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.

Monetising the Arts – Fundraising and cultural collisions

A promotional still for The Met Opera’s season opener, ‘Eugene Onegin’, which debuted to a blizzard of protest and outrage.

Damien Hirst divides the art world. No one thinks him a good artist, of course. But there are those who despise him for his commercialism, and those who recognise the ingenuity of the man and his innate sense of self-promotion and salesmanship. The apotheosis of this was undoubtedly Beautiful Inside My Head Forever, the infamous Sotheby’s auction held on the eve of the global recession. The diamond skull that was the centrepiece of the auction was described as a “vulgar publicity stunt” by The Economist. In the auction’s aftermath, the market for his works “bottomed out”; sales performed poorly versus the contemporary art market as a whole (see chart below). Despite such schadenfreunde, it was satisfying to read a positive review for the artist’s new retrospective, “Relics”, which opened last month in Doha. The exhibition is part of a major push by Qatar to make itself culturally relevant abroad. Indeed, the physical context in which the pieces are set do apparently allow the viewer to judge them anew, without all the tabloid baggage the artist’s works usually bring with them. But concessions have had to be made too:

“In a country where Muslim clerics hold sway, the titles of these works, many of which feature the word “God”, have not been translated into Arabic. Mr Hirst sees the sense in this, admitting that he wants his art to be “provocative in the right way”. Nudes are also virtually banned from public view.”

In an increasingly homogenised culture – by which we simply mean one where content from one nation is easily accessible and ultimately transferable to another – what does being “provocative in the right way” mean?

In New York, such questions were similarly asked in recent months, in particular at the city’s two opera houses. One, the New York City Opera, recently filed for bankruptcy. The house has long been suffering from financial difficulties, and despite a last-minute Kickstarter campaign that raised $300,000+ in a short space of time, the curtain will fall on this institution. Its strategy seemed sound – to not be, rather than to beat, the competition, in this case the Metropolitan Opera. In pursuing this end, they often used American singers and often produced avant-garde works, the most recent and famous of which was undoubtedly Anna Nicole, about a Playboy model who captured the hearts of America’s flyover states before meeting her tragic end. Such courage should be commended, and in a just world, rewarded, but sadly it was not to be. Indeed, the City Opera lost its biggest donor entirely because of this production.

The other of New York’s opera houses, The Metropolitan Opera, a stalwart of tradition, is battling with political ramifications that are happening thousands of miles away. In June this year, in another blow to any sense of fledgling democracy in Russia, President Putin signed into law an act that restricted discussion or promotion of homosexual acts, labelling such things “propaganda”. The New York Times cites one Anton Krasovsky, “a television anchor who was immediately fired from his job at the government-controlled KontrTV network in January after he announced during a live broadcast that he is gay, saying he was fed up with lying about his life and offended by the legislation”. Such news quickly became internationally relevant when mixed messages came from the Kremlin as to whether openly gay athletes would be welcomed at the Sochi Olympic Games next year. Boycotts are being considered. Just as there are openly gay people in sports, so in the arts. The controversy settled on the Metropolitan Opera as it prepared to launch its new season with Tchaikovsky’s Eugene Onegin. The new law, the almost universally acknowledged fact that the composer was homosexual, as well as the presence of talent (soprano Anna Netrebko and conductor Valery Gergiev) that were known Putin sympathisers, served to create a perfect storm. It was not long before opera fans were pleading with the Met to dedicate its opening night performance in support of homosexuals. Gergiev, an indisputably great conductor, as well as being a “close Putin ally”, according to the Financial Times, has long been dogged by rumours of political favours from the President, and protesters are becoming increasingly vocal. His claim on his Facebook page that the law targeted pedophiles, not homosexuals, pleased few. The stubbornness was mirrored by the Met. Writing an article for Bloomberg, Peter Gelb, General Manager of the Met, attempted to clarify why the house wouldn’t “bow to protest”. Gelb conceded he personally deplored the new law, as much as he deplored the 76 countries that go even further than Russia currently by completely outlawing homosexuality. He went on,

“But as an arts institution, the Met is not the appropriate vehicle for waging nightly battles against the social injustices of the world.”

Clearly, Gelb is declaring that such a mention before the performance would not have been – to return to Hirst’s words – “provocative in the right way”. But just as we have called it a perfect storm of political and cultural affiliations, was this not also the perfect opportunity for such a tremendously important institution to take a stand for those people who do not have such a prominent pulpit? Gelb asserts that the house has never dedicated a single performance to a political or social cause. Progressive thinking and innovation rarely develops from such thinking. Moreover, the Met has stood up for the rights of the marginalised in the past when it refused to play in front of black/white segregated audiences. So a precedent exists, which arguably is not being lived up to.

