DIESEL REVS ITS RETAIL ENGINE

Byline: Scott Malone

NEW YORK — There’s no fuel shortage for Diesel.
The Veneto, Italy-based high-end jeans maker is forging ahead with aggressive retail growth plans, even though its U.S. sales have taken a hit in the aftermath of the Sept. 11 terrorist attacks.
Renzo Rosso, the company’s owner, told WWD that the firm is on track to rack up $502 million in sales for the year ending Dec. 31 and expects to complete the year with a net margin of 4.8 percent. That would bring its profits for the year to about $25.1 million.
That’s a tidy jump from the earnings of $17.5 million, on sales of $367 million recorded in 2000.
What to do with the money is not a big question for Rosso — build the company’s retail presence.
In an interview Tuesday morning at the company’s recently opened Diesel Denim Gallery in SoHo — its second new store in New York in the last four months — Rosso said the firm plans to open another 100 company-owned stores around the world by 2005, bringing its total to about 160 units. There are also about 75 franchised Diesel stores around the world, mostly in countries with legal barriers to foreign-owned businesses, such as the United Arab Emirates.
One reason for that goal is marketing.
“Our stores are our window on the world,” said Rosso. “With our retail stores, we can really show who we are and what we can do with our product.”
That is, sell really expensive jeans — Diesel’s retail price points run from $99 to $300 in the U.S.
“Normally, a lot of retailers want to buy the simple stuff from us,” he said. “We show them with our stores that sometimes the consumer wants something special. In our stores, we sell our most expensive items. It shows that people don’t only want the first price, that they’ll take the middle and high-prices.”
The average price paid for a pair of jeans in Diesel’s company-owned stores is $139, Rosso said. Beyond showing off its brand, though, Rosso aims to have a tighter control of his own financial destiny. He said, “We’d like to develop our business so that our sales were 50-50 retail to wholesale.”
The company is close to that goal in the U.S., where it presently operates 16 stores, which bring in 45 percent of its revenues, and also sells to about 315 wholesale doors, which account for 55 percent of revenue.
Worldwide, though, the retail-to-wholesale revenue ratio is about 25 percent to 75 percent. Still, the company has plans to substantially build its retail presence in the U.S.
Next year, Rosso said, the company is set to open at least six, and possibly eight, more stores — in target markets of Philadelphia, Seattle, Detroit, Austin, Tex., San Jose, Calif., and Short Hills, N.J.
Rosso said the company’s Union Square store here has performed much better than he initially expected, which has helped to offset a decline in overall U.S. sales over the past month-and-a-half.
“Since Sept. 11, we have in general lost about 9 percent of our retail sales” in the U.S., he said. “But Union Square is running 70 percent ahead of projections, so in the end, we’re coming out even.”
To meet demand at the 11,000-square-foot behemoth, Diesel has been rerouting goods destined for other stores. Rosso said that during a recent visit to the store, the unit’s manager asked him to consider keeping the unit open until midnight on Friday and Saturday, instead of 10 p.m., to attract the hordes of teens and twentysomethings in the area around 14th Street for movies and bars.
Still, Rosso acknowledged that the post-Sept. 11 retail slowdown has hurt the company in the U.S. According to sources, Diesel lowered its U.S. sales growth targets for the year to 15 percent from 20 percent, which would bring its total volume here to $91 million.
Rosso noted that Diesel has closed the books on sales of fall-winter 2001-2002 merchandise, has essentially finished showing spring-summer 2002 and is now preparing to sell fall 2002 goods. That, he said, means that the firm’s sales and earnings projections for the current year will likely match the actual results that can only be known in January.
Next year, the company expects worldwide sales to grow another 20 percent, he said.
While the cash registers have been ringing constantly at the Union Square location, things down at the SoHo store on Greene Street have been more subdued. Rosso said that location was intended to be more of a showpiece than a high-volume store.
“Doing jeans, for us, is like producing art,” he said. “That is the concept of the denim gallery.”
The store is sparsely merchandised, with some jeans hanging like paintings high on the walls and a small assortment of sportswear and accessories. Altogether, about 100 items were out on the 2,000-square-foot sales floor shortly after its opening a week ago.
Rosso intends to use the store as a platform to try to sell styles that might appeal to only a small number of true jeans enthusiasts. He said the company plans to ship runs of about 100 pieces on a given style to the stores to see how well consumers respond.
