Kering and Moncler: The risks and rewards of a possible alliance
today Dec 6, 2019
Rumours were rife after Bloomberg’s revelations about the possible acquisition of Moncler by Kering. The share price of the Italian luxury down jacket label soared by more than 11% since trading opened at the Milan stock exchange on the day the news was published. Kering was contacted but declined to comment. The Italian label's boss, Remo Ruffini, stated in a communiqué that “at the moment, there is no concrete hypothesis under consideration.” This was enough to reassure the markets.
Ruffini nevertheless said that “as the [primary] shareholder in Moncler, he maintains contacts and interacts with investors and other sector participants, including the Kering group, in order to explore strategic potential opportunities to further promote the successful development of Moncler.”
Last week, Kering allowed Bernard Arnault to take over Tiffany & Co. for €14.7 billion without even attempting to raise the stakes, and is under pressure from its main competitor, LVMH, now in a leading position on the jewellery market. Boucheron is the main jewellery brand owned by François-Henri Pinault’s Kering, in addition to Pomellato, Dodo, Qeelin and Swiss watchmakers Ulysse Nardin and Girard-Perregaux. Kering is therefore no longer a heavyweight in the industry, and will struggle in future to secure for itself the best store locations, the best gems and prime advertising space.
It would therefore seem natural for the group to attempt a major acquisition. In the jewellery sector, Kering is left with precious few options, apart from an improbable merger with Swiss giant Richemont. The French group’s only alternative is to focus on fashion. In the current landscape, Moncler looks like a golden nugget, one that could shine alongside Kering’s star labels Gucci, Saint Laurent and Balenciaga.
Moncler’s is a well-known success story. Ever since entrepreneur and creative director Remo Ruffini bought a 22.5% majority stake in Moncler in 2003, the label has been growing exponentially. It was listed on the Milan stock exchange six years ago, and its market valuation is in excess of €10 billion. In 2018, Moncler recorded a revenue of €1.4 billion, and posted an operating margin of over 35%. In other words, it would have significant status within the Kering galaxy.
Yet, as Luca Solca of consulting firm Bernstein noted in a communiqué, “Remo Ruffini and his senior management team have steered the label almost faultlessly, raising it to unprecedented levels. Adding further value after buying Moncler will therefore not be easy.” Also because the premium to be paid, in relation to the label's current valuation, risks being extremely high.
“Of course, Moncler still needs to deploy its online distribution capabilities effectively on a global scale - Kering’s know-how and size could be very useful in this respect - and also, Moncler could benefit from greater bargaining power when looking for premises for its stores,” added Solca.
The question remains whether Moncler will be able to fulfil its promise. The label operates nearly 300 monobrand stores and, until now, it has cleverly managed to reinvent the brand around down jackets, while also developing other apparel and accessories collections. It has been constantly climbing up the market positioning ladder, regularly resorting to renowned or avant-garde designers, famous photographers and celebrity brand ambassadors, while also multiplying its marketing initiatives, collaborations and presentation formats. It seems difficult for Moncler, with down jackets as the single leading product category, to maintain the same growth pace and the same capacity for reinvention.
As for Kering, Moncler’s acquisition would above all allow the group to strike a better balance between its revenue and profitability centres. The French luxury group is in fact highly dependent on its leading label Gucci, which generates 80% of the group’s operating income. According to analysts from Mediobanca Securities, should a deal be struck, Moncler would become the third-largest brand in Kering’s portfolio, with a revenue of €1.6 billion.
Also, through the acquisition, Kering could strengthen its position in the luxury sportswear segment. However, Kering might be wary of the negative experience it had with another iconic sportswear brand, Puma, which it paid for very dearly and ended up selling off recently, preferring to focus on luxury labels.
Then there is the issue of the management team. For the past 15 years, Ruffini has been the embodiment of Moncler, which was originally founded in France. An acquisition without him remaining at the helm seems improbable. On the other hand, analysts highlighted the remarkable savvy of Moncler’s leadership. “It is a highly dynamic brand, a leader in its market segment, with top-notch management and one of the industry's highest levels of profitability,” said the analysts of Italian investment bank Equita.
In conclusion, as Solca put it: “Moncler is a first-rate company, but this operation would not be transformative for Kering, and the issues the group faces in the jewellery and watches sector would remain unresolved.”
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