Slimming all therage as belts tighten

For years, equity analystsurged Johann Rupert tospin off tobacco andturn Richemont, the

company he chairs and controls,into a “pure play” luxury goodsgroup. In 2008, the independent-ly-minded Mr Rupert finallytook heed and returned Richem-ont’s stake in British AmericanTobacco to shareholders, leav-ing his group focused on Cartierjewellery, Montblanc pens andmuch else.Today, some of the same pun-

dits are regretting the loss ofthose high and stable BAT divi-dends, as the world’s luxurygoods industry struggles withits biggest challenges in dec-ades. Demand has tumbled vir-tually across the globe with noclear sign of recovery. Manufac-turers from LVMH Möet Hen-nessy Louis Vuitton, the world’sbiggest luxury goods group, toItaly’s Bulgari, find themselvessaddled with stubbornly highcosts, leaving little room formanoeuvre. Even beauty hasproved vulnerable, contrary tothe common claim, as figuresfor L’Oréal and others show.On top of the market prob-

lems, the sector faces tough sec-ular change. Globalisation hasput a premium on size – butsheer mass risks diluting theexclusivity that is luxury

groups’ key feature. The grimeconomic backdrop has alsocome just as some companies,notably in leather goods andfashion, face anxieties aboutethics and environmentalism.Advocates of sustainability havetargeted groups using rare spe-cies and skins; parfumiers haveto cater to growing interest inall things organic.Ever fickle, luxury goods have

turned near impossible to pre-dict – as the irony of Richem-ont’s restructuring demon-strates. So hard has it become toforecast the market that manytop manufacturers have virtu-ally given up. “Visibility is non-existent” says Norbert Platt,Richemont’s chief executive.The unpropitious circum-

stances have been reflected ingrim results. Bulgari hasincurred its first quarterly lossin 10 years. Burberry, the UKfashion brand familiar for itsdistinctive plaid, last monthreported its first full year loss.Richemont’s sales in April, the

first month of its new financialyear, were down 19 per cent. Tif-fany’s first-quarter sales andprofits tumbled as expected.And last month, Christian Lac-roix, one of the biggest names inFrench fashion, filed for protec-tion from creditors.With the scope for cost-cutting

limited, brands have turned to“cost containment”. Hiring hasstopped, temporary labour con-tracts have been suspended andpay sometimes frozen. Store net-works, particularly in thestricken US, have been pruned.Richemont is closing 62 out-

lets, mainly in the US, whileBurberry has taken heavycharges on the value of its Span-ish stores. And everyone is look-ing to protect cash flow byreducing inventories andsqueezing suppliers.In an image-driven business,

only marketing and advertisinghave escaped relativelyunharmed, as manufacturersfear tarnishing their brands.Reducing share of voice risks

inflicting permanent damage inan industry where customerperceptions are vital. Manufac-turing has also been protected –as far as possible – with fashionand watchmaking brands espe-cially aware of the difficulties ofreplacing highly-trained seam-stresses or watchmakers whenthe upturn comes.How severely companies have

reacted has depended on marketfactors and on owners’ percep-tions of the crisis, in an indus-try still dominated by individu-als.Richemont’s Mr Rupert has

been among the hawks, warningof the sharpest downturn in 20years. Francesco Trapani, chiefexecutive of Bulgari, by con-trast, said last month his grouphad registered a “clear sign ofimprovement” in April, both atits directly-operated stores andeven in the tougher third-partydistribution channel. Burberry’sAngela Ahrendts reinforced thatmessage, noting recently thatthe recession was beginning todiminish. And Nicolas and NickHayek, the father and son teamat Swatch Group, maintain thesecond half will bring a distinctimprovement. More objectively,Bain & Co, the management con-sultancy, believes the luxurygoods market will shrink by 10per cent this year, with the painconcentrated in the first half,following a flat 2008.But some broader themes

have emerged. Take geography.Those brands particularlyexposed to the US havefaced the biggest challenge,with Japan not far

Haig Simonianinvestigates theproblems faced byluxury goodsconglomerates in thecurrent market

Inside this issueInvisible gloveMartin Wolf quizzes threeeconomists about their viewson the economy Page 2

LVMH Bernard Arnaulttalks to Vanessa Friedman

about the prospects forthe sector Page 3

Italian styleTod’s chiefexecutive, DiegoDella Valle(right), says

Italian chic is about more thanespresso, writes Vincent Boland

Page 4

Lipstick index Isbeauty immune from

recession? Elisa

Anniss investigatesPage 5

Licensing Brandsare reconsidering adiscredited business

model, saysLucie Greene

Page 6

Big squeeze: slow sales, hiring freezes and store closures have made it a tough year for the sector LynchContinued on Page 3

��������

�� ���� ��������� ��� SPECIAL REPORT | Monday June 15 2009

VIDEO on FT.comLionel Barber, Martin Wolf andVanessa Friedman interview leadingfigures at the FT luxury summit inMonte Carlo FT.com/luxury-video

www.ft.com/business-luxury-2009

2 ★ FINANCIAL TIMES MONDAY JUNE 15 2009

Business of Luxury

started queuing to discoversomething new.But does a guide for thetastes of the future startby interviewing prospectiveclients? Or by developing apersonal vision, realisingit, and educating eliteclients who become rolemodels? Consider the casesof fragrances and cars.The doyenne of classicmarketing, Procter &Gamble, has a Beauty andPrestige division for itslicensed fragrance businesswhere it applies the samerules as for its FMCG (fastmoving consumer goods)brands.Everything begins withmarket research aiming toidentify specific consumersegments and their needs.The goal is to launch aproduct for each segmentin order to build thebrand’s portfolio offragrances, but theproblem is that theconsumer expectations areoften very much the sameacross brands.Hugo Boss and Lacosteare two P&G licences, forexample, that share thevalues of panache, youth,class, success and energy;they share a consumerbase and thus the launchadvertisements for the twobrands are almostinterchangeable.This consumer-centricapproach also produces abuilt-in obsolescence: itsproducts do not lastbecause they are based ontransient consumer needsand stereotypes. The scent

must have immediateappeal to maximise thechance of success: P&Gtakes no risks and uses thefragrances rated high inthe trends.But olfactive preferencesare short-lived, and thisfragrance building modelleads to short-term success.Fragrance licences growsales by launching newproducts, year after year:but the older ones cannotsustain sales generated bythe massive marketinginvestment at launch. To

be profitable they need toreduce such investmentbut without a bigmarketing push, productdemand often falters.Luxury brands today arethe trailblazers oftomorrow’s taste.Once a consumersegment is identified it istoo late to exploit it.There is no surprise inexisting demand. This iswhy all classic luxury

ContributorsHaig SimonianZurich Correspondent

Vanessa FriedmanFashion Editor

Martin WolfChief EconomicsCommentator

Vincent BolandMilan Correspondent

Fiona HarveyEnvironment Correspondent

Elisa Anniss, Lucie Green,Imran AmedFT Contributors

Tom GriggsCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact:

