In Luxury Goods, Pandemic Shows Bigger is Better

By Eric Sylvers in Milan and Matthew Dalton in Paris 

The coronavirus crisis is widening the gap between the haves and the have-nots of the luxury goods industry.

Virtually all luxury brands suffered revenue drops of more than 20% in the first half as boutiques were closed for months and big-spending shoppers couldn't travel. But the industry's biggest brands -- Louis Vuitton, Dior, Hermès and some others -- have held up better than the industry as a whole and taken market share in the crisis.

At the same time, midsize Italian luxury-goods companies Salvatore Ferragamo SpA and Tod's SpA have sputtered compared with their bigger competitors. Their brands were already suffering before the pandemic, hampered by lack of investment in digital marketing and e-commerce, a weakness that left them particularly susceptible when pandemic lockdowns made online operations the only way to connect with customers.

Analysts say the damage caused by the pandemic, coming after years of declining results for Tod's and Ferragamo, could raise pressure on the companies to seek outside investment or sell themselves to one of the industry's conglomerates: LVMH Moët Hennessy Louis Vuitton SE, Kering SA, Compagnie Financière Richemont SA or Capri Holdings Ltd. The giants control much of Italian luxury-goods production, including Gucci, Fendi, Bottega Veneta and Versace.

"The trends that we observed before the crisis -- the fact that the bigger brands outperformed the smaller -- continued and accelerated," said Anne Le Borgne, who manages a luxury and lifestyle investment fund with CPR Asset Management in Paris. "For the sector, this could accelerate consolidation."

Tod's majority owner, Diego Della Valle, has repeatedly said he is committed to the brand, and he has increased his controlling stake over the past several years to 81%. Last month he reiterated that he has no intention of selling Tod's. Mr. Della Valle has in the past considered selling one of Tod's smaller brands, such as luxury sneaker label Hogan, a person familiar with the matter said.

Florence-based Ferragamo, which is still owned by the family that founded the company almost a century ago, also says it isn't for sale. But the rehiring during the pandemic of a former longtime Ferragamo CEO as executive deputy chairman led to a 15% jump in the share price amid speculation the company might be sold. The Ferragamo family is often seen as an obstacle to efforts to refurbish the brand, known for its Vara pumps and handbags.

Ferragamo's revenue plunged 60% in the second quarter, one of the biggest drops of any large luxury company. In the first half, revenue fell 47%, compared with 27% for LVMH, which owns Louis Vuitton and Dior, and 30% for Kering, owner of Gucci and Saint Laurent. The two conglomerates reported steep drops in earnings, but remained profitable. Ferragamo will report complete first half results in September, with analysts expecting a loss. The company said revenue improved in all markets in July, the first month of the current quarter.

Tod's, which reports first-half results on Sept. 8, could book an EUR80 million loss in the period, according to investment bank Equita.

The challenges facing the two companies predate the arrival of the coronavirus. Tod's has had trouble connecting with younger consumers, and both have lagged behind in online sales.

The two companies get about 10% of sales through e-commerce, according to Flavio Cereda, an analyst with investment bank Jefferies. While that has benefited from a recent surge during coronavirus lockdown, it remains below the industry average of around 15%, he said.

Paris-based LVMH and Kering have so far fared better during the pandemic. LVMH has been able to lean on the strong momentum of its biggest brands, Louis Vuitton and Dior, both of which have well-developed e-commerce operations that have been able to offset much of the hit from closing physical stores across China and the West.

Momentum at Gucci, Kering's biggest brand, had already begun to slow before the pandemic. But Kering also owns two of the fastest-growing brands in the industry, Bottega Veneta and Balenciaga, and the group has extensive e-commerce operations.

The gap between industry leaders and some independent Italian brands shows how those that neglected their digital operations before the pandemic are struggling to catch up now.

The well-developed e-commerce operations of LVMH and Kering brands helped them to satisfy demand even during the height of lockdowns, when the industry was forced to shut bricks-and-mortar stores. Both groups have also devoted significant resources during the pandemic to cultivating top-spending clients even if they were unable to shop physically in boutiques.

"As we move past the pandemic's initial shock, we are seeing consumer confidence begin to return, with many customers now shopping online for the first time," said Chris Morton, CEO of Lyst, which ranks the fashion industry's hottest brands and products by tracking the behavior of more than 9 million online shoppers.

Ferragamo launched a refurbished website and e-commerce shop during Italy's lockdown that the company says has resulted in more traffic and online sales. But neither Ferragamo nor Tod's are in the top 20 of the most recent quarterly Lyst Index, which is led by Nike and includes Italian luxury brands such as Gucci, Fendi and Bottega Veneta that are owned by one of the conglomerates.

Write to Eric Sylvers at [e-mail] and Matthew Dalton at [e-mail]

(END) Dow Jones Newswires

August 12, 2020 11:12 ET (15:12 GMT)

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