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Invest in vertical expansion or stay wholesale? Go public or entertain a cash-rich partner? Hand off to a new generation or sell out?
This story first appeared in the November 19, 2012 issue of WWD. Subscribe Today.
Italian fashion companies face uneasy growth prospects, generational shifts, harsh governmental austerity measures, high unemployment, high labor costs and ongoing troubles connected to the euro zone.
What to do?
Some are exercising a multipronged strategy, taking an aggressive stance at a very challenged time. According to the Fashion Economic Trends study published by the nation’s Chamber of Fashion, the Italian fashion industry’s revenues in 2012 are expected to fall 5.6 percent to 60.2 billion euros, or $78.3 billion at current exchange, compared with 2011. Business is expected to pick up in the last quarter but still fall below the levels of the fourth quarter last year. Exports in 2012 are forecast to drop 2.4 percent to 41.6 billion euros, or $54.1 billion.
It is also a transitional phase for several Italian fashion companies facing a generational shift, as they seek to ensure a future beyond a founder’s lifetime via a sale or intricate family succession. One option is a public listing (Salvatore Ferragamo) or an outright sale to a conglomerate or wealthy investors (Bulgari and Valentino Fashion Group, taken over respectively by LVMH Moët Hennessy Louis Vuitton and Qatar-based Mayhoola for Investments).
The IPO Route
Most fashion companies have made retail expansion their mantra, as they invest in stores to better control brand integrity. But to do this effectively, they need cash. This, along with the need to increasingly secure expertise, has prompted firms such as Prada and Brunello Cucinelli to turn to the stock exchange and look to high-net-worth individuals globally.
The Bourse has proven lucrative for the latest cluster of Italian companies to go public. Ferragamo shares gained 90 percent to 15.69 euros, or $20, at press time since its debut price of 9 euros, or $11.74. In June 2011, the Florence-based firm floated 25 percent of its stock in a deal worth 344.5 million euros, or $448.6 million, in an effort to develop the organization with continuity and a strong management—also in light of the ever-growing number of family members, now totaling 70.
After postponing its IPO several times in the past decade, Prada went public on the Hong Kong Stock Exchange, also in June last year, to help fuel an aggressive store-opening plan, especially in Asia. Share prices have risen 54 percent to 63.70 HKD, or $8.22, at press time, from its debut price of 39.5 HKD, or $5. Through the IPO, Prada raised $2.2 billion.
And Brunello Cucinelli went public in April, not only to ensure his company will continue but to attract new management while raising funds to finance growth. Shares climbed 80 percent to 13.48 euros, or $17.19, at press time since its debut price of 7.75 euros, or $10. In floating about 30 percent of the company, Cucinelli raised 173.9 million euros, or $226.4 million.
Most recently, Pomellato chief executive officer Andrea Morante said he was evaluating a public listing. He compared the Italian jewelry firm to Brunello Cucinelli in terms of volume. “They are both niche luxury brands, they are both expanding globally and they don’t have many brand extensions,” he says.
But the public markets aren’t for everyone. Jtg Consulting founder Tomaso Galli, who has worked for brands such as Gucci and Prada, says Versace has a strong visibility globally and would make a successful initial public offering, as would Dolce & Gabbana, although the two founding designers there have repeatedly said they are not interested in that option for the time being. “They want to be flexible and free to do what they want. Folding the D&G line, which was extremely profitable, into the signature collection and focus on the latter is the perfect example,” says Galli. “And Giorgio Armani on the Bourse would be fantastic, but the market would ask the designer to put a succession plan in motion first.”
Armani has been open about his reluctance to publicly list his company, seek a partner or sell to an investment partner, for “one very simple reason: absolute independence,” he says. The option of forming a foundation that would control the company has emerged, although “it is only one of the possibilities,” says the designer.
Bankers and analysts would also like to see Ermenegildo Zegna on the stock market, but ceo Gildo Zegna has denied any interest in this route, as the family-owned firm is flush with cash and growing organically. According to sources, Zegna studied both the Brioni and Valentino dossiers, looking at expanding its group through an acquisition, but balked at the price tags. Instead, he turned to a high-profile designer—Stefano Pilati—to revive a sleepy brand that was already in-house, Agnona, and thus build the women’s wear category.
