Investing fashion and luxury brands cannot bypass these four puzzles | Alicia Yu, the Founder of Luxe.CO

On November 14th, Alicia Yu, the founder of Luxe.CO and the president of Orange Bay University was invited by CITIC Securities to participate in the “China CITIC Securities 2019 Capital Market Annual Meeting” held in Shenzhen and served as a guest speaker at the “Good Living Forum”. She shared a series of typical investment and M&A cases in the fashion and luxury industry that were tracked and researched by Luxe.CO in the past year, summarizing the latest trends in global fashion innovation and revealing the core driving forces behind these trends.

Although the word “fashion” can be seen everywhere, it is always a distant and difficult existence for most people, especially those in the Chinese capital market. The investment value of the fashion industry is far from being fully understood and explored.

Yu pointed out that fashion is a greater business than people’s imagination, with an annual global output value of trillions of US dollars. The essence of fashion is to accommodate change and innovation, so it is an eternally young ancient existence. Although the history of luxury has a long history, it has only gradually changed from a niche to the crowd beingness in the past 30 years. Combining the rise of pop culture, independent designer, Internet entrepreneurial, and social media, the democratization of global fashion is inevitable. It has become a common practice, represented by Chinese consumers, people's desire for being stylish is increasing tremendously, indicating that the future development of fashion and luxury is still unbelievably broad.

The booming of the Internet did not weaken but strengthened the importance of the branding – the global purchasing power and brand awareness has improved, empowered the impact of the exquisite brand, makes the fact that, the top brand is in urgent need, increasingly prominent. Especially in the Chinese market, we are welcoming the golden age of the brand, this is why Luxe.CO has always regarded brand as the focus of attention. Since its inception in 2013, Luxe.CO has covered more than 1,800 brands’ business data, as well as its development regarding innovation, investment and M&A. From the top ones to entrepreneurial brands, it covers various subdivisions of fashion and lifestyle industries such as clothing, jewellery, beauty, food, sports, interiors, and leisure travel.

Speaking of the global investment and M&A trend, which draws most concerns from the capital market, Yu refined a series of industry trends from the 622 fashion investment and M&A cases tracked and studied in the first three quarters of 2018 by Luxe.CO. Talked about the topics that the audience is most interested in: how Chinese capital acquires overseas fashion and luxury brands.

Yu said M&A has always been the main theme of the development in global fashion, especially luxury industry. In fact, the world's four luxury groups LVMH, Kering, Richemont and Swatch have all became the leader after a series of intensive M&A in the 1980s.

Internationally, the driving factors of brand M&A can be summarized as accelerating the growth of the company, increasing the profit rate, enhancing the competitiveness, resisting the life cycle risks of the brand, and resisting the risks of the macroeconomic cycle. However, the motives for Chinese companies to acquire overseas brands are different, which can be summarized as the following five points:
1) Actualize the upgrade of the combined portfolio and acquire the brand with higher premium potential
2) Actualize the generational replacement of brand portfolio and resist the existing brand life cycle risk
3) Diversify the brand portfolio for different segment markets
4) Facilitate overseas brands to soft land in the Chinese market and enable the complete potential
5) Leverage overseas brands to expand the international market and obtain international talents and resources.

Yu also admitted that M&A has always been a balancing consideration of opportunities and risks. In the field of fashion and luxury, investors must solve the following four puzzles:
1) In the past 20 years, the biggest controversy for the investor has been to invest the  “super brands” (high valuation, high scarcity, a wide audience) or “niche brand” (low valuation, biased towards niche, but developable potential). The LVMH Group's M&A strategy has evolved from the previous casting a wide net towards focusing on segmentation categories. However, it has undergone a tortuous and lengthy process of learning, practice and adjustment.
2) Cross-border and cross-category M&A has always be questioned whether it can achieve the integration of brand and corporate culture, and effectively protect and inherit the genes of the original brands. Not only Chinese but also American and Japanese companies, when they are purchasing brands in Europe, it is often suspected that if they can really understanding of the cultural roots of these brands. However, cultural integration itself is a gradual process, if nobody really practices, it is almost impossible to become familiar with and adapt to overseas brands, especially the culture.
3) To develop high-end brands, finding excellent creative talents, international senior management and local operational with grounding local knowledge is often the key to success.
4) In what way is it possible to promote the landing process of these overseas brands in China, should we be relatively conservative or radical?

There is no standard answer to these questions, and the most appropriate path must be found through exploration and practice on the basis of in-depth research. Some Chinese leading enterprises and investment funds have already initiated the process by practising higher-frequency international investment and M&A activities and developing appropriate countermeasures.

Yu emphasized that cultivating a high-end brand is a long-term project requires consistent investment. From the historical experience, there are absolute complicated subjective and objective factors behind each brand's success. No formula can be copied, also, the past successes are hard to replicate.

Chinese corporations and investors need to take the first step to meet the learning curve, learning from hands-on knowledge, from the best practices of global brands and manageable mistakes. Positioning in a sensible industry as fashion, decision-makers must avoid following their sentiments. All decisions need to be made based on a profound understanding of the industry, and everyone should constantly enrich the knowledge and update it in time to have the ability to make an informed decision anytime.

Fashion is an industry that must not be isolated from the background of globalization. The aim of Luxe.CO is to band together fashion, finance and technology, with the vision of building a global industrial network with knowledge and sharing the best practices among brands. By breaking the invisible boundary between different fields, supporting the growth of China's fashion industry and capital power.

The three business segments of Luxe.CO include the premier business media, involving Chinese and English websites, app, WeChat, Weibo, etc; InnoBrand innovation competition and the upcoming InnoBrand accelerator. Also, Orange Bay University, which was founded in 2017, the world's innovative fashion business school.

Up to now, Luxe.CO has held the Global Fashion Innovation and Investment Forum for four consecutive years, and published various exclusive research report includes “China Fashion Consumption Survey”, "Global Luxury Stock Monthly and Annual Report", "China Fashion and Lifestyle Investment Weekly", "China Independent Designer Monthly", " Global Fashion Technology Express", "Annual China / International Fashion Investment Report”, “Global Sustainable Fashion Express”, and several research reports on key luxury enterprises and segments.

Luxe.CO will also launch a “Think Tank” service for enterprises and investment institutions in the near future to help everyone better comprehend the development trend of the global fashion industry.
Please contact contact@hualizhi.com for more information.

Photo courtesy of CITIC Securities.