Luxury brands: Takeovers become fashionable again

7th March 2011

Demand for must-have labels in developing markets, such as China, has got analysts speculating of a new trend this spring/summer 2011 season – consolidation.

Reuters was among the first to report the take over of Italian jewellery designer Bulgari by France's LVMH in a 3.7 billion euros ($5.19 billion) deal.

The news is predicted to be followed by further consolidation in the luxury market, which bounced back from the 2009 slump much faster than expected.

LVMH was founded by billionaire Bernard Arnault and is built on acquisitions, its empire includes Louis Vuitton handbags, Chaumet and Fred jewellery, Celine and Kenzo fashion, Hennessy cognac and Moet & Chandon champagne.

Bulgari, a family-owned firm, may appear a sure bet for LVMH but for the investor, picking the next fashionable brands takes nerve, and then some.

You only have to look at the the latest set of sales figures posted by Primark to see how fortunes can change. Once a go-to store for many fashion conscious females, it has just posted its weakest growth for five years.

Daily Mail writer Liz Jones believes the British are falling out of love with cheap fashion; admittedly a contrarian view in a recession.

She may have a point, though saying that throwaway fashion may in fact work out more costly at a time when the consumer is trying to pare things down.

"Whereas my mum's generation had just one sweater, one coat, one bag, perhaps two pairs of shoes, young women were told we had to have dozens of pairs of shoes and hundreds of bags. The coat we wore in spring was out of fashion come May."

Alec Letchfield, manager of the HSBC UK Focus fund, says that for every Bulgari there are at least ten Primarks.

He says: "In terms of our portfolio we have been backing from playing the retail game at all. Consumers are under a large amount of pressure and have been saving rather than spending."

If you want to invest in fashion then you should look at the sector as having two sub groups. "If you play them well you can make some clever money," says Letchfield.

The first group would be considered the innovative, must-have brands. The current favourite includes Supergroup which owns the SuperDry brand.

"This came to the market last year and has been very suceesful in terms of its mid price quality offering.

"It doesn't hurt that David Beckham has been seen wearing it either

"The problem is you have to time things well, this kind of company will become expensive very quickly"

The second sub group is the luxury goods sector. "These are fully-valued stocks such as Burberry which is a very popular and covetable brand in developing markets."

Richard Buxton, head of equities at Schroders, also holds Burberry: "From a valuation that implied no recovery whatsoever in  early  2009, Burberry has rallied consistently, highlighting the resilience of demand  in the luxury goods sector."

In the end it may be the luxury brands that win out, or at least the ones offering quality. Jones appears to have a point.

The Independent reports that an ageing population will place more emphasis on quality and service over price.

Richard Lowe, the head of retail and wholesale at Barclays Corporate, said: "Consumers want quality as well as value, and are happy to trade up to buy statement pieces. That said, the value end of the market will remain buoyant and enjoy continued growth."

But as with any stock, the price a brand can command is like fashion – it comes and it goes.

See also: Nouveau riche in emerging markets fuel demand for luxury brands

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