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The Race to Control the Luxury Leather Business

As more fashion labels push into the accessories business, luxury titans like Kering, LVMH and Hermès jockey for control of a leather market in flux.
An artisan piecing together a leather handbag | Source: Hermès
By
  • Robin Mellery-Pratt

LONDON, United Kingdom — Marble altar merchandising, year-long waiting lists, outlandish price points and shop assistants in silk gloves — on the surface, the lucrative luxury leather goods business is alive and well.

The data seems to support this view. According to Exane BNP Paribas, in 2014, the global market for luxury leather accessories grew to represent almost 30 percent of the overall personal luxury goods market, up from 18 percent in 2003. Over the last ten years, the category’s success has transformed businesses, invigorated brands and contributed significantly to sustained periods of double-digit revenue growth across entire segments of the luxury industry. Indeed, Bain puts the 2015 global market for luxury leather accessories at €43 billion (about $46 billion at current exchange rates).

But along the way, this boom in business has stretched the supply of luxury-quality leather to breaking point.

The biggest brands are controlling supply

"In 2013, demand for leather was so acute that it outstripped the world's supply. And in 2014, we hit all-time record highs because fashion was hot, number one, and, number two, China was going crazy," says Don Oshman, the founder of Hidenet.com, an online resource for the leather industry.

According to Exane BNP Paribas, 10 to 15 years ago, Louis Vuitton and Gucci were the only accessories-focused luxury megabrands, while Hermès and Coach dominated the high-end and accessible markets, respectively. Today, Chanel, Bottega Veneta, Céline, Saint Laurent, Dior, Balenciaga, Givenchy, and almost every other fashion brand controlled by LVMH, Kering and Richemont, have entered the market.

“The product category is very competitive and very crowded. If a brand has got the capability and desirability to convey the idea that they use a superior material, it can make a mark-up on this product particularly high. With handbags, we are talking about very important gross margins to luxury businesses,” says Mario Ortelli, senior analyst at Bernstein.

As a result of increasing competition in the last few years, LVMH, Kering and Richemont have jockeyed for control of their supplies of luxury leather. Marc Brunel of Premiere Vision Leather, one of the most influential leather fairs for the global fashion industry, identified the key acquisitions for BoF. In 2009, LVMH entered into a partnership with Tannerie Masure, an esteemed Belgian tannery. In 2011 and 2012, it took control of Heng Long and Tanneries Roux. Also in 2012, Hermès acquired Tanneries d’Annonay, a factory in France’s traditional leather heartland, which creates over three million square feet of calf leather each year. And in 2013, Kering took over exotic leather specialist France Croco, while Chanel acquired Bodin Joyeux, a lambskin business founded in 1870, which processes approximately 400,000 skins a year.

“If you control the supply, you can keep all the top quality leather that you want and then you can keep the leather business running, selling the [lower] qualities to third parties,” says Ortelli, of the battle to buy up leather businesses.

Demand from the masses, supply for the few

In addition to high margins, leather goods, especially handbags, have attractive retail economics, combining high sales productivity (sales per square foot) with strong full-price sell-through and sustained consumer interest in “cost-effective status anchors,” in the words of Luca Solca, head of luxury goods at Exane BNP Paribas.

The boost in the accessories business has been a key driver behind the recent retail expansions of Louis Vuitton, Burberry, Gucci and Prada, among others. Publicly-held brands' ability to appease shareholders with positive sales growth is also dependent on the continuing performance of the leather goods category.  But with China's appetite for luxury goods — a major driver of luxury houses' growth in the last decade — slowing, these brands have decelerated their retail expansion to a compound annual growth rate of 0.6 percent in 2015. Growth, therefore, must come from higher productivity in existing stores. Leather goods are key to this, and the outcome of the race to control the luxury leather supply is crucial to the future of these brands.

In 2014, the price of all rawhides, regardless of origin and quality, increased by 18 percent, according to APFL Materials, Manufacturing and Technology, a Hong Kong-based leather fair. In 2015, a further 9 percent increase was recorded, before the commodity “priced itself out of the market,” according to Oshman, and crashed ­­— with the exception of luxury-quality skins.

