Fashion victims

Italian label Prada’s DM275m (£93m) purchase of German design house Jil Sander this week is the latest stage in the battle for control of the world’s fashion brands. Independent labels are being devoured by the largest players such as LVMH and Pinault-Printemps-Redoute and the industry is adopting some of the aggressive marketing tactics used by packaged goods giants like Procter & Gamble and Unilever. Top designer names from Gucci to Fendi are succumbing to the lure of mass marketing – something they wouldn’t even have dreamt of 20 years ago. Indeed, for many of these top brands, the key to survival and prosperity is raising marketing and advertising budgets and moving the message beyond the pages of glossy fashion magazines and Paris catwalks. Market saturation and the drive to cut the cost of sourcing, manufacturing and distribution has led to unprecedented consolidation. A handful of conglomerates may soon control the majority of the world’s luxury goods brands, but in the process they risk undermining their prestige value. Amid aggressive commercialism, the marketing of luxury goods and premium fashion brands is about to undergo a seachange. One City analyst says: “These companies have already expanded into all the markets they can think of and can’t expose their brands too far or they will become naff. The result is growth through acquisition.” Two French arch-enemies are vying for acquisitions: luxury goods group Louis Vuitton Moë Hennessy (LVMH), led by Bernard Arnault, and retail giant Pinault-Printemps-Redoute (PPR) – headed by Francois Pinault and 42 per cent owned by Artemis. LVMH owns brands such as Louis Vuitton, Krug and Dom Perrignon champagne, Christian Lacroix, Givenchy and Kenzo couture, and Christian Dior and Guerlain fragrances and cosmetics. Meanwhile, PPR’s cache includes the La Redoute mail-order fashion business, Au Primtemps department stores and Sanofi Beauté’s Yves Saint Laurent brand, plus a clutch of Internet, telephone and financial services companies. They have fought a vicious battle over control of Italian fashion house Gucci, which PPR, for the time-being at least, has won. By the mid-Eighties, Gucci, founded in 1923, was floundering, and in 1993 investment bank Investcorp took full control of the company. Then, in 1994, Domenico de Sole became president, turning it into a public limited company a year later. In 1997, Gucci regained creative control and, with creative director Tom Ford, de Sole turned its fortunes around. It reported net income up 49 per cent to $60.2m (£37.9m) in the first quarter of this year. Investment bank Warburg Dillon Read on Wall Street expects Gucci’s new market penetration to boost top line growth by ten to 12 per cent a year, and recommends it as a “strong buy”. “Gucci’s commercial management makes it appear more like Procter & Gamble than a luxury fashion brand,” says one City analyst. LVMH began accumulating Gucci shares earlier this year. In response, Gucci issued new shares to dilute LVMH’s stake from 34 per cent to 26 per cent. LVMH then sued in a Dutch court to block the move. In March, PPR rode to Gucci’s rescue, paying $2.9bn for 42 per cent of the company after new shares were issued to dilute LVMH’s stake. LVMH is continuing with legal proceedings. PPR intends to build a new luxury goods empire using Gucci, which is embarking on a shopping spree with the $3bn from PPR’s purse. It is in talks to buy Italian luxury goods group Fendi – also linked with Italian label Bulgari. PPR bought YSL at the same time it was negotiating for Gucci. Gucci is to buy the brand for about $1bn and revamp it to form the basis of a new empire. “YSL is a huge brand, we think it has a lot of potential. Gucci needs to get it under control and start producing good quality products,” says an analyst in the City. But the family-run Italian fashion house Prada is not prepared to consider takeover bids. It is taking on the luxury goods giants at their own game. Driven by the husband and wife team of managing director Patrizio Bertelli and designer Miuccia Prada, the company is challenging the conglomerates by building its own multi-brand empire through acquisitions and investment. It owns the Prada brand and Miu Miu diffusion range and made $140m by buying a 9.5 per cent in Gucci in January and selling it to LVMH. In March last year it acquired 51 per cent of Helmut Lang. It also has a holding in the eyewear company De Rigo. Hello! magazine ad sales and development director Jon Humphrey highlights an advantage Prada may have: “Family run companies can make decisions quicker. They have a tactical freedom some of the big companies do not.” The Italian companies’ acquisition trail has led to the UK, where Prada has taken a 8.5 per cent stake in quintessential English shoemaker Church & Co. Gucci is rumoured to be interested in buying Burberry from Great Universal Stores (GUS). One industry analyst says Burberry chief executive Rose Marie Bravo, ex-president of the New York Saks Fifth Avenue fashion store, has held talks with de Sole, but only about how to market a luxury brand. “Burberry is the UK’s answer to de Sole. Bravo is pursuing the correct strategy,” says the analyst, who believes Lord Wolfson [the GUS chairman] will keep Burberry while its value increases over the next couple of years, before selling or floating it. LVMH, PPR, Gucci and Prada each intend to create multi-brand fashion and luxury goods empires by drawing on their worldwide sourcing and distribution networks, robust finances and advertising and brand image know-how. For independent brands, the future looks bleak. Humphrey says brands that are not acquired by the conglomerates face a stark choice: “adapt or die.” He says: “There is room for small, focused companies which perform well. The difficulty is for medium-sized organisations