Keep it exclusive” has proved a winning strategy for the world’s luxury brands. Hermes and Bulgari, two of the most prestigious brands, have even applied it to their shares. Both are listed, but made takeover-proof by majority family shareholdings. Moreover, both have so far shunned big deals. Covetous rivals like France’s Gucci Group and LVMH have been free to look, but not touch. Staying relatively small worked in the old world. Hermes, a €8 billion firm best known for a handbag named after Grace Kelly, and Bulgari, a €3 billion jeweller famous for its classical designs, avoided the fate of rivals who chased growth too eagerly in the 1990s. Gucci and Burberry are just two who spread their brand too thin, attracted counterfeiters and lost their gloss. But modern luxury is all about untapped regions such as China and India and the US heartland. In emerging markets, which Bernstein Research says accounts for a third of global luxury growth, long-standing cultural romances won’t help. Brands need to deploy huge resources ahead of rivals.
Bulgari and Hermes don’t have a problem with cash. With respective margins of 13% and 26%, both can easily sustain their current expansion out of their own cash flows. A little more can come from tighter working capital, as Bulgari did, or raise more capital in the market. Teaming up with private equity thus has little to offer.
What they lack, though, is scale. Luxury conglomerates like PPR and LVMH have vast experience of selling to emerging market customers, and huge media influence. Both need to diversify away from their star brands, Gucci and Louis Vuitton, respectively. Bulgari especially could bolster the presence of either in fast-growing jewellery and watches.
Francois-Henri Pinault, chief executive of Gucci Group owner PPR, said last week he would be interested in Italian jeweller Bulgari, if available. Francesco Trapani, Bulgari chief executive, said its main shareholders did not intend to sell. Bulgari is 52% owned by three Bulgari family members: brothers Paolo and Nicola 24% each and nephew Trapani 4.5%. It reports interim figures on Thursday.
Hermes, the French scarf and handbag company seen as an attractive takeover target by analysts, is also majority family-owned, About 60 members own almost 75% shares, with two shareholder pacts and a poison pill under which the group can effectively issue new shares to prevent a takeover. Without scale, the standalone approach doesn’t look like a winner for the two companies—especially now the industry’s push into emerging markets has started in earnest. If they don’t want to get left behind, investors’ best hope might be that big rivals decide to build strategic stakes in these objects of desire—and that the ageing barons of bling decide to?hear?them?out.