Luxury brands are snapping up suppliers: What are the pros and cons?

To receive the Vogue Business newsletter, sign up here. Luxury fashion brands will step up their supply chain acquisitions in 2023, as they look for greater control, better margins and increased speed to market, experts predict. Global supply chain disruptions prompted nearshoring and vertical integration in 2022, as brands looked to guarantee supply. This was partly driven by inflation and the need to improve margins, but also to gain access to skilled craftspeople and drive down lead times. Supply chain mergers and acquisitions have largely been focused in Italy, which is known for its high-quality craftsmanship. Among the M&A deals, LVMH acquired a majority stake in tannery Heng Long Italy and a minority stake in leather and suede manufacturer Robans; Brunello Cucinelli took a 43 per cent stake in the share capital of knitwear supplier Cariaggi Lanificio from the Cariaggi family; and Chanel acquired a majority stake in Italian knitwear company Paima. Golden Goose acquired its largest supplier, Italian Fashion Team (IFT); and Fendi took a majority stake in Italian knitwear company Maglificio Matisse. The trend is set to accelerate this year as brands look to differentiate, predicts Anita Balchandani, senior partner at consultancy McKinsey & Company. “Luxury brands are likely to step up the rate of acquiring their suppliers to strengthen their competitive edge when it comes to access to unique materials, production techniques and capacity. This will also enable them to more credibly support their storytelling around provenance and craftsmanship — key to differentiation in the increasingly competitive world of luxury,” she says. Some brands may even be pushed towards forced M&A activities to avoid disruptions in their supply chain due to the macro-economic context, predicts Claudia D’Arpizio, senior partner and global head of fashion and luxury at consultancy Bain & Company, with 2023 expected to be “very uncertain” due to global recession fears. Continuity and quality control As the wider market challenges continue, impacted by geopolitical pressures such as soaring energy costs and labour shortages, more vertically integrated supply chains could have big benefits for brands. In September, Prada Group took a 43.65 per cent stake in Tuscan calfskin tannery Superior. Prada says the acquisition allows it to ensure the “continuity of specialised craftsmanship” through more quality control in all stages of production, as well as ensuring greater efficiencies in the production processes, allowing it to respond more quickly to market demands. Brands investing in their supply chains have a better understanding of how suppliers operate and manage their own businesses, which leads to greater knowledge in terms of the process and how to improve their own supply chains. Regarding more supply chain acquisitions in 2023, Prada says the brand is “constantly scouting opportunities in this direction”. In June 2021, Prada and Ermenegildo Zegna Group announced they were jointly taking a majority shareholding in Filati Biagioli Modesto, a producer of cashmere and noble fibres (fibres of the highest quality, for example those sourced from rare animals). It is just one of many specialist Italian manufacturers Zegna Group has acquired, as the company looks to strengthen its “Made in Italy” Luxury Textile Laboratory Platform, which it uses to supply both its own brands Zegna and Thom Browne, as well as others. Through the platform, Zegna has acquired historic Italian manufacturers such as boutique weaving mill Tessitura Ubertino (in 2021), jersey fabric manufacturer Gruppo Dondi (2019), milliners Cappellificio Cervo (2018), and textile manufacturer Bonotto (2016). It says this enables it to work towards a “largely vertically integrated business model”, and gives the business more oversight over the quality of materials. “Each of these acquisitions have represented a best-in-its-class of fabrics or materials,” Zegna says. Silvio Campara, Golden Goose CEO, says the acquisition of supplier IFT means that around 40 per cent of the brand’s total production will now be in-house, enabling it to oversee a large portion of its supply chain. As well as ensuring efficiency and transparency, he says owning more of the supply chain will allow the business to scale up production capacity for its next phase of growth. “We have been working with [IFT founder and CEO] Michele Zonno and the IFT team for seven years and what really drew us to partner with them are their core values of craftsmanship, innovation and quality,” Campara explains. “IFT shares with us the desire to deliver the highest quality product to the end consumer in a sustainable way. The vertical integration of IFT into Golden Goose’s production process will also allow us to consolidate IFT’s margins. We will support the new company to maintain a high level of efficiency while also offering the world-class quality we’re known for.” Mutual benefits Vertical integration can have big advantages for suppliers, too, fostering innovation, digitalisation and sustainability as brands can finance the development of new capabilities that manufacturers may not have been able to finance alone. IFT’s Zonno says