PARIS, France — The appetite for mergers and acquisitions in the luxury sector often seems to peak during the dog days of summer, when most of Europe unofficially shuts down for business. It's as if the executives doing the buying and selling want the deals to go through when no one is looking.

This summer has been no exception, from Temasek's 30 percent stake in Stone Island and Groupe Artémis' investment in Giambattista Valli, to Michael Kors' $1.2 billion acquisition of Jimmy Choo and the closing of Coach Inc.'s $2.4 billion purchase of Kate Spade.

While the conglomerate model is sometimes criticised as underproductive and inefficient, mergers and acquisitions in the luxury space remain commonplace. American fashion powerhouses Coach and Michael Kors are aiming to build conglomerates in the mould of the "big three" luxury groups: LVMH, Kering and Richemont. But earlier this summer another piece of news slipped relatively unnoticed into the cycle: Richemont announced it was finally offloading its long-underperforming Chinese brand Shanghai Tang to Italian entrepreneur Alessandro Bastagli.

We often hear about which brands the big luxury groups should acquire, but rarely do we have a robust discussion about which brands they should sell. LVMH says it agreed to sell Donna Karan International last July because buyer G-III made a $650 million offer it couldn't refuse, positioning the transaction as more opportunistic than proactive, even though the Donna Karan brand had not flourished since LVMH acquired it for $450 million in 2000. Arguably, it had become a distraction and could have been sold off years ago.

Investors have been urging Richemont to divest itself from fashion and leather goods — most notably by disposing of underperformer Lancel, which sources say the Swiss conglomerate has been trying to sell for years — and instead focus on its expertise in hard luxury. Fashion houses like Alaïa and Chloé may be better suited to LVMH or Kering, whose DNA is rooted in fashion.

At Kering, rumours have circulated for years that it would sell off sportswear giant Puma and the smaller brands in its lifestyle division, including Volcom, which some say distract from the group's luxury business. "[Puma's] acquisition was supposed to mark the start of an entirely new development into the lifestyle market, a complement to Kering's luxury portfolio," Luca Solca, head of luxury goods at BNP Exane Paribas, wrote in a December 2016 column for BoF. "However, synergies between Puma and the group's luxury portfolio were never expected, and the move has actually neutralised much of the possible value created by [Kering's] progressive refocusing on luxury and away from retailing."

LVMH, Kering and Richemont — along with new competitors, most notably Coach, Michael Kors and Mayhoola, the Qatari royal family-backed investment fund that owns significant stakes in the Valentino Fashion Group, Anya Hindmarch and Balmain — must work on keeping their assortment of brands optimised. This means selling underperforming brands, as well as making new acquisitions.

“Underperforming brands are a drag and a source of distraction, both of funds and senior management attention,” says Solca. “It is never too early to rationalise your portfolio, especially as growth prospects moderate in the next three to five years.”

Global sales of personal luxury goods are projected to grow just 3 to 4 percent each year until 2020, reaching €280 billion to €290 billion ($330 billion to $340 billion at current exchange), according to management consulting firm Bain & Company.

It is never too early to rationalise your portfolio, especially as growth prospects moderate in the next three to five years.

But it's not that easy. As family-run businesses, the big groups have had the luxury of acquiring brands with long-term potential, even if short-term prospects look uneven. Kering hit a homerun with Bottega Veneta when it acquired the leather goods firm in 2001; it went from being on the verge of bankruptcy and generating about $40 million in annual sales to reporting nearly $1.4 billion in sales in 2016. Saint Laurent, on the other hand, took longer to get on track, but has experienced record growth since the now-departed Hedi Slimane joined as creative director in 2012.

But there are also downsides. "These are family companies with families running them, and family-run businesses are not that rational sometimes," says Jonas Hoffmann, associate professor at SKEMA Business School in Paris and co-author of "Independent Luxury: The Four Innovation Strategies To Endure in the Consolidation Jungle." "There's an emotional side to it. In the long term, yes, it would make sense for LVMH to sell Marc Jacobs. But if you look at Christian Lacroix, one of the only brands that Bernard Arnault himself created, they kept it for 20 straight years of losing money."

