Today marks the beginning of London Fashion Week, where top designers and fashion houses will showcase their new collections, informing trends for next season. Designers have previously shown pieces from a range of sub-labels, but today they are more likely to exhibit a single, unified collection. Why are a growing number of luxury apparel companies consolidating their collections, and what does this mean for investors?
In an increasingly frenetic world, maintaining purity of brand has become fundamental to retaining market share. Today more than ever, consumers are bombarded with information and companies need to be focused and sharp, positioning their brands carefully and offering a clear message in place of a broad one.
As a result, we are seeing companies in the luxury apparel space reversing changes implemented in the past to make their brands more accessible. Hugo Boss was one of a number of clothing brands to go on a rapid expansion drive after 2008, segmenting the brand into different categories at different price points. The result: confused customers and a distorted brand identity. The company has since announced plans to simplify its brand structure and refocus on just two brands, Boss and Hugo.
A single vision
Calvin Klein last year announced plans to unify all of its brands under a single vision and Burberry phased out three of its labels, Prorsum, Brit and London, to make it easier for customers to understand its product offering. In March 2015, Marc Jacobs opted to blend his cheaper line, Marc, into his higher end line, Marc Jacobs, to create one collection with a range of price points. We expect more companies to follow suit to strengthen and create excitement around their brands, particularly as the online channel grows in importance and accounts for a greater proportion of companies' sales.
The internet has created an omnichannel, granting consumers easy access to product lines. Consumers who buy luxury products care first and foremost about the design, quality, and personal service and less about the sub-brand on the label. Some of the most exclusive and sought after brands, like Hermès and Chanel, have demonstrated how companies can successfully sell a wide range of price points with different product categories under one name. A unified label allows consumers to buy into a single idea and also gives them confidence that they are buying the right product.
As well as consolidating their product lines, luxury companies are aligning their pricing structure across geographies, closing pricing gaps which meant that the same product could be significantly cheaper in one country than in another. Luxury goods consumers' appetite for travel and the ease with which they can compare prices has accelerated this trend.
Changing modes of shopping
The growth of the online channel also means that customers are now paying fewer visits to fashion stores to buy their luxury goods. This is particularly true of millennials, who have increasing significance as consumers, especially as baby boomers become more cautious with their spending as they move towards retirement.
In our view, the fast and costly expansion of brand stores is over. Luxury companies are placing greater emphasis on improving retail productivity and concentrating their capex on e-commerce and social media marketing. Millennials buy more on endorsement from their peers and are less influenced by traditional advertising. Companies like LVMH (owner of the Louis Vuitton brand) have appointed chief digital officers at the top management level to reflect this.
What does this mean for investors?
Although the brand consolidation trend has been driven predominantly by external trends, specifically digitalisation, it brings obvious business benefits. It creates a business model that is simpler, more efficient and easier to run. Given lower capex needs, as online sales continue to accelerate and spending on new stores and traditional media falls, we expect the major luxury companies, which have been increasing their dividends year after year, to continue to raise their pay-out to shareholders. We also expect the sales momentum in the luxury industry to continue to strengthen in 2017, following three years of headwinds. Crucially however, the improvement will not be uniform and stock selection remains key.