Beat Gucci: how Michael Kors plans to return Versace to its former glory

The purchase of the Versace fashion house by the American holding Michael Kors for $2 billion became the main deal on the global fashion market in 2018. The Versace brand, which never fully recovered from the murder of its founder in 1997, missed out on the rapid growth of the luxury market in the mid-2010s, which doubled sales of Gucci and Louis Vuitton. Now he can help Michael Kors challenge global luxury giants LVMH and Kering.

A brand that lags behind its competitors

• “Versace is still in an investment phase,” then-Gianni Versace CEO Gian Giacomo Ferraris said in 2016. At that time, the Versace family business had existed for 38 years. Nevertheless, Ferraris was able to lead Versace out of the protracted crisis into which it found itself after the murder of the brand's founder, Gianni Versace, in 1997. Before the murder of the founder, the company was preparing for an IPO, which was decided to be postponed - in the end it was never carried out. The same 1997 brought a surge in sales for Versace ($550 million), but the record was explained by the attention to the brand due to the death of its founder - over the next 20 years this figure has not grown much.
• The change of management (Versace's sister Donatella became the creative director) was not painless. The public perceived the new collections coolly, and celebrities appeared in Versace less and less. The company was spending more than it was earning, and the Versace family had to sell the property owned by Gianni and 25 works by Picasso from his collection. In 2004, information appeared that Donatella Versace was undergoing treatment for drug addiction, and the company was undergoing another reorganization. Some distributors refused the products. Versace accumulated debts amounting to $143.8 million. Nevertheless, Donatella managed to give up cocaine and round-the-clock parties and go into business. In 2006, after several years of losses, the company made a profit of $19.1 million, and a year later sales grew by 30%. Like other European fashion houses, Versace began to make money on accessories - back in 2005 they accounted for 4% of sales, in 2008 - already 40%.
• In 2009, at the height of the global crisis that threatened Versace with disaster, the company was headed by Gian Giacomo Ferraris. He started by firing 25% of the employees (about 350 people) who were not involved in developing new collections, promised that in two years Versace would be in the black again, and kept his word - in 2011 the company became profitable, earning €8.5 million. And in 2014, members of the Versace family sold 20% of Gianni Versace SpA to the American investment fund Blackstone for €210 million. The money was used to expand the business and prepare the company for an IPO, through which Blackstone planned to recoup the investment. But something went wrong again.
• From 2015 to 2017, Versace’s revenue increased by only 6% - from €645 million to €686 million. Competitors grew many times faster: sales of Gucci (owned by the Kering holding) during the same time increased by 60%, fashion brands of the LVMH holding led by Louis Vuitton - by 25% . There were several problems. Firstly, Versace’s business was concentrated in Europe (it accounted for 40-42% of sales), which is why it suffered greatly in 2016, when, after terrorist attacks in France and Belgium, the tourist flow fell along with sales of luxury brands (according to Bain, the luxury market fell that year for the first time since the 2008 crisis). Secondly, Versace overslept the entry of fashion retail online: the company’s online sales by 2016 were only 2% and covered only nine countries (mostly European). A representative for Michael Kors stated after the current deal that Versace's e-commerce business is "practically non-existent."
• Competitors, meanwhile, were betting on a younger audience: Louis Vuitton collaborated with popular streetwear brand Supreme, and Gucci was the first luxury brand to livestream its show on Snapchat, saying millennials now make up more than half of its customers. Versace missed the opportunity to attract new customers, which luxury brands took advantage of in the mid-2010s, writes The Wall Street Journal. Now bringing the brand back into the spotlight is “an ambitious goal,” says Luca Solca, head of luxury market research at Exane BNP Paribas.

Good deal

• Despite Versace's problems, its shareholders received a good price in the deal with Michael Kors - the company was bought for 22 EBITDA and valued at twice as much as when it sold a 20% stake to Blackstone in 2014. A possible explanation is that Versace was perhaps the only famous European luxury brand that has not yet been acquired by one of the large conglomerates like LVMH or Kerring. “In modern conditions, it is difficult for a family brand to fight for a place in the market alone. And the actively growing Michael Kors will have the opportunity to diversify its business and become the main luxury conglomerate in the United States,” says Fashion Consulting Group CEO Anna Lebsak-Kleymans. Now the leader in the USA is the same LMVH, accounting for 11.8% of the market.
• “The biggest challenge for Versace is making the brand relevant to younger generations, especially in Europe and Asia,” says Pascal Martin, partner at OC&C Strategy Consultants. Michael Kors could take Versace the same way as Gucci. Until recently, this brand was losing its position in the fashion industry, until in 2015 the new creative director Alessandro Michele rebranded , starting to work with a younger audience and making the collections more democratic and casual. But under the terms of the deal, Donatella Versace will remain the creative director of Versace - this only confirms the fact that the family’s plans do not include “sell and forget,” says Anna Lebsak-Kleymans. If a company that has traditionally been considered “heavy luxury” does not pivot towards a younger audience, it risks missing out on the trend. Now, according to Bain, 85% of all luxury brand sales come from buyers under 35.

Prospects

• The new owner plans to increase sales of accessories under the Versace brand, in particular bags, shoes and other leather goods. This is also part of a plan aimed at the preferences of the younger generation. Role model Gucci already makes 50% of its profits on inexpensive leather goods, jewelry, silk scarves, perfume and sunglasses. Other luxury brands are taking the same strategy: Burberry last year hired a handbag designer from Dior and bought its own leather factory in Tuscany, and LVMH hired star designer and former Yves Saint Laurent head Hedi Slimane to run its Celine handbags and accessories brand.
• From a retail point of view, Michael Kors already has what Versace lacks - a developed online sales system, in which the holding has already invested about $100 million. By 2019, online sales of luxury retailers will reach $41.8 billion, and by 2025- Mu, according to analysts from Bain and the online store Farfetch, 25% of all luxury will be sold online, although last year this figure was only 8%.
• Michael Kors is also looking to grow its own Versace retail footprint, with the number of stores growing by 50% to 300, but the new locations will be much smaller than its flagship stores in Milan, London and New York and will target new markets. The main growth driver for luxury brands remains China, where Versace has only three stores (Gucci, Chanel and Louis Vuitton have 7, 8 and 16, respectively). The company also plans to develop Versace's business in Korea and Japan.

Egor Sonin