ESCADA’S NEW ‘HOUSE’ KEYS AMBITIOUS GROWTH PLAN
Byline: Katherine Weisman
MUNICH — Turnarounds don’t come easily.
But Escada Group has effectively achieved one, despite a high German mark, expensive production costs and soft international markets. The company now appears to be solidly back on track for sales and profit growth.
To propel Escada forward in what he calls a “hostile climate,” co-founder and chairman Wolfgang Ley is banking on a new strategy: building a “House of Escada” by creating products and grouping them into various divisions of branded apparel, accessories and fragrances. This includes the Escada Sport division, a line of clothes for “free time” in its second complete season for fall 1996, and Escada Development, the Paris-based accessories company in its third season for fall.
This year, the company opened two freestanding House of Escada stores. The first, a franchise, opened in January in Istanbul. The second opening was in mid-February, when the company inaugurated its flagship store in its hometown, Munich.
“We got rid of the gold and the glitz,” said Ley. Each of the three stories and basement level of the Munich shop is devoted to an Escada collection, with Sport in the basement and Couture on the top level. The concept will be used for other freestanding Escada stores worldwide.
Also, a store just opened in Milan, and negotiations for a U.S. House of Escada store are under way. Escada’s U.S. president, Ron Frasch, would not reveal the U.S. location, but he noted that the company plans to fully or partially transform six of its 12 company-owned Escada stores to the new House of Escada concept over the next two years.
“The goal is to make Escada a recognizable brand, like HermAs and Chanel have done,” said board member Massimo Suppancig, responsible for international sales and marketing.
The company isn’t focusing only on its Escada brand, which accounts for roughly half of group sales. A big push is on to support the Laurel bridge line, which has had its share of ups and downs and represented about 13 percent of total turnover in fiscal 1994. The new chief stylist, Stefano Guerriero, previously with Versace and Genny, has assumed the design of the collection for fall and helped develop a new sporty jeans segment within the line. Apriori, a younger, lower-bridge collection from the Schneberger division, has also been spruced up.
Altogether, the group has nine apparel brands, including Kemper, predominantly a coat company, which holds the worldwide license to make and sell the Cerruti 1881 women’s rtw collection, and Blusen Neumann, a German blouse company. The money-losing Nic Janik and Crisca brands were discontinued over the past few years. “These lines needed a lot of support from headquarters, and we couldn’t make the extra investment,” said Suppancig.
But it took tough restructuring for Escada to find its footing again.
It wasn’t long ago that fashion observers were posing serious questions about the apparel group’s viability. The 20-year-old company had its first losses of $74.5 million (108 million marks) in the fiscal year ended Oct. 31, 1992. At the time, rumors abounded in Germany that the company was a takeover target or that it would close its doors. Moreover, the company was forced to sell off its 80 percent stake in the profitable St. John Knits through an initial public offering in 1993, a move which helped the group’s sales base shrink by about $200 million (300 million marks) in fiscal 1993. But the company was able to pay down debt, Ley said.
“They were faced with one of the worst possible scenarios,” observed Jens Schmidt, a consultant with London-based Management Horizons Europe. “The co-founding designer [Margaretha Ley] died in 1993, the market dropped out from under them and foreign currencies weakened in the face of the mark.”
Just over a year later, designer Michael Stolzenburg, the longtime right hand of Margaretha Ley who took over the direction for the top line after her passing, also died.
Schmidt, like others, is predicting that the company can increase its sales and profits steadily, especially if they stick to their new strategy of developing a House of Escada grouping of product categories. But most acknowledge that sales will never return to the spectacular pace of growth Escada experienced in the 1980s, a phenomenon touching many fashion companies, whose business exploded during that period.
Sales for the fiscal year ended Oct. 31, 1995, are up about 6 percent to $827.6 million (1.2 billion marks) compared with the previous year, while Wolfgang Ley expects net profits to double to roughly $20.7 million (30 million marks). A London-based financial analyst, who asked not to be identified, predicts that by fiscal 1997, net profits will reach $32.4 million (47 million marks) on consolidated sales of $896.6 million (1.3 billion marks).
Steps taken to revive the company were not easy. For years, the company had made most of the top Escada Margaretha Ley (EML) collection in high-cost Germany, with a smattering of production coming from Italy. Now, roughly 65 percent of the line is made in Germany, 25 percent in Italy and 10 percent in other markets like Slovenia or in Portugal, where Escada owns a factory. For the Couture collection, much of the embroidery and beading is done in India. The Sport line, Ley said, is made in highly skilled but low-price markets. Industry observers believe that most of the line is made in North African countries. And the company could reduce its German manufacturing even more once relationships with new non-German contractors have solidified.
