Adult women lining up to take selfies in front of a bright pink wall isn’t a typical activity for a Wednesdayafternoon – unless you are at the Kate Spade store in Hudson Yards, a luxury shopping center in New York City.Kate Spade, Stuart Weitzman and Coach sit under the Tapestry Inc umbrella. Walk into any of these retailers, and you will see the same type of customer: she is young, has disposable income and is ready tospend. While this demographic’s social media presence makes it seem like they are everywhere (or more specifically, at a Taylor Swift Eras show), their wallets and buying power are elusive and extremely coveted.Chasing the high-end shopper This is what Joanne Crevoiserat, the CEO of Tapestry, identified as the primary reason for the recent acquisition of Capri Holdings (the parent company of Versace, Jimmy Choo and Michael Kors), during aninterview on Yahoo! Finance the morning the acquisition was announced.“We are playing in a $200 billion luxury market that includes handbags, shoes, accessories and apparel, and this acquisition deepens our access to higher-end luxury consumers that are quite resilient,” she saidwith a confident tone and the faint twinkle of dollar signs in her eyes.Retail merger and acquisition activity has increased as pandemic lockdowns have come to an end and market conditions point to a stronger economy and even stronger five-year outlook. In fact, the world ofM&A is thriving despite inflation and rising interest rates driving up the cost of money. At the time of this writing, the Tapestry-Capri deal is worth almost $15 billion. When you add in the deal premium and EBITDA, it’s just over $2.5 billion. Along with a large bet on the core customer, Crevoiserat sees the newly acquired luxury shopper as someone who wants to purchase, is sick of staying at home in sweats and on Zoom calls, and is willing to put her hard-earned cash into looking good.This notion is contrary to what the CFO of LVMH, Jean-Jacques Guiony, said on the company’s Q2 earnings call on July 25 – that the “aspirational customer is suffering a bit, [with] lower sales online and in‘second-tier cities.’ ”But go to those second-tier cities that Guiony refers to, specifically Atlanta, Austin, Charlotte, Dallas, Denver, Miami, Nashville and Raleigh, and you will see the customers Crevoiserat describes filling thestores, shopping and putting it on display for everyone to see in the form of YouTube haul videos and #BamaRush shorts on TikTok. They are wearing Zimmermann, Golden Goose and LoveShackFancy mixedwith products that have lower price points.Acquiring such brands means access to an immediate platform, built-in endorsements and an audience that has spending power. That combination, along with the potential to reach major markets outside of the US, is driving plenty of interest from luxury groups looking to add to their portfolios.Battling brand dilutionFor heritage labels, this appetite for M&A is one way to address a long-term problem. Keeping a 200-year-old luxury brand relevant, specifically for a younger demographic, is more difficult than it seems,and heritage brands are starting to lose market share in the US. With brand equity tied up in logos and color palettes that feel old, and college-aged women opting for David Yurman instead of Tiffany, European parent companies are starting to panic. “A lot of people do not want branded goods because brand dilution is real and we are seeing this play out with old-school European brands that have been around for centuries,” Kelly Cutrone, author and founder of People’s Revolution, a fashion publicity company based in New York City, told Inside Retail.“There is a belief that wearing a luxury brand will automatically give you status and that belief changes from market to market. In the United States, the demand for over-the-top, outward-facing luxury brands is waning. That seems to be the case in China and with the lower price-point items.”Cutrone noted that the rise of counterfeits – specifically for a luxury handbag in a popular style or pattern – has led to consumers stepping away from ‘it bags’ and wanting something older, vintage and nostalgic. “There is an idea that something that shouts, ‘Hey, this bag is $5,000,’ in this economic environment feels out of style. The aspirational customer isn’t suffering, she wants something that reflects the multilayered person she is.”The resilience of the luxury customer – even if, in some ways, she is changing – can be seen in the demand for brick-and-mortar space. Jeff Roseman, vice chair of Newmark Knight Frank, a commercial real-estate company in New York City, said the luxury retail sector has had its best year yet. “We are going through an incredible boom on the retail side, and it’s all over the city. Rents are creeping back to pre-pandemic prices, specifically on Madison and 5th avenues. Everyone wants to be back in New York City,” he told Inside Retail.CBRE reported that in Q2, Manhattan retail rents rose for the fourth straight quarter, generating a subdued optimism” due in part to a rebound in international tourism, and strong consumer demand for the luxury and food and beverage sectors. Playing by Gen Z’s rulesIt’s clear that the Gen Z luxury shopper operates by a different set of rules, and brands that can play by those rules are prime targets for M&A activity, whether in the US or overseas.McKinsey & Co observed five key characteristics of the APAC customer in its report, What Makes Asia-Pacific’s Generation Z So Different? They rely on social media but are thoughtful about how they engage with it, they prefer brands that show their personality and uniqueness but are also well known enough to be recognized, they are greatly influenced in their brand selection by video content, and they want to be seen as environmentally conscious, but they don’t want to pay for this. Lastly, these shoppers are also willing to embrace new forms of media to purchase items; for example, they shop via the metaverse and use interactive AI to submerge themselves in branded worlds.“Gen Z in China are rather spoiled by the efficiency, speed and increasing quality of retail. As such, brands have had to raise the bar significantly to stun, delight and capture the attention of this customer segment,” said Angela Chan, global investment lead at Swire properties. “Omnichannel solutions, such as pop-up AR and VR that connect to your digital identity, have played a big part in ensuring the brand journey is consistent across offline and online. For instance, the SKPmall in Beijing blurs the boundary between a museum and a mall.Nestled among brand exhibits are imaginative interactive displays such as a futuristic farm with robot sheep that look like live sheep, hundreds of penguins that mimic the walking of passersby and a bakery with organ-shaped pastries [like noses and ears] and impractical utensils.