“I believe demand is very tight [to supply] because the number of tanners that can produce this very high quality leather that we are talking about can be counted on maybe one hand in France,” says Perrine Ardouin, commercial director of APFL Materials, Manufacturing and Technology , and the All Leather China Exhibition in Shanghai, the biggest leather fair in the world. As more brands have entered the market with strategies set on the same consumer interest in leather accessories, the pressure on leather supplies has intensified.

“There is absolutely no slowing down of the demand,” says Ardouin, who notes that, by buying up tanneries, luxury brands are vertically-integrating the leather supply chain to protect the quality of their supply. “They actually limit the access. There are some types of leather that are actually only produced for some brands and the tanners cannot even show those products at our shows. They are particularly reserved for those luxury brands,” she says.

European quality is still king

Currently, leather of the quality needed by luxury houses can only be sourced from Europe. France is the world's largest veal producer and consumer, and a crucial producer of luxury leather. In 2014, overall production of finished bovine calf leather in France slightly increased by 2 percent, with an annual turnover of €177.5 million (about $189.8 million), according to statistics collated by the French Leather Council and the French Federation of Tanners, provided by Premiere Vision Leather.

“European herds are taken much better care of vis-à-vis their skins than in America. In Europe, they eat mostly grass and there’s not the scratch and insects [which effect end-product quality]. In the US, they eat grain and they grow faster which means the grains of the leather tend to be scratchy,” says Oshman. Animals from South-German, French and Dutch herds are slaughtered in abattoirs, which view the rawhide as a by-product of the meat industry, and sell the hides to tanneries. However, vertical integration has impacted the quality of even European hides and skins.

“The quality of the skins will be never as it was before,” says Philip Atienza, managing director of savoir-faire shoemaker Massaro, which was founded in 1894 and, today, is part of Chanel’s Paraffection Group. In the past, he says, “the leather was perfect everywhere” on each hide. Today, “Vuitton, Hermès, Chanel, the big companies — they get the first access. Then, for us, we just have the second or third grade. On those grades, we can find the good cuts of the leather to be able to make good work,” he continues.

Customers look to accessible luxury

Traditionally, increases in the price of leather have been easily passed on to the consumer, thanks to the high margins and rising prices of luxury leather goods. The prices for the Louis Vuitton Keepall Bandoulière and the calfskin Hermès Kelly have a compound annual growth rate of 6 percent over the last 30 years, while the price of a lambskin Chanel 2.55 has a compound annual growth rate of 13 percent over the last decade, according to Exane BNP Paribas.

However, the margins of luxury leather goods may have been stretched too far: “Prada pushed its prices too far and found itself stranded with high-priced bags and little else. The result was a strategy that was overly dependent on very expensive handbags,” says Solca.

Meanwhile, accessible luxury brands, such Michael Kors, Kate Spade and Tory Burch, have taken market share from high-end labels. Meanwhile, Michael Kors' share in the leather goods market has grown from 1 percent in 2008, to 6 percent in 2013. Megabrands have fundamentally abandoned the €500 (about $535) price point, according to Exane BNP Paribas.

“Emerging markets will produce an army of new middle class consumers, the vast majority of which will find mega-brand handbags too expensive (though they may consume mega-brand cosmetics and fragrances) and who will settle for lower-priced alternatives,” says an Exane BNP Paribas report.

Unlike traditional luxury brands, accessible luxury titans are less obligated to use the very finest leather, and perhaps freer to use composite designs that require smaller pieces of unblemished leather. “New smaller models and lower ticket items have inverted the trend but [are] unable overall to drive the same growth in volumes of the past years,” states Bain’s 2015 global report on the luxury industry.

Indeed, those same brands that are battling for control of the leather supply, must not ignore the waning cult of the luxury leather handbag. “In a market awash with choice, a strategy based on past success and reputation, whether associated with a logo, a form or a material, is a recipe for negative like-for-like performance,” says Solca.

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