Gina Walker on:tel: +44 (0) 20 7873 4208fax: + 44 (0) 20 7873 3204e-mail: gina.walker@ft.comor your usual representative

Luxury marketing playsby a different set of rules

The present economiccrisis has forced allcompanies to questiontheir strategies andpractices, and this hasnever been more crucialthan for luxury brands andmarketing.What once worked as ameans to sell products nolonger works; it is time toreconsider the essence ofluxury management.As faculty at the HECSchool of Management inParis, it has been our jobto analyse currentpractices, and it is ourconclusion that the moststriking feature ofcontemporary luxurymanagement is thenecessity to turnmarketing on its head:classical marketing is thesurest way to fail in theluxury business.Instead of the marketingstatus quo we haveproposed the “anti-laws ofmarketing”: 18 axioms thatinclude: raise your pricesto increase demand;advertising does not aim atselling; and – mostimportantly – do notpander to consumers’wishes.At a time of managerialconsensus on the necessityto focus on the client, thismight seem like heresy.And, for most brands andgoods it would be. But notfor luxury. The reason forthis can be traced to thebirth of the luxury goodsbusiness, two centuriesago: while the craftsman –or expert artisan – wouldgo to Court and make thecloth or furniture hisaristocratic client had inmind, the luxury goodsbusiness as we know it didnot exist: the artisan wasmerely a supplier ofbespoke products.It was not until thatartisan started creatingobjects the clients had notyet thought of that luxurybecame a distinct market.This inverted theclient-creator powerstructure: consumers

scents – many still in theworld top 10 of fragrances– were created throughemotional intuition, fromYves Saint Laurent’sOpium, Thierry Mugler’sAngel, Jean-Paul Gaultier’sLe Male, and, of course,Coco Chanel’s N° 5.Let us now compare thefate of Saab and Mini. Mini(bought by BMW withRover in 1994) sold 250,000cars in 2008; Saab (boughtby General Motors in 2000)sold 93,000, and it is nowbankrupt, despite the factthat its latest Saab 9-3 wasseen as one the best carsin its category.To boost the sales ofSaab, GM took a classicmarketing approach,asking consumers whatthey did not like aboutformer models. As a result,they softened the radicaldesign and used an Opelengine. The resulting Saab9-3 looked more like rivalproducts from Audi orBMW than a traditionalSaab.By contrast, BMW hasretained many of theMini’s historicalcharacteristics despiteconsumer surveysrepeatedly labelling themas faults: too small a boot,too low a car – but thesequirks were integral to theunique kart design andstyle experience of the1960s that made the carpopular in the first place.Of course, luxurycompanies should notignore their corecustomers’ wishes entirely,but too much listeningmitigates against therequirements to surpriseand stand apart.As a cultural creator,luxury brands should settheir own high standards.Listening to theconsumer is the best routeto a lack of differentiation,and failure to inspire thedream – the two levers ofdesire that are the onlypaths out of the recessionin the luxury world.

Jean-Noel Kapferer andVincent Bastien areco-authors of ‘LuxuryStrategy – Break the Rulesof Marketing to BuildLuxury Brands’

Guest ColumnJEAN-NOEL KAPFERERand VINCENT BASTIEN

How the world economy might recover its poise

The world is in themidst of the worstfinancial crisis andbiggest global recession

since the 1930s. But many nowsee reasons for hope. Is thisplausible? Where will therecovery come from?Stephen King, HSBC Group’schief economist, Jim O’Neil,head of global economicresearch at Goldman Sachs,and Norbert Walter, chiefeconomist of Deutsche BankGroup, give their answers tothese vital questions below.

Are the “green shoots” realor imaginary?

SK: In contrast to thesuffocating fear of depressionat the end of 2008, financialmarkets have staged a recoveryand aggressive de-stocking isdrawing to a close, whichsuggests a pick-up in industrialproduction is due.Yet worries remain. Finaldemand is depressed.Traditional monetary policyhas run out of room and fiscalpolicy will do so soon.Economic recovery depends on“unconventional monetarymeasures”, which are mostlyuntested. Deflation is a risk.Recovery will be a struggle.High levels of debt willconstrain the pace of activity,at least in the developed world.The good news comes fromelsewhere: Beijing’spolicymakers have shown theycan kickstart Chinese domesticdemand, offering a silver liningto a mostly recessionary cloud.

JO’N: According to ourproprietary indicators, as wellas much recent publishedleading and coincidentindicators, the shoots areblossoming into daffodils. Ourglobal leading indicator hasshown a marked improvementin the past two months afterdramatic falls from Octoberthrough February. We areconfident that by the thirdquarter world economic growthwill be positive again.

The strongest positive signalsare coming from the largestdeveloping countries, especiallyChina. Within the so-called“advanced countries” theshoots seem greenest in theUK, perhaps surprisingly. Inaddition to a strong recovery inbusiness surveys, consumerspending appears to have heldup much better there thanmany pessimists expected.

NW: The green shoots arereal. This is because theprecipitous drop in orders andproduction after the thirdquarter of 2008 correctedexcessive stocks of almosteverything. Since one can rundown stocks only once, acontinuation of the free-fallseen in the last quarter of 2008and the first quarter of 2009was impossible.If observers consider such aninflection point to be the startof a genuine recovery, they aredead wrong. The stock marketcorrection may be a falsedawn, as well. But since yieldson alternative investments areso low, increasing the weight

of equities in portfolios isreasonable.

Which parts of the worldeconomy are going to recoverfirst and which will lagbehind?

SK: China is already in thelead. While its exporters havesuffered heavy losses, thegovernment’s domesticinfrastructure policies appearto be bearing fruit.Yet an infrastructure-ledpick-up in Chinese domesticdemand will do little to helpother Asian exporting nations.The world’s commodityproducers – the Middle East,Russia and parts of LatinAmerica – should, however,benefit from China’s insatiabledemand for raw materials.History suggests the US willrecover more quickly thanEurope, although its ongoinghousing market weakness is anew experience. The biggestrisk for the eurozone is theeuro’s likely strength, asinvestors conclude thatFrankfurt’s central bankers are

less keen on the printing pressthan those of the US and UK.

JO’N: As each month of 2009passes, we find ourselvesthinking ever more that thiscrisis is almost good for China,or more specifically, for China’srole in the world economy.China seems to realise that anexport-based model of growth isno longer sustainable.

In addition to the bigstimulus package, China hasembarked on a big reform ofsocial security. By pressuringits banks, as well as cuttinginterest rates and reserverequirements, Chinese financialconditions have alsodramatically improved. Werecently made a positive

revision to our forecasts forChinese growth in 2009 and2010. We now forecast 8.3 percent and 10.9 per cent,respectively.We have also revisedupwards our forecasts for HongKong, Taiwan and Korea andbecome slightly less pessimisticfor Japan. We now forecast 3.2per cent world GDP growth in2010 after a 1 per cent declinethis year. Meanwhile we seethe “old economies” of Europeand Japan lagging behind.