“These are unique and memorable experiences that not only draw consumers back to brick-and-mortarbut also augment brand equity for increased customer loyalty and stickiness.”Stateside, Coach understands that the way Gen Z interacts with retail spaces is critical to getting traffic into its stores. To launch its ‘Tabby bag’, the brand created an AI interactive display outside of its SoHo location in the spring of 2023. As shoppers walked by the window, they could see their reflection with the bag on their shoulder or in their hand, thanks to a video-layered mirror.Zero 10, the AI company that created the display for Coach, said in an interview with Fast Company,that the number of shoppers paying attention to the brand’s window display rose by 93.5 percent andin-store traffic was up 50 percent within the first week of the mirror’s installation.“People are just building a better mousetrap,” Roseman said. “There is so much access to customer dataand it is so granular, brands can now synthesize it to give them an accurate snapshot of what their customers truly want. When you see a store that has significant online sales and then moves to brick-and-mortar in a specific area, that’s not by accident. “Gone are the days when retailers are making moves because their competitors are in space. Commercial spaces are deliberate, interactive and meant to keep shoppers purchasing. The 3000-year-old retail model where there are displays, wide aisles and a person at the cash register is finally changing.” What’s really driving M&A activity?While it’s true that changing customer shopping preferences and the ‘need for speed’ have driven up demand and, in turn, revenues for some retailers, M&A activity in the past year has ultimately been driven by macroeconomic forces.One specific factor affecting companies’ acquisition activity is the rising Federal Reserve rate. In the past year, higher interest rates have made debt more expensive, yet they have also created a favorable five-year outlook for companies looking to make big moves because the due diligence is so extensive. Companies engaging in M&A activity want to ensure their targets are worthwhile. Further, the FederalReserve has implied that interest rates will start to come down in 2024 into 2025, which would fuel the M&A market considerably. “M&A is a game of confidence and that evaporated for a bit when the Federal Reserve started raising the interest rates last year,” Richard Kestenbaum, partner at Triangle Capital, a private investment banking firm and M&A advisory based in New York City, told Inside Retail. “Firms looking to acquire have a five-year plan in place and look at things like timing, value and whether this would be a high-growth move. Everyone wants to look smart when it comes to profitability, instead of taking a company off a cliff.” Kestenbaum also noted that recent M&A activity in retail isn’t necessarily part of a long, steady trend. Peaks and valleys, specifically with big transactions, are always tied to market conditions and the economic outlook.Prior to the pandemic, in 2019, consumer and retail M&A activity comprised 5,349 deals, KPMG research shows. With the onset of Covid and global restrictions, M&A activity waned and then spiked again in 2021, reaching 6,548 deals, 34 percent of them in the Americas. The expectation is activity will continue to build on a “gradual and cautious” return to pre-pandemic levels, KPMG partner Nicola Longfield said.Understanding Zimmermann’s appeal Tapestry’s acquisition of Capri wasn’t the only billion-dollar deal done in August. Last month also included private equity firm Advent International’s acquisition of a 70 percent stake in apparel and swimwear brandZimmermann. The terms were not disclosed, but Reuters cited “sources close to the matter,” who said the firm paid $1.15 billion, or 14 times Zimmermann’s core profit. Valuations and payouts like Zimmermann’s would motivate any small luxury brand to drop everything, head straight to Wall Street and search for a buyer. Unfortunately, not every small luxury brand with a loyal customer base, high product demand and strong social media presence is an ideal candidate for an acquisition. Zimmermann’s recent success was, in fact, many years in the making.Founded by sisters Nicky and Simone Zimmermann in Australia in 1991, the brand started out as a scrappy fashion label at Sydney’s Paddington Markets. After doing extensive market research and getting to know exactly which designs their customers engaged with most, the sisters employed a methodical approach, using specific details with their blouse and dress buttons, material, fabrics and prints. High collars became synonymous with the brand’s dresses and shirts. Hand-drawn floral prints inspired by Monet helped establish, solidify and preserve brand equity. This commitment to staying true to the design DNA safeguarded the brand from potential counterfeiters and reinforced its upmarket position. What’s more, the brand continues to have a wide demographic appeal.“You can see a 25-year-old wearing a Zimmermann dress to a formal occasion just as easily as you wouldsee a 65-year-old throw on a gown to go to a black-tie. There is no other brand in the market that comesclose,” merchandising executive and consultant Divya Mathur said. Another attribute that separates Zimmermann from its competitors is its distribution strategy. While others may take advantage of collaboration opportunities, have many distribution channels and discount frequently, Zimmermann does the opposite. The brand has been working with its retail partners for decades, and has a true understanding of its customers. These factors – combined with a specific focus onapparel and not accessories – are what set Zimmermann apart. Like Tapestry and other luxury fashion groups, market expansion is at the top of Advent International’s post-acquisition priority list. Zimmermann has 58 stores in the US, UK, Europe and China, but expertssee it moving into markets such as India and Latin America, which already have strong demand, and improving its presence across Asia, while maintaining profitability. So far so good for Tapestry and Zimmermann, but the question on everyone’s mind is whether the buzz around these two major M&A deals signals a boon for the wider retail sector, which it so desperatelyneeds. “When a big transaction happens, often competitors say to themselves, ‘We would like one of those things, too.’ It takes a lot of courage to buy a company, especially if it’s done with the intent of helping the company’s investors,” Kestenbaum said. While it may not be a gold rush, the future for retail deals is bright, and to quote Taylor Swift, it’s been a long time coming. This story first appeared in the September 2023 issue of Inside Retail US magazine.