Zegna did manage to hook up with Loro Piana and Marzotto, each group taking a 15 percent stake in combing mill Pettinatura di Verrone to support the Italian textile production chain.
Taking On a Partner
Joining forces with the right partners can make or break a business. This is particularly true in areas like China or the Middle East.
Vittorio Missoni, who heads his family-owned company, is making a fresh start in China next year after a negative experience with previous partners. “It’s a big country and there are many big collaboration opportunities. In the past, it was easy to find investors for franchised stores, but they often had money but no experience, so we had to take a drastic move and close those stores,” says Missoni, explaining that the previous partners “had no knowledge” of the fashion world or of the brand. “I am more in favor of partnerships that allow us to have more control on operations.”
Missoni is negotiating with two potential partners in China to expand in the region. “A simple distribution contract in some cases is not a guarantee,” he notes. Missoni plans to hold a majority stake in this venture, and he says this kind of agreement can be extended to other countries where “a more direct involvement” is required.
Sometimes seeking funds in the private sector means going outside Italy. The fact that the new owners of Bulgari and Valentino are not Italian has triggered strong media reaction and laments of what some perceive as the flight of Italian brands from the country. The list includes tailored men’s wear brand Brioni moving under the Paris-based PPR umbrella; London’s Goga Ashkenazi taking control of Vionnet, once French but more recently owned by Italian entrepreneurs Matteo Marzotto and Gianni Castiglioni; Gianfranco Ferré bought by the Dubai-based Paris Group; investment firm Eurazeo of Paris taking over Moncler and shelving its plans to go public, and private equity firm Pai Partners, also from Paris, taking a majority stake in Marcolin, with plans to delist the eyewear maker, which produces and distributes collections for brands including Balenciaga, Tom Ford and Tod’s. At the Blumarine show in September, Ashkenazi said she is focused on building the Vionnet brand, which has “so much legacy and potential,” but also on “eventually creating my own conglomerate one day.”
“Karl Marx said it more than a century ago: Capital is international. Companies that have a value and that have further growth potential are the ones that are being acquired,” reasons Armando Branchini, deputy chairman of Milan consultancy InterCorporate. “Is it a pity that there are no more Italian companies that can afford, or want to buy, Italian firms? Yes, but at the same time, it’s a good sign that Italian firms are considered so interesting and worth paying for.”
Branchini also underscores how Italy is “an industrial reality, not a financial one,” and it doesn’t historically have a tradition of major conglomerates or holdings in any sector. In the late Nineties, merger mania swept through Italy. IT Holding, for example, collapsed under its debt load, and its Gianfranco Ferré and Malo brands, as well as its Ittierre manufacturing arm, were sold by state-appointed commissioners under government-backed protection. Prada also tried to create a luxury goods pole with Fendi, Jil Sander, Helmut Lang and Azzedine Alaïa, but eventually shed most labels as debt mounted, keeping only Church’s and Car Shoe.
But there are exceptions, like Diego Della Valle’s Tod’s Group, which comprises the Tod’s, Hogan, Fay and Roger Vivier labels, but whose core business is accessories.
Foreign investors, meanwhile, are taking a closer look at Italian companies that boast superior craftsmanship and heritage. “Traveling around the world, you realize how credible Italy is and how foreigners are fascinated by the European and Italian way of life,” says Cucinelli.
Umberto Angeloni, ceo of Italian manufacturer Caruso, notes that on the Chinese site Hurun, a private organization that directly interviews affluent consumers (primarily in China), and its Best of the Best Awards Survey 2012, only two Italian labels are cited—Prada and Armani—after five French brands (Louis Vuitton, Cartier, Hermès, Chanel and Dior) among the 10 most prestigious brands for gifting and preferred by Chinese millionaires. Among the annual list in 2011 of top 100 world brands compiled by Businessweek—Interbrand (“The Best Global Brands”), French labels Louis Vuitton and Hermès have a value of $ 27.5 billion, while the Italian brands Gucci and Armani total $12.6 billion.
While bearing in mind that lists are influenced by growth and scale and that accessories have an advantage in this sense, Angeloni wonders why Italy does not get credit for the same excellence as France. Longevity is not enough, he says, pointing to Trussardi and Zegna, each with more than 100 years of history behind them.