“The most exciting thing is finding out who will buy them,” he said.
While the Denim Gallery’s assortment is small, it offers high-end service. In addition to free tailoring, the store stamps each pair of jeans purchased there with a mark entitling the owner to free laundry services for those jeans in the store. Rosso said the intention is to alleviate the worry that an expensive pair of pants might lose the special finish in the washer or shrink in the dryer.
Rosso said he doesn’t see Diesel’s retail rollout as a threat to its wholesale customers.
“Our stores are also good for our department stores,” he said. “It builds our image in the world.”
Kal Ruttenstein, senior vice president for fashion direction at Bloomingdale’s tends to agree. His chain’s New York flagship for the past five years has been catty-corner to Diesel’s Lexington Avenue store, with no adverse effects, he said.
“It hasn’t hurt us, our business is good with Diesel at this point,” said Ruttenstein, who cited the brand’s basic jeans, whiskered corduroys, narrow-cut styles and a green-washed denim as being current strong performers.
Similarly, Sam Avraham, owner of The Atrium in Greenwich Village, a little over a mile from Diesel’s 14th Street location, said he’s seen no ill effects from the new stores.
“In the beginning, I didn’t know how to take it and then I was looking at the numbers since they opened up on Union Square and we’re up,” he said. “They’re definitely helping the brand image.”
He said Atrium’s sales of Diesel jeans have been slowed by the slew of high-end entrants into the jeans market, during this time of strong consumer demand for premium denim.
“They’re doing better than ever,” he said of Diesel. “Women’s is a little bit softer than men’s this year because in women’s there have been so many little denim lines coming out from the West Coast that the business has been divided.”
Still, he said Diesel’s design strengths continue to draw in consumers.
“The thing that makes them really unique is the wash,” he said. “They have a good fit and amazing washes, a totally new concept of washes.”
While Rosso believes department stores shouldn’t view single-brand retailers as a threat, he said there are several things the big chains can do to improve their business.
One strategy he’s not fond of is the heavy reliance on markdowns. Diesel doesn’t mark down merchandise at its own stores, he said, and discourages its wholesale customers from doing so.
“It’s so stupid to go down in price 20 percent or 30 percent,” he said. “What are you going to be feeling if today you go to the store and buy something and come back tomorrow and it’s 30 percent off?”
Chain stores, he contended, should concentrate on providing shoppers with a more entertaining experience. He suggested that, in addition to apparel, major U.S. retailers should expand their merchandise to include things like toys and offer restaurants to encourage shoppers to spend more time — changes that would in some ways make department stores look more like they did 20 years ago.
“Department stores have to create a very nice environment,” he said. “The environment is the way to bring people in. They need to create a place for a family to spend a couple of hours.”
He contended that overstuffing racks and micromanaging floor space only detracts from the shopping experience.
“You need to have room to show things. You can’t just try to manage everything down to the square meter and cram in as much stuff as you can,” he said. “You need to have people in the stores that will talk with customers, not just ring things up like in a supermarket. Shopping today is different. It’s no longer about what you need. It’s about what you want.”
Rosso said he’d recently stumbled across a statistic that illustrated the effects of staid merchandising in the U.S.
“Normally in the U.S., 69 percent of people, when they go into a store, know what they want to buy, what item, what brand,” he said. “It’s different in Europe, where only 20 percent of people know that.”
He said he also believed that statistic is evidence of a backlash against aggressive advertising in Europe and suggested that similar attitudes will find their way to the U.S.
“It’s not enough today to spend a million dollars on advertising and tell the consumer what she wants to buy,” he continued. “Consumers today don’t want to be told what they want. They want to choose.”
He said that marketers need to back away from the approach he described as “being violent with advertising.”
“This is all going to change,” he added. “I realized that when I started opening retail stores in the U.S.”
For the time being, Diesel’s advertising, which has been brazenly controversial in the past, is going to change, too, Rosso noted. Most recently, the company dropped the “Save Yourself” tag line from its fall campaign, replacing it with the phrase “Stay Young.”
For spring, Rosso added, the company is trying to avoid creating any kind of controversy.
“The next campaign will have much more happiness, be more positive,” he said. “Our advertising is always ironic.”
