Focus: Private equity persuades Italian luxury suppliers that bigger is better

Ermenegildo Zegna NV

16/01/2023 06:00

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      Italy's small luxury manufacturers joining forces
    

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      Fund investments helping to drive consolidation
    

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      Larger groups can speed supplies to customers
    

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      Also make it easier to prove ESG credentials
    

  
    By Elisa Anzolin and Valentina Za
       MILAN, Jan 16 (Reuters) - Italian businesses discovered
the limits of their 'small is beautiful' motto when competition
became global. Nudged by private equity funds, those supplying
the booming luxury goods industry are now finding strength in
unity.
    With its tradition of sophisticated craftsmanship, Italy is
home to thousands of small manufacturers that cover 50-55% of
the global production of luxury clothing and leather goods,
consultancy Bain calculates, against 20-25% for the rest of
Europe.
    Largely family-owned and small in size, these businesses
often struggle to meet the changing needs of the luxury brands
they work for.
    To address luxury shoppers' growing sustainability concerns
while also securing timely deliveries, brands are looking to
establish close ties with suppliers, who in turn require hefty
investments to track where they source materials and build an
adequate digital backbone.
    Private equity funds, after running out of big brands to
buy, have now locked on to the challenges of the luxury
industry's supply chain and turned to a "buy and build"
strategy.
    "Luxury brands have been growing exponentially: our
customers needed us to grow with them," said Nicola Giuntini,
whose Tuscany-based company makes luxury coats and jackets for
brands including Celine, Burberry  BRBY.L  and Stella McCartney.
    The Giuntinis in 2020 sold their company to VAM Investments
- controlled by former Bulgari Chief Executive Francesco Trapani
- and two other Italian investment firms when they became part
of a hub of luxury clothing manufacturers.
        "Working together we can guarantee stable production
levels and undertake projects that would otherwise be too
costly," said Giuntini.
        ADVANTAGE ITALY
        Private equity has had a big say in the shaping of
Italy's fashion industry. It accounts for 40% of transactions
over the past decade or so, including the buyouts of Moncler
 MONC.MI , Versace, Roberto Cavalli and Ermenegildo Zegna
 JN0.F , KPMG research showed.
    The COVID-19 pandemic, with its aftermath of supply chain
disruption, has been central in convincing Italian baby-boomer
business owners that the time was right to let outsiders into
their closely held companies.
    The Giuntini business is now part of Gruppo Florence, a hub
owned by the funds and the families that sold their businesses
and reinvested part of the proceeds.
    The group currently includes 22 companies with combined
revenue of more than 500 million euros ($542.00 million) and
aims to get to 30 before looking at a possible initial public
offering.
    Meanwhile it has started working with Bank of America and
Citi to assess strategic options after drawing interest from
investment firms including Carlyle and Permira, two people close
to the matter said. All interested parties declined to comment.
    "There are no listed assets that give investors exposure to
the luxury sector's made-in-Italy supply chain," VAM CEO Marco
Piana told Reuters.
    "This is one of the few sectors where being Italian is a
competitive advantage: there is no other geography where you
have the same know-how when it comes to manufacturing soft
luxury products."
    Luciano Barbetta, whose clothing company in southern Italy
joined Gruppo Florence last year, said hubs can help producers
to make up for delays in deliveries of raw materials.
     "There being several companies we can help one another
fulfil orders right on schedule. And it feels good to know all
the weight is not just on your shoulders," Barbetta said.
    PRODUCTION NICHES
        Italy's manufacturing sector has also been a hunting
ground for big luxury brands keen to secure their supply chain.
    Private equity investors and fashion majors could
potentially be competitors, but KPMG Partner Stefano Cervo
pointed to supply chain niches that are a good fit for funds and
less appealing to luxury conglomerates.
    "For a big brand it makes sense to buy, say, a tannery
specialising in rare leather but I struggle to imagine they'd be
interested, for example, in the makers of golden coating for
handbag chains or buttons," he said.
    "Yet there is value to be created in bringing together
golden coating makers. Just from a sustainability perspective,
scale makes it easier to recycle production waste or reduce the
carbon footprint."
    Italian private equity firm XENON International, for
example, has bet on producers of materials and finishes for
luxury items which it has grouped together in MinervaHub.
    The seven companies in its portfolio, which include makers
of metal accessories or specialising in surface finishes, have
aggregate sales of 180 million euros which MinervaHub wants to
grow to 300 million as it scrutinises another six companies.
    MinervaHub provides support to its businesses on legal and
financial matters as well as environmental, social and
governance (ESG), said XENON Founding Partner and Managing
Director Franco Prestigiacomo.
    That is vital in an industry which KPMG's Cervo says has
become "obsessed" with ESG.
    "Suppliers can pose a major reputational risk for brands,"
VAM's Piana said.
    "In the world of social media it's too dangerous not to have
full visibility on your supply chain."
($1 = 0.9225 euros)
 (Reporting by Valentina Za and Elisa Anzolin; 
Editing by Keith Weir and Susan Fenton)
 ((valentina.za@thomsonreuters.com; +39 02 6612 9526;))