Chinese Buyers Showing Renewed Interest in Global Luxury Deals
As recently reported in Footwear News, large Chinese corporations have been especially active acquirers of iconic Western luxury brands in the first half of 2018. In one notable deal, Fosun International Ltd., a Shanghai-based conglomerate, purchased a majority stake in French fashion house Lanvin. Likewise, Shandong Ruyi Technology Group Co., a large Chinese textile firm, acquired a controlling stake in Swiss apparel and leather accessories brand Bally.
Recent Harris Williams & Co. experience reflects these headlines, according to professionals Daniel Wang, Corey Benjamin, and Christopher Darlington. In this article, Wang, Benjamin, and Darlington discuss the enduring appeal of global luxury brands, the trends bolstering Chinese participation in deals, and the evolving strategies of Chinese buyers.
The Appeal of Luxury Brands
Strong differentiation, built-in price protection, and generous margins make established luxury and near-luxury brands valuable to strategic buyers and investors around the world. However, for a variety of reasons, that appeal is especially strong in China.
Daniel Wang, a managing director who leads Harris Williams & Co.’s efforts in Asia, explains that one reason is the strong demand for such goods among Chinese consumers: “There has been rapid growth in wages, and as a result the middle class and upper middle class are growing too. For many of these newly affluent Chinese consumers, Western luxury items are increasingly important status symbols.”
“For a number of years, Western brands have been trying to crack the code on getting access to the Chinese consumer,” adds Corey Benjamin, a director in the firm’s Consumer Group. “We still see that going on, but increasingly we’re also seeing Chinese buyers looking to bring Western brands directly into their markets.”
Slower domestic growth and the relative lack of Chinese luxury brands is another factor, says Wang. “Chinese investors are increasingly looking abroad for growth, and for things they can’t produce domestically. Plus, established Western brands have cachet and heritage that many Chinese brands can’t match.”
Evolving Chinese Buyers
While Chinese buyers’ interest in Western footwear, apparel, and accessories brands is an established trend, their participation in M&A processes is undergoing several changes, including greater speed and sophistication, and is leading to the emergence of new strategies.
“Five years ago, we were seeing relatively few Chinese buyers, and they generally moved more slowly than we’re used to seeing in the U.S. and Europe,” explains Benjamin. “That has changed dramatically. Our efforts to target Chinese buyers have been paying off, and we’re seeing them participate with much greater speed and certainty than before.”
Greater sophistication and scale among Chinese private equity firms and strategic buyers is a major contributor to this more advanced level of participation. In fact, in recent years several hundred Chinese private equity funds have been established, accounting for hundreds of billions of dollars in equity. Increasingly, these firms have been teaming up with strategic buyers during a process, acting as outsourced corporate development teams and streamlining transactions.
“The private equity group brings M&A deal execution capabilities and, often, offshore capital, which further speeds up the process,” says Wang. “And, in certain instances, a private equity group can help bridge the gap for Chinese corporate buyers with limited experience operating a global business.”
Having dedicated coverage in Asia has allowed the Harris Williams & Co. team to make the most of this maturation. “Being on the ground in China helps our professionals gain better access to players, and makes them aware of opportunities well in advance. That helps buyers pursue deals with more speed and confidence,” adds Wang.
New Strategies Boosting Participation
As London-based Senior Advisor Christopher Darlington explains, new motivations are emerging among Chinese buyers seeking to acquire Western luxury and near-luxury businesses, boosting their participation in deals. “For example, you might have a buyer who owns shopping malls or department stores, looking to buy prestige brands to drive foot traffic.”
According to Wang, pressure to differentiate and protect share from specialty retailers often drives this strategy: “Department stores in particular risk losing share to specific-brand stores and to fast-fashion brands like Zara and H&M. Owning and controlling prestigious global brands is a key defense against that risk.”
Access to foreign markets is also driving Chinese participation in transactions. Darlington says, “Increasingly we have seen buyers with existing footwear, apparel, or accessories businesses looking at Western brands as an avenue into Europe and the U.S.”
With large and more established middle and upper middle classes, such markets are naturally attractive to Chinese conglomerates. By acquiring Western brands, such buyers quickly gain the relationships, distribution channels and knowledge they need to enter these markets more easily.
“Given the relative scarcity of strong global luxury brands and the upside growth potential in the Chinese market, these buyers may have greater capacity to compete on price,” says Wang.
Chinese buyers are increasingly competitive in M&A transactions involving global footwear, apparel, and accessories brands, particularly those with the cachet and heritage Chinese consumers demand. Luxury and near-luxury brands satisfy the growing Chinese appetite for status, while providing retailers and manufacturers with domestic and global growth opportunities.
Published May 2018