operation through which the acquired company cesses to exist andbecomes part of the acquiring company. The legal entity of the acquired company will be lost. Outcome: the acquiring company enlarges the dimension of its organization and perhaps the clients/market of the acquired company will switch to the acquiring company. The acquiring company will also acquire the resources (tangible and intangible) of the other company.
• Acquisition: The acquiring company obtains the majority stake in the acquired company, which does not change its name or legal structure (very common in luxury sector, LVMH won’t buys Fendi, which is still Fendi. It lose its legal name.

The industry is based on creativity (artistic dimension) and if the artistic dimension (such as fashion designers, etc.) of the acquired company doesn't feel free to express its creativity, there will be a departure of key creative talents, loss of know-how, and clash of corporate cultures (acquiring & acquired). So, there should be a balance between transferring knowledge from the acquiring to the acquired company (knowledge sharing), and the acquiring company should identify the best way of changing without influencing too much the creative vision of designers (employee retention). An intensive knowledge sharing with the acquirer poses the risk of changing and influencing too much the creative vision.

STRATEGIES TO AVOID FAILURES: THE ROLE OF HR

The key role in the acquisition strategy is played by the HR department, which has a strategic role as it has to identify different plans to follow in order to achieve the final goal: the growth of the company. There are two

M&A tightly focuses on managerial business, such as markets and commercials, leaving out the creative part of the organization acquired.

The key people of the acquired company enable the head of the group to maximize on the synergies developed. This final statement means that the management of the acquiring company has identify the key roles (for example, fashion designers, tailors) in the acquired company and create a loyal/trusty relationship with them by listening to them/recognizing their values/let them be present in meetings and in the board).

LVMH VS KERING

The main target companies in M&A transactions undertaken by two French holding companies are identified in the historically grown organizations in terms of quality and production expertise. Companies like Gucci, Sergio Rossi, Bottega Veneta, Brioni, Pomellato are now part of the "business park" of Kering holding.

LVMH, as opposed to Kering, has a product portfolio with a high diversification rate.

monitoring organizations operating in different industries such as wine and spirits, fashion and leather garments, perfumes, cosmetics, jewelry. LVMH has also undertaken M&A deals to add items within its value chain, through acquisition of distribution channels, such as Sephora, and communication (Group Les Echos).

2. RETRENCHMENT

• Turnaround - downsizing existing company/divisions. The company cannot sustain anymore its previous position/its goal. The company decided to reduce both its dimension and the activities in the current divisions of the company.
• Divestiture - selling off existing divisions/subdivisions. Example: Turkey. External conditions/elements are affecting the country. And so, companies are investing less in Turkey and customers have the same purchasing power that they had 2/3 years ago. In this situation companies that have already invested in Turkey may feel obliged to sell some divisions of the company.