Best foot forward

Made in Italy, owned by China

For high-end brands price hikes are a means to hedge against cost inflation and currency moves. But during the pandemic they have been used rather more dramatically to keep profits flowing amid store closures in many markets. Louis Vuitton has bumped up the prices for some of its handbags – a category that yields some of the highest profit margins – four times since the beginning of last year. Peers such as Hermès, Chanel and Gucci have all followed suit.

Much of that additional margin is coming from Chinese consumers, who have steered the sector into safer waters with luxury goods sales that rose 48% to Rmb346 billion ($53.5 billion) last year, according to Bain, a consultancy.

That bucked a global decline of 23% in revenues, meaning that China’s share of luxury goods sales has surged to a fifth of the worldwide total. The Chinese market is on course to make up 50% of luxury purchases by 2025, Bain adds.

Forecasts like these shed light on why private equity firms are keen on increasing their exposure to the sector. Earlier this month Sequoia China announced that it had taken a minority stake in SSENCE, an e-retailer that specialises in high-end fashion and streetwear in a deal that valued the Montreal-based company at C$5 billion ($4.1 billion). Angelica Cheung, former Vogue China editor and now a partner at Sequoia, will join the board to spearhead the company’s expansion in China.

The investment is SSENCE’s first external funding in its 18-year history and marks Sequoia China’s second outbound acquisition in the fashion world, after it bought a majority stake in AMI, a nine-year old Parisian runway brand, in January.

Both additions to the portfolio hope to profit from future sales to China’s millennial and Gen Z consumers.

The same day that Sequoia unveiled its stake in SSENCE, Fosun, a Shanghai-based conglomerate, said that its fashion unit would acquire 100% of upmarket footwear brand Sergio Rossi from Investindustrial, a European private equity fund. The duo are expecting to complete the transaction this summer, although the price remains undisclosed.

Seen as a rival to the likes of Jimmy Choo and Roger Vivier, Sergio Rossi was founded in 1951 by an Italian shoe designer of the same name. His shoes have featured in Federico Fellini’s movies and have been worn by celebrities such as Madonna, Gwyneth Paltrow and Taylor Swift. The designs are celebrated for their geometric patterns and meticulous detail: each shoe takes 14 hours to make, says Clarissa Sebag-Montefiore, a British fashion journalist.

After disappointing performance under the management of Kering (which owns luxury labels that include Gucci, YSL and Bottega Veneta), Sergio Rossi was sold in 2015 to Investindustrial. The new owner drove the brand’s pivot to mainland China, teaming up with new partner Luxba Group, a brand manager and distributor owned by Hong Kong tycoon Adrian Cheng the following year. Cheng is also the boss of New World Development, which runs a portfolio of upscale malls in China, mostly under the K11 label.

In the year before the pandemic Sergio Rossi derived half of its sales from Asia, grossing €70 million, with China the key growth engine, Tencent News notes. The brand’s growing reliance on the China market is believed to have given Fosun an advantage over other bidders, including Swiss shoemaker Bally and US fashion group Marquee Brands.

In WiC542 we wrote about how Fosun seemed to have bounced back from Beijing’s crackdown in 2017 on ‘overly-acquisitive’ companies. In fact, the sprawling firm – led by Guo Guangchang – has purchased a medley of apparel brands for its fashion group, including France’s Lanvin, Austria’s Wolford, and America’s St. John. Fosun’s plan is to forge China’s first luxury fashion retailer by creating a portfolio of its own world-class brands for sale to Chinese shoppers. For now it trails rivals in the luxury sector like LVMH and Kering by some distance.

But Fosun’s bet is that it can exploit its home advantage by bringing new brands to what will soon be the dominant market for luxury goods.

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