NW: If one does not needparliamentary approval foranti-cyclical measures andcitizens have little right tointervene in governmentplanning and execution ofprojects, investment spendingcan be faster and moreeffective. So China will lead inpropelling domestic demand.Effective measures forstimulating demand forpassenger cars in a fewcountries may also see theseindustries recover in 2009.Countries with excesses in realestate and construction and

those with a concentration inthe financial industries will behit harder and for longer.

What needs to be done toensure a durable globalrecovery?

SK: While policy-makers havehelped avoid a “GreatDepression Mark 2”, their workis not yet over. The crisis hasrevealed many fault-lineswithin global finance, includingthe mismatch between a globalcapital market and nationalregulation and supervision. Itis hard to imagine a return tothe “status quo ante”, yet theshape of any future financialarchitecture is, at best, hazy.My guess is that there will besignificant diminution ofcross-border capital flows.Unconventional policies willhave to be maintained formany quarters. I am also notconvinced we have seen thefull effect of toxic assets. I verymuch doubt that the banksalone are threatened by theproblems of toxicity.Meanwhile, the attempts to

rescue the financial systemhave extracted a heavy fiscalcost, notably in the US andUK.

JO’N: We are optimisticabout prospects in the “BRICs”(Brazil, Russia, India andChina). We also see scope foran inventory-based recovery inthe group of seven high-incomecountries for a few quarters.Yet a more sustained globalrecovery will probably need theworld to cope with a furtherreduction in the importance ofthe US consumer. In order forthe world to avoid many yearsof subdued growth, we needstronger demand in the oldereconomies of Europe andJapan. This will require bolderpolicies, aimed at reducinghousehold savings in Germany,and corporate savings in Japan.For the US and UK, exportgrowth is likely to be thesource of sustainable strength,but without stronger demandoutside their borders, this willbe slow to develop.In all, we appear to beentering a period where therelative share of incrementalactivity will be even moredominated by the BRICs thanin the “noughties”, especiallyby China and India. For luxuryretail companies, this is wherethe big opportunities remain.

NW: First, the trends of 2003to 2007 were unsustainable. Theirresponsible monetary policies,lack of regulatory disciplineover financial markets,depletion of resources andgrowing burden on theenvironment cannot continue.Second, the huge governmentinvolvement may lead toexcessive intervention inmarkets, including the risk ofprotectionism. Regional andglobal co-operation should bethe goals. President Obamashould lead. Europe shouldfollow. The Doha round oughtto be revived. This financialcrisis and its ensuing rescuepackages must not threaten theglobalised system, which is sobeneficial to mankind andparticularly the emergingworld.

In sum, the three agree theworld economy is starting toimprove, but many obstaclesstand in the way of sustainedand vibrant economic growth.

ECONOMICS

Martin Wolf talks tothree economistsabout the prospects fora global recovery

A consumer-centricapproach producesits own built-inobsolescence

Jean-Noel Kapferer (left)and Vincent Bastien

‘As each month of2009 passes, we findourselves thinking evermore that this crisis isalmost good for China’

Go east: domestic demand in China is the world economy’s best hope for a recovery and where the best opportunities for luxury retail are to be found Getty

FINANCIAL TIMES MONDAY JUNE 15 2009 ★ 3

Business of Luxury

Slimming all therage, belts tighten

behind. Europe has beenmixed, while Asia, notablyChina, has remained resil-ient. Bain expects onlyChina and the Middle Eastto escape this year’s con-traction.Robust Asian marketshave tended to favour thelarger groups, such asLVMH or PPR, owner ofGucci, with the broadestinternational networks andthe resources to haveinvested heavily there. “Inthe current context, we seeemerging markets exposureto be the key factor limitingadverse trends in moremature markets,” notesLuca Solca, luxury analystat Sanford Bernstein.Products are the secondkey factor. Firm data isscarce, but many analystsargue that, in hard timesfor even the rich, cheaperitems, such as shoes orhandbags, hold up betterthan pricier ones. “Gift giv-ing will still go on in thesub $1,000 bracket, but notwith watches costing$50,000 or more,” says JonCox, analyst at Kepler Capi-tal Markets in Zurich.The breadth of a group’srange also matters. Here,the evidence is not compel-ling – as the relative healthof Hermès shows. But mostanalysts say companieswith products spanningprice points are more pro-tected than those, like theFrench silk and leatherwaregroup, that are more tightlyfocused. A broader portfoliomeans manufacturers cancater to consumers tradingdown, and can provide mus-cle with third-party whole-salers and retailers.In a market where promi-nence has become more per-tinent than ever, distribu-tion has gained ground.Independent retailers, fac-ing stretched credit lines,have destocked rapidly topreserve cash flow. Luxurygoods brands, such asItaly’s Luxottica, with ahigh proportion of directlyoperated stores, have

enjoyed greater protectionthan those dependent onthird parties. “We continueto see risks associated witha high exposure to thewholesale network – chan-nels must destock before arecovery in sales canoccur,” notes Louise Single-hurst of Morgan Stanley.Sheer size has become agreat differentiator. “Thestrong brands are gettingstronger and the not-so-strong brands are gettingweaker,” says Mr Platt.Having a portfolio ofproducts, such as at LVMH,Richemont or PPR, hashelped to spread risk. Whilefinancial flexibility may bemore dependent on gearingthan size, bigger groups canspread costs over muchlarger turnovers, enjoygreater potential for costsynergies, and more swayover suppliers.With centralised treasuryoperations, the largestgroups may also be betterplaced to withstand cur-rency swings. And theymay have deeper and betterqualified managementpools. Recent upheavals atItaly’s Versace have spot-lighted the potential forinternal squabbling whentimes get tough.Finally, the largestgroups may be best placedto exploit opportunitiesfrom the tougher market.That means anything fromnegotiating better productpositioning in stores toimproved terms from mediaoutlets or rental contractsfrom mall owners.Ultimately, the biggestgroups may also seize anyrare chances for acquisi-tions in a still-fragmentedindustry. Richemont’s MrRupert has said none of thecompanies he covets is forsale. But he – and others –have taken care to avoidmistakes of the previousdownturn after 2001 byensuring strong balancesheets. That not only reas-sures shareholders, but alsoprovides the financial fire-power to act should thechance arise.

