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Conglomerates Strive for Vertical and Horizontal Integration Amidst Stiff Competition

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By: Euromonitor Research

The personal accessories market is forecast to reach US$484 billion in 2013, and is currently led by luxury conglomerate groups LVMH, Richemont and Swatch. Despite the European crisis, the market is supported by demand in the emerging BRIC markets. With rising demand, conglomerates are looking to reduce the risk of overreliance on a limited number of raw material suppliers or business divisions. Euromonitor International looks at the recent trends of conglomerates, expanding business divisions simply by acquiring parts of the supply chain.

Acquiring and expanding business divisions

The recent announcement of Swatch Group’s purchase of Harry Winston comes as no surprise, as the group’s intention to expand its luxury portfolio has been clear since its collaboration with Tiffany & Co, which ended in a court case due to management disagreement. With the purchase of Harry Winston, the group has expanded its vast portfolio by adding a prominent jewellery brand and joins the other two key luxury groups, Richemont and LVMH, which already have a strong presence in jewellery.

The Swatch Group is the leader in watches with 11% of the global shares, where it is also the key player in the manufacturing and sale of electronic systems used in watch making. Swatch’s production arm, ETA SA Manufacture Horlogère Suisse, provides a fair amount of components and mechanisms to other watchmakers around the world. With considerable influence over the watch industry, it is no wonder the watch competition is worried. If the group should stop supplying to its competitors, several watches companies could be in severe distress and may probably mark the end of its brands. This segment of the business contributes 7% of Swatch Group’s annual sales but it is a segment that Swatch is willing to forgo as commented by Mr. Hayek, CEO of the Swatch Group.

The Richemont Group holding 4% of the global watch share, not to be undermined, has also started a strategic move towards a more independent approach in terms of the supply chain since 2007, with its purchase of the component business of the Swiss watchmaker, Roger Dubuis, and acquiring the bracelets and watch case manufacturer, Donzé-Baume. The latest strategic move of the group has been to form a joint venture with Chow Tai Fook Jewellery Group Limited, as distributor of Baume & Mercier in China. The joint venture partnership allows both parties to extend and offer a significant boost to their watch businesses in China, the largest watch market globally in 2012, according to Euromonitor International’s Personal Accessories research.

What seems purely like another brand acquisition for LVMH group when it acquired the Italian brand Bulgari for €3.7 billion in 2011 has a deeper meaning. In addition to Bulgari being an iconic, desirable brand with a distinct heritage, the acquisition will also benefit LVMH in terms of component production. LVMH has been actively acquiring companies from the supply lines. In 2011, the group bought leading leather supplier Les Tanneries Roux and to build on its acquisition in 2007 of the Singapore-based crocodile skin supplier Heng Long International Ltd. With leather goods accounting for approximately 37% of LVMH’s total sales, this acquisition is strategic and well-planned; ensuring a stable supply of premium leather material for the group to continue creates leather products that it is well known for. Similar to Richemont group, LVMH is in talks with the Sandoz Family foundation owner of Atokalpa spirals, to replace the Nivarox spirals used in Tag Heuer watches. The Swatch group company owns the Nivarox Company, who announces that it will not renew the contract with LVMH in 2012.

LVMH is also expanding its product categories for its existing brands leveraging on its established brands name and image. Luxury apparel and bags leader Louis Vuitton unveiled its first of its kind fine jewellery and watches collection and Christian Dior has been growing its jewellery and watch ranges.

Conglomerates increasingly dominate the luxury industry

Rather than being held on the leash, fearing that supply of raw materials will be eventually cut off, luxury groups are looking to acquire suppliers of raw materials. At the same time, independent brands such as Harry Winston will seek shelter in conglomerates such as the Swatch Group, to concentrate on the diamond mining business division, or in the case of Bulgari to simply extend the brand’s existence in the market. Gucci to PPR, Bulgari to LVMH; while the Italians may be agonising at the loss of another luxury brand to the French, it is inevitable that large conglomerates will continue devouring independent brands looking to survive in the global luxury market.

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