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ZeGroup-partnersA w h o l e v i s i o n

Accessories products / Luxury market segment

Upstream Vertical Integration, Supply-Chain, Made-in marketing

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Avec le temps et la patience,

la feuille du murier devient de la soie…

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Agenda

Executive Summary

Elements of the Environment

Analysis – Vision

Business Idea

Insights

Key Concepts

Supply-Chain evolution

Effects of Made-in

Value Chain Analysis of key players in the luxury market

Strategic forces and advantages of the vertical integration …..

Opportunities and Threats of Current Strategies

Strategic Plan

External analysis

5 forces analysis

Threats and Opportunity

Potential ‘Movers’ of the Market: ‘Strategic commitment’ of the Chain (France-Italy)

Conclusions

Proposal

Partners / Project Team – Core Competencies

References and Sources

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Executive Summary

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The current macroeconomic environment presents a strong global growth in the luxury market in general

and specially in the accessories segment (ties, shawls, scarves) due to the demand from emerging countries.

French Groups (owners/holders of the main brands) play a key role. They are amongst the leaders in the sector

due to the customers' perception value.

The European productive outlook related to these Luxury Groups, in the manufacturing and industrial sectors, is

divided between a few Italian suppliers who organized themselves in order to offer a complete service to these

Groups.

In France, there is only one organized structure of the chain (controlled by Hermes/HTH). All the other French

suppliers, who are positioned as ‘third’ tier suppliers, only manage their know-how.

In order to improve their quality, creativity, confidentiality, timeliness and response to changes, some other

Luxury Groups can be potentially inspired by the Hermes/HTH approach. This means combining a productive

chain with a strong partnership, guided towards the upstream chain, with implications on the overall upstream

chain.

Nowadays, the market offers the possibility of building an aggregated supply-chain for the manufacturing of

textile accessories, controlling investments, while controlling the upstream processes of the value chain.

The purpose of the current study is to illustrate the possibilities of such a work based on the current

competencies and experiences of the Luxury sector.

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Executive Summary – Variables and context

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Variablesand

context

Product

Market

Raw Materials

Supply-chain

(operators)

‘Made-In’ marketing

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Product

Market

Raw materials

Supply-Chain (operators)

‘Made-in’ Marketing

Increasing demand (CAGR +10%), growth of the customer base

Development of the ‘perceived value’ from the client side (immaterial part)

Customers are paying attention to the different ‘messages’ of the luxury product (significant goods)

Demand for a better global coherence from the luxury brands

Strong development of the luxury markets, despite the effects of recent economical crisis

Necessary differentiation vs. Luxury Competitors vs. Fashion Sector

Entry barriers on the retail market are becoming more flexible (development of Luxury on internet )

Internet accelerate the knowledge of brands, as well as comparing and perception of “brand message”

Increase of costs (direct and indirect)

Less availability of raw material of high quality, thus becoming a strategic resource

Reduction of the number of suppliers able to handle high quality raw material (loss of sense of quality)

Decline of the European chain, instability of suppliers (reduction of the visibility over the continuity)

Few players, concentration of some big ones (Italy)

Fragmentation of SMEs which are not chain organized in France

Complete chain in France, with know-how and productive capacity controlled by Hermes (monopoly)

‘Origin’ (Provenance) perceived by consumers as a key value (intangible) and as an element of

coherence between the brand and its history and products

Strong element used for differentiation, providing an added value to the product and equity to the brand

Rapid evolution of regulatory framework, with enhanced constraints & protection

Variables Observations

Executive Summary – Variables and context

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Executive Summary – Analisys / Vision

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Upstream Vertical

Integration

Supply-Chain organization

‘Made-In’ Marketing

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Upstream Vertical

Integration

Supply-Chain organization

‘Made-In’ Marketing

To guarantee and ensure the high quality and quantity of supplies

Leverage effect on differentiation, additional entry barriers (vs Competitors & New players)

To acquire knowledge and culture of the upstream cost structure and to integrate the value

chain

To disturb /Upset competitors’ supplies, reinforce the bargaining power versus suppliers

To guarantee confidentiality, products homogeneity and quality control, including global vision

along the value chain

Control of an ‘enterprise network’ and of a know-how (net of savoir-faire)

Global vision along the entire supply-chain

Management of the complexities, make leverage on the capillarity for innovation and reactivity

(coordination of complex products manufacturing)

Allows to improve Corporate Social Responsibility thanks to a better control (i.e. avoiding the

effect of third parties in domino, like the ‘chinitaly’)

The Origin Labeling conveys the values of legitimacy and coherence

The strategy of the Marketing of Origin, by leveraging on the intangible part (of the product),

underlines the history background of the brand from which it draws its legitimacy and

particularism

Reinforces the coherence of the brand with an increase of ‘brand esteem’ and ‘brand equity’

Increases the perceived value of the product and the brand

Provides a ‘product and brand’ differentiation in creative interpretation (vs «Fashion»)

Parameters Objectives / impacts

Executive Summary – Analisys / Vision

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Executive Summary - Business Idea

Historic moment with an increase in the demand of Luxury products, along with

an important decline of the supply chain (network of savoir-faire) as well as a

diminution of availability high quality raw material (tangible part of the product).