Continued from Page 1

How to managethe transitioninto quality

Bernard Arnault,chairman of MöetHennessy LouisVuitton, the largest

luxury company in theworld, does not like theword “luxury”.“I prefer to think of it asquality,” he says, a caveatthat may seem semantic,but is, in fact, significant: itspeaks to the permanentchange in the industry thathe sees occurring post-re-cession.“The availability ofmoney not just for consum-ers but buyers will disap-pear for a very long time –maybe 10 years, maybeuntil the next bubble,” saysMr Arnault, who believessector growth will be drivenby the real economy, andwill not be much more than2 per cent a year in devel-oped markets – half the rateof the past. What thismeans for the luxury indus-try is more competition, notfrom more brands, but froma – permanently – more dis-cerning consumer base: onethat demands legitimacy inall its goods, from history toconception to manufactur-ing, along with all the infor-mation and communicationthat implies.And what that means, asfar as Mr Arnault is con-cerned, is placing ever moreimportance on sustainabil-ity, not just in ecologicalterms (though that plays apart), but in corporate strat-egy.

“It is a natural tendencyof companies during a crisissuch as the one we are in tocut costs, drop prices, andstop expanding, because ithas the most immediateimpact on numbers,” hesays. “But what we havelearned in the many criseswe have been through isthat this is a mistake, espe-cially when it comes to lux-ury.“Last winter, when I wasvisiting one of my Vuittonshops, a number of custom-ers actually came up to meand thanked me for neverputting any products onsale,” he continues. Thiswas around the time USdepartment stores panickedat the prospect of a nega-tive holiday season, andslashed prices up to 60 per

cent pre-Christmas; becauseVuitton has a policy ofnever discounting products,and has no wholesale distri-bution, they were not sub-ject to the sell-off.“If you don’t put yourproducts on sale consumersfeel they are buying some-thing that retains itsvalue,” continues MrArnault, and value is one ofthe catchwords he sees for

the future. After all, ifworth is long-term, consum-ers are more likely toinvest, even if the vehicle isa handbag.Though Mr Arnaultacknowledges the currentglobal recession is a magni-tude greater from the oth-ers he has experiencedsince he first began creat-ing the world’s biggest lux-ury group in 1985, he alsobelieves the lessons helearned in the early 1990sand post 9/11 and SARShelped position his group tobe able to withstand thedownturn. Ten years ago,for example, the companytook a position on the needto pay down debt with aneye to the long-term.Indeed, when it comes toluxury, Mr Arnault says itis important not to have athree year plan or even afive year plan, but a genera-tion plan – a generationbeing the amount of timehe believes it takes to givea luxury brand the historiccomponent that is neces-sary to confer “legitimacy”.Thus, despite much spec-ulation about his desire toadd to his luxury portfoliowith a leading companysuch as Giorgio Armani orHermès, Mr Arnault hasbeen on a relative spendinghiatus since the turn of thecentury, divesting himselfof such loss-making brandsas Christian Lacroix in2005, and making onlysmaller, strategic invest-ments, such as Hublot lastAugust, which, with itsgrowth in Asia, was seen asstrengthening the relativelysmall LVMH watch busi-ness; and last month takinga minority share in Edun,the organic clothing linedeveloped by Bono and hiswife Ali Hewson, which will

allow LVMH to improve itsgreen credentials, perhapsextending the ethical edgeto collaborations with otherbrands within his group.“At some point in the lastcycle, everyone lost theircommon sense and didcrazy things, in luxury aswell as in housing,” says MrArnault, making referenceto the sudden trend of pri-vate equity buying into lux-ury. “It was very easy to getlots of money to invest, butthat is over.”Still, Mr Arnault says heis already seeing – if notgreen shoots, then brownand beige LV-brandedsprouts, especially in theUS, the area Mr Arnaultbelieves will rebound first,possibly as soon as thiswinter.Mr Arnault believes thatthe combination of govern-ment investment, reactivecompanies, and his refusalto change course in the faceof the current market crisiswill create a positive envi-

ronment for his manybrands, including ChristianDior, Givenchy, Fendi andCeline, though especiallythe flagship Louis Vuitton.The luxury landscape willobviously look very differ-ent on the other side of glo-bal recession, however.Already, Mr Arnaultbelieves, a number oftrends are identifiable thatwill gain momentum as theluxury industry – and,indeed, all industries –begin to see the light at theend of the tunnel. Chiefamong these are the insist-ence on “value and values”on the part of the con-sumer; the emphasis oncontrol on the part of brandmanagers that is bestowedby own-retail as opposed towholesale models – thoughthat clearly implies yetmore investment; and theimportance of the internet,for both good and ill.“The internet is more andmore important for bothcommunication and how we

manage our company inter-nally,” he says. “I can haveinstant access in real timeto my stores around theworld. Then there’s the factthat more young people arealmost uniquely receivinginformation on the internet,and the fact that we feel itis a customer service to sellproducts online. But at thesame time, it is the greatestrisk to this industry goingforward.”The proliferation of fakeproducts sold on the inter-net is, Mr Arnault believes,the single biggest danger tothe luxury industry post-re-cession, since it underminesits evolution from a sectorbased on “luxury”, with thebling that suggests, to onebased on quality.“To me this is the thingwe have to tackle next,” hesays.“We have to find someway to put morality online.After all, it is one of thefast-growing areas of tomor-row’s economy.”

INTERVIEW

BERNARD ARNAULT

Vanessa Friedman

discusses the stateof the industry withthe head of LVMH

‘If you don’t putyour products onsale consumers feelthey are buyingsomething thatretains its value’

More than just a pretty dress: Marc Jacobs’ autumn-winter collection for Louis Vuitton AFP

4 ★ FINANCIAL TIMES MONDAY JUNE 15 2009

Business of Luxury

Italian atmosphere is central to Tod’s global expansion

It is not too difficult, in thehigh-ceilinged elegance ofPalazzo Della Valle on theCorso Venezia in Milan, tobe seduced by the charmsof a certain kind of Italianlifestyle. Here is the head-quarters of Tod’s Group,which has become a power-house in the marketing ofthat vision to the world’swealthy and discerning.The atmosphere is delib-erate: where some Italianfashion houses haveexpanded ever further into

the realms of celebrity andglamour, Tod’s is anchoredas firmly as it can be to itsfamily roots and its tradi-tional, hand-made, century-old heritage.Its signature products –shoes and bags – are madeof leather, a raw materialthat has remained almostunchanged since it was firstdiscovered. A new advertis-ing campaign will take thecompany back to basics,with a focus on Italian fami-lies and their lifestyles –actual Italian families, how-ever rich and privileged –rather than on celebrities.“The Italian lifestyle is inour DNA, and in our groupwe believe in our DNA,”says Diego Della Valle, thechairman and chief execu-tive of Tod’s Group.Dressed in a blue blazerand jeans and comfortable-

looking shoes, he looksyounger than his 55 yearsand betrays only a hint ofjetlag despite having justreturned from China. He isthe grandson of the founderof Tod’s, and he refers onseveral occasions duringthe course of a nearly hour-long interview to the DNAof his company, by whichhe means precisely thatartisanal heritage that issynonymous with the Ital-ian concept of luxury and,one might say, with theItalian concept of family.“You can see the truevision of Tod’s through Ital-ian families,” Mr DellaValle says. “These are peo-ple who live privileged butalso serious lives; real peo-ple, not actors or models.”This image is especiallyimportant in new markets,such as China and India, he