Also having to do with keeping shopping interesting, Rosso said he wants to insure that, as Diesel rolls out more stores, each unit remains distinctive.
“I want to have a different store in every town, with different merchandise,” he said. “It’s very easy to roll out one store everywhere, but to do a different store in every town is very difficult, as my manager’s keep telling me.”
While it is challenging to design each store to be distinctive and to keep the merchandise assortments different, Rosso said he believes it will pay off in traffic.
“I want the people to like visiting our stores because they’re all different environments,” he said. “Otherwise, if you live in New York, why do you need to visit our stores in Rome or Paris if they’re the same?”
While retail growth often seems a clear way to build revenue and boost brand recognition, it is expensive and logistically challenging. Many sources attribute Guess Inc.’s recent roller-coaster financial performance, in which it entered 2000 with earnings booming only to overheat and end the year with results declining, to its aggressive retail expansion last year.
Undaunted, Rosso said he believes his current growth plans — for 30 more stores worldwide next year — are reasonable.
“We have a possibility to do even more than we’re doing right now,” he said. “Right now, we can support this.”
Rosso said the expansion will be largely self-financed and that he has no interest in selling shares in the company to the public to raise capital for expansion. He said Diesel has no debt, though this summer the company worked out a six-year, $77 million revolving credit line with Italian bank Credito Italiano to help it build stores and make acquisitions.
“I don’t want the company to be very big. I just want the Diesel brand to be cool,” he said. “I want to open as many stores as is right.”
While Diesel has become a well-known name in fashion circles since Rosso and former partner Adriano Goldschmied founded the company in 1978, its volume is small compared with the giants of the jeans business. Five years into its sales slump, Levi Strauss & Co.’s volume for the first nine months of 2001 still came in at $3.02 billion — last year, Levi’s brand sales represented 75 percent of total company revenue. VF Corp.’s flagship jeans brands, Wrangler and Lee, are estimated to have respective volumes of $1.5 billion and $950 million.
Rosso acknowledges that there is a limit to how big Diesel could become and still carry its trendy, outsider image. However, he doesn’t think the company is close to that limit, if it expands its presence geographically.
“We have a lot of countries where we can be bigger than we are now,” he said. “Certainly in the U.S., maybe in the Far East, in Japan.”
The company is in negotiations to form a joint venture in Japan with its current distributor there.
But, he added, “I don’t want to increase apparel sales volume in Italy, Holland, Denmark and Greece. There comes a point when you’re no longer exclusive.”
The company does see growth opportunity in those nations in licensed product categories, including footwear, watches, bags, sunglasses and pens.
Even as the company builds more stores in the U.S. — by 2005 it wants to have 40 company-owned stores here — it is no longer looking for additional wholesale distribution here, he added. Another growth area is home furnishings, which Rosso said the company hopes to produce in-house rather than license out.
“When you start working for the numbers,” he said, “you lose control of who you are.”
The 46-year-old executive sees many other growth opportunities for his company, though, particularly at Staff International, a $27.6 million ready-to-wear maker Diesel acquired last year. That operation produces the New York Industrie, Martin Margiela and Vivienne Westwood lines, as well as Diesel Style Lab sub-brand.
Rosso said he’s been spending more than half his working time lately on New York Industrie, which is primarily a suit business.
“I want to see if I am able to develop something new,” he said, describing the product as “suits for people who need to wear suits,” but wouldn’t necessarily choose to do so.
“Armani went from formal into suits,” Rosso said. “I want to see if I can go from comfort.”
Rosso acknowledged that his company also recently held acquisition talks with the Irvine, Calif.-based surfwear and skatewear maker Stussy.
“I was very interested in Stussy because it is a very close fit with 55DSL and was an opportunity for my son [Andrea Rosso], who loves America, to work in the U.S.,” he said. However, the two companies were unable to reach a deal.
Andrea Rosso, who is now based in the U.S., heads up the 55DSL line, which also produces activewear inspired by skateboarding and snowboarding.
While Rosso hinted that the company may make another acquisition in the near future, he said that Diesel SpA has no plans to go on a buying binge.
“I don’t want to buy any more brands before we see how this [the acquisition of Staff] develops,” he said. “The brands that I have are areas I can give my attention to. But to buy a brand that is not a good fit is not good for the brand or the buyer.”