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Reinforce positions in the upstream textile supply-chain for Luxury by

organizing the control and the support of the supply-chain thanks to Quality,

Exigency and Know-How, through an upstream vertical integration process

with key suppliers, forming part of a process of ‘skills clusters’

Ensure the availability of supplies,

consolidate the qualitative levels

of raw materials and finished

products

Strategic commitment / games theory

(vs competitors, new players and

suppliers)Driver

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Depth Study

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Key concepts

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Demand becomes more precise and

demanding, entering a period where

'intangible investment' takes greater

importance.

Application of coherence between the

brand and intangible content that

Origin is a distinctive element.

Differentiation and quality

Extreme need for differentiation in the

market between competitors from

Luxury vs Fashion industry.

Need to leverage the intrinsic and

meaningful product characteristics

including the Excellence in quality.

Brand perception Vertical

integration

The upstream integration consent vertical

control on the availability and quality of

raw material and confers a competitive

advantage.

It agrees to manage any difficulties in

certain phases of the process, ensuring

supplies and production capacity, and so

the time to market.

It guarantees the confidentiality of creation

/ innovation.

Adjustment to

competing model

Vertical integration has already been

activated by one of the actors (Hermes /

HTH), which controls the only organized

network existing today (France).

Elements that contribute to increase the perceived

value of products

Origin &

“Made in”

Instrument of ‘intangible content in

the product’ ; transmits a message.

Part of the marketing levers to

enhance differentiation.

Privileged partnership with existing

players

The objective is to coordinate (strengthen

the link) some key players in the market,

creating strategic partnerships

strengthened or investing with them.

Need to activate strategic agreements with

suppliers to ensure the possibility of establishing

the sector and get the competitive advantage and

considered positioning

… product aspects … sector aspects

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Key concepts

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Presence of industrial operators

Context is characterized by a

concentrated number of

operators -converters with

industrial dimension: Ratti, ISA

Seta, Mantero ... Concentrated

on their core business printing,

supply and licensing finished

products.

“Evolution of the industry”

Italy

Unique example

France

SME network

Concentration risk (due to M & A operations

or closures) with increased bargaining power

of key suppliers

Risk of strengthening the monopoly of

Hermes / HTH or closure of small operators

Need to consider the approach of the

upstream vertical integration

The only structured sector is

the one owned by Hermes /

HTH

Presence of SMEs, small non-

integrated operators,

unstructured with vertical

approach but by professional

sectors

SME networkChallengers that serve various

markets with an approach of

subcontractors.

The current market environment has :

Ability to structure (one) new sector, rapidly

activating strategic agreements to achieve a

competitive position

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Effects of “Made In …”

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Brand coerency Perceived Value from customer

Cognitive valueBrand Story telling

Label of Origine

(Made In …)

• Increases the Perceived Value from

customer of product and brand

• "Made in" brings Meaning and Content

• As a result, Equity Brand increases

• Key element of the message conveyed

through the product

• Objective element that communicates values

of authenticity and coherence

• Significant message, simple and easy to

convey

• Information sign and thus, the valuation of

the product and/or of the brand

• To guarantee a product with a specific “Made

in …” increases the global coerency for the

Brand

• Increases the Brand Reputation and Brand

Esteem

• Acts as a link between the brand and the

continuous business

• The "Made In"… transmits the complete

‘dream’ within a product, a piece of culture

and history, style and savoir-vivre

• Marketing tool to reinforce the authenticity

and the differentiation of the brand

Label of

Origine

(Made-In…)

Luxury

Creates Brand Equity

Fashion

Not (so) Important

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Value Chain analysis for Accessories (Key players)

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Hermès/HTH

LVMH

Kering / Gucci Group

Richemond

Rawmaterials

Weaving Engraving Printing ConfectionFinishedproducts

Supplier

Partnership

JV

In House

Supplier

Partnership

JV

In House

Supplier

Partnership

JV

In House

Supplier

Partnership

JV

In House

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Strategic impacts and benefits of vertical integration upstream

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Vertical integration

(stream)

Guarantee supplies

Stability of the ecosystem production

In a context of scarcity of raw materials, it is

necessary to ensure their supply to the desired level

of quality and on time.

Increase the competitive advantage

The process of vertical integration is a Strategic Engagement (game theory).

