By Neil Saunders
That Michael Kors should court Versace is no great surprise. The American company has long desired to transform itself into a house of luxury brands, a process it started with last year’s acquisition of Jimmy Choo. Versace comes with a much bigger price tag of $2.35 billion—almost double the $1.2 billion price that Michael Kors paid for Jimmy Choo. However, it would also put a big-hitting brand with true global status into Michael Kors’ stable.
Michael Kors has done a good job of developing new store concepts that have resonated with shoppers. This expertise can be put to good use in the Versace business.
Other than the desire to become a bigger conglomerate, the rationale for buying another luxury label is perhaps less sound. While progress has been made, Michael Kors has not rebuilt its core brand to the same extent as other players like Coach: its offer is still confused and is nowhere near as rounded nor polished as many other luxury players. This shows up in the company’s sales figures, where growth has been driven by an upswing in U.S. consumer sentiment and spending, rather than because the brand is generating better traction.
Over the past couple of quarters, two things have helped push the group onto more solid ground. The first has been the sales contribution from Jimmy Choo, which has flattered sales growth numbers. The second has been a rebuilding of margins, which has helped push up profit. These dynamics have given Michael Kors the confidence to look to new corporate deals to fuel future growth.
Expanding its lifestyle position
The choice of Versace is interesting. If the deal goes through, it would push the group into the big league in terms of its profile in the luxury space. It also means that the company would be a player in many categories from fragrance to home to pets, thereby giving the group a true lifestyle position. However, despite its profile, Versace has struggled to grow sales. As such, Michael Kors is not buying a perfectly performing brand; it is buying a brand that needs work and repositioning.
Michael Kors past experience with its own brand will help it make the changes required, but these shifts will cause short-term disruption and might mean that the true benefits from the acquisition will take years to deliver through. Some work required on Versace includes toning down some of the brasher elements of the brand, which are now out of step with the more subtle tone preferred by modern consumers. These are precisely the issues with which Michael Kors has struggled and is yet to satisfactorily resolve.
Ultimately, we view this deal as additive. While the enlarged group would be able to make savings on central costs, we don’t see the addition of a brand like Versace being about helping to boost the Michael Kors brand, other than perhaps through a more extensive global supply and distribution chain. It is much more a play to give the group a more rounded and defensible proposition that has a number of brands to drive performance across different parts of the market.
Putting expertise to good use
There are a number of favorable points.
Donatella Versace will stay on as creative director, and her family will become shareholders in the newly enlarged business. Although some repositioning of the brand is needed, she has been instrumental in acting as both the face of the label and the heart and mind behind many of its creative successes. Her vast experience in luxury retail will be extremely valuable to the new group, especially as it ramps up international expansion.
Secondly, the name change to Capri Holdings is sensible and reflects the much wider interests of the group. This follows the example of Coach, which changed its corporate name to Tapestry following the acquisition of Kate Spade. It is a subtle change, and many consumers may not notice, but it underlines the intention of the group to become a luxury powerhouse.
Thirdly, the deal helps transform the business into one with a better international reach, especially in Europe and in Asia. Ultimately, this will help all brands in the stable to grow their international footprint, especially as operational activities come together.
Fourthly, there is a clear intent to grow the Versace business through both stores and online. Over recent years, Michael Kors has done a good job of developing new store concepts that have resonated with shoppers. This expertise can be put to good use in the Versace business.
Versace is not a perfect operation. While it is iconic and high-profile, much work must be done to position it for higher growth. This will absorb both time and money from the group and must be done in tandem with the ongoing efforts to put Michael Kors firmly on the right track. Synergy savings are not a core part of the announcement, which is perhaps a recognition of the fact that spending will be needed to create superior growth.
Ultimately, for the deal to be a success, it needs to be more than additive. Capri Holdings now needs to find a way of leveraging all of its brand assets to make the business worth more than just the sum of its individual parts.
Neil Saunders is managing director of research firm GlobalData Retail.