Mike Redwood
As we moved into the 1990s and leveraged buyout (LBO) structures became standard, aggressive debt loading, accelerated borrowing, and excessive dividend recapitalisations became the pattern of what we knew as Private Equity (PE). In the UK, monopoly sectors such as water were exploited in the absence of effective regulation and loaded with debt while high dividends were being paid. The whole concept of PE became immensely unpopular. With the leather industry structured by thousands of small and medium sized tanneries it felt good that it might remain unaffected.
Not so. At the start of the century TFL and Stahl Chemicals were both acquired and move into the leather chemical sector were soon followed at ISA TanTec and Italy’s Pasubio and Rino Mastrotto. To my surprise the behaviour of these PE-backed deals in the leather sector appears to be more about internationalisation, supply chain integration, and growth needs, rather than financial engineering to quickly extract cash.
ISA TanTec’s acquisitions were clever, if not inspirational
ISA TanTec’s subsequent acquisitions in Italy and the U.S. were clever, if not inspirational, and showed a real interest in innovation, fashion and leather skills. ISA Next-Gen Materials was established working with biomaterials and regenerative leathers showing a clarity of vision and a higher level of collaboration than seen elsewhere in the leather industry. They have created a market leading position closely aligned with the way brands want to move forward and fitting consumers looking for a wider material choice in certain categories.
Although as buyouts increase the LBO side of PE is becoming more evident, the PE involvement to date has been more about technology, sustainability and consolidation in a struggling industry that needs help. The wider marketplace, EU oversight, the need for compliance to high product standards for brands and brand-led sustainability requirements do limit the scope for aggressive financial practices that might destabilise the value chain, but the sector has generally outperformed during the ownership by PE in growth, investment and job creation.
Over the past decade the leather industry has become vulnerable as weak demand, particularly from global fashion markets, and high inflation has pushed up operational costs. It has led to some tanneries going out of business or into the hands of these financial investors. The crisis is most acute for small and medium-sized family-owned businesses: but consolidation via buyouts and increased PE participation is now a clear, ongoing trend.
Also taking an interest in problems in the leather trade are the luxury conglomerates. This is more than just seeking to vertically integrate supply chains. It relates to a determination not to lose historic skills or access to specialist raw materials.
LVMH Métiers d’Art, Kering (Gucci), Chanel and Prada Group have all been involved in transactions. Luxury conglomerates are now buying, investing in or forming strategic partnerships to secure supply, quality, and innovation and support broader sector consolidation at a time the industry is in economic difficulty.
The evidence is clearly there that consolidation is needed. The less than perfect data we have consistently suggest overcapacity, weak global demand, rising costs, and technological change that our current industry cannot cope with. Being so fragmented is now slowing innovation, creativity and making modernising requirements too costly.
Consolidation
Consolidation immediately allows for economies of scale in production and sourcing, supports stronger investment and spreads the costs of marketing, compliance and research and development over a larger volume. It looks like the best response to today’s challenges and where it is happening the industry appears to be stronger not weaker,
It will become steadily harder for independent family-owned SMEs to flourish in the current environment especially if they are in sectors where they are competing with these vertically integrated, consolidated groups.
Clearly some niche and highly specialised tanneries will still succeed due to unique skills, heritage, or ultra-premium positioning, but they will have to maintain strong balance sheets to weather geopolitical and market shocks.
The industry might prefer the moves of the Luxury Groups as more likely to retain leather industry traditions and technical jobs, whereas PE can be more disruptive. But we are seeing that PE does bring capital and professional approaches. We are at the moment seeing both these groups changing the global leather landscape. A neat mix of stability versus necessary transformation and dynamism.
this article by me has recently been published by International Leather Maker under their open access opinion column it goes towards explaining my view that the leather industry has a chance to really progress but it must widen its vision and collaborate more
