Mar 13, 2013
Small labels lure big bucks in fashion's latest trend
Mar 13, 2013
PARIS - Christophe Lemaire has spent the past three years designing dresses for Hermes. Now he wants to develop his own brand and ride a wave of investor interest in new labels which have the potential to become global brands.
He's not alone.
Whether it is private financing or takeovers by major luxury groups like LVMH, the latest trend in fashion is to find a promising niche label that has no history but plenty of imagination.
Fuelling the bull market for young designers is executives' conviction that demand for luxury goods is strengthening further in markets like China and the United States, especially for the kind of fresh looks that only new blood can create.
"People are taking comfort in the luxury goods sector's track record and growth prospects, which is encouraging them even more to invest in young niche fashion brands," a Paris-based banker said, declining to be named.
Take Damir Doma, a 31-year-old Croatia-born designer who worked with Belgian designer Raf Simons, now at LVMH's Christian Dior. His brand's parent recently sold a 5 percent stake to Bernd Beetz, former chief executive of Coty who is still the board of the perfume and cosmetics maker.
And the designer has attracted the attention of another big name - Concetta Lanciaux, former adviser to LVMH CEO Bernard Arnault, who built her reputation on her ability to spot talent and who sits on Damir Doma's board.
"I think designers are opening up their capital earlier now because they understand that it allows them to grow faster," Lanciaux said, adding that Doma was for her a "modern Armani".
Lemaire, the women's ready-to-wear designer at Hermes who previously worked at Lacoste for a decade, is also hoping to find experienced partners for his own fashion brand, which targets sales of 2 million euros ($2.6 million) this year.
"We feel that there is money to invest in fashion and there has been a rise in interest in small brands," said Lemaire, who is about start prospecting for new investors.
Retailers say appetite for niche labels has grown to the detriment of megabrands such as PPR's Gucci and LVMH's Louis Vuitton, which have seen their sales growth slow in recent quarters, even in vibrant markets such as China.
Competition for good designers is such that investments in fashion labels tend to be made at the early stage of a brand's development, aiming to lock-in the talent and give the brand a strong start.
And there are other factors at work.
Arnault's long and painful search for a replacement for disgraced designer John Galliano at his group's flagship Dior brand goaded many groups into widening their talent pool, experts say, as it showed how difficult it could be to find the right person for a brand.
Both LVMH and PPR have recently invested in young designers, with the former last month buying around 30 percent of the brand of 28-year-old Maxime Simoens. PPR earlier this year took a 51 percent stake in seven-year-old British brand Christopher Kane, known for its original mixes of fabric.
PPR is also in talks to buy a stake in Italian jeweller Pomellato, famed for its coloured stacking rings.
Other promising brands in play include China-born French designer Yiqing Yin and British brand Erdem, known for its imaginative prints, who have both recently received interest from investors, according to industry sources who declined to be named.
"At an early stage, what the investor is buying is the brand's growth potential and its notoriety, as it will take several years before it makes a profit as start-up costs are huge," a London-based investment banker said, adding that these costs usually ranged from 10 to 20 million euros.
Yet these are small sums compared with the billions of euros in profits made by big luxury groups such as PPR and LVMH.
Valuations of young brands, most of them lossmaking, range between one and three times sales, depending on their maturity, compared with a ratio of two to three times at listed luxury groups such as LVMH.
"Big groups certainly have the means to afford investments in upcoming talents, also to get them ready for important future assignments and ambitious development plans," said Renzo Rosso, founder and president of Only the Brave (OTB) which owns Diesel.
OTB, which has invested in smaller brands such as Maison Martin Margiela and Viktor & Rolf, in December bought control of Marni, a bohemian-chic Italian label that makes 130 million euros in annual sales. Financial details were not disclosed.
"We are constantly looking for upcoming talents to grow," Rosso told Reuters in an email exchange.
Big groups have also started building closer contacts with fashion schools. Last year, LVMH created a scholarship at the Central Saint Martins school in London, while PPR launched a contest with the Parsons school of design in New York with winners getting internships at Alexander McQueen or Gucci.
Industry observers say there has not been so much interest in investing in fashion brands since the late 1990s and early 2000s, when LMVH and PPR were building up their empires.
Only back then, the trend was to resurrect old names such as Balenciaga and Yves Saint Laurent in the case of PPR, and Fendi, Celine and Loewe for LVMH. And if they did invest in new brands, it was at a much later stage of their development.
LVMH acquired Marc Jacobs and Donna Karan for instance more than a decade after they were founded in 1984, while PPR in December 2000 bought a controlling stake in Alexander McQueen, which was created in 1992. The brand's sales have since risen 12 fold to more than 100 million euros.
So far there seems little reason to think the latest investment upsurge has run its course.
The global luxury goods sector has shown tenacious growth in defiance of economic shocks. After growing 10 percent last year, global sales are set to expand by between 7 and 8 percent in 2013, according to analysts' forecasts.
Meanwhile the world's top three luxury groups - LVMH, PPR and Richemont - are cash-rich and competing with private equity and individual investors for acquisitions.
"There is a desire to invest in risk," said Didier Grumbach, president of the French Fashion Federation. "That did not exist five years ago."
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