“Does it have to do with the level of management and the influence of the families? If that is so, the acquisitions of Italian companies by French groups are more than welcome: They can help a brand express all its potential, clearing away the myth of the family DNA,” says Angeloni. “Heritage, when it is not accompanied by facts, has no value. The strength of heritage is based on authenticity and implies a degree of excellence. It must be reflected in service, product and distribution.” Consumers are very attentive, especially after two recessions so close to one another in time, and they understand “the dichotomy between what is said and what is done. French brands have been very good at maintaining heritage relevance. Heritage is a promise that [must be kept].”
Consultant Galli points to the hefty investments that are behind the changing landscape: “The fashion and luxury industries are radically changing and increasingly require major financial, managerial and organizational resources. It’s more and more capital-intensive, and faster.”
Organic Growth and Store Expansion
“If you sing and dance to your own tune, you may enjoy it, but it may not be constructive.” So says Massimo Ferretti, chairman of Alberta Ferretti and Moschino’s parent group Aeffe, referring to the fierce pace at which Italian designers are building networks of directly owned and operated stores. The unconstructive part? Losing out on valuable feedback from multiline retail buyers.
“Retailers are the ones prompting us to stay modern and relevant, because if they don’t like a collection, they don’t buy it or they shift it around in the store,” says Cucinelli. “This is the greatest test for us.”
Indeed, brands are competing in their efforts to open more and bigger stores, locally and abroad, so tourists will buy when traveling.
“Chinese tourists buy brands they see and know at home, so you have to have a strong presence in China,” explains Galli. Real estate and communication are major investments. “Let’s define a small to medium brand as having sales of between 200 million and 400 million euros [$260 million and $520 million] and compare it with giants such as Gucci, Prada, Dior, Louis Vuitton, whose sales are all beyond the 1 billion-euro [ $1.3 billion] threshold. These huge companies generally invest between 5 and 10 percent of sales in communication—the size of the small and medium firms.”
Other big industry players are not lured by the siren calls of the stock market. Asked before the Just Cavalli show in September about a possible IPO, Renzo Rosso, owner of Only The Brave, said: “I don’t want to lose my company.” The group controls Diesel, Viktor & Rolf and Maison Martin Margiela, among others. That’s not stopping Rosso’s ambitious plan to double his business in five years—without the Bourse. Last year, the company reported sales of 1.36 billion euros ($1.89 billion at average exchange). Rosso is always looking at expanding his brand stable, whether through licenses, like Just Cavalli, or with new labels. Rosso was also said to have been interested in buying Valentino and Marni.
Similarly, Aeffe’s Ferretti is keeping an ear to the ground. The publicly listed Aeffe controls the Alberta Ferretti, Moschino and Pollini brands and produces for Cacharel and Cédric Charlier. In September, Aeffe struck a deal with Emanuel Ungaro to produce and distribute its women’s top-line clothing and accessories, tapping Fausto Puglisi as creative director. While technically a license for the global production and distribution of the brand’s women’s clothing and accessories under the Emanuel Ungaro moniker, Ferretti defined the agreement as a “partnership” with Ungaro owner Asim Abdullah, a San Francisco-based high-tech entrepreneur, and his investment vehicle Aimz. Aeffe has the option to acquire a significant minority share of Ungaro’s capital stock on achieving shared goals, but not before 2020.
Keeping the company private is also a priority for Missoni, Roberto Cavalli and Versace, at least for the time being. “We would like to remain a family brand, educate the new generations and give continuity,” says Vittorio Missoni.
Gianluca Brozzetti, ceo of Roberto Cavalli, says the designer’s family owns 100 percent of the company. “There are only rumors [about a possible sale]. The mission is to grow the company, consolidate and develop its product categories and licenses, keeping it healthy and reinvesting its cash flow in operations on new projects,” Brozzetti says.
Versace ceo Gian Giacomo Ferraris also touts “an organic growth, which must not be finalized to a sale, and maybe even take advantage of the buyer. The family doesn’t want to sell. They want to grow the company on talent, and this is their strategy. We are working on the value of the company. That’s what I’m doing, drilling for oil that is already there, under the surface.”