Can a Shortage of Skilled Craftsmen Affect These Luxury Brands?

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The label ‘Made in Italy’ is not what it used to be – Italian fashion manufacturers are increasingly sending goods to be partially manufactured or assembled in other countries, such as Bosnia or Moldova. In 2010, an Italian law went into effect that required at least two of the four manufacturing stages to occur in Italy in order for a product to carry the Made in Italy label. Traditional Italian clothiers are not happy with the current state of manufacturing and feel the process is diluting the value of Italian-made goods. Consumers supporting the $30 billion industry are starting to show concern with the craftsmanship of these products, which typically sell for a high premium.

The problem stems from an aging and retiring workforce and the reluctance of younger Italians to take on artisanal jobs that involve pattern making, cutting, sewing, embroidery, knitting, and other manual skills. Lower-skilled textiles jobs have also been declining since 2006 and jobs in shoe-making for example, have been outsourced to countries with cheaper manufacturing. This has led many Italians to regard textile jobs as unstable.

While many factories use machinery during production, people are still needed for a variety of roles, such as the assembly and hand stitching of leather goods. The industry has also done a poor job at promoting careers in the textiles industry and factories prefer to attract talented craftspeople from their competitors instead.

As textile recruits and apprentices become harder to find, how will products made for brands owned by LVMH Moet Hennessy Louis Vuitton (NASDAQOTH: LVMUY)), Prada, and Kering (NASDAQOTH: PPRUY.PK) be impacted as the number of skilled craftsmen begin to decline?

LVMH’s commitment to quality and craft

In LVMH’s latest annual report for 2012, the company’s fashion and leather goods segment generated $13.08 million, the highest revenue of all the business groups. This segment generated 35.3% of total revenue by business group and experienced 7% organic revenue growth with luggage and leather goods maker Louis Vuitton leading the way. The brand continued its progress in the first-quarter of 2013 and the segment reported a growth of 3%.

The company’s Italian factory for its leather goods brand Fendi recently opened its doors to customers in an effort to show off the quality and craftsmanship behind the products. Louis Vuitton, which has 17 factories producing its line of leather goods, intentionally grows its business slowly to preserve the quality of the brand (Asian factories are contracted only in the production of certain components, such as zippers.)

A recent sign of what may be the future for small scale clothiers -- LVMH acquired an 80% stake in Loro Piana, a sixth-generation Italian textile producer of wool, cashmere, and other fine textiles with a global network of over 130 stores that sell its women’s and men’s clothing lines and other goods. The purchase gives the company access to the ultimate luxury segment, which is expected to grow faster than the rest of the industry going into 2014, according to Bain & Co.

Prada’s pursuit of uncompromised quality

Prada’s first quarter of 2013 reported net revenues up by 14% and same store sales grew by 8%. Net income increased 18% over the same period prior year. The company’s 2012 annual report mentions how the designers and craftsmen, who have been working for the company for an average of 20 years, are known for rigorously defending the individual heritage and identity of each brand. They are dedicated, highly specialized and committed to passing their knowledge to the next generation of craftsmen.

Prada carefully monitors every step of the production process, inside and outside the group, to guarantee uncompromised quality. The company’s products are made at 11 facilities located in Italy and England, all owned by Prada. Subcontractors are carefully chosen for their craftsmanship skills.

Kering seeks acquisitions that complement its brands

Kering, formerly known as PPR Group, posted first-quarter 2013 results with comparable revenue up 3% powered by the luxury division, specifically its Fashion and Leather Goods segment, whose performance was up 6%. This segment includes brands such as Gucci, Bottega Veneta, Saint Laurent, and other brands.

The company has been busy making acquisitions in 2012 and 2013. Kering expressed that part of its strategy is to acquire small and medium sized businesses with promising expansion prospects and which meet strict criteria that strengthen and complement their brand portfolio.

In January 2012, Kering acquired Brioni, which makes custom and ready-to-wear Italian menswear. Brioni is known for its highly skilled master tailors and has its own tailoring school to pass on skills and know how to new tailors. In January 2013, the company also acquired a majority stake in Christopher Kane and his luxury clothing line known for its original pairings of materials. Two months later, Kering acquired a stake in France Croco, a renowned tannery of crocodilian skins located in Normandy, France. The purchase should secure Kering's access to materials.

Conclusion

The companies mentioned do not seem to have a shortage of talent to produce their goods for the foreseeable future. Small scale Italian clothiers that are struggling to find talent and stay in business may find that an alliance with the right luxury goods company could provide the resources they need to keep Italian craftsmanship thriving and allow them to compete with Asian textile producers. I believe that additional acquisitions, like those made by Kering and LVMH, will continue and benefit the luxury goods market as long as consumers covet the Made in Italy label and the quality and craftsmanship it represents.

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