Ley had been reluctant at first to delocalize, fearing it could compromise the quality of the EML line. “I was afraid our customers worldwide would be jeopardized. Credibility is the most important thing. It’s hard to build, but easy to lose,” Ley explained. But by the end of January, the company was in negotiations to buy a manufacturing facility in Italy.
Downsizing meant even tougher choices, like laying off employees, closing down divisions and closing nonprofitable stores, like those of Laurel. The number of employees jumped at the end of the Eighties, when sales were progressing by as much as 30 percent annually. But once the middle-management levels were properly staffed, the fashion market stagnated. Now, the Escada Group has roughly 4,000 employees, down from 6,000 in fiscal 1992 (which included St. John). Most of the difficulties in overhead came from non-Escada-brand operations, Ley said.
The EML collection, now under the guidance of chief designer Brian Rennie, a Scot, is the machine of the group and the showcase label for the House of Escada strategy. There are roughly 1,000 references for EML and 300 for Couture. Between the two, roughly 780,000 pieces are produced each season.
Despite its quantities of business, an indicator of the brand’s international popularity, EML gets little fashion press, and Ley quickly acknowledged that the company may not have spent enough time courting editors.
“Are they making fashion breakthroughs on the runway? Probably not. But for thousands of women, Escada is fashion,” said Burt Tansky, president and ceo of Neiman Marcus. “The fact that it isn’t part of the fashion flavor of the month is somewhat in the brand’s favor.”
“There is definitely a preponderance of color,” noted Rose Marie Bravo, president of Saks Fifth Avenue. “In some seasons, Escada might be the only thing [at the designer price] that offers colors or prints.” In the U.S., the Escada brand often ranks among the top three best-selling resources in designer-level fashion in stores like Neiman Marcus or Saks Fifth Avenue. This spring, the collection is being supported by a major ad campaign featuring model Paulina Porizkova.
“There is a high demand for Escada Margaretha Ley. The name has grown synonymous with quality and style,” noted Tansky. “It’s one of our highest volume sellers and presents a real opportunity for growth.
“Banking on that kind of notoriety, the Escada group brought out Escada Sport as a test a few seasons ago, and the line is heading into its second complete season for this fall,” Tansky said.
“In Europe, men have nice casual selections, but for women, there are very few casual offerings. The idea with Sport is to create corners [in stores] where the Escada or Armani woman can go and find everything she needs for free time,” explained Suppancig, “In the U.S., there is Gap and Banana Republic,” but few high-quality casual brands. Sport is not just a line extension, he said, but it is a way to tap into new markets.
The Sport collection boasts about 350 models per season, with 50 pieces of knitwear. Currently, Escada is producing 400,000 per season and hopes to boost that number up to one million in two years, Suppancig said.
Also with Escada Sport, the company plans to open freestanding, wholly owned or franchised stores in several international capitals. In the U.S., a wholly owned unit is slated to open on Rodeo Drive in Beverly Hills this fall, across the street from the current Escada boutique, Frasch said.
The other new Escada label is Elements, a line of understated, modern classics that is designed to fill a market niche — claimed already by Gucci, Prada, Jil Sander and others — that the EML collection doesn’t touch, said Suppancig. The line is priced about 10 percent below EML. Fall is Elements’ second season, and it is made up of about 150 pieces manufactured in Italy. Italy was the line’s weakest market for its launch season because of the existing local competition. The line did best in the U.S., where Bravo of Saks indicated that sales have been strong.
“The aim is that the Elements woman will buy Elements and pieces from Escada, the line she didn’t know,” Suppancig said.
Jamie Marshall, director of marketing for Escada USA Inc., explained that with Elements, the company is hoping to get into doors that don’t carry Escada. Marshall specifically cited the upscale multibrand shop Ultimo in Chicago as an example.
“In Elements, the company is using what they do best. The construction of the jackets is impeccable,” said Todd Oldham, design consultant for EML in his fourth season with the company.
Escada Couture has been a real surprise for the group since it was separated out from EML as a small independent grouping two years ago to better service the demand for special occasion wear. EML and Couture designer Brian Rennie said that the best-selling dress for fall retails for about $6,000.
“Our Couture is cheaper than Armani and Valentino. We use many of the same fabric mills, but we can achieve a lower price through higher quantities,” Rennie explained.
Escada branded accessories are now under the umbrella of the Paris-based Escada Development, established by Escada France president Beatrice Bongibault. Since its launch for fall 1995, the collection has been broken down into categories to better target distribution. Distribution of the daisy- and heart-theme pieces, for example, ranges from boutiques to duty free locations. Meanwhile, Japanese buyers liked the line, but wanted a younger, more junior-fashion range, which led to Miss E, a black and red line.