says. In common with otherluxury goods makers he isintent on capturing con-sumers in those marketswho aspire to the samesense of the Italian lifestyleas do customers in more

mature markets. “Theyhave an extraordinarysense of what luxury is, andthey aspire 100 per cent tothe same sorts of thingsthat others do,” he says.It is an expensive busi-ness preserving that DNA

in an increasingly homoge-nised global market. MrDella Valle says it is essen-tial that companies such ashis have full control overtheir image, production sys-tems, and marketing.The downturn is testingall brands. It is also chal-lenging the “Made in Italy”segment of the Italian econ-omy, with wholesale pro-ducers complaining of van-ishing margins and profits.“A luxury goods companyhas to have control of itsimage,” he says. “For Tod’s,the thing is to communicatethis tradition, the genera-tions of work that havegone into our products. Forus it’s an absolute priority.”To achieve it, one mustput quality before quantity,and one must maintain thegroup’s traditions even as itglobalises, which it has

been doing fairly relent-lessly in the past decade.Apart from Tod’s hand-made shoes, coats, andbags, it also produces morecasual shoes and clothes forits Hogan and Fay brands.In 2008 the group had reve-nues of €708m and netincome of €83m, and, whilethe Della Valle family hasmajority ownership and fullcontrol, it is quoted on theMilan stock market, whereit is worth about €1.2bn.The challenge is to marrytradition with modernity ina way that not all Italianluxury goods and fashionproducers have managed.Tod’s has done it, Mr DellaValle says, by maintainingone key vision: “We’re aluxury goods company, nota fashion company.”This distinction betweenfashion and luxury is cen-

tral to Mr Della Valle’s glo-bal ambitions. The two havedifferent products and oughtto have different strategies,he says. The competitors headmires most, he says, areLouis Vuitton, Hermès andChanel.“Is Tod’s vision modern? Ithink, very,” he says. Anddo luxury goods companiesand fashion companies havethe same customers?“Maybe 50 per cent.”Mr Della Valle says thatthe goal in the next fiveyears is “to complete theglobalisation” of Tod’s, forwhich he has been layingthe groundwork. “I’d likeTod’s to be much biggerthan it is now, withoutdiluting the brand,” hesays.He expects China andIndia to account for asmuch as 25 per cent of reve-

nues by then, because thegrowth potential is muchhigher than in more tradi-tional markets.“There is a much biggerappetite for luxury goods inthose markets than inmature markets, and day byday more people are cominginto this market.”But as for China as acompeting producer, MrDella Valle is scepticalabout its ability to produceluxury goods.“It lacks the structure ofsmall companies, the tradi-tion, the concept of excel-lence” that Italian luxurygoods producers have inher-ited and which they mustmaintain as a competitiveadvantage, he says. “Madein Italy doesn’t necessarilymean expensive goods,” hesays. “It means excellentgoods.”

INTERVIEW

DIEGO DELLA VALLE

Vincent Bolandtalks to the head ofthe Italian fashionhouse about qualityand globalisation You can see the

true vision of Tod’sthrough Italianfamilies . . . who liveprivileged but alsoserious lives

Exchange rates blamedfor price differences

Last July, reporting LVMH’sfirst-half results, Jean-JacquesGuiony, chief financial officerof LVMH, made a pointedobservation: group operatingprofit increased by only 7 percent, due to the impact of thebiggest currency fluctuationsthe group had ever seen. Atconstant exchange ratesoperating profit would actuallyhave risen 19 per cent.When asked for his thoughtsin January on the outlook for2009, he remained cautious:“It’s difficult to say how thingswill pan out in 2009 until weknow better how things unfoldfrom a currency perspective,”he said. “Volatility is at anunprecedented level andmaking any predictions ishighly risky.”Most luxury companies findthemselves with the majority oftheir costs in euros but up to80 per cent of their revenues inother currencies. In the past,they have protected themselvesagainst fluctuations throughthe use of hedging but in thecurrent economic climate,things change so quickly that,according to Claudia D’Arpizio,luxury goods expert at Bain &Co in Milan: “While currencyhedging is a useful technique,we are also advising our clientsto focus on pricing.”Unlike hedging decisions,which originate with a CFO,pricing decisions are made atthe brand level.While brands have always setdifferent prices for differentmarkets, recent currency shiftshave opened up wide,unintended differentials inprices for the same product indifferent markets. This has ledto a kind of fashion arbitrageand poses a new managementchallenge.In recent years, it wascommonplace for Britishshoppers to jump on aircraft toNew York to complete theirChristmas shopping with thebenefit of a strong pound, butlate last year, after the poundfell more than 20 per centagainst the euro and more than25 per cent against the dollar,it was the British who stayedat home, while eurozone andUS shoppers descended uponLondon to snap up bargains,bolstered by heavy discountingon the shop floor.In December, Eurostarreported a 15 per cent increase

in the number of peopletravelling to London from thecontinent, many of whom hadapparently come with onepurpose: to shop. Burberryattributed some of the 20 percent spike in its third-quarterUK sales to tourist flows fromChina and Europe.In response to this massconsumer migration, luxurycompanies, including LouisVuitton and Dior, reducedprices in Japan by 7 to 8 percent late last year, whileChanel, Chloé and Versacereduced their US prices bysimilar amounts. But even afterthese adjustments, a studyconducted by Luca Solca,luxury analyst at SanfordBernstein, found that averageprices for a basket of LouisVuitton and Gucci handbagswere 30-50 per cent higher inChina and Japan than Europecompared with about 15 percent a year ago. In the US, thesame handbags were 20 percent more expensive than in

