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Tailoring Marzotto’s Future in the Luxury Arena

MILAN — Best known for its suit fabrics and men’s wear, Marzotto transformed itself into a luxury player when it bought Valentino earlier this year. The purchase was merely the latest step in Marzotto’s increasing drive into fashion...

MILAN — Best known for its suit fabrics and men’s wear, Marzotto transformed itself into a luxury player when it bought Valentino earlier this year. The purchase was merely the latest step in Marzotto’s increasing drive into fashion and away from fabrics.

Marzotto, nestled in Italy’s northeastern Veneto region, is decreasing its dependence on its money-losing textile business and streamlining its structure to focus on its three best-known brands: Hugo Boss, Valentino and Marlboro Classics, a Philip Morris license for a rugged sportswear collection.

This part of the strategy differs from Marzotto’s past approach of pinning its fashion hopes on a mix of brands little-known outside Italy, such as Borgofiori and Lebole. Until the Valentino purchase, Hugo Boss was the sole Marzotto brand with real international name recognition.

Once a company focused on vertical production from the wool thread to the tailored suit, Marzotto is fast-forwarding to fashion, chief executive officer Antonio Favrin said in an interview.

“We have to focus more attention to the product and have the ability to anticipate the trends in the market,” said Favrin, sporting a Yves Saint Laurent-monogrammed shirt. “A good businessman should go against the grain and do what the others aren’t doing. A good businessman doesn’t follow the herd. He leads it.”

Marzotto is also bringing its corporate structure up-to-date. It plans to separate its textile and clothing operations into various business units, each with an independent manager at the helm who is held responsible for its financial performance. While this pragmatic approach may not seem a novelty in the U.S., it is an improvement in Italy, where byzantine corporate structures abound.

“Each manager is held responsible for making his or her business unit competitive in its sector and create value for shareholders in the medium term, not in the short term,” Favrin said. “It must be value sustainable in the medium term. This is really important.”

Just 10 years ago, Marzotto was a different company, with about half its business concentrated in textiles. In the economic boom of postwar Italy, many a man dreamed of owning a custom-made suit bearing a Marzotto tag on the fabric.

But as time wore on, the demand for those fabrics waned and competition heated up, especially from developing countries like China. The company switched gears to concentrate on clothing, developing its own brands in-house and signing licensing deals to produce clothes for Missoni’s second line, M for Missoni, and Gianfranco Ferré’s various diffusion lines.

As reported, IT Holding, which took control of Ferré in 2000, has said it plans to terminate the licensing deals with Marzotto for Ferré’s GFF, Studio and Forma lines as it goes through its own process of restructuring Ferré. Fall-winter 2003 is the last season for which Marzotto will produce those lines.

The push toward fashion has changed Marzotto’s make up considerably. In 1991, fashion sales accounted for 52 percent of Marzotto’s revenue and textile contributed about 48 percent. In 2001, even before the Valentino acquisition, fashion accounted for 80 percent of Marzotto’s revenue and 20 percent came from textiles.

Undoubtedly, Marzotto has had a tough year. The textile operations have performed poorly, weighing on Marzotto’s financial figures. Most recently, third-quarter net profit dipped 46.8 percent to $25 million from $46.2 million, while sales dropped 2.4 percent to $562.7 million from $576.7. (Dollar figures have been converted from the euro at current exchange rates.)

Meanwhile, Hugo Boss, once considered the power engine of Marzotto, has had its own troubles. As reported, shareholders in the German fashion company have filed a class-action lawsuit against it over inventory discrepancies of $10.8 million in its U.S. operation and the highly publicized departures of former Boss USA ceo Marty Staff and chief financial officer Vincent Ottomanelli.

But Favrin said Marzotto has passed the worst of it. The ongoing restructuring of the textile division, which has included focusing on higher-end fabrics and transferring production to lower-cost countries like Lithuania and Tunisia, will start to bear fruit next year, he stressed.