Importance of speed of implementation, the existing risk of other competitors or suppliers will seize

the opportunity to 'win' on the front control of supplies and / or differentiation.

With the weakening of the European production

chains, allows the guarantee of maintaining the

diversity of skills, culture, capacity for innovation,

quality and production capacity.

Has a higher entry barriers, better visibility into the

cost structure, greater bargaining power with

suppliers, as well as disruption of competing supplies.

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Opportunities and threats of current developments on the "Made-in ..."

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Made-in Italy Made-in France

• Inside the textile / clothing Luxury sector, there is

an active Italian lobbying to highlight the 'Made-

In Italy' with a potential risk of creating confusion

over brand consistency for those not Italian.

• The 'Made-In Italy' has a good resonance in the

fashion industry, creating a "pollution" of the

message for the French luxury sector, the values

of the two sectors being frequently associated

similarly

Exploit the opportunities, investing on vertical integration, levering on the

possibilities offered by the respective national chains

• The 'Made-In France', contains a distinct identity

and particularities and specific

• Should be considered as an element of

differentiation against the 'Made In Italy,' even if it

promotes similar values and details

• Emphasized, not the "French Touch", but

"French Exigence" in Luxury, Quality and

Creativity

• The evolution of the legislative framework at European level, guided by the lobbies of the dispute and Luxury Textile industry

moves towards greater protection of Made-In ...

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Potential movers of the "Strategic Commitment" in the industry [France-Italy]

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Players Strategic Objectives Impacts

• Upstream vertical integration

• Strong differentiation in the market

• Strategic Commitment vs competitors/

suppliers

• Secure supplies

• Take advantage of the monopolistic position,

uniqueness

• Saturate local resources

• Disrupt supplies competitors

• Increase market share with a complementary

and differentiated offer vs. competitors

• Take a unique position

• Submit a dual sourcing approach on the 'made-

in'

• Enter the market and take market share

• Take advantage of 'entry barriers' lower in

France than those present in Italy

• M & A transaction with the objective of

financial return and exit-strategy, no

industrial objectives

• Limited investment on the beginning with strong ROI

potential output in a short time

• Take a position on the market, becoming differentiated

'unique' player and making it necessary, amending in

the same time the 'rules of the game'

• Becomes a 'One stop shop'

• Increases its market power

• becomes essential

• Acquires a greater power on the control of prices and

costs

• Visibility on the value chain structure

• Balancing market power with key suppliers

• Take the initiative has a competitive advantage against

competitors

• Increases own structure and production capacity

• Strengthening / Holding the 'Unique‘ position

Luxury groups

Suppliers

Private Equity

- LVMH

- Kering

- Richemond

- Hermès

Italians

industrials(Ratti, Mantero,…)

Challenger

Italian / French

PE operators

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The time is right to consider the upstream vertical integration, both ‘direct control’ and the

‘coordination of the sector’ should be integrated into a skills center approach or Center of

Excellence.

Conclusions

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Analyzes previously described can be summarized as follows:

• Prospective difficulties for the availability of high qualitative raw materials (including silk)

suggest to invest in the control and mastery of supplies.

• Consumer preferences suggest the need for major coherence between brand and product

characteristics (quality, original label).

• The natural historical sectors are largely weakened, and the ecosystem of suppliers can be

further reduced (closures) or move to a concentration with a possible threat in terms of

continuity, reliability, price and quality.

• The increase in costs and prices of raw materials carries to secure margins through mastery

of the real costs of production.

1

The Franco-Italian industrial network offers spaces to strengthen the privileged partnership

relationship or invest in productive structures or realities that belong to the sector of Luxury and

Silk.

2

The time window to operate is narrow, it is necessary to work quickly, anticipating competitors.

3

Consequently, the analyzes suggest that:

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Information sources

Sources :

SMI / Sistema Moda Italia

Camera della Moda

Pambianco news e studi

IFM / Institut Français de la Mode

Comité Colbert

Altagamma

Euratex

UIT / Union des Industries Textiles

Assolombarda / Confindustria

Ipsos Public Affairs (World Luxury Tracking*)

Datamonitor

Journal du textile (Francia)

Fashion Mag (Italia e Francia)

Fashion Magazine (Italia)

Usine Nouvelle

Les Echos

Il Sole 24 ore

Rapport Yves Jego

Rapport Clarisse Perotti-Reille

Fashion Luxury Insight (Altagamma, Ernst&Young, S.d.a

Bocconi)

BCG / Boston Consulting Group

Bain Company

OCDE et Eurostats

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Profile

Linkedin : http://it.linkedin.com/in/huguesbartnig

Hugues Bartnig / Executive Business Advisor

Business Development - Global Sales & Market Strategies - Management & Team Leadership