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Luxury Start-Ups: Oxymoron or Opportunity?

The most valuable luxury brands are all over 100 years old, but under certain conditions investing in luxury start-ups can deliver stellar returns, writes Pierre Mallevays.
Olaplex hair repair-focused products. Instagram/@olaplex.
Olaplex hair repair-focused products. Instagram/@olaplex.

In September, investors saw stellar returns from luxury start-ups such as hair care brand Olaplex, valued at $16.2 billion when it IPOed this month, and Vestiaire Collective, valued at $1.7 billion in its latest round of investment.

You will be forgiven for thinking “luxury start-up” is an oxymoron. After all, heritage is core to most luxury brands, the most valuable of which are all over 100 years old. So, when does it make sense for luxury investors to back start-ups?

Disruptive Models

Ever since Amazon upended the distribution of books and, later, the entire world of brick-and-mortar retail, investors have sought out disruptive business models. Vestiaire Collective, founded amid the Great Recession when more consumers sought out deals and others saw an opportunity in monetising their wardrobes, established a global marketplace for pre-owned luxury fashion. The re-commerce site has found renewed relevance in recent years as a more accessible entry point to the luxury market and a flag bearer for sustainability, hence the $1.7 billion valuation. The company will need the funds as Farfetch increasingly encroaches on its territory, having launched its “Second Life” platform in 2019 and created a fashion footprint tool in 2020, allowing consumers to better understand how their pre-owned and conscious fashion choices can impact the planet.

Therein lies the challenge: disruptors can themselves be disrupted. Farfetch has put pressure on Net-a-Porter and we are seeing a similar dynamic in the online luxury watch market. Chronext, a Swiss online marketplace for new and second-hand luxury watches, just pulled its planned CHF 250 million ($272 million) IPO due to “market conditions.” The company is competing on an increasingly crowded playing field that includes Richemont-owned Watchfinder. German rival Chrono24 raised over €100 million ($116 million) in its latest funding round in August this year. The company is open to IPOing in the future and is reportedly valued at €1.5 billion. US-based watch e-zine-meets-e-tailer Hodinkee raised $40 million at the end of 2020 and counts LVMH Luxury Ventures as one of its investors. The self-proclaimed market leader in the category, WatchBox, which posted revenues of $290 million in 2020, also raised $50 million in August this year. Will there be room for everyone?

Backing Talent

Phoebe Philo launching her namesake brand backed by LVMH on the back of a stellar, 25-year career in fashion, notably as creative director of Céline, is a good example of investment backing talent. Hopefully her own brand will be as successful as Charlotte Tilbury or Bobbi Brown were in the beauty sector, the former selling her company, launched in 2013, to Puig last year for a reported valuation of $1 billion. Putting money behind a well-known talent undoubtedly helps mitigate start-up risks, although succession will be an issue to contend with at some point, particularly in fashion where a cult of the designer prevails.

Acquiring Small or Dormant Heritage Brands

By definition, heritage cannot be created overnight. So, acquiring a neglected, under-capitalised or dormant brand, dusting it off to give it new life and a new business model can make a lot of sense to investors that know their way around the industry. Goyard, Moynat and Lanvin are such examples, as was Chanel when Alain Wertheimer recruited Karl Lagerfeld in 1983. Karl restructured the brand’s heritage, defined its signature design codes (tweed, gold, beige, black, pink, double C’s, camelias) and twisted them to make them relevant, turning Chanel into one of fashion’s biggest megabrands. Gucci was similarly saved from oblivion by Investcorp’s money riding Tom Ford’s talent. The latest success story in the revival category is surely Delvaux, the world’s oldest luxury leather goods house, acquired by First Heritage Brands in 2011 when it was small and loss-making and sold to Richemont over the summer after increasing sales almost ten-fold. (Disclosure: the author of this article advised the First Heritage Brands on the transaction).

Celebrity Start-ups

Instagram has changed the world of luxury in many ways, one of them being the way the app gives a platform to celebrated artists like Rihanna as well as favouring the emergence of global megastars who are, well, famous for being famous. Rihanna’s Fenty beauty, powered by LVMH, has been a runaway success, topping $550 million in sales in 2018, its first full year of operation. Elsewhere, the Kardashian/Jenner sisters have used their celebrity status to launch KKW Beauty and Skims (Kim Kardashian West, 258 million followers), Kylie Cosmetics (Kylie Jenner, 274 million followers) and Good American (Khloé Kardashian, 189 million followers). Coty bought both a 51 percent stake of Kylie Cosmetics in 2019 valuing the business at $1.2 billion and a minority stake in KKW beauty in 2020 valuing the business at $1 billion, whilst Skims raised capital earlier this year in a deal that valued the business at $1.6 billion. Staggering numbers, but of course celebrity is no substitute for a sustainable business model (see Rihanna’s Fenty fashion line).

Backing Innovation

Product innovation can also be the backbone of a successful luxury start-up, particularly in beauty. Hair care company Olaplex’s innovative bond-building technology, which can repair hair damaged by chemical, thermal, mechanical, environmental and ageing processes, has propelled the company, which launched in 2014 with three products sold exclusively through the B2B channel, to a $16 billion valuation when it IPOed this month. No doubt a lot of work took place behind the scenes before the company was launched in 2014, but the risk was worth the reward as demonstrated by an eye-popping multiple of 80x historical EBITDA.

SLI vs. MSCI

The Savigny Luxury Index (“SLI”) fell almost 5 percent in September amid concerns of spreading coronavirus cases in China, whilst the MSCI lost just over 2 percent. The Chinese government’s announcement of increased regulation of casinos in Macau also had an indirect impact on luxury stocks as investors took notice of the government’s increased rate of crackdowns on business and consumption.

SLI Graph September 2021

Going up

  • Ferragamo was the only SLI constituent to post gains this month, ending just over 2 percent higher, on the back of first half results which saw the company swinging back into profit.

Going down

  • Safilo lost almost 13 percent of its value in September – the positive newsflow of a deal with Instagram influencer Chiara Ferragni was offset by the loss of the Givenchy license later in the month.
  • Estée Lauder lost almost 12 percent of its value this month. Confirmed reports that Amazon is planning an early holiday beauty sale in October, one month ahead of the planned holiday sales by the likes of Sephora and Ulta spooked luxury beauty investors.

What to watch

Amazon has designs on luxury. Last year, it launched Luxury Stores on its mobile app but had only managed to sign up one luxury brand: Oscar de La Renta. Amazon has since added 43 new brands to Luxury Stores including Altuzarra, Clé de Peau, RéVive Skincare, Rodarte, La Perla, The Conservatory and Elie Saab. Whilst it has not managed to secure a big brand name for its platform, it has nevertheless parked its tank on the lawn of luxury retail. The internet giant’s latest move to hold a holiday beauty sale before the holiday sales shows its intent to play hardball. The luxury sector has better brace itself for an unwelcome disruption.

SLI Table September 2021

Related Articles:

Inside Farfetch’s Bid to Dominate Luxury E-Commerce — Download the Case Study

The Logic Behind LVMH’s Phoebe Philo Deal


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