Europe, compared with 5 percent a year ago.Furthermore, many brands,including Gucci and Hermès,seem to have maintainedartificially low prices inmarkets such as the UK,apparently to bolster spendingby tourists and locals alike.While these price differentialsare a return to the norm in thesense that they reflecthistorical industry standards,differential pricing is moreobvious than ever before.Aided by information gleanedfrom frequent internationaltravel, the internet and brands’own e-commerce sites,consumers are starting toquestion whether differencesare justified, particularly intoday’s value-consciousenvironment, and especially inmature and expensive marketssuch as Japan.Yet for the brands, makingstrategic changes is not as easyas it sounds. The problem isthis: following the age-oldfashion cycle, prices for luxury

goods are usually set sixmonths or more in advance,creating a lag in the brands’ability to make any changesonce prices have been set.“In particular, those brandswho sell through wholesalechannels and multi-brandstores have limited flexibilityto adapt pricing later,” says MrSolca. “It is at the momentwhen brands sell a collection ata specific price after thefashion shows and sellingcampaigns that they effectivelytake a currency risk.”So while brands withvertically-integrated retailoperations, such as Hermès andLouis Vuitton, can be morereactive and change theirprices mid-season, others mustalso consider their wholesalepartners, especially if theywant to maintain consistentprices within the samegeography.Proposed solutions to thechannel conflict issues includedeveloping separate collectionsor “splitting the assortment sothat a big chunk is notcomparable across channels,”says Ms D’Arpizio. “This wouldbetter enable brands to respondto currency fluctuations as wellas protect themselves fromdiscounting in the wholesalechannel, which is anotherimportant pricing issue.”However, she says, brandsshould not be making pricingdecisions with the soleobjective of achievingconsistency across markets, butshould move towards dynamicpricing with in-season priceadjustments, right down to thecountry level.According to the SanfordBernstein report, brands withthe most sophisticated pricingstrategies, such as LouisVuitton, are “fine-tuning pricesby market in the euro area”.Burberry creates a globalpricing architecture, whereindividual regions can provideinput on final pricing based onbenchmarking, while alwaysensuring that overall margintargets are met in the end.“By strategically loweringprices in some markets, brandsmay be able to capture sharein a rapidly changing industrycontext,” Ms D’Arpizio says.“Alternatively, they couldmaintain higher priceselsewhere, which would allowthem to reinvest in theirbrands. Unfortunately, manybrands currently lack theinformation systems to executethis kind of strategy in ascientific way.”

Imran Amed is an adviser tothe fashion industry and isEditor-in-Chief of LuxurySociety

POWER OF PRICING

Imran Amedexamines the effect ofcurrency fluctuationson the industry andconsumer behaviour

‘Volatility is at anunprecedented leveland making anypredictions is highlyrisky’

Jean Jacques GuionyFinance director, LVMH

Build for a lifetime and itwon’t end up on the dump

The Great Pacific Gar-bage Patch is a vastarea of sea north-west ofHawaii, estimated at

about seven times the size ofIreland, containing billions ofpieces of plastic detritus.The floating rubbish dump isthe result of the winds and cur-rents of the oceans carryingaway the mess from our throwa-way society – though most ofthe plastic packaging, bags, nap-pies, fishing nets, toys, bits ofequipment and disposable trin-kets of various kinds that wedump is left in landfills, some ofit finds its way to the sea.Much of the rubbish bobsaround coastal waters or iswashed up ashore, but theremainder can be carried longdistances, and the GarbagePatch is where several signifi-cant ocean currents and windsconverge.The plastic, much of it brokeninto small pieces, is a danger tomarine and bird life. Fish andbirds mistake the small piecesfor food, and cannot digestthem, either choking or starvingas a result. Or they get caughtup in the longer strands and die.David de Rothschild, a scionof the banking family, is anadventurer turned eco-warrior,whose latest project is to makea boat from plastic bottles andrecycled waste. He is sailing theboat – the Plastiki, in a pun onthe famous Thor Heyerdahl

craft – to the garbage patch tohighlight the toxic threat itposes, and the damage that ourthrowaway habits are doing tothe oceans.The boat and journey arebeing sponsored by IWC Schaff-hausen, the high-end watchcompany. Mr de Rothscildargues that there is somethingin the very nature of a long-standing luxury brand thatchimes with the values he is try-ing to reinforce by his voyage,including that seeing consumergoods as inherently disposableis a waste of resources. “IWC isa brand that seems to continu-ally attract a loyal, long-termand – most importantly – pas-sionate customer, who is gener-ally very often obsessed by thebrand and everything it standsfor,” he says.The idea of luxury goods isthat they are built beautifullyand built to last. This is thevery antithesis of the ideasbehind the throwaway societythat have led to the creation ofthe vast mess of floating detri-tus the Plastiki plans to chart.Luxury goods companies arepicking up on the fact that theirproducts can offer consumers away to consume economically –if not in cash terms, in environ-mental terms – by buying aproduct that will last for manyyears rather than a disposablemass-produced imitation thatwill end up in the dump.Some watch companies, suchas Patek Philippe, have for sometime deliberately marketed theirproducts as heirlooms in themaking – they are to be passedon through generations. Jewel-lery companies take the sameline – a diamond is, after all,forever.

This is, in some senses, theultimate in recycling and in theeconomy of the use of resourceswhich environmentalistspreach.“Durability does make theseproducts more environmentallysustainable – the fact that theycan be used for a long time isgood,” says Anthony Klean-thous, senior policy adviser toWWF, the green campaigninggroup.He says that making goodsthat not only have a value inthemselves, but also have avalue at re-sale, can mean thatproducts go on to have liveswith other consumers once their

owners have tired of them. Thisis a message that resonates withthe environmental values ofthrift and the green mantra of“reduce, reuse and recycle” – to“reduce” consumption, reuse“products” and “recycle” whenproducts have reached the endof their useful lives.These three values are pre-sented in that order becausereducing consumption ofresources, and of waste, is thebest option, followed by reusewhich is also green, and recy-cling is a last resort.Luxury goods owners buy intothis idea. Watch enthusiastGeorge MacDonald says hisfavourite possession is a Jaeger-

LeCoultre Reverso watch, witha face that flips over to protectthe glass while playing polo,which he has owned since 1999.“It will last me forever,” hesays. A problem arises, how-ever, when high-end consumersuse their wealth not just to buythe best, but to buy far morethan they need. “If someone justbuys 10 of these [luxury goods]and puts them in a drawer, howis that good for the environ-ment?” asks Mr Kleanthous.So campaigners would preferconsumers to be conscious thatit is good to buy durable items,within their budgets, but not toover-consume. They also urgeluxury goods owners to donatetheir items to second-hand own-ership once they have finishedwith them, and only to recyclethem if absolutely necessary.Mr Kleanthous also warnsthat this “built-to-last” ethosdoes not absolve luxury goodscompanies from needing to takegreater care to protect the envi-ronment, he warns. “It dependsalso on the efficiency of theproducts, of the waste involvedin their production, in theenergy required and in wherethe raw materials come fromand how they are used,” heexplains.But luxury goods companieshave the opportunity to presenttheir products as relevant to thegreen pattern of consumption –buying a smaller number ofhigher-quality goods and serv-ices – which may become essen-tial if we are to succeed in mar-rying economic growth with thelower consumption of naturalresources. Which could help, infuture, to cut the size of theocean’s enormous garbagepatch.

ENVIRONMENT

Fiona Harvey askswhat approach theindustry should taketowards waste

‘If someone just buys10 of these [luxurygoods] and puts themin a drawer, how isthat good for theenvironment?’

