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MILAN — Contagion.
This story first appeared in the June 15, 2012 issue of WWD. Subscribe Today.
Usually more associated with medical papers, the term is now a recurring one in discussing the European economy — from Greece to Spain and now to Italy. Sandwiched between Spain’s bailout plan, proposed last weekend, and the crisis in Greece, Italy is increasingly under scrutiny, perceived as being at risk of catching the “euro bug.”
Countries are desperate not to be lumped into those described as “problem economies,” even as the cost of borrowing leaped in both Spain and Italy on Thursday. U.K. Chancellor of the Exchequer George Osborne revealed plans Thursday to increase liquidity in the British economy by injecting up to 5 billion pounds, or $7.2 billion, a month into the financial system. There also were reports that European financial ministers are prepared to take action if the Greek elections have a significant impact on the financial markets.
Italy is a major concern, however, given that it is the euro zone’s third-largest economy. The country has seen a long economic slide — one that technocrat Prime Minister Mario Monti is desperately trying to reverse with a regimen of fiscal austerity. One hopeful note for Italy is that its economy is much more export-focused than Spain’s, although executives admitted that firms dependent on the domestic market face major issues of survival.
“The euro situation in Italy is no worse than in other countries that pretend they are in better shape, but our situation is portrayed in a worse manner,” said Tod’s SpA chief Diego Della Valle during the fourth Luxury Summit here, organized by Il Sole 24 Ore daily, on Thursday.
On the sidelines of the conference, Brunello Cucinelli pointed to another issue dogging the euro zone: “When we created the euro, we were aware that we had a new currency, but the social, economic and fiscal balance was not there, and each country has its own culture.”
Cucinelli’s luxury firm successfully went public in April, and the entrepreneur admitted he was concerned investors would fear channeling their money into Italy. But, he said, “Italy is credible, we are credible if we are true to ourselves, we should walk with our heads high and bring back moral and economic dignity to the work of artisans. I am not afraid — the world is fascinated by our products, but they must not be overdistributed.”
His words certainly struck a chord — “Cucinelli Prime Minister” was extensively tweeted during the summit.
Even while fashion industry executives expressed optimism about the country, statistics indicated just what tough times these are for the Italian economy. According to Eurostat, Italy has a gross domestic product of 1.58 trillion euros, or $1.97 trillion at current exchange, and is weighed down by a debt of 1.94 trillion euros, or $2.42 trillion, as reported by Banca d’Italia on Thursday. At the end of 2011, Italy’s debt stood at 1.89 trillion euros, or $2.36 trillion. Eurostat also says 8.4 percent of the country’s population is unemployed, while Istat noted that Italy’s industrial production in April fell 1.9 percent over March.
National papers on Wednesday reported Monti’s alarm and his concern over the fluctuation of international markets at a time when the country has to tackle the consequences of the earthquake that hit the region of Emilia-Romagna last month and its aftershocks. Monti is a strong advocate of strengthening the euro zone in the interest of all members of the region, as he has been tightening fiscal pressure and focused on pension reform, while facing social unrest and ongoing political squabbles.
“Italy is in Purgatory now,” said Stefano Corneliani, senior analyst at Intermonte SIM. “But the induced effects are — it has obliged the government to enforce strong decisions, strong fiscal pressure and tracking of wealth — almost as in a police state, and all this has created a concern in customers, a psychological worry that has caused the wealthy to cut spending by 10 percent and those who have trouble sleeping at night by around 30 percent.”
Corneliani underscored the limited access to credit and said that small and medium-size companies here that are reliant on the domestic market “are on their knees. Those companies that have a sizable export business are safe.”
Mario Boselli, head of Italy’s Chamber of Fashion, said that companies “that export more than 50 percent” of their production are faring well, while those firms that work with unfinished products are challenged, given the limited access to credit.
