Merger and acquisition (M&A) activity continues to heat up among luxury brands, particularly in the fashion industry. This summer, L Catteron, a private equity firm backed by LVMH, agreed to buy a 60% stake in the Italian fashion company Etro.1

M&A activity has been, and will likely continue to be, a persistent tailwind for incumbent luxury brands in the Emles Luxury Goods ETF (LUXE) portfolio. We believe the mergers and acquisitions will enable the entrenched leaders to become larger, more diversified, and more profitable.

M&A activity over the last decade provides multiple examples of this trend, including LVMH’s acquisition of Tiffany, Bulgari, and Dior; Michael Kors’ acquisition of Versace and Jimmy Choo, and the merger between Essilor and Luxottica. This consolidation raises the barriers to entry in industries where barriers are already quite high. Consumers’ loyalty to luxury brands persists over decades, and it is both expensive and challenging to establish a new luxury brand that can compete with large, diversified luxury houses like LVMH and Kering. When consumer preferences do shift, conglomerates are much less susceptible to the changes than single-brand companies are.

Conglomerates also have large budgets to fund M&A activity. We believe the established single-brand companies will find it increasingly difficult to compete with conglomerates because they don’t have the same budgets to spend on marketing and M&A opportunities. That could lead to more of them being acquired. While it may be difficult for the single-brand companies to remain independent, their stockholders could benefit if they become targets for an acquisition.

When exciting new companies emerged in the past, they generally had a choice between two paths – to stay niche and small or be acquired by a larger luxury firm. For the larger firms, acquisitions enable them to establish a more diversified portfolio of brands. Numerous examples of this have taken place in recent years. LVMH has continued to grow by acquiring the hip hop and streetwear fashion brand Off White, founded by American designer Virgil Abloh, and the high-quality luggage manufacturer Rimowa, as well as many others. Skiwear maker Moncler abandoned its single-brand strategy in recent years and looked to become a more powerful company through its acquisition of a rival, the men’s apparel brand Stone Island.

Emles Luxury Goods ETF (LUXE) enables investors to focus on the world’s strongest luxury brands, and the benefits they are realizing through this continuing M&A activity. We expect M&A trends to make consolidators in the LUXE portfolio stronger and provide a boost for the stock valuations of the smaller players in these markets.

Tags: ETF, Growth, Luxury