Travelling light: a suitcase bobs around in the Pacific along with thousands of tonnes of packaging and other waste Greenpeace

FINANCIAL TIMES MONDAY JUNE 15 2009 ★ 5

Business of Luxury

Time for lipstick index to pucker up

Even people in the beautybusiness are not convincedthe lipstick index is a validmeasurement anymore.“When you look at beautyin a global way you have tobe very careful,” saysNPD’s beauty specialistKaren Grant. “In the US,make-up is the largestprestige beauty categoryand accounts for 38 percent of the $8.4bn prestigemarket. In France, make-upaccounts for only 14 percent of sales, whilefragrance accounts for 64per cent, so would a lipstickindicator really be whatyou’re looking for inFrance?” She adds that inthe US, make-up has beenthe fastest-growing beautycategory for the pastdecade, with lip-gloss in theascent, but lipstick salesare actually declining. Anyuptick in lipstick sales hasbeen short-lived – the lastone happened in the twomonths following 9/11, andthey have recurred relativelyrarely since then.

“Lipstick has been off thedial for a long time, but I’mtotally obsessed with it,”says New York-basedinnovator Poppy King, wholaunched Lipstick Queen inJanuary 2007. Although MsKing is realistic aboutlipstick’s power to defy thedownturn, she remainsupbeat.

Though “the impulsebuying of beauty in the Sex& The City era is over”,because her business isabout a small, affordableitem she still plans on widerdistribution and hopes forher best year ever in 2009.

“A new make-up look, oreven a lipstick, is a muchcheaper way of changingyour look than buying anew outfit,” says NickyKinnaird, founder of thebeauty company Space NK,which has 62 stores in theUK and Ireland and 13 inthe US. Still, Ms Kinnairdbelieves 2009 “will be aperiod of consolidation,whilst still keeping our eyeson real estate marketopportunities”. With peoplespending more time athome Ms Kinnaird has seensales of scented candlesgrow, rather than lipstick.

Meanwhile, Bliss founder,Marcia Kilgore, shifted fromluxury to value in 2006 withthe launch of beauty brandSoap & Glory. In 2008, thebrand notched up sales of£18.2m with the line. “I amdemocratic at heart, andbelieve that all peopleshould have access to greatproduct and great design,”says Ms Kilgore. “I love tomake the masses happy –and it doesn’t cost a lotmore to do that.”

Elisa Anniss

Innovativeretailideas goon the net

In times of war anduncertainty, make-upis considered a femalepanacea: the one lux-

ury item that stays indemand no matter whathappens in the world out-side.Hence the “LipstickIndex”, a term coined fol-lowing an observation madeby Estée Lauder chairmanLeonard Lauder post-9/11:as the market goes down,lippy sales go up. And yet,according to a Mintel reportthat came out in April, lip-stick’s power as a pick-me-up is not holding tru-ethis time. Mintel’s survey,in the US, UK and France,found that from a list ofcosmetics, lip colour wasthe item women would bemost likely to spend less on,while more was being spenton shampoo and cleansers.Why? It seems the lipstickindex has been replaced bythe online index.Consider the recentresults of the UK’s largestonline fashion and beautyretailer asos.com. Its pre-close trading updateannounced sales up 104 per-cent to £165m for the 12months to March 31, 2009.Now international brandsare clamouring to access itscustomer base: Mango,Hackett, Gant and Mini

Boden will appear on itssite this summer. And fromAugust, kid’s, men’s andwomen’s accessories andapparel from Gap will fur-ther augment asos.com’s800-strong brand offering(which ranges from HighStreet names to boutiquefare such as McQ by Alex-ander McQueen, Sass andBide and PPQ).The site’s successes havealso wooed senior retail per-sonnel away from Britishbricks and mortar. “Peoplewant to work somewherewhere sales are increasing,”says chief executive NickRobertson.“With matchesfash-ion.com it surprised us howquickly the site grew intoan ever-expanding market,”says Tom Chapman, ownerof the UK high-end bou-tique group He notes thatthe online store has swiftlybecome the number onewomenswear outlet in thecompany.“We forecast a contrac-tion of bricks-and-mortarsales in 2009, with 110 percent growth online,” saysMr Chapman. “This growthis coming from new mar-kets and consumers as wellas existing bricks and mor-tar consumers who are pur-chasing in increasing num-bers online, possibly due totheir wish not to be seen soovertly as consumers.”Meanwhile, Yoox Group,the Italian online companyfounded by Federico Mar-chetti in 2000, finished 2008with net sales of €101m,marking year-on-yeargrowth of 48 per cent. In

recent years the YooxGroup’s focus has shiftedfrom being an upscale TKMaxx to becoming an inter-net luxury goods specialist– the group also operatese-commerce sites targetingthe EU, US and Japanesemarkets on behalf of Italianbrands includingMarni.com, Emporioarm-ani.com, Costumena-tional.com and Emiliop-ucci.com. In February,Bal ly .com andMoschino.com joined its sta-ble, and there are plans tocollaborate on an additionalsix online stores by 2010.Likewise, Theresa, theMunich fashion destination,which launchedmytheresa.com in 2006, hasalso benefited from its rela-tionships with luxury

brands and become anonline portal: their offeringincludes Prada and Tod’s aswell as brands like Lanvin,Jasmine de Milo, andGivenchy and their cus-tomer reach extends to the

UK, Poland, Romania aswell as France, Spain andItaly. As the only independ-ent purveyors of RogerVivier footwear online, aswell as one of the stockists

of Jimmy Choo they haveseen shoe sales jump 30 percent in the first quarter of2009. As for Jimmy Choo’svery own website, salesonline have shot up 80 percent year to date, accordingto chief executive JoshuaSchulman.“This crisis is doing ourindustry a service,” saysGuy Salter, deputy chair-man of the luxury organisa-tion Walpole.“For a long time no onewas questioning the way ofdoing business and whentrading was good it was dif-ficult to see opportunities.Now, if you compare thecosts of a store roll-out withthe cost of extending whatyou do online, the latter ismore cost-effective and oneof the long-term benefits is

it also brings us closer toour customers, when pre-crunch they were becomingremote.”A recent online retail andtravel report by ForresterResearch estimates thatabout 28m consumers – thatis one in two UK consumers– shop online, outspendingtheir European and eventheir US counterparts.By 2014, Forrester fore-casts 37m UK online buyerswill spend £56bn online –perhaps partly lured by thenewest online fashiontrend: invitation-only shop-ping, pioneered by theFrench site vente-prive.com.“There is a demand fordesigner fashion at mark-down prices,” says MrSalter. “And when it’s pre-

ONLINE

Beauty and fashionon the internet iscoming of age, saysElisa Anniss

‘[Online stores]bring us closer toour customers,when pre-crunchthey werebecoming remote’

Is even the lipstick index being replaced online? Dreamstime

sented as a private sale, itnot only protects the brand,but also gives the consumerthe idea that they arewithin an inner circle.”In 2007 the Gilt Groupe –www.gilt.com – launched inthe US while UK siteCocosa – cocosa.com –launched in 2008.The Gilt Groupe is thebrainchild of Alexis May-bank and Alexandra WilkisWilson, and offers 36 hour-long sales of styles from asingle designer. DistinctlyAmerican in flavour, thegroup has previouslyoffered brands such asMichael Kors, Oscar de laRenta, Valentino, Thakoon,Anthony Nak, Botkier andShoshanna.Cocosa, by contrast, isthe brainchild of

Bauer media, which ownsBritish women’s magazineGrazia.“It’s a way of leveragingour magazines on line,”explains Cocosa’s managingdirector Andrew Robb, whosays that each 48-hour salesells the product of a singledesigner and offers a care-fully edited selection of pastand existing seasons. “Ibelieve the recession will begood for Cocosa, becausebrands will want new chan-nels to reach the con-sumer.”