In the U.S. and some European markets, buyers were clamoring for more evening looks. For fall, Bongibault tapped one of France’s best-known handbag designers to create silk satin and passementerie structured bags and clutches.
“We learned a lot in the first season. We needed smaller pieces for the printed daisy or to develop some feminine briefcases for the more career-oriented golden-heart theme,” said Bongibault.
Also in leather goods, the company launched a men’s collection for fall.
Other big news at Development: U.S. director Amy Rosi and Bongibault enlisted New York designer Stephen Dweck to create some high-end fashion jewelry pieces to add to the collection. As with the leather goods, Bongibault said that the jewelry needed to have different categories and price points to be able to penetrate a wide range of stores.
“With Dweck, we want to have some very exclusive pieces to propose to top stores, like a Bergdorf Goodman,” Bongibault explained.
Rosi added that by spring 1997, the Escada Development accessories are likely to be showcased in six shops-in-shops at Saks Fifth Avenue and Neiman Marcus, but negotiations have not been concluded.
Bringing these Escada products under one store roof will help the company communicate its raison d’etre. Management Horizons’ Schmidt makes the comparison to Nike stores, which have helped promote the Nike image.
The Laurel brand has also been going through lots of changes. Interestingly, it sold more pieces in the Eighties than Escada, according to Suppancig, who noted that in the last three years, the brand lost a lot of ground in terms of fashion and volume. The brand has wholesale volume of roughly $83 million (120 million marks), nearly half what it used to generate. Suppancig wants LaurAl to be positioned as a very feminine collection situated at a diffusion price. His volume target is between $172 million and $207 million.
“Laurel is to Chanel or Versace what Max Mara is to Armani,” he explained. “In the U.S., it will be positioned as upper bridge, while in Europe, it’s more lower diffusion.”
As with Escada, the Laurel line was backed by a new ad campaign shot by Miles Aldridge, featuring Christy Turlington. The product will also be supported by a new store concept.
“I think the scheme fits perfectly,” said Laurel’s Guerriero. “Many companies like Calvin Klein or Prada are doing a great job with clean, understated basics, but not every woman wants the spare look.”
Saks’ Bravo confirmed that Laurel is being rolled out to more stores.
“It’s doing very nicely. It offers a niche between designer and bridge,” she said.
As for the other collections in the Escada Group, Suppancig said that the Kemper-produced Cerruti boasts one of the fastest rates of sales growth of all the Group’s collections. “It’s the only line we have on the Armani side of the market, and we are ready to invest more,” he explained.
While it might not seem exciting, the Blusen Neumann line is a bread-and-butter company. It’s a healthy, fairly local business with very high profits, but no synergy at all, noted Suppancig.
Yet despite all the positive changes at the Escada Group, it is not without its critics. Some industry observers said the company’s growth may be held back due to management’s need to concentrate on so many different brands. While the House of Escada strategy is highly praised, some consider that this should be the only priority for the company.
“They don’t seem to have the confidence to go out in the world using just the Escada name,” noted the London financial analyst. “You ask them why they have held onto nonrelated companies, and they say, ‘Well, we have always had them.”
“I just think there are too many labels under one roof,” says Gotthard Artelt, the managing director of Kurt Salmon Associates Europe, based in Dƒsseldorf. “In the long term, the market will choose what it likes and doesn’t like, just as it did with Crisca.”
While Kemper owns the lucrative Cerruti license, the Kemper business is extremely cyclical, with its health dependent on cold winters, in order to sell coats. This is a liability, observers said.
And then there’s the question of licensing. Escada’s roots are in apparel manufacturing, not perfume or accessories development. Some outsiders question management’s decision to run these businesses in-house, especially since upstart investments means that new divisions produce losses for the first few seasons of business.
The Escada perfume business, which broke even last year and should become profitable at the end of this year, is half-owned by Wolfgang Ley and half-owned by the Group. “If they are able to bring Escada back around as a top brand, they should license out the perfume. It’s a very difficult business, and it uses up too much of management’s time,” said Artelt.
As for accessories, some licenses are being examined, like those for eyewear or watches, Suppancig noted.
Perhaps one of Escada’s biggest problems is that consumers have the perception that the brand is expensive.
“But it’s not, compared to designer labels. They have very good value for money, and they could expand their base if they communicated better,” said Schmidt of Management Horizons. But perhaps the new store concept and advertising will combat the problem.
Escada executives are undaunted. The more collections they have, the more they have to offer retailers. And why sell off businesses that, even if unrelated, are turning out cash flow and profits?
“We don’t have a goal, we have a dream,” explained Suppancig, “Let’s see if we can realize it.”