Higher prices for niche labels

It’s almost prepubescent to worry about being buried by big operators via knockoffs in light of this news from Apparel News in Deal Makers for the Apparel Industry on a Roll (scroll down):

“It is hard for big companies to add huge volume annually with their own in-house brands. So they are forced to grow by acquisition. It is also about the lifecycles of brands. As their older brands become more widely distributed, the bigger companies are looking to take on smaller niche brands and use their talent and power and capital to grow and expand the brands.”

In other words, a large player wants more than your products and merely copying your style isn’t going to satisfy them. They want your retail distribution too because it’s the only way they can grow. To get both, they’ll have to buy you out. I think a lot of young designers lose sight of this. They get all worked up over a given style or two -focusing on a tree or two- when they should be nurturing the health of their forest because that’s what a buyer will care about. Another way to look at it is that if nobody is copying you, you probably don’t have anything anybody wants. But I digress, the article highlights an intriguing new trend in the industry. Specifically, that the price of buy outs is at an all time high.

Indeed, the old rule was that if a company had, for example, $40 million in revenues, the selling price was often in that ballpark. But the Sage Group has found that if a label has strong brand recognition and the legs to expand internationally and into other categories, big apparel companies looking for an infusion of newness and high profit margins are willing to gobble up these fledgling businesses at premium values.

To whit, the deal maker Sage LLC has upped the ante, selling Earl Jean Inc with annual revenues of $30 million for an unheard of price of $86 million.

Sage’s success, however, is causing ripples through the apparel mergers and acquisitions industry because deal makers are under pressure to find top dollar for their clients. “Sage is really killing my business because now all my clients are asking for higher values on their companies,” said one Los Angeles acquisition expert, who asked not to be identified.

In some respects, this reminds me of the overheated housing market which has since deflated with no end in sight. If you’re wondering what could be driving the upsurge in the valuations of new brands, I think it is most likely aligned to the continuing consolidation of retail operations such as the recent Federated Department Stores’ acquisition of May Co last year. Now manufacturers only have one customer where they once had two (the one customer is not buying as much as the two once had). In this light, it makes sense the larger players are looking to expand by buying new brands who have their own stable of retail customers.

In summary, it’s not your styles that they want but your customers. Keep your eye on the big picture, assuming that’s where you want to go. Miracle knows people who go out and start brands just for the purposes of acquisition. They make a pile and then they start up another brand which they intend to sell. A lot of times, they buy an even smaller DE concern from which to jump start.

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