The Business of Fashion – Regulation, acquisition and the slowdown

When the global financial meltdown struck in 2008, many of those with a vested interest in the luxury market watched nervously; high net worth individuals had surely seen many investments wiped out as the recession struck and would thus be more inclined to austerity. While there was a brief moment of humility and caution over indulgence in life’s finer things, it was brief. The luxury market proved surprisingly resilient. Global spend has increased since the recession by around a third, helped in no small part by the explosion of growth in developing regions, China in particular. Orson Welles once said “If you want a happy ending, that depends of course on where you end your story”. Our story, sadly, does not end here.

It was not a good omen when fashion curator and director of the Musée Galliera in Paris Olivier Saillard said during New York Fashion Week last month, “We are in a moment that’s very bizarre in fashion: there are too many clothes”. Business of Fashion lamented both a lack of quality and vision in contemporary collections,

“Fashion seems stuck between the need to surprise using a new array of communications tools and the urge to deliver novelty at the fastest possible pace. Slowing down might be a solution, but that would be a hard route, which will hardly find followers.”

And it is followers that fashion, and the luxury market as a whole, are in need of. Earlier this month the Financial Times reported on the global slowdown of luxury spending. Behind this slowdown lie two factors. On the one hand, there is what are hopefully short-term influences; geopolitical turmoil is rife. Hong Kong continues to see protests that refuse to simmer down, causing disruption to myriad businesses. The city accounts for perhaps 20% of global luxury spending. The Middle East, whose consumer origin or nationality according to Bain & Co. has the biggest average per capita spend, is similarly in chaos, with Syria, Iraq, Afghanistan, Egypt, Libya all in various stages of unrest. Regions like Saudi Arabia and Qatar are caught between a rock and a hard place. In Russia, sanctions have hit oligarchs and their ilk hard. As a result, shares in luxury good companies have been hit hard. Prada has seen profits slide 20% in the first half of the year. Everyone’s darling of fashion innovation, Burberry, has warned of a “cautious outlook”. Mulberry has issued a string of profit warnings and recently ejected its CEO.

McKinsey illustrate the drift of luxury growth from developed to emerging markets

So we can reason that these companies are seeing fewer customers. But they are also attracting new ones, albeit with very different expectations of the service they expect from the companies they have relationships with. This is the longer-term challenge. Millennials may have been treated as a distinct niche group with quirky demands from brands, but next year they will outnumber Gen Xers, according to McKinsey. These utterly digitally savvy citizens have embraced and contributed to a digital fragmentation in the consumer decision journey, the production process and the fundamental nature of buyer / seller value exchange.

“[A] confluence of digital, the rising power of street fashion and changing consumer attitudes… are radically altering the industry. [It is a] consumer-led shift away from ostentatious and mainstream mega-brands towards understated originality”

One of the most obvious ramifications of this has been the trend of ‘logo fatigue’. It is likely to hit those like Gucci particularly hard, while benefiting those like The Row, and little-known retailers like L’Art du Basic. For larger brands there are some examples for inspiration though. Yoox, whom we have profiled in detail before, have gone from strength to strength in embracing effective digital strategy. The fashion ecommerce site reportedly sees 42% of its global traffic coming from mobile devices, and has recently made a significant push into experimenting with instant messaging app WeChat. As elaborated by Fashion and Mash, the account allows users to “shop via an interactive look book, and to instant message customer service teams and personal stylists. Content also invites users to exclusive events and provides early access to specific products”. In the physical world, Ralph Lauren’s hosting of a cafe in its Fifth Avenue store in New York may be less immediately strategic but seeks to leverage the same burgeoning trends. Brands will need to do more of this, more often, if they are to find what works best for them in terms of engaging and converting future prospects.

