Leather accessories are growth leaders in the fashion-luxury sector. The most famous brands are experiencing excellent economic and financial results. Also Italian tanneries that supply quality materials are experiencing positive results, but less so than their customers. This is partly a question of size.
Article by Cecilia Maria Castelli and Filippo Peschiera
Companies that produce leather goods to high-end fashion represent one of the characteristic sectors of Italian manufacturing, known throughout the world for its excellent quality, innovative style and attention to sustainability.
It is a healthy sector that is growing well. Revenues have risen at a weighted average rate of 9% over the last five years for which figures are available.
Growth in Billings (mil €)
Profits are also on the rise, €54M overall in 5 years for the sample analyzed, corresponding to +71% in 5 years, in the face of slower growth in the cost of sales. This indicates a sector which, having overcome the 2008-2009 crisis, has been able to boost efficiency.
Like many Italian manufacturing sectors, it is a highly-fragmented one in which there are a few large groups alongside a multitude of small- or medium-sized companies that are often specialized in a specific type of material or finish.
If the sample analyzed is broken down by size (7 large companies with billings over €100M, 18 medium-sized companies with billings between €30M and €100M and 26 small-sized companies with billings under €30M), it can be seen that the percentage growth in billings over the last few years is uniform across the entire sample. But, in terms of profits, the larger companies have doubled their figures in five years, with a less-positive result in the medium and small companies affected by a cost of sales that has grown 89% in 5 years.
Overall, the percentage on revenues is more satisfactory—around 5% with a tendency to grow over the period examined and a slight slow-down between 2013 and 2014.
This slow-down trend clearly corresponds to what is happening in the sector downstream, namely the high-end leather goods, footwear and accessories sector. In fact, after a series of very successful years, the “personal luxury goods” market (which includes apparel, as well as leather goods, footwear and accessories) reveals slower growth since 2012: although considered the most promising aspect of this market, the leather goods and accessories sector has settled into a constant rate.
Here, the market is dominated by large multi-brand groups that have not abated in their strategy of acquiring new brands (and often go shopping upstream—tanneries are often the target for acquisition or inclusion in the orbit of customer brands). These are groups whose stockholders demand double-digit growth rates, something which—especially in the face of a slow-down in revenues—generates enormous pressure to reduce costs that impacts on those upstream in the supply chain.
The result is that the customers of tanneries produce an EBIT percentage that can even exceed 20%.
Among the factors that promote the discrepancy in the results between tanneries and their customers is, unquestionably, the different level of aggregation. Small tanneries (which rarely bill more than €100M) are up against buyers from huge-sized groups (the LVHM group exceeds €30B; in terms of customers, even the small ones have annual billings of over €200M).
The theme of aggregation emerges as a potential element to reduce this gap in results. And not only. Looking at tannery customers, it can be seen that the large conglomerates have better results than their competitors. The study “Finance for Growth – New proposals for providing finance to companies” presented at the 27th “The Outlook for the Economy and Finance” Workshop, held in collaboration with the Italian Ministry of Economy and Finance, shows that it would be profitable for Italian companies to become larger.
Larger companies (the result of either natural expansion or acquisitions) exhibit better performance, not so much because size in itself is an advantage, but because it allows them to offer a wider product range, broaden their customer base, and invest in development or initiatives with a positive impact (e.g., sustainability).
Beginning to think about potential aggregation approaches to work toward enhanced performance levels is useful. But also in order to become companies that are more structured and therefore “preferred” by customers. A “large” supplier can also represent a guarantee, both in terms of product (quality and selection) and service. In other words, a true partner for fashion brands which, today, are looking to increase their efforts on the distribution front.
The tanneries that took part in the “Are We selling The Skin Off Our Backs” event on April 12, 2016, are in agreement with this perspective. Now what is needed is to identify the right direction to be taken, the destination (companies with billings of €150-200M) and intermediate goals. The time is more than ripe for creating large-sized companies.
Partner, The European House - Ambrosetti