It would be naive to avoid acknowledging the pitfalls in the knee-jerk use of the arts to constantly promote change and stand against discrimination. In some cases, such calls to action can fall on deaf ears, or worse, provoke outrage that costs the institution and earns it an unfortunate reputation. Such damage to a reputation can be financially devastating (the New York City Opera is to an extent an example of this), which apart from anything else rules out any future opportunities to make such important statements. These organisations are, whether for profit or no, ultimately businesses that cannot afford to support every cause, no matter how relevant. Arts organisations have the rare distinction of often being at the intersection of culture, politics and money (which can often make for a murky combination). Perhaps what is needed is an entirely new fundraising model. Monied interests will usually be conservative in their tastes (why would someone want to change the status quo that allowed them to get where they are?). Increased use of crowdfunding, such as the City Opera briefly used with Kickstarter, will surely play a far greater role in the years to come. Such efforts could go some way to negating the worry of avoiding a few vested interests. What an organisation should or should not publicly speak out on must always rest with the individual situation, as well as how any statement is phrased, which does not necessarily need to condemn a party. As Andrew Rudin, the composer who started the petition to ask the Met to make a statement, implored, “I’m not asking them to be against anybody. I’m asking them to be for somebody”.

Could sponsors hold the key to stopping racism on the terraces?

So Lance Armstrong (under)stated recently that he’d had a ‘difficult couple of weeks’.

Just to recap. In the last fortnight or so (and despite his protestations of innocence), Armstrong has gone from being a much lauded athlete who overcame serious illness to dominate one of the world’s toughest sporting competitions to a discredited drugs cheat and stripped of all his titles.

A ‘difficult couple of weeks’ by anyone’s standards.

Since the evidence against him grew and former team-mates spoke out about his role in the doping culture in the US Postal team, the position of sponsors such as Nike has shifted. Where initially they stood by their man, they ultimately decided to cut the relationship, citing that he had “participated in doping and misled Nike for more than a decade“.

It’s one of the inherent dangers of sponsorship.

While your endorsee is sweeping all before them you are associated with success and glory. But as Tiger Woods sponsors found out a few years ago, if that star misbehaves your brand is associated with someone getting the headlines for all the wrong reasons.

The news that cycling has/had a doping problem is both unsurprising and depressing.

Unfortunately, the same can also be said for the experiences of the England U21 side in their recent play-off in Serbia.

Racism in football

Having been subjected to racist chants throughout the game, things came to a head at the final whistle when Danny Rose was sent off for kicking the ball into the abusing crowd and punches were thrown as players and coaching staff jostled their way towards the dressing rooms.

Racism is a blight on society. It exists in the UK and while it is not tolerated in public arenas, the economic downturn hasn’t helped our natural tendency to tribalism when things are tough.

For nations that haven’t experienced the levels of immigration of other ‘races’ that the UK has, attitudes to people with different colour skin are not as liberal. Let’s not forget that it wasn’t all plain sailing and painless for us to get to where we are.

Terminology that was common just a couple of generations ago is now taboo. TV shows of the 1970’s wouldn’t even be considered now. And footballers in the UK used to have to run the gauntlet due to their skin colour as recently as the 80’s and indeed, incidents are still being reported in 2012.

None of this excuses what happened in Kruševac and nor does it excuse the lenient approach footballing authorities have taken with racist incidents in the past. In a multi-billion pound industry, fines of tens of thousands of pounds have little impact.

FIFA and UEFA are keen to cite the power of football to change society when awarding tournaments to countries like Ukraine and Qatar but plead impotence when it comes to topics like racism.

The natural indignation in England has lead some to suggest that we should pull out of international tournaments to make a point. Such an action would most likely be met with champagne corks popping in Nyon and Zurich, and would only serve to further dilute our voice in the global game.

The Serbian FA could have offered UEFA a get out of jail card. A statement recognising the monkey chants, apologising to the FA and footballing family and a clear plan of action to ensure it never happens again would have enabled the games rulers to give them a slap on the wrist.

Yet the Serbian FA refuted clear evidence of racist chants and stated that any claims to the contrary were malicious.

‘FA of Serbia absolutely refuses and denies that there were any occurrences of racism before and during the match at the stadium in Kruševac. Making connection between the seen incident – a fight between members of the two teams – and racism has absolutely no ground and we consider it to be a total malevolence.‘

Had they sent a letter saying ‘Fuck you! We did nothing wrong and we’re not changing!’ their attitude couldn’t be any clearer.

And in doing so they batted the ball firmly into UEFA’s court making the question very clear.

Do UEFA believe there was racism at the game and if so, do they consider it acceptable?

Driving behaviour change

Behaviour change and persuasion are all about understanding what motivates of the people you are trying to influence. This means putting your own motives to one side for a moment.

In other words, if we want UEFA and FIFA to impose stronger penalties for incidents of racism we need to understand what influences them.

And let’s be honest, British indignation has never kept them awake at night.

Much higher on the list of priorities are the many sponsors who provide a huge chunk of the money that powers the multi-billion pound football industry.

Just like Nike and Lance Armstrong’s sponsors, FIFA and UEFA’s backers (which include brands like Coca-Cola, McDonalds and Adidas) have a rare opportunity to make their opinion on an unsavoury topic clear.

No brand wants to be associated with racism and upsetting the sponsors is something the footballing authorities do not tolerate. Just ask Niklas Bendtner who was fined £80,000 for showing his Paddy Power lucky pants during EURO2012.

Compared to the fines given to national associations for incidents of racism, it seems rather excessive.

Let’s face it, for all the anger,  griping and T-Shirt protests in England we simply don’t have the clout to demand action.

The sponsors are the ones with real power to influence, and maybe only a rebuke from the people who line their pockets will make finally FIFA and UEFA start taking racism in football seriously.