Also this month, Zeitgeist found itself at an event at London’s Four Seasons hotel off Park Lane, hosted by law firm Baker & McKenzie. Threats, tech trends and M&A were the main subjects of discussion. Zeitgeist scribbled down some bons mots which were thought worth recounting here. Last month, McKinsey produced an insightful piece on the future of luxury growth, indicating growth would come for the most part from what they termed global megacities, a large proportion of which were located in emerging economies. But China is facing a slowdown; no doubt one of the reasons it was recommended in the conference that businesses start to think less of China as an independent market of growth and more of ASEAN as a region.

3D printing was a matter of much conjecture, but it was pleasing to see that the regulation of such materials was already being considered. One speaker offered the technology would be a greater problem for toy manufacturers than luxury, but cautioned that fast fashion and high customisation were a potent mix. Current UK regulation allows for printing any designs (of one’s own creation or not) at home for personal use for no gain. Such laws may have to be re-examined as 3D printing becomes more widespread. It is difficult to protect the IP of a fashion designer’s work, and difficult therefore to know where to draw the line between inspiration and infringement. The case of the red shoe, specifically between Yves Saint Laurent and Christian Louboutin, has illustrated such difficulty. In the case of 3D printing, one speaker suggested that printing could be limited via restriction similar to how publishers use paywalls, or a more sophisticated version of the DCMA. The importance of protecting the source code of 3D printing designs looks set to be important; Pirate Bay already has a section for such product. Social networking as a new source of IP was also discussed. David Yurman sought opinions on styles to be included on a Valentine’s campaign; users could drop hints to their partner. Bergdorf encouraged fans to design Fendi bags over social, too. But there have been slip ups; Cole Haan offered to pay fans $1,000 for taking pictures of their shoes, without making it clear it was part of contest where someone would win and that the company was sponsoring the activity. They got off with a warning from the regulator, but luxury brands must treat that as a cautionary tale as they continue to experiment. “The law is not keeping up with the technology”, as one speaker sagely confessed.

David Yurman’s Facebook campaign suggests new IP possibilities for businesses in the future

The M&A chat was equally of interest. Speakers ruminated on the rise of vertical integration as LVMH et al seek to own the whole process. It’s a brave step for companies that traditionally haven’t involved themselves with supply chains or distribution, according to those speaking. Acquisitions were taking two forms: one was spotting missing gaps in the portfolio. For LVMH, the hole in their portfolio was jewellery, which lay behind their purchase of Bulgari in 2011. More recently Giorgio Armani – or as one speaker referred to the man himself, “King George” – reclaimed control of Armani Exchange as it attempts to leverage fast fashion trends. The other form was that of acquisitions in support of brand development – innovation, technology, CRM in Mandarin, social media, etc. More of these sorts of acquisitions were expected on the horizon.

How do these deals play out today? Private equity buyers have a lot of capital and access to cheap debt, but traditionally many of the targets of a buyout have been family-owned businesses who were not ready to relinquish control to a PE firm. These firms are much quicker and more aggressive at deals; they can quickly globalise a brand, can improve the supply chain and stretch the brand up and down from the original price point. Of course, adding new assets, like social media, makes due diligence – and knowing how to allocate risk to a mercurial medium – much harder. Owning supply chains carries risks of more exposure (see Apple and Foxconn). One of the most thorny issues that speakers envisioned was for a luxury good empire known for provenance and quality to be acquired by a a company in a jursidiction that is not known for such things. What if Alibaba bought Balenciaga from Kering, for example?

Digital is expected to drive, on average, 40% of projected luxury sales growth from 2013 to 2020

Next year will see the return of John Galliano to the runway stage to the helm of a fashion house, this time at Martin Margiela. A recent article on the designer’s flameout while creating works of wonder for Christian Dior emphasised the way in which Galliano “had been cloistered off into a strange protective bubble. Sometimes, we isolate (and elevate) talented creatives so much in the fashion industry that they lose connection with reality”. It is arguably a similarly protective bubble that the fashion industry itself has often been accused of being in, and we would argue it is in now with regards to the need for greater digital sophistication and a more significant investment in digital strategy as it concerns customer insights and the law. It is plain to see that the luxury industry continues to face disruptive challenges, be they at the hands of digital, demographic or geopolitical trends. Some of these disruptions will hopefully, as mentioned earlier, be more temporary in nature. The more fundamental shifts in consumption, though challenging, also present myriad opportunities for businesses that are brave and agile enough to test what works best to capture and retain the customer of the future. Last month Exane BNP Paribas published a report illustrating just how important digital sophistication will be (see above chart), and naming those most likely to benefit from such changes. They could do worse than start by reading our previous post on the future of retail.

