DJN Blogs

Smriti Gupta, Symbiosis Law School, Noida
Date: 16.09.2022
MERGERS AND ACQUISITION IN THE FASHION INDUSTRYTHE ROLE OF MERGERS AND ACQUISITION IN THE EFFECT OF COVID-19 ON THE FASHION INDUSTRY
ABSTRACT
“The future of fashion
is creative, collaborative. The future of fashion is circular”
–Eleanor Turner, CEO & Founder, The
Big Favorite
Mergers and
acquisitions have been said to be the future of fashion. This paper aims to
find the adverse effect of covid-19 on the fashion industry and how mergers and
acquisitions helped brands recover from the damage. It also takes into
consideration the types and the nature of mergers and acquisition in the
country in the field of fashion industry before the pandemic and also what are
the future prospects of subject. Mergers and acquisition became a big part of
the industry and this research article provides relevant information on the
topic. It would also shed light on the need of the fashion
brands to opt for amalgamations and collaborations to not just stay relevant
but also stay in business. Here, I have researched how the change in times and
the change in the demand of the customers forces the brand to constantly be
creative and stay in the market.
5
KEYWORDS
mergers and acquisitions, fashion industry, covid-19, pandemic, change in demand.
INTRODUCTION
Even
before the pandemic hit the world, the fashion industry was going through
massive changes. The consumption of the customers and the invention of e-market
had created enough opportunities and barriers for the fashion houses. After a
decade worth of change, the industry had adopted to surviving by way of
mergers, collaborations, acquisitions etc. These aspects took a different turn
when covid-19 forced brands to be creative to survive and boosted the barriers
related to entry in the market for the new brands.
When
the world went into lockdown the brands became obsolete as clothing and
accessories or anything related to fashion became a luxury. The brands had to
re-establish themselves to reach to the customers and protect themselves from
becoming insolvent. As these companies worked thorough their losses, they found
how bigger and stronger brands could help them with the way of mergers and
acquisitions.
Mergers and acquisitions or M&A are the contracts by which firms, through various financial transactions, take over other firms or merge into a new firm. The laws regarding mergers and acquisitions are given in the companies act from section 230 to section 240. The mergers and acquisitions can be within the firms that are based in India or even when one company is based in India and the other is based overseas.
PRE-PANDEMIC
Before
the pandemic the fashion world was trying to increase their footfall by
increasing the number of physical stores and expanding their business.
Digitalization of the market was also being setup by the brands. For this, the
brands acquired and merged with other brands to keep the creative spark alive
and eliminate competition. Besides expansion opportunities and designer
collaborations companies also saw this as an investment opportunity.
The
type of mergers and acquisitions that were prevalent before the pandemic were:
· Buying
out smaller brands- a very common type of merger was when one of the big brands
would buy different smaller and newer brands in the market. Brands tried to
identify such smaller, profitable brands that reduced their risk.[1] This is usually done to decrease
competition in the market and profit from the brands that had bright future in
the industry. It was easier for these bigger brands to incorporate such
businesses as they would usually be in the same field and serve similar markets
and fulfil the same needs of the consumers. Thus, the customer base was already
set up. Eventually, this builds up to form the economies of scales.
· Vertical merger- this type of merger is usually done to expand the stages of production or increase the supply chain. This helped the business in becoming whole in itself and depending less on 3rd parties. The value chain in such propositions moves upwards or downwards. The business would have better control on its over all product and also helped reducing the cost of the product. This was often opted by fashion houses to provide luxury feels to the customers and provide high-end services to maximise customer satisfaction. This also gives the company to test out its product and tap into new markets which were unreachable beforehand. An example of the same can be the Netherlands based investment group, Exor, buying stakes in Louboutin. This strategic move can give Exor the opportunity to diversify its portfolio and with its linkages, Louboutin can expand its endeavours in China.[2]
DURING
THE PANDEMIC
The
need for mergers and acquisitions during the pandemic:
· Change
in demand- The first issue was that fashion industry was never a necessity. The
demand in clothing, accessories and personal use items decreased significantly.
