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Optimistic Italians: Brands Bullish in ’08, U.S. Economy Aside

The growth of the U.S. economy may be grinding to a halt and dragging Europe down with it, but Italian fashion houses are still upbeat about business in 2008.

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MILAN — The growth of the U.S. economy may be grinding to a halt and dragging Europe down with it, but Italian fashion houses are still upbeat about business in 2008.

As fashion week here kicks into high gear, senior executives at leading Italian brands told WWD that, despite the market jitters, they see few signs of a downturn and have made a positive start to the year. And they remain bullish about the U.S., especially within their own stores.

“We’re very optimistic about things,” said Giorgio Armani commercial and marketing director John Hooks, adding 2008 year-to-date sales were up “quite a bit” last year. He did not disclose figures.

Executives argued true luxury consumers are more resistant to economic volatility and thus the real challenge facing fashion brands is how to balance access and exclusivity in a market that is increasingly democratized.

“The consumer is very demanding and at the same time extremely sensitive and receptive to new and different products,” Cristiana Ruella, managing director of Dolce & Gabbana, said, adding that pre-fall sales had been “very positive.”

“The exclusivity and uniqueness of the fashion product becomes a distinctive trait, which gratifies the client, making them special,” Ruella said.

Prada chief executive Patrizio Bertelli agreed, saying this spring’s fairy-print bag was the next “icon product.” All but one model of the bag sold out in Milan in the first delivery.

According to HSBC, luxury growth in the U.S. is forecast to slow to 7 percent at constant exchange compared with 15 percent in 2007 as rising energy prices, inflation and the subprime mortgage crisis dent consumer spending.

Executives of Italian fashion houses did not disclose forecasts for the year, but said they expected sales to increase in the U.S. — notwithstanding the super euro, which has appreciated 11.5 percent against the dollar over the last 12 months. And to better target customers with deeper pockets, they were committed to ongoing store expansion in America.

“[The U.S.] is still important and still has enormous potential,” Ferragamo ceo Michele Norsa said. “It’s clear that every market depends on the level of penetration a brand has.”

That said, executives acknowledged department and specialty store retailers needed some convincing, after being spooked by a disappointing Christmas.

“[Department stores] are obviously very, very nervous,” Hooks said, adding this would probably impact wholesale orders into the next quarter. “But across the board, also in Japan, our direct retail experience belies the timidity of the wholesale market.”

Despite buyer caution and the fact that the runway collection represents only 20 to 30 percent of revenues a season for fashion houses, with the vast majority coming from pre-collections, executives are still gearing up for a strong buyer turnout at Milan Fashion Week even as they continue to see the runway as an image builder more than a revenue generator.

“The first objective of the catwalk is that of communicating the spirit of the collection and of summing up its key elements and its character,” Bertelli said. “Therefore, the percentage of sales of items presented in the show is not a parameter to take into consideration for judging its success.”

Where luxury brands are likely to measure success this year, however, are emerging markets, which are fast becoming core drivers of revenue.

“Emerging markets are a fantastic opportunity for everybody and beginning to give us some very good results now after years of laying foundations,” Hooks said.

In line with analysts’ forecasts, executives said markets like China, Eastern Europe, the Middle East and South America would fuel growth this year, thereby picking up the slack from possible slowdowns elsewhere. To meet demand, Italian fashion brands will continue to roll out a bevy of stores, from Macau to Mexico City.

“[In China] there is an infrastructure boom that clearly facilitates luxury growth because the realization of malls and new residential neighborhoods is part of the packet,” Norsa said.

Ruella said Asia was Dolce & Gabbana’s most dynamic market with sales growth of 30 percent, followed by Russia and Eastern Europe with 20 percent. She added that group sales would likely grow a minimum of 20 percent for the fiscal year 2008.

It was a similar picture for Gucci, where ceo Mark Lee said Asia-Pacific, excluding Japan, accounted for almost a quarter of 2007 company revenues.

“Russia and the Middle East also continue to grow strongly and we are opening [stores in] Macau, Prague and Budapest this year as part of further expansion into Greater China and a push eastward in Europe,” Lee said.

India also was on the radar, with Giorgio Armani among those about to break into the market, with two stores slated to open in New Delhi this spring.

“It’s the start of Armani in India,” Hooks said.

Financing the gold rush in emerging markets could prompt Prada and Ferragamo to push ahead with their initial public offerings this year, despite slumping stock markets worldwide. On average, fashion companies listed in Milan have lost a third of their value in the last three months.

Both Prada and Ferragamo have stayed mum on proceedings but are expected to make a decision after the end of March, following full-year reporting by banks. Bertelli declined to comment on Prada’s listing, which he has terminated three times in the last seven years due to unfavorable market conditions.

Ferragamo’s Norsa was a little more forthcoming, “We’re proceeding with the task of preparing the listing.”

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