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.

Regulating in the face of digital disruption

Having studied policy and regulation at university, Zeitgeist is often compelled to look at many issues facing companies today through a regulatory lens. But even the most dispassionate fan of rules and laws would have to concede that as digital innovation disrupts multiple sectors around the world, the way these new innovations and businesses are governed is an important consideration. In this piece we’ll be looking at regulatory concerns for disruptors like Uber and Netflix, as well as how regulation effects legacy companies like Microsoft and Comcast. As with many of our articles on this blog, we’ll be taking a particular look at the TMT sector. (Bitcoin will have to wait for another article).

Regulators often find themselves caught between a rock and a hard place. Should the emphasis be placed ex-ante, to ensure compliance, or ex-post to apply punitive measures and fix problems once they have become apparent? The former seems wise as it sets initial goals for companies. But it also risks opening loopholes, as well as being overly prescriptive and thus failing to adapt. It can also lead to the development of overly-familiar relations between regulator and industry, leading to what is known as ‘capture’. Currently, the US favours an ex-ante approach, but as Edward Luce detailed recently in the Financial Times, this has led to a “creeping impulse to micro-regulate“. The FDA’s recent announcement that they would regulate e-cigarettes, despite no proof it encourages the take-up of smoking tobacco, is such an example. Ex-post – regulating after an event – seems just as bad, mostly because the damage has already been done at that point. While it means that all problems addressed are real-world and practical, they can also be applied with too much emphasis. Above all, regulation ultimately risks stifling innovation; Edison moved to the West coast because he was fed up of the stringent regulations in the East. A recent lead article in The Economist asserted that, far from too little regulation, the global recession was caused by too much state involvement in the wrong places. Too little oversight though, and companies can be allowed to run wild.

Earlier this month, The New York Times featured an op-ed on regulating the online world. It is written by New York State attorney general Eric Schneiderman. As might be expected, he quickly attacks online start-ups saying it is “amazing” that they think just because their business is online, that “somehow makes them immune from regulation”. This is all well and good, but it masks the fact that clear regulations have not been established. Schneiderman is right to point out that just because a business now has an app instead of a high street store doesn’t mean its responsibilities to the law have changed. It is an apt analogy. But in practice the story is different. As with most innovations, from film to Napster and Airbnb, regulators must constantly be playing catch-up. The complaints of new businesses are not that they should be subject to regulation, rather that those rules are onerous or outdated, applying to a different time. The sharing economy works because it has found cheaper, more efficient ways of offering services that hitherto were more restricted; regulations need to be appropriately dispensed. Sadly, many cities in the US have simply blocked allowing such services to operate. Uber – a car pickup service – is probably not wholly repulsed by the thought of regulation, but they are resistant to rules put in place by entrenched interests and unions. Airbnb might violate the letter of the law, but not the spirit surely. People have always let out their living space to others. The only thing that has changed is scale. Why does scale suddenly make something legally problematic? Schneiderman points out that some lettings are so large, with multiple rooms let at once, that they are essentially hotels. True enough, perhaps, but Zeitgeist has certainly never come across such a property, and they are certainly small in number, and no more represent Airbnb’s ethos than any hotel violating its own (regulated) terms. A recent article in The Economist argued for “adaptation, not prohibition“. Schneiderman’s sentiment is that these start-ups need to work more closely and proactively with regulators, but this fails to recognise that regulators need to also fundamentally change their approach.

East and West shook up a regulatory framework with the recent release of “300: Rise of an Empire” via China’s Tencent website

Regulation in China has been a hot topic for a while now. This is principally because the region has a low tolerance of free speech. But it extends to cultural concerns as well; the Google Play store, Twitter, and most of Hollywood’s annual product do not make it onto Chinese shores (legally, anyway). What this creates is a secondary tier of companies who take Western business models and run with it. That’s why there are multiple Chinese Android app stores, why Sina Weibo is a fantastically successful service, and why many poor remakes of US films flood the Chinese market. It has been pleasing then to see two recent developments in the way China regulates the TMT sector that should be good news for consumers and Western companies. Today saw the announcement that Microsoft’s Xbox One is to be sold in China. It will be the first foreign games console to go on sale in the country, lifting a fourteen year ban. This would open up the company to the half billion active gamers in China. Additionally, as Michael Pachter, analyst at Wedbush Securities pointed out,

“The middle class in China is pretty large, and positioning the box as an over-the-top TV receiver gives it a lot of appeal to wealthier Chinese.”