“Some of it is figuring out where a brand is in its life cycle,” says Bain & Company partner Vandana Radhakrishnan. While LVMH chairman and chief executive Bernard Arnault acquired Céline in 1988, it wasn’t integrated into the group until 1996. Michael Kors was appointed creative director just a year later and would remain so until 2004, but it took more than two decades and several changes in creative leadership for the brand to break out.

"Céline was bought at a rich valuation and wasn't growing, but LVMH had good instincts" to keep it and wait for the right creative talent to capture its potential, which "can be a lifeline to a brand that really needs it," Radhakrishnan adds, crediting the vision of designer Phoebe Philo.

For LMVH, which has a broader diversified portfolio of brands — more than 70 houses across multiple categories, including wines and spirits, but also Italian pasticceria Cova, and French financial news company Les Echos — there is less urgency to make every business successful at every moment, and more flexibility to wait until it is met with another offer it can’t refuse, as was the case with Donna Karan International. “When you look at LVMH you have a hedge,” Hoffmann says. “If one geography doesn’t not perform well, you’ll hedge your bets.”

LVMH may hold on to an underperformer like Edun, for instance, because the brand’s core values — sustainability and social responsibility — better reflect the values of the next generation of luxury consumers. (LVMH did, however, sell its majority stake in Nude cosmetics, also co-founded by Edun’s Ali Hewson, to “clean beauty” company Beautycounter in 2016 for an undisclosed sum.)

But there are still other underperformers in the LVMH portfolio which could be candidates for divestment. Consider Thomas Pink, the one-time favourite brand of investment bankers, for which the group paid about $50 million for a 70 percent stake in 1999. Under LVMH’s watch, the shirtmaker expanded from a predominantly UK business into a global player, with more than 100 stores worldwide.

However, as officewear has moved away from strict shirts and suits, the brand has failed to evolve and keep consumers interested. In the United Kingdom, for instance, sales were down nearly 6 percent to £35 million ($47 million at current exchange) in 2015 from £37 million ($48 million) in the year previous, with the company citing discounts and a decrease in foreign business as driving factors.

While the Thomas Pink business has grown globally since the acquisition — LVMH does not break out sales for its brands — the fact that it has barely grown in the UK over the past 20 years does not bode well. (Back in 1998, annual sales were £25 million, just $33 million at current exchange.) What’s more, the brand never garnered the cachet of a competitor like French shirtmaker Charvet, whose long cuffs and slippers are loved by the likes of Céline’s own Phoebe Philo and film director Sofia Coppola.

Another brand that LVMH could sell is Marc Jacobs, which has lost half of its value since its peak of more than a billion dollars a year in retail sales in 2014. But it is unlikely that the group will let go of the label anytime soon. Whether or not the brand can pull off a turnaround remains unknown, but it is thought that Arnault's loyalty to the designer — who helped catapult Louis Vuitton into a multi-billion-dollar business during his tenure as its womenswear artistic director — means that the group will likely continue to put effort into Marc Jacobs in the short term. There is a strong emotional commitment to Marc Jacobs the brand and Marc Jacobs the person.

To be sure, the shedding of brands, while equally important to optimising a portfolio as acquiring brands, is a lengthier, more difficult process. “Several luxury goods companies have given themselves a long time before pulling the plug on ill-conceived acquisitions,” Solca says. “It is rare though that companies finally strike gold after struggling to go anywhere for 10 years. Ten years should be the time limit to admit one is not in a position to get an acquisition to work. The best acquisitions are those for which there is a plan on day one — which shows signs of working within three years.”

“My experience tells me that entrepreneurs in this sector don’t like to sell brands,” he adds. “Entrepreneurs are builders. Selling a brand is tantamount to admitting defeat at building a project one had in mind.”

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.

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