the acquisition by Golden Goose will allow the business to focus its energies on what it does best: “excellence and craftsmanship”. He says the new organisational structure will also help facilitate the development of a new pipeline of talent, enabling “new opportunities for young and emerging talents who wish to enter our industry”. For luxury brands, vertical integration is key to securing legacy skills or “savoir-faire”, which is critical for the luxury industry but some worry will disappear, without financial and operational support. This was one of the key reasons for the launch of Italian supply chain platform Gruppo Florence in 2020, which was set up by former Bulgari and LVMH exec Francesco Trapani and a consortium of investors. The platform acquires smaller, often family-run Italian luxury fashion manufacturers, operating them under one group umbrella structure with shared management and operational resources. As part of the deal, suppliers invest in the larger group structure, with business owners staying on to manage their own companies. Luciano Barbetta, chief executive and founder of jersey manufacturer Barbetta, which Gruppo Florence acquired in June last year, says support from the group’s management team has been invaluable to the business, with weekly meetings to inspire ideas and share best practice among the different businesses. However, he says with so many strong entrepreneurs under one roof, there can be “internal competition” between the suppliers, regarding proposing strategy ideas which are then taken forward by the group. “The challenge is not to stay in your comfort zone,” Barbetta adds. Gruppo Florence chief executive Attila Kiss says the company is looking to bridge the cultural gap between small, family-run suppliers and large, global fashion houses in order to leverage economies of scale, but also mitigate risk for both suppliers and brands. He explains: “When I take a new company into the group, I have two main objectives. One is to preserve the flexibility, the creativity, the reactivity, and the technical know-how of these small companies, who are experts in the materials they are working with. The other is to give them the industrial benefits of digitalisation, ensuring their systems are efficient, lead times are shorter, and deliveries are on time.” Gruppo Florence is targeting new acquisitions during the first part of 2023, as it looks to grow its portfolio of manufacturers in all product categories. It already owns businesses in ready-to-wear and denim, for example, but is looking to add to its roster with leather goods and more footwear. Kiss says the aim is to have manufacturers in all key product areas, to help mitigate the risk at group level, if one category is performing better than another at any given time. Franck Delpal, a professor at the Institut Français de la Mode (IFM) in Paris and an expert in vertical integration, says before buying up a supplier, luxury brands should consider category areas that are already important sources of revenues, growing and profitable. By focusing on core categories that are intrinsic to the brand’s DNA, this will help mitigate risk if a new creative director comes on board, for example, and wants to take the brand in a different direction. Cultural differences Despite advantages, the cost of acquisitions can be an obstacle, especially in the current economic climate, as brands are being closely scrutinised by investors and interest rates are high (brands rarely disclose the financial terms of supplier acquisitions). Challenges can also arise when integrating smaller, family-run suppliers into large, global brands. “There can be cultural issues with integration and ongoing governance, particularly if it’s a large, listed luxury business,” warns Conor Cahill, head of consumer products, North and South Europe, at global consultancy Deloitte. “Having a previous client supplier relationship and moving away from that to being a subsidiary of a larger company is quite a big, cultural change for some of these businesses. To impose this on a supplier, who might only be small, or a subsidiary of another business that doesn’t have the same kind of governance or reporting constraints, can lead to friction,” he adds. If this area is not well managed, by properly communicating the shared vision so that people can buy into it effectively, the brand could end up losing the very people it wants to bring into the organisation, which in turn will devalue the whole acquisition. Gruppo Florence’s Kiss says, in turn, when a small entrepreneur makes the conscious choice to be acquired by a prestigious brand, the supplier must adapt to the rules and priorities of that brand. With wider global economic uncertainty continuing in 2023, Kiss adds: “Selected vertical integration can offer both flexibility and reactivity which will be essential to future-proof supply chains in the year ahead.” Comments, questions or feedback? Email us at feedback@voguebusiness.com. More on this topic: ‘It could ruin us all’: Fashion suppliers plan for 2023’s cost increases Inside the manufacturer localising luxury for Halpern and Christopher Kane Fashion’s reshoring rush: Why now and for how long?

Make better business decisions

Make better business decisions