View from the EU29 January 2020
The performance of the European calf market, particularly in Italy and France, constitutes a welcome piece of good news for the beleaguered international tanning industry. Andrea Guolo crunches the numbers, and analyses key investment and acquisition trends.
In general and international disasters impacting the tanning economy, a significant exception is linked to the calf. The market prices of veal reflect a trend of greater stability compared with that of adult cows, sheep and goats, where it is possible to find much more drastic declines.
Furthermore, tanneries that specialise in calves have been the subject of two recent acquisitions and the related operations have concerned Italy.
The first one is that of Samanta, acquired by Chanel. The second is Zonta, sold by the Zonta family to a law firm in Bassano del Grappa, and certainly anomalous compared with the previous operations, which they have always seen as a buyer profile, a luxury group, or an investment or private equity fund.
In this regard, the sale of Rino Mastrotto Group, which is certainly a major player in bovines and not a calf specialist, but operates the Pomari division, a significant luxury calf brand. Once these operations were archived, there continued to be insistent talks of some open negotiations linked to the high-end calf, which, according to the rumours, will lead to luxury groups that have already made other ‘hits’ in calves in the past.
Number of Italian footwear manufacturers that closed in the first half of 2019, with the loss of almost 1,000 jobs.
At the same time, the investment fund radar is well focused on this specialisation, which has small numbers and quite high margins. In essence, 2020 promises to be the year in which other acquisitions will be announced, making the European high-end calf even more oligopolistic in which the difference is made by an initial factor: the cost of acquiring the raw material. Here we return to the initial consideration – the reference prices.
According to Hidenet’s weekly surveys, the European calf began to decline in 2018, suffering the negative impact of the other selections, and now a Dutch origin that was quoted up to a maximum of €5.50–5.80/kg can be bought saving €2 and sometimes more. The loss was therefore 25–30%, which in general terms is a lot – however, compared with standard cows, it is much less.
It is worth comparing with the 25kg-plus northern German cows, which, from €1.70/kg in 2017, fell in two years to €0.50/kg, losing about 70% of their value. Moving on to France, large-sized calves lost an average of 20–30% in the case of standard selections, but for the best origins – or those of the heads raised in the French-Swiss area – the descent was much more contained; once upon a time they were sold for €8/kg, today €7 is necessary to get the same quality. The problem is finding those skins.
This is a niche that, according to the ranking on the 2018 budgets of Italian tanneries drawn up by Pambianco magazine, does not find space among the top 10 groups by turnover. To find a calf specialist, we need to go down to the second part of the ranking, between positions 11 and 20, where Russo di Casandrino, Nuti Ivo, Superior, Incas, Marbella and Masoni appear, whose trends are mixed and for which, in general, profit margins are shrinking.
According to various observers, the sacrifice of margins would be linked to the bargaining power acquired by the commissions of these tanneries, which imposed a cut in sales prices in exchange for constant quantities. The reduction of margins, when it happens, can mean the possibility of making a good deal for those who buy the tannery, because in general the calculation of the value is carried out starting from the EBITDA margin and multiplying it by a certain number, up to a maximum of 10 (and sometimes beyond, but hardly in the presence of a tanning group you go beyond this threshold).
This means that today, acquiring a specialised veal tannery could be a good deal because it would be paid even less than in the past, and with the possibility of obtaining a good medium-term return. This ignites the interest of private equity funds, which have an investment horizon of three to five years, and explains why the rumours in Italy are very high and concern precisely the names of the calf with the highest turnover of those mentioned above.
The track leads almost exclusively to Italy because in France, basically, what had to be sold has already been sold: Roux went to LVMH, Haas entered Chanel’s orbit, and Du Puy was acquired by Hermes, exactly like Tannerie d’Annonay.
However, like cows and bulls, the calf also has different situations.
“The larger sizes for leather goods depend mainly on French and Dutch origins, while the smaller calf for footwear has structured harvest areas – for example in the US and New Zealand – and others have unstructured harvest where it is quite hard to obtain available raw material,” explains Roberto Lupi of the BCN tannery in Santa Croce sull’Arno.
“As a result, prices in areas where high quality is found, mainly in Eastern Europe, are on the rise and today are worth more than the best large-sized pieces.”
There is talk of €8/kg, and even more for Poland and Ukraine. Conversely, Lupi tells us that the fall in prices in the Netherlands has led tanning customers to apply pressure, in full awareness of the market trend, ending up contracting the tannery margins. Unfortunately, there are no alternatives, he adds, because today it is unthinkable to be able to sell high-quality finish leathers outside Europe.
“So you have to settle for the prices offered by the big luxury holdings,” he says. “There is a continuous struggle to take the customer away with low-price hits.”
BCN is a name that has historically specialised in calves, with a particular focus on the smaller sizes for footwear. The company has recently invested in expanding production in Santa Croce sull’Arno and is not, at present, among the potential ‘preys’ discussed in the market. Nor is Bonaudo, which started with sheep and goat production (but even before was a kangaroo specialist), and added calf for footwear and leather goods, where this tanning group has been focused for about 10 years following investments made in Veneto, with two top-tier production centres.
“I am moderately positive despite a worrying market situation for contingent situations,” says president and CEO Alessandro Iliprandi. “In footwear, apart from a few specialists in highquality men’s production, the calf was almost abandoned due to its huge cost. Today, 90% of our calf production is destined for leather goods, but there are about 10 customers and there are no prospects for enlargement, indeed.”
Faced with this concentration of customers, there was also a concentration of tanneries that has given rise to a sort of oligopoly that could be even stronger in the future.
“I do not exclude further acquisitions by luxury groups or private equity funds,” emphasises Iliprandi. “I hope, however, that these may concern companies of true excellence, with cutting-edge production structures, because if I think of what was concluded in France, where several companies acquired were certainly dated as a structure, I really do not understand the logic of the operations.
“In general, since the calf market is divided between Italy and France, I can say that excellence and quality are now made mostly in Italy.”
Make the grade
The real problem has become the upgrade of second and third grades that are not in line with the demands of the brands, and that the tanneries that once selected the lots purchased by the slaughterhouse certainly cannot sell off, on pain of budget liabilities.
“These lower grades were previously intended for small and medium-sized leather goods brands, now in crisis,” says Lupi. “Therefore, we must resort to artifices to ennoble the skins and obtain a product of acceptable quality. The research is spasmodic.”
In this general situation, according to Lupi, it is not unlikely that the profile of the investor can be linked to the investment fund, even more than to the luxury holding company.
Increase in turnover in the tannery sector during the first quarter of 2019, thanks to sales of finished calf leathers.
“The private equity funds have money to invest and must remain active in the market,” he says. “There is good activity in the calf, and margins are high on average and companies are doing well. Why then should they not consider the investment?”