The Leadership Legend – CEOs, David Petraeus & Marie Antoinette

Zeitgeist has found himself leading projects several times over the past year. The prospect can sometimes be a challenging one, and the received wisdom is that looking to the past can help shed light on the future. Looking at both recent and ancient history, however, says one thing more than anything else; leaders are a victim of circumstances. Any strategy must adapt to context.

As a 20-something Londoner with money to burn, Zeitgeist naturally found himself on Saturday night sitting at home, reading The New Yorker. The fascinating review by Dexter Filkins of recent biographies on David Petraeus, former CIA director and responsible for the execution of the ‘surge’ in Iraq and Afghanistan, painted an interesting portrait of what leadership is about. He recognised that the system in place in the early days of Iraq of rounding up countless civilians in order to ferret out insurgents was not an efficient one, nor was it especially effective. Rather, as Filkins points out, “I witnessed several such roundups, and could only conclude that whichever of these men did not support the uprising when the raids began would almost certainly support it by the time the raids were over”. Leadership, then, in this case, came in the ability to spot a deficiency, and then building on it by offering a better solution. Petraeus, who liked to say that “money is ammunition”, focused on the civilians they wanted to protect, rather than the enemy they wanted to kill. This was a drastically radical notion at the time in the military. True leadership narratives are often riddled with anecdotes of absolute maverick behaviour of this kind. The fallacy is that, and this is one of Taleb’s main points in his book on uncertainty, Black Swan, the stories of those whose maverick ideas did not work out rarely make for interesting books or films. Few songs will be written about those guys.

Just as Petraeus was able to leverage the time in which he happened to be serving in order to spot something that he could perceive to be at fault and have the opportunity to amend, there is then an element of luck involved too. “I have plenty of clever generals”, Napoleon once said, “Just give me a lucky one”. Petraeus’ luck began with being around at the right time in order to see how things could be different. It continued when he managed to shepherd his idea for the ‘surge’ to fruition. While at the time the idea of deploying an extra 25,000 soldiers to Iraq was greeted with some mixed reactions to the say the least, it can certainly be said to have paid off in large part. It was another example of a maverick move that panned out well. However, as Filkins points out, the timing of it all was what made it such a success. The Awakening, a phrase given to Sunni-orchestrated truces with US troops that began before the surge, was instrumental. Filkins writes, “Could the surge have worked without the Awakening? Almost certainly not”. The Awakening most assuredly featured tactically in the execution of the surge, but you can be sure it was never part of the strategy. Perhaps it was the failure to notice this, and the attractiveness of the holistic narrative – another fallacy that Taleb notes in his book – that led to a surge being attempted, with far less success, in Afghanistan. What works in one place at one time, might not work again.

Zeitgeist is also currently wading through the Marie Antoinette biography by Antonia Fraser. It is quite extraordinary to note how many times the autocratic aristocracy are a victim of circumstances, rather than being able to dictate their own fate through their own policies and leadership. In the long-term, though greeted with warmth at the start of her reign, Marie Antoinette was always treated with a modicum of suspicion by the people of France, hailing from Austria, a country of lukewarm political relations and which culturally left many an ordinary Frenchman cold. It was long-gestating prejudices such as these that helped blacken the Queen’s name. The phrase ‘Let them eat cake’ had been ascribed to various monarchs going back over a century before Marie Antoinette ascended to the throne. In the medium-term, the support France provided in the American war of independence was pivotal. The Treasury spent an enormous amount of money funding the war, which was seen as a proxy battle with England. This action alone nearly bankrupted the country. But, away from finances, there was the ideological lens to consider as well. Landed gentry like Lafayette, who left nobly at the King’s command to support the war, returned not only as lauded heroes, but as heroes who had been fighting with a group of people who yearned to be free of a suppressive, royalist regime. Such thinking proved infectious, and was not forgotten when men like Lafayette returned home. Finally, in the short-term, an absolutely ruinous stroke of weather stunted harvests, creating mass famine across the country in the lead-up to the revolution. All such things were manageable to an extent by the royalty, but truthfully the origins of such influences were out of their hands.