ONLINE EXCLUSIVE

Jonathan Birchall analysesglobal retail trends based ondata from credit card saleswww.ft.com/luxuryretail

6 ★ FINANCIAL TIMES MONDAY JUNE 15 2009

Business of Luxury

Horrors of past are now just a memory

Mention licensing to luxurybrand executives andchances are you’ll begreeted with a shudder.

Memories of the 1970s and Pierre Car-din’s ignominy are still fresh as ever.But these are testing times, particu-larly for younger brands low onresources, not to mention publicly-traded companies, where profitability– recession or no recession – is neces-sity, not choice. There’s no questionlicensing can help. And there’s noquestion we are seeing a thaw.According to Luxury Briefing – anindustry information service – the$192bn licensing business is set togrow by 4.7 per cent over the next fewyears, with a significant proportion ofthis from the luxury industry.Guy Salter, deputy chairman atWalpole, a luxury organisation,admits: “Luxury licensing is having arenewal, but it’s gradual. There hasbeen a renaissance as people haveseen that it can play role as part ofbalanced portfolio. Although, every-thing is relative. It’s never going to belike it was in the 1970s.”A quick round-up of the past yearalso reveals a slew of licensing deals.In December Gucci Group (owned byPPR) divested its perfumes and cos-metics division YSL Beauté to L’Oréal(YSL, Stella McCartney, Oscar de LaRenta, Boucheron and ErmenegildoZegna products). Meanwhile, chil-dren’s wear witnessed a giant luxury-licensing boom, with virtually everydesigner hopping on board, includingBallantyne and Jean Paul Gaultierwho joined recent converts LittleMarc Jacobs, Moschino, Chloé andJohn Galliano among others.In menswear, Roberto Cavalli signedwith Gibò and Marc Jacobs signedover its menswear to Renzo Rosso’sStaff International. Vera Wang’s Lav-ender Label now has a licence foraccessories with the Accessory Net-work Group; DKNY has licensed outintimate apparel to MaidenformBrands Inc for spring 2009; MarcJacobs has licensed swimwear to Any-wear Swimwear; and Jil Sander haslicensed inner wear and swimwear.Finally, Prada signed a license forelectronics, Armani and Versace forhotels, and Marc Jacobs for condoms.

Still, to Ilaria Alber-Glanstaettenchief executive at Provenance, theluxury arm of M&C Saatchi, thesedeals do not indicate a strategic shift.“If you look closely at the history ofmost brands, there was always a levelof strategic licensing,” she says, point-ing out that while there’s undoubt-edly been growth in the area, mostcurrent licensing deals are occurringin specialist or peripheral categoriessuch as swimwear or accessories, andusually involve smaller or independ-ent labels, rather than key power-house brands.Often, they are also kept within spe-

cific regional markets. “There hasbeen significant licensing in chil-dren’s clothing area because theydon’t have the capability to distributethe product themselves,” says StevenEkstract, Publisher of License! Maga-zine. “It’s the same with eyewear –only two or three manufacturers pro-duce all the eyewear for designerbrands. But they do a good job; pro-duce good designs, so the relationshipworks well.”Within beauty and fragrances par-ticularly, licensing can also beextremely profitable. Following itslicence deal Gucci Group’s YSL divi-

sion reported its first-ever positiverecurring operating profit in thefinancial year 2008.For smaller brands with limitedresources, licensing product catego-ries (if handled well) also remains agood way to expand and build pres-ence in the market – see Topshop’slicences with young British andAmerican designers, and the agree-ments between young British design-ers including Giles Deacon, DanielleScutt, Peter Pilotto, Todd Lynn, andPreen and London-based eyewearmanufacturer Linda Farrow.“Licensing gives you a great oppor-

tunity to venture into areas that youwouldn’t normally have access to, asthe initial financial outlay, productdevelopment and manufacturing sideis costly, lengthy and complicated,”says Lulu Guinness, of the epony-mous London-based luxury accesso-ries label, which currently haslicences for umbrellas, eyewear (opti-cals and sunwear), bedlinen, Mac-Claren baby buggies, as well as Japa-nese licences for gloves, small leathergoods, and handkerchiefs sold exclu-sively in Japan. Still, Guinness pointsout a key difference between today’slicences and those of the past:“Licensing only works when you havea rigorous signing-off procedure and ifyou are absolutely stringent duringthe design processes.”“It helps that it’s easier to manufac-ture good quality inexpensively,” saysMr Ekstract. “It used to be that youcould really see the differencebetween the high street and designer.Now the gaps are much narrower.”Today designers retain creative con-trol, the contracts are shorter, and arecarefully managed. “Brands havelearnt their lessons. They make sureproducts meet quality standards. Youcan’t afford to lose the credibility withconsumers or that’s it, it damages thebrand,” says Mr Ekstract.Thus distribution and discountingare all now seen as a key areas forregulation. Last April, for example,the European Court of Justice ruledthat trademark owners could legallyoppose the resale of their goods bydiscount stores. The move followedthe case of Christian Dior Coutureagainst its former licensee SociétéIndustrielle Lingerie (SIL) for sellingDior lingerie to discount retailerCopad International.“It’s all very well to say: ‘more con-trol’, but appeasing that is a differentmatter. It’s very challenging to police,particularly if in remote territory likeChina,” says George Wallace, Directorat MHE Retail, a retail consultancy,who also cautioned against relaxinglicences in different territories. “Themarket today is more global. Youhave to have a consistent imagethroughout, and quality. You don’twant the customer to see three differ-ent iterations of the brand.”So, says HSBC luxury analyst Anto-ine Belge, while “smaller brands mayturn to licensing, large establishedbrands won’t. Louis Vuitton has nolicences, and I can’t see that changing– whatever the climate. It’s morelikely that larger brands will considerdropping a category if they are underpressure, rather than licensing it out.”

LICENSING

Lucie Greene investigateswhether the benefitsoutweigh the dangers ofdiluting the brand

Tapping the brand: the Prada phone introduces the luxury label to a younger generation AFP/Getty

‘It’s all very well to say:‘more control’ butappeasing that is adifferent matter. It’s verychallenging to police’