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LIFESTYLE INVESTMENTS


such brands. The halo effect can often obscure the fact that despite a great name and history, the brand has historically not performed financially, has limited growth opportunities for the future, or has had limited success entering the Asian market. This requires investors to place greater focus on the company’s financial and commercial due diligence, preferably by a firm that is capable of evaluating businesses in emerging markets.


Understand the seller’s motivation The headline stories of why firms or individuals might be selling a luxury brand are rarely the full story. Many of the brands up for sale cite the fact that the founders seek to exit the business or that the companies are seeking funds for major expansion – all valid reasons, but they often obscure true motivations, such as a brand in decline or a company that is failing to deliver on financial objectives. Investigating the business track record and reputation of the founder and key principals can reveal the seller’s true intentions.


“Despite the local heritage of luxury brands and their connections to the national identities of the countries where they were founded, the world of luxury fashion has decidedly and emphatically relocated to China”


a 9.5 per cent stake in Greek jewelry retailer Folli Folie; and Hong Kong businessman Peter Woo’s eight per cent stake in Salvatore Ferragamo. A number of major fashion houses have indicated


their intent to sell part or all of their stakes in various well-known brands, such as House of Galliano, Roberto Cavalli, Pierre Cardin. The sellers of these brands have made no secret of the fact that they are courting Chinese investors. Having recently completed work for a number of clients in the sector, Kroll has observed that there are a number of good brands available at a fair valuation. However, there are some significant issues that Chinese investors need to consider when investing in Western brands. The following are some key issues:


Beware of the halo effect Successful luxury goods brands cultivate a story and an emotion around the heritage and lifestyle these brands can offer. This positive emotional attachment is perfect in generating sales at the consumer level, but investors must maintain a level of rationality when purchasing


Realize that multiple store openings are not enough It is difficult to find a luxury brand that has not already made headway into China. Many firms flaunt their footprint as proof of their ability to connect with Chinese consumers. It is important to examine how quickly stores have turned profitable, which Chinese cities the stores are located in, what market for such a brand exists in second-tier cities, how Chinese consumers perceive the brand, and whether that perception be changed or maintained.


Justify the valuation Luxury goods brands compared to other assets on stock exchanges typically trade at higher price multiples. Also, current valuations of luxury brands are higher than they have been historically. Any purchase of a luxury brand is likely to be at a premium price and competition for such brands will continue to be keen. Nonetheless, the growth trajectories of the underlying businesses must support these valuations. Chinese buyers must ensure that the brands justify the valuations in order to reap good financial returns. Chinese investors are in a unique position to derive


significant returns from what is now becoming a Chinese luxury sector, but financial success is not ensured. A greater focus on the issues and circumstances underlying the brand’s performance as highlighted above should help investors determine which of the luxury brands will survive the demands of Chinese consumers.


Melvin Glapion, Managing Director, Kroll, global risk consultancy. mglapion@kroll.com


Kroll has been helping clients make high-risk, high-value decisions throughout the world for 40 years. Kroll’s due diligence services provide clients with the intelligence they need to make informed decisions about the companies and people with whom they do business.


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