CEOs today are seen as less wizard-like than they were five or ten years ago, when moguls, particularly in the media industry, bestrode the globe, acquiring companies at their whim, creating ‘synergy’ where none really existed in the first place (think AOL Time Warner). The paradigm shift of course has been in the global recession that few – including many a lauded business leader – foresaw. Confidence in such people has been shaken. What these histories tells us about the ways to handle leadership then can be summarised in the following ways: 1. Know your environment. Externalities and trends are likely to influence your business, and not always in obvious ways. 2. Be mindful of context. What works somewhere might not work in the same way again elsewhere. 3. Appearance, rightly or wrongly, counts for a great deal. 4. When you choose to do something can sometimes be as important as the thing you are trying to do itself. 5. A small amount of luck can go a long way.

On demographics, devices and ‘Downton Abbey’

“Keynesian paradigm shift” was a term Zeitgeist was introduced to back in those glorious days of university. We’re often on the lookout for that next shift. 2003 was the first time when Zeitgeist began to take blogs seriously, as your average Iraqi citizen started writing journals online that gave more of an insight into the invasion than any “embedded” Fox News reporter. Incidentally, anyone looking to know more about the way news was covered by those reporters under the care of the US military at the time should check out the fascinating documentary “Control Room”.

There’s has been much discussion of more paradigm shifts over the last couple of years as PVR / DVR devices like TiVo and Sky+ have set various network TV honchos and advertising execs fretting about the lessened impact of advertising caused by delayed viewing. Advertisements on television are scheduled at a particular time to appeal to a very particular audience, and may be very ephemeral in nature (eg for an upcoming event or film). Having viewers watch the commercial at a later time might be bad, as it could be – in the advertiser’s eyes – too late. But having the viewer fast-forward through the commercial break altogether is disastrous. Simply put, companies won’t pay to have an ad on TV if no one is going to watch it. This of course is especially relevant to shows with covetable demographics, i.e. Watched by the financially comfortable, as ironically they are more likely to have purchased a device that makes those advertisements fast-forwardable.

However, recent news should cheer those whose job it is to worry about such matters. In the first place, as the world economy stutters into recovery, advertisers are funnelling money back into mainstream media, particularly television, as we reported on last October. Moreover, as Variety recently reported, the feeling of watching a show as it is broadcast “live” is a special one. This has long held true for sporting events and the Oscars, but increasingly it applies to popular sitcoms and dramas, too. Shows like ITV’s recent Downton Abbey revealed that people made a point of watching the broadcast live so that they could engage more in the online conversations that were taking place on social networks like Facebook. UK TV ratings are now at their highest since records began.

This brings up two points, one of cultural philosophy, the other of political science policy. In the mid-1930s, Walter Benjamin wrote a seminal piece of work known as “The work of art in the age of mechanical reproduction”. The crux of this paper rested on the idea that there is something infinitely intangible and special about seeing the genuine artefact; beholding the original Mona Lisa in the Denon wing of the Louvre is a more special experience than looking at it on a postcard. There is an “aura” to it. If we extrapolate this to the world of film and television, that aura is fed now by social media chatter amongst friends.
From a policy point of view, an argument that Zeitgeist has mentioned before bears noting, that of technological determinism vs social constructivism. It posits the argument over whether what a technology is intended for necessarily dictates how it is used, and influences user behaviour. With a heightened demand for the live experience, evidently this is not the case with PVRs. Recent studies show that people are fast-forwarding through commercials less and less, and, as mentioned, gravitating toward enjoying the live experience more and more. A savvy person might ask how we can mesh these two worlds together. Zeitgeist wouldn’t be surprised to see in the near future programme recommendations appearing on your PVR from friends you are connected to over social networks.