Conversely, Fabrizio Saccomanni, general director of Banca d’Italia, was reported this week as saying that “lines of credit have opened up again,” while underscoring the stall of the country’s growth over the past 10 years. The market share that Italy has of global exports “went from 3.6 percent in 2002 to 2.7 percent in 2011, while Germany’s did not change, standing at 9 percent,” said Saccomanni, pointing to Italy’s exports as showing less technological content compared with Germany’s as the structure of national production is unbalanced and geared towards traditional goods. “The era of ‘small is good’ is over forever. Small family companies with modest technological and managerial resources do not have a future in global competition. Entrepreneurs must have more ambitious strategies in order to grow in dimension,” said Saccomanni.
Patrizio di Marco, Gucci’s global president and chief executive officer, said the luxury company works with suppliers that are not exclusive to the brand. “This helps them have more access to credit. Our suppliers are partners, and it’s all more efficient,” said di Marco.
He conceded Gucci generally benefits from tourist flows, but stressed the firm continues to invest in the local market. “It’s more difficult, given the external factors and also because the local customer is more sophisticated,” he said.
Salvatore Ferragamo ceo Michele Norsa said that in Europe, travelers, not only tourists, are essential for the relaunch of the economy. “We must open the country to this migrating flux, improve services, food, mobility, trains and visa permits. We have this ability to attract through a joyful attitude and we must convey positive signals of optimism,” said Norsa.
The executive said “uniqueness of product and new product ranges,” are pivotal as the Chinese are more concerned about the value of product rather than its price. “They distinguish materials, fabrics, gold and so on, and this helps companies such as ours that have value in goods produced.…Those that are positioned in an undistinguished range suffer,” explained Norsa. For his part, he said Ferragamo in 2012 continues to see “a still significant growth potential.”
According to Global Blue Italia, the tax-free market in Italy totals 4 billion euros, or $5 billion, and in the first five months of 2012 it showed a 33 percent gain compared with the same period last year, while local shopping slowed down. At the end of 2011, Russian shoppers accounted for 27 percent of tax-free purchases, followed by Chinese (14 percent), and Japanese and Americans (7 percent each). Since 2006, China grew from accounting for 3 percent to becoming the second most important nation for Italy, and Chinese shoppers doubled their purchases in Italy over the past three years. In the January to May period, the number of Asian tourists is the one that grew the most, with Chinese up 80 percent and Japanese up 45 percent.
Tomas Mostany, country manager at Global Blue for Italy, said Russians aim 73 percent of their purchases at clothing, while Chinese shoppers are more into watches and leather goods.
Vittorio Missoni, who heads the family-owned business, said that “stores in important locations fared well thanks to tourists.” He argued that “people are not spending serenely, even those that can, because the atmosphere is depressed.”
Missoni lamented the lack of liquidity in trade, and noted that many encounter difficulties with payments. “Small companies have trouble being financed, it’s a domino effect,” he said. The fashion firm didn’t change prices but worked on creating more of an entry price in the collections. “Attention to price is fundamental. It provides access to a collection, and customers more than ever want the price to be justified,” said Missoni.
Alberto Baldan, ceo of Italy’s department store chain La Rinascente, concurred. “In difficult times, customers expect more value for money,” he remarked.
Baldan said the main issue today “is the limited visibility on the future, the new property taxes that have not been defined yet, the uncertainty on the VAT taxes, the discounts that are announced a few days before they kick off. There is no vision and these factors all impact our strategies and the customers’ choices.”
Della Valle said that if a fiscal advantage were to be introduced, small and medium-size companies “would pick up right away and it would bring back dignity to those companies that deserve it.”
As for his luxury group, he said he felt at ease, that Tod’s “fundamentals are good, our business model has held very well in turbulent moments,” and that expected targets will be met.
Despite the confusion in Europe, Raffaele Jerusalmi, ceo of the Italian Bourse, said the stock exchange remains central for investors: “For the first time, there is a waiting list for the Bourse, with 30 companies in the pipeline for October and we are implementing our internal structure. We must not be afraid, even in a crisis there are opportunities.”