Date
23 June 2018
It is estimated that over 75 percent of the total growth in global luxury spending, over US$65 billion, could be due to purchases made by Chinese consumers, either at home or abroad. Photo: Reuters
It is estimated that over 75 percent of the total growth in global luxury spending, over US$65 billion, could be due to purchases made by Chinese consumers, either at home or abroad. Photo: Reuters

Chinese consumers continue to drive global luxury M&A

In recent years, China has become a major player in the global luxury M&A market. Increased consumer spending, driven by a growing middle class and newly created wealth, has created a significant incentive for Chinese corporations to acquire recognized international brands to expand them into China.

This trend is likely to continue this year, even as government and financial constraints increase: the fundamental drivers remain strong and a growing track record of successful deals provides a roadmap for more to follow.

Chinese consumers accounted for only 12 percent of global luxury spending when Beijing hosted the Olympics in 2008. Since then, it is estimated that over 75 percent of the total growth in global luxury spending, over US$65 billion, could be due to purchases made by Chinese consumers, either at home or abroad.

By 2025, the value of the global luxury goods market is forecast to reach 2.7 trillion yuan (US$422.6 billion). Chinese consumers will account for a majority of this growth, and by 2025 will comprise 44 percent of the total global market.

This year, the number of Chinese millionaires is expected to surpass that of any other nation. Chinese luxury consumers currently account for over 500 billion yuan in annual spending, representing a third of the global luxury market.

These consumers value brand status as the single most important factor for purchases. This sentiment is evident across all luxury segments, from ready-to-wear apparel to bags and accessories.

Driven by increased demand from China’s growing luxury consumer market, and as the country shifts towards a consumption-driven economy, Chinese interest in European fashion labels has been on the rise.

On Feb. 9, Chinese textile company Shandong Ruyi Group acquired Bally International, a high-end leather accessories brand, from European investment fund JAB Holdings. 

Shandong Ruyi also bought British heritage brand Aquascutum from Hong Kong’s YGM Trading on March 3, 2017, for US$117 million, and also owns French fashion group SMCP, fabric specialist Taylor & Lord, and Harris Tweed manufacturer Carloway Mill. It continues to seek leading Western brands so it can move up the value chain.

Meanwhile, as of Feb. 12, Fosun is reportedly in takeover discussions with Lanvin, the world’s oldest continuously running fashion house, beating Qatar-based Mayhoola, owner of Valentino and Balmain. Fosun is said to be injecting more than 100 million euros (US$117 million) into Lanvin, which has faced challenges since the departure of an industry-leading artistic director.

Fosun has been on a shopping spree in recent years, having invested in upscale American apparel brand St. John, Greek jeweller Folli Follie, and is now rumored to be in talks to acquire Italian top-end lingerie brand La Perla.

The year 2017 was marked by transformative M&A deals in the sector. In August, Shenzhen-based fashion and apparel company Ellassay Fashion acquired Vivienne Tam’s brand rights in China. It previously acquired German fashion label Laurel’s Chinese operations; French brand IRO; American apparel brand Ed Hardy in China, Taiwan, Hong Kong, and Macau; and is aiming to become a high-end fashion conglomerate.

In the same month, Fujian Septwolves acquired an 80 percent stake in Karl Lagerfeld Greater China, which owns the Karl Lagerfeld trademark in greater China. In June, Fortune Fountain Capital finalized the acquisition of French luxury crystal maker Baccarat. Fortune acquired an 88.8 percent stake for US$184 million from Starwood Capital and L Catterton. And in February, Global Brands Group acquired assets of BCBG Max Azria – specifically, ownership of the operating assets of BCBG as well as licenses for BCBG products.

Previous Chinese-European transactions also include Sanpower’s acquisition of House of Fraser, the British department store chain, which it acquired for US$560 million in 2014; and Hong Kong’s Citychamp Watch & Jewellery Group acquisition of Swiss brand Rotary, which also includes timepiece brands Corum, Eterna, and Rossini.

The high-end jewelry sector has also been pursued by Chinese companies: in December 2016, the Italian premium jewelry brand Buccellati sold an 85 percent stake to Gangtai Group, a Chinese corporation in Gangsu Province. Also pursuing premium brands, Dalian Wanda owns a majority stake in Sunseeker, Britain’s largest luxury yacht manufacturer, while in the luxury hotels sector, Waldorf Astoria was acquired by Chinese insurance giant Anbang Insurance Group for US$1.95 billion and Fosun owns Club Med, the premier resort operator based in France.

Despite strong economic tailwinds, Chinese companies face challenges going into 2018. President Xi Jinping’s continued austerity measures towards China’s elite have dampened some government spending, although private consumption has been largely unaffected.

A more serious issue is that a handful of large, acquisitive corporations, including LeEco and HNA, are being chastised for acquiring too quickly and beyond their capabilities. Both companies have faced liquidity problems due to rapid expansion.  The government has issued orders against multibillion-dollar acquisitions in the luxury space, afraid of the appearance of government-backed extravagance. For acquisitions above US$200 million, capital controls remain a concern.

While football clubs and Hollywood studios may see a lapse in exuberance, the fundamental drivers of M&A in the luxury sector remain strong. China’s rapidly growing wealth and ever-increasing demand for top-of-class products will result in continued expansion in the global luxury sector. Chinese companies are expected to compete against regional rivals Korea and Japan for leading Western assets, both large-scale and in the middle-market.

Euan Rellie and Karen Cheung, ConLux Sector Leaders contributed to this article.

– Contact us at [email protected]

RT/CG

In December 2016, the Italian premium jewelry brand Buccellati sold an 85 percent stake to Gangtai Group, a Chinese corporation in Gangsu Province. Photo: Buccellati


Investment banking analyst at BDA Partners

EJI Weekly Newsletter

Please click here to unsubscribe