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‘Definitely anticipate more M&A activity’ in luxury: Pauline Brown

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Pauline Brown, Former LVMH Chairman of North America and author of 'Aesthetic Intelligence, joins Yahoo Finance’s Zack Guzman and Akiko Fujita to discuss her thoughts on the LVMH, Tiffany deal and the state of retail going into the new year.

Video Transcript

- Pauline, it's good to be chatting with you again here. I mean, we talked about the Tiffany deal and the problems that it had through the pandemic, the allegations, the lawsuits, everything. But finally, getting wrapped up. What's your take on maybe where things go from here now that that's behind us?

PAULINE BROWN: Well, I think strategically this is always a good deal for LVMH. And financially, this was always a good deal for Tiffany and even at the closing price, which was marginally less than the original, it's still a great deal for the Tiffany shareholders. It's really a great deal for them. I think, ultimately, Bernard Arnault has kind of lost the battle. I think he was hoping at a minimum for a much steeper discount, but he didn't have a legal leg to stand on. And ultimately, that small reduction from $135 a share to $131.5 was really just a face saving gesture on Tiffany's part. But I would say they got financially the upper hand on this and time will tell whether strategically LVMH is happy with how this plays out. But it will take a while to play out properly.

- Pauline, this comes in a year where we have seen, as you've described it, this bifurcation in luxury brands for the big names like a Chanel or a Louis Vuitton, for example, doing well while some others have maybe been left behind a little. How do you see things shaping up going into 2021? And to the topic we were just talking about, can we anticipate more M&A activity?

PAULINE BROWN: Well, just to answer the second question, first we definitely shifted a bit for more M&A activity if only because you're going to have a lot of distressed assets in luxury. And we still have a lot of money in the form of private equity by the sidelines looking for quality deals and quality deals in the form of powerful brands. Going back to your question on bifurcation, I think you've got a couple of issues here. One is that this has been a disastrous year for almost every luxury player, including the big names. Their saving grace has been China, the fact that they had a fairly aggressive footprint in China and that market has continued to go strong. Rest of the world, very anemic.

And the smaller or less well resourced brands have not had as strong a position in China. And they've relied a lot on Chinese tourists in Europe, in US. And Chinese tourists obviously have slowed down considerably. Most of the Chinese consumption of luxury brands is happening in China. And so, that is why you're seeing a big split. And I don't think that 2021 or '22 are going to show sharp rebounds for most brands. I think it's going to be a tough slide for many of them for some time.

- Yeah. What does that mean, though, for some of these players there if China is expected to be the driver? We saw that rebound much stronger in the pandemic, post-pandemic rebound there in terms of spending levels. When you talk about that, how does it maybe break up some of those luxury leaders in betting on China and what that might look like into 2021?

PAULINE BROWN: Well, China doesn't show any signs of slowing down. So if you already have momentum there, you can continue to ride that for a good while. For younger brands or for smaller brands that didn't start with a big advantage in the China market, they'll be shut out because real estate is very expensive, because the marketplace is already fairly saturated with brands. So I do think that the weaker ones, notwithstanding Chinese appetite for all forms of luxury, are going to continue to wane. And the lucky ones will probably be scooped up by players that see the long term value. The less lucky ones will probably have to contract. And some will even have to go away. I think we also just have too many brands competing in too many stores for too few consumers.

- I mean, speaking of too many brands, some of these big names have really struggled throughout the pandemic. J.Crew one at the very beginning of the pandemic. Gap one that was already struggling even before all of this began. What's the outlook for some of those brand names? And if we're talking about consolidation, are we likely to see that activity especially in sort of these middle of the road names that have really relied on malls to get the traffic into their stores.

PAULINE BROWN: Well, so first of all, similar to the luxury goods sector with the mall sector, we're going to see a real divide between what I'll call the A malls and the rest. A malls being the top performers, the higher end ones, the more established, like the Simons of the world. So I think the B's, the C's, and definitely the D's-- what we call the D's, sort of the lowest end are going to have to repurpose. In some cases, they'll just probably become parking lots, empty parking lots at that.

The stores that have relied on malls for their expansion will have to contract with the sector at large. And so I think that it's going to be an interesting time to watch retail. There are segments of retail that are doing relatively well. I mean, people are buying sportswear, they are buying a home and gardening equipment, they are buying entertainment products. What they're not buying are clothes and fashion, maybe with the exception of high end sneakers. That's probably one of the few green shoots in all of this are high end sneakers.

And so brands like Gap and J.Crew that are built on ready to wear, and they've always been stuck in the middle. They can't win on price against Zara, H&M, and they can't win on quality against the luxury players. They're going to continue to be challenged. And we're going to probably see significantly reduced footprint in the next year or two by both those players.

- Yeah. More pain ahead. It's going to be a while until we feel really comfortable in packed malls. Pauline Brown, it's always good to talk to you. Really appreciate your time today.

PAULINE BROWN: Thank you. Thank you for having me. Happy new year to you all.

- Happy new year.

- Happy new year to you too.