When it did stabilise, the consumers with the fear of infection of the deadly
virus and persisting lockdowns changed their major consumption source from
offline to online. People who had never purchased online became comfortable
with the omnichannel which included both offline and online. Shift to online
and digital purchasing became the new normal.
· High
cost of maintaining stores- With the change in demand the brick-and-mortar
companies that had been investing in offline stores faced great issues.
Research by industry analyst Coresight mentioned that in the US as many as
25,000 stores had to be closed due to the pandemic. The decision to sell online
in the middle of the pandemic was not an easy one but was important to keep the
companies from bankruptcy. The setup of channels in a very short time was only
possible by way of mergers with pre-existing market places that had established
online presence in the e-market place. A lot of companies which did not adapt
to the situation had to face the consequences including the company Aldo which
had to file for bankruptcy in Canada. This loss of brick-and-mortar companies
just resulted in their conversion to brick and click companies
· Resource
allocation- The need for flexibility in the resources of the companies
including labour increased a lot. A lot of companies adopted for methods by
which the store employees delivered the goods to the customers’ homes. By way
of collaborations the companies tried to meet the demands of the customers and
stay afloat.
· Loyalty
shock- Not only did customers’ demand habits changed but they also switched
with the scarcity of certain products and brands. People had to opt for
alternative options available in the market. The brands also fulfilled these
needs buy merging with other brands and diversifying the ways in which their
products could be used.
For
these reasons the mergers and acquisition in the fashion industry during the
year 2020 increased by 71%.[3]
The
type of mergers and acquisitions that gained popularity during the pandemic
were:
· Congeneric merger- it is a type of channel expansion which is used by brands to increase the exposure that their products get. The products sold by the brands might be different but they serve similar markets and thus improves the product offering of the brand.
POST
PANDEMIC AND FUTURE PROSPECTS
With
all the lessons that the pandemic taught the brands, we can expect more and
more brands to try out mergers and acquisitions. This time the brands should be
alert enough to prepare before hand and understand the opportunities and
recognize the threats. To lessen the risk and increase the profits, we saw that
a lot of brands increased their product pool and category footprint by taking
over other brands. This can be expected to be continued as brands try lookout
for different portfolios that match with their existing brand.
With
stronger supply chains that the brands have acquired, they will rely less on 3rd
party companies and might even try to become fully reliant in terms of
production and manufacturing. The
companies that were strictly e-commerce may move adjacently and integrate
vertically to expand their market and compete with brick-and-mortar companies.[4] The fashion industry will
constantly look to involve new technology and invest in both in store and back
end.
CONCLUSION
One
could say that before the pandemic, mergers and acquisitions were a luxury that
only the top of the brands enjoyed. But during the pandemic smaller brands were
also forced to consider it as an option and it opened doors to greater
opportunities for them. What was done mostly as a creative and financial
strategy now became the last resort for a lot of companies. This definitely
made the world realise the power that mergers and acquisitions hold. Only the
brands that made smarter decisions stood the test of time and survived to see a
world without the pandemic.
Earlier, brands tried to merge or acquire brands that were in similar fields or helped them expand their current portfolio. The main motive with this was for brands to continue with their trusted markets and continue earning their base line profits. Pandemic made the brands uncomfortable and they had to go out of their way to sell even to their most trusted and profitable buyers. So, the brands were forced to collaborate and take risks with other brands to profit off of each other.
[1] Steffen Meinshausen, Dressed to
merge — small fits fine: M&A success in the fashion and accessories
industry (2011)
[2] Recent luxury mergers and
acquisitions in the fashion world (2021).
[3]Barbara
Quacqarelli, Integration of Mergers and Acquisitions in the Fashion and Luxury
Industry (2017).
[4] Harris Atmar, The next normal: Retail
M&A and partnerships after COVID-19 (2020).
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