New fashion trends might not be the only thing to watch coming down the runway as the fashion industry heads into 2009. The new economic landscape is posing interesting challenges for both fashion brands and those private equity groups that have historically dominated investment in the industry. With consumer confidence and spending at record lows, brands are finding it difficult to generate the cash needed to break-even, let alone prepare for long term success by diversifying and expanding. Many brands in need of capital will be forced to place their companies up for sale; however, the buyers who ultimately capitalize on this investment opportunity might look different than in the past.
Traditionally, private equity groups predominately acted as a source of capital infusion for cash-strapped fashion houses; however, the current credit squeeze has private equity groups struggling to raise debt necessary to finance acquisitions. At the same time, valuations of fashion houses, which are largely driven by changes in consumer confidence and consumer spending, have fallen significantly, thereby enabling strategic buyers that were previously priced out of the marketplace to become legitimate players. Recently, the private equity group, Change Capital Partners, which owns fashion house Jill Sanders announced that it will be selling the brand to Japanese apparel group Onward Holdings Company of Tokyo and its European subsidiary, the GIBO Company for approximately $244.2 million. Similarly, in September, Gap, Inc. announced that it is planning to acquire Athleta, Inc., a popular women’s sports and active apparel company for approximately $150 million in cash. Through this strategic acquisition, Gap plans to enhance its presence in the growing women’s active apparel sector in the United States.
Many are speculating that cash-rich emerging market luxury goods groups will be among the first to benefit from the current credit crises in the United States. With less competition from highly leveraged Western luxury brands and private equity groups, these emerging market groups are now in a better position to make strategic acquisitions as they strive to assemble their own fashion conglomerates. Speculators in the industry expect several high profile brands to be acquired by Chinese, Indian, and Russian groups over the next few months. With the increase in luxury malls and multi-branded shops being built across China, India, and Russia, these emerging market groups can immediately leverage brands upon acquisition by taking advantage of the growing retail space at home.
Strategic buyers looking to align themselves with other brands in an effort to diversify their product offerings and increase market share are not the only ones who can benefit from the changing landscape of transactions in the fashion industry. Young brands in need of capital but focused on retaining their brand identity can also benefit from the changing composition of buyers in the marketplace. Young brands are often faced with a difficult dilemma. On the one hand, these brands need cash to grow their business, yet on the other hand they want to retain creative control over their designs and the evolution of their brands. Designers are often hesitant to sell their brands because they do not want to relinquish control and decision making authority when it comes to their designs, especially when that authority rests in the hands of bankers whose top focus is to turn a big profit and get out quickly. Acquisitions by strategic buyers can provide fearful designers a better sense of security when it comes to maintaining control of their designs and retaining their brand image. By aligning themselves with business people who are interested in and understand how to build a brand, young brands can benefit from the financial resources, experience, and distribution network of established brands.
How investment in the fashion industry ultimately shakes out in 2009 remains to be seen; however, it seems that amidst the financial "chaos" that plagues private equity investment, there is real opportunity for strategic buyers to grow their portfolios and a better value proposition for young brands in the market for cash.