Downton Abbey is worth noting again. In the past, when we have thought of wildly successful shows and films, thoughts of the latest teen sensation might have come to mind. And while Twilight and Justin Bieber do occupy a significant part of the current Zeitgeist, shows like Downton Abbey illustrate that there is another audience – a rapidly growing one – that is only just beginning to appear on the radar of media executives. As The Economist recently pointed out, the baby boomer generation has a relatively high spending power, and buys a relatively high quantity of media like CDs. And while, according to Variety, movie studios plan to release some 27 prequels or sequels this year, there are also signs for hope too. The King’s Speech came very close to not getting made after debacles with funding, and Black Swan had a similarly bumpy road to production; Variety says it “kept losing its funding until the day before principal photography”. These were two of the greatest (and most mature) films of last year according to Zeitgeist, with the former winning both Best Picture and Best Director. Black Swan has grossed more than $100m in the US. The only other film from Fox studios to do the same was the latest Narnia incarnation, which must have cost north of $200m to make, once marketing is included. Films about royalty and ballet are ones that will appeal to the superannuated audience, and not coincidentally perhaps the ones with the highest profit margins. The much-coveted 18-49 demographic is an anachronism, let’s think bigger (and older).

Futurology, DARPA-style

From the Winter 2009 Zeitgeist…

Zeitgeist face such an alarming amount of numbers, facts, figures and statistics every day that sifting through it all to find the relevant information has become something of a fine art. Did you know mobile advertising is up almost as much as newspaper is down (18.1% and 18.7%, respectively)? Wikipedia currently features over 13 million articles, (though as reported recently in Le Monde, the rate of growth is slowing). Did you know the average US teen sends 2,272 texts a month, that Nokia manufactures thirteen cell phones every second, that 93% of Americans own a mobile, but a third donʼt yet feel comfortable paying for items with it?

These sorts of facts can help prognosticators look to the near future with a vague certainty toward upcoming trends. However, Zeitgeist is not satisfied with merely peering into the near future. We are always looking beyond the horizon, into the depths of futurology.

Who would have predicted that space exploration would have precipitated the creation of digital hearing aids and cancer detection devices? Who would have predicted that a little-known DoD agency created in a knee-jerk reaction to the launch of Sputnik, would stumble across a way of communicating between computers that would develop into the Internet we know and love today? DARPA lists many of the projects it is currently working on, which aside from their military uses might also have intriguing applications for consumers in the future. Chemical robots that are able to change size and shape in order to fit into different areas and perform different functions and nano air vehicles “less than 7.5cm in size” are some of the more fascinating things in development.  Programmable matter could see brand comms with manipulative particles that ʻrememberʼ their position. Paint on your walls could change to a Guinness hue at happy hour. Micro power sources would give client Duracell new avenues of energy storage to explore, and tiny micro air vehicles could be sent anywhere to project video imagery or augmented reality functionality for a product.

Yet, as The Economist points out, despite manifest amounts of consumer products that are military derivatives, “lately some kinds of technology have been moving in the other direction, too”. Drones plaguing neʼer do wells in Pakistan are piloted using modified X-box controllers (it helps if the video feed is protected, however). Moreover, “soldiers in Iraq and Afghanistan are using Apple iPods and iPhones to run translation software and calculate bullet trajectories”. While the military has an enormous budget for R&D, little is invested in electronics, hence why the USAF recently bought 2,200 PS3s to form a super-computer. Zeitgeist has already placed an order for a nano air vehicle from GE.