Although he denied that Marzotto plans to exit the textile business altogether, as some analysts have suggested, Favrin said the company will consider selling some assets or form alliances with partners if the right offer comes along.

“We asked ourselves, ‘Why do we have to start with the wool and go through to the final product?’” he said. “We will position ourselves in the parts of the production process where we have the know-how…the edge over our competitors,” Favrin said, adding that Marzotto will concentrate on innovative fashion-oriented fabrics and high-quality yarns.

Favrin was upbeat on Hugo Boss, especially on the potential for the Hugo Boss woman’s line. The venture has not lived up to the great expectations built up at its launch in spring-summer 2001, plagued by what some say are unjustified price points, a lack of design identity and a revolving door of management.

“We are convinced that this is an enormous opportunity for Hugo Boss,” he said, reiterating that the line should break even in 2003 and be profitable in 2004.

“There are always problems with start-ups. That’s normal. The new collection is coming out and it is younger and closer to the aggressive spirit of the [men’s] Boss line. It’s more European and more complete,” he said.

Undoubtedly one of Marzotto’s other priorities is attracting a broader spectrum of customers to Valentino, by forming a series of licensing deals with partners to develop accessories and roll out a jeans line to court younger customers away from the likes of Emporio Armani and Dolce & Gabbana. The goal is to boost sales volume and get the brand profitable in 2004 — a target some analysts consider a tad ambitious.

“The world of young people is a vast one, one that is very consumer oriented,” Favrin said. He shrugged off the theory that a series of lower-priced items could risk tarnishing the exclusive nature of the Valentino brand. “Approaching the youth market doesn’t mean necessarily giving them a cheaper product, but it’s a matter of finding the right product.”

Favrin declined to comment on what manufacturer will win the Valentino jeans license, saying only that a deal should be struck soon. But sources close to the company say it will most likely be Italian fashion group SINV Holding, the licensee for the labels Voyage Passion, See by Chloé, JPG Jean Paul Gaultier Jeans, Krizia Jeans and Gabriele Strehle Jeans.

Analysts agreed that a younger line could be a good way to boost sales, but warned it could be tricky to implement.

“We need to see if they can implement this strategy without cheapening the brand,” said Daniele Scarinci, an analyst at London-based Actinvest.

Paola Durante, an analyst at Merrill Lynch, said a young line could be successful, but Marzotto needs to focus on the overall Valentino image first.

“Valentino is a strong brand, but it needs to find some freshness,” Durante said. “If Armani weren’t Armani, there wouldn’t be an Emporio.”

Marzotto is also pushing Valentino on accessories. Last month, Valentino unveiled a made-to-order crocodile hobo bag with suede fringe and a snake-shaped handle.

“We really believe in the world of accessories,” Favrin said, noting a fresh, young crop of designers for Valentino. “We have a very strong team of people.”

Meanwhile, there continues to be market speculation that Marzotto’s shareholding structure is destabilizing and there are increasing differences of opinion between the Marzotto family members.

Last month, the members of the Marzotto family divided themselves when Pietro Marzotto, the company’s biggest shareholder with about 20 percent, and some of his family allies voted against a plan to reorganize the family’s assets.

Under the terms of this now-scrapped plan, Marzotto family-controlled company Industrie Zignago Santa Margherita would have launched an offer for all outstanding shares of Marzotto SpA. This operation was seen as a defensive attempt by the family to tighten its grip on the company out of fear it could become a takeover target.

But Italian fund managers opposed the plan on the grounds that it failed to deliver any industrial logic and was murky on detail. At a Zignago shareholders’ meeting, Pietro Marzotto voted against the proposal on the premise that the market had rejected it.

But one person close to the company said he wouldn’t be surprised to see Pietro Marzotto eventually sell his stake.

Favrin downplayed this conflict and said that this was simply a case of the Marzotto family members choosing to interpret market sentiment differently.

“There are different sensibilities,” Favrin said, adding that he doesn’t foresee changes in the shareholding structure of the company.