without international distribution.” He cites the case of Yardley: “It was medium-sized, had patchy distribution and got snapped up by Wella. This is the position many brands could find themselves in.” One City analyst says: “A lot of smaller companies are run by individual designers with no idea about business” – an accusation that has been levelled at Jil Sander. He gives the example of fash-ion name Romeo Gigli has been bought by Ittierre “for next to nothing”, or about e25m (£16.4m). “Gigli had no business sense, he just made nice clothes, and is happy to sell out. You just have to look at Gucci five or six years ago to see what state companies can get into.” © BT Alex Brown analyst John Richards says consolidation is not necessarily a bad thing for smaller companies, provided the brands continue to be managed effectively. Richards comments: “Being part of a group capable of global expansion can help to develop and market a brand effectively.” But he says it is essential that the uniqueness of individual brands is maintained. “It is the eternal issue: brands want to increase sales, but they also want to maintain their exclusivity.” However, rabid competitiveness means it is difficult to differentiate brands within a portfolio. Humphrey says: “You could argue LVMH’s Givenchy, Guerlain and Dior perfumes are tripping over each other in the way they are marketed.” A City analyst says: “Consumers don’t know about ownership, so its doesn’t necessarily damage the brand in their eyes.” He says groups are more worried about maintaining a brand’s reputation for hand-made quality, service and innovation, which is what customers are buying in to. Hermés bought a 35 per cent stake in Jean-Paul Gaultier earlier this summer, raising £15m to fund a network of shops called Galleries Gaultier. Observers say the company will lend Gaultier its commercial management expertise and diversify products to enable it to grow. “It’s a very sound investment,” says one. Undiluted brands which have concentrated on one area – like Jil Sander has with clothing – are being targeted by predators hoping to extend the brand into accessories, watches, perfume, eyewear and shoes. “If a brand extension offers a similar quality to the host, it can reinforce the brand. The difficulty comes when the extension is not perceived to be of the same quality,” says Humphrey. The key to managing the consolidated groups is marketing. One industry analyst says: “It is a more competitive market, and if you invest huge amounts in a brand you have to exploit that investment. Marketing is a very serious exercise in this industry, in a way it wasn’t ten or 15 years ago.” Humphrey agrees: “The quality of marketing is much slicker than ten years ago.” He says companies are changing their approach to marketing in the luxury goods sector, where people pay more attention to the brand’s image than the product. An industry insider says: “Companies are becoming more professional in their approach to marketing. There now tends to be fewer fluffy public relations people working their way up to marketing positions, and more people from blue-chip, marketing backgrounds.” Consolidation will not only have an affect on the brands being bought but also existing brands within a group’s portfolio. Humphrey says: “We may see fewer product launches and more attention being paid to existing brands – not enough is spent on maintaining them.” In the future there will be more extensive, but focused, product ranges that adhere to strict brand image guidelines being marketing aggressively and uniformly the world over by just a handful of companies. If LVMH, PPR, Gucci and Prada can maintain consumers’ affection for the exclusivity of the brands in their portfolio, luxury goods could become the marketing success story usually reserved for baked beans and fizzy drinks. Trends among UK fashion designers The UK’s few remaining luxury brands are being targeted by European conglomerates, the country’s top fashion designers are heading up French fashion houses and London Fashion Week routinely fails to attract serious buyers. So can the UK maintain a place in the fashion and luxury world? Burberry Could it turn out to be the UK’s answer to Gucci? In 1997, Great Universal Stores chairman Lord Wolfson appointed Rose Marie Bravo – ex-president of New York store Saks Fifth Avenue – as chief executive of the classic English clothing label. Analysts have confidence in Bravo’s strategy to turn the 143-year-old brand around: new management, merchandise and design teams, and the closure of three UK factories and lose of 400 jobs. But Gucci is circling and Wolfson may float the division. Mulberry The ailing Somerset-based luxury accessory company reported an increased first half pre-tax loss of £1.8m and an 11 per cent sales downturn to £27.4m. Mulberry has signed licensing partnerships with Toray in Japan and Kravet in the US. John Galliano at Dior Galliano led the British takeover of French fashion houses with his 1995 appointment to the LVMH-owned house of Givenchy. But his 1997 elevation to design director at LVMH’s other couture house, Dior, proved the eccentric Englishman could lead the most elegant label in France. Alexander McQueen at Givenchy Scruffy enfant-terrible McQueen replaced Galliano at Givenchy. He revels in controversy and showed his latest fantastic creations on fibreglass mannequins instead of models. Givenchy now has the credibility and cutting edge required to propel the brand into the next millennium. Stella McCartney at Chloé Chloé was a forgotten brand until it hired the daughter of a former Beatle. Her appointment boosted both its image and spin-off product sales. McCartney has brought Chloé up to date, although her designs have been accused of being less than artful.


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