Earlier this week, Warner Bros was the latest film studio to partner with Chinese site Tencent. The film 300: Rise of an Empire, is available to rent through the site, while it is still in cinemas in territories like the US. The points of the deal were very interesting. Zeitgeist has for a number of years now advocated an increased flexibility to film platform release windows. Such a rigid structure as the industry has in the US is not as apparent in China. This could help alleviate piracy in the country and separately could pave the way for a relaxing of the quota of US films that are let into the Chinese market every year. Hopefully this will be a precursor to more such moves in Western markets. As someone commented on the news when it was published on the Financial Times website,

“Maybe they can do the same in the rest of the world as well?
Or I could wait 2 months for something to come out on Bluray in the UK compared to the US. Or just pirate it when the US version is available since they won’t let me buy it in my country, but will let other people buy it in other countries.”

While China is taking steps forward, the US seems to be faltering in its regulatory approach. We mentioned the impending restrictions on e-cigarettes earlier, and let’s not even go into then-mayor Michael Bloomberg’s crusade against sugar. We’ve written about net neutrality before. The issue has been of interest to Zeitgeist since university days. It was thrust into the spotlight this year when a US court ruled that the FCC had “overstepped its authority” after a legal challenge from Verizon. Last week, new rules were proposed that will undermine the original purpose of the policy of treating all traffic the same, allowing ISPs to charge companies like Netflix more in order to reach consumer with greater quantity or quality, but only on “commercially reasonable” terms. These terms have yet to be defined. These moves touch on a related matter that has also been greeted with consternation by those who favour fairness. This is Comcast‘s proposed merger with Time Warner Cable. Netflix recently publicly came out against the move. It is easy to see why. As The Economist recently elaborated, such a deal would limit competition and reduce any incentive to innovate. It is also one more example of the assumption companies have that their problems can be solved with size. Comcast have admitted they will raise prices for the end user, while as much as conceding there will no be no discernible benefit to them. One might argue there is little more for such companies to do, but average internet speeds in Tokyo and Singapore are ten times as fast on average as in the US. Even the Financial Times, which can often be counted on to be a bastion of support for capitalists, compared Comcast to the Railway Barons of the past.

The sharing economy is creating difficulty for many sectors, and regulatory agencies have not escaped this. Such forces have been to slow to adapt to fundamental changes in the TMT sector, particularly in print, music and film industries. There certainly seems to be a tendency for over-regulation today, particularly in the US. Returning to an article we mentioned at the beginning of our piece, Edward Luce laments that America “no longer feels unusually free”. Perhaps this is part of a cyclical trend. Like the causes of the recession, perhaps the problem is a stifling caused by over-regulation in the wrong places, coupled with a lack of innovation in areas where sensible rules that do not cater to the established are in dire need. It is good to see rules and regulations around consoles and release windows are being relaxed in China, but the furore around regulating the sharing economy needs a similar dose of innovative thinking.

UPDATE (17/9/14): We’ve included some nice examples in this post of innovative thinking paired with light touch regulation going on in China’s entertainment sector. Sadly the pendulum swings both ways; though shows like BBC’s ‘Sherlock’ were made available with authorised translations mere hours after their original broadcast in Blighty, the state is cracking down hard in other ways. The Economist reports that last week, China’s TV regulator said that, from April, any foreign series or film would need approval before being shown online. It is looking for “health, well-made works” that “showcase good values”. This sounds like a vague excuse to arbitrarily censor content it doesn’t like. Explicitly, banned subject matter includes, according to The Economist, “superstition, espionage and—bizarrely—time travel”.

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”.

The “Jaws” of death? – Rethinking film industry strategy

Steven Spielberg on-set for “Jaws”. The Leviathan gave birth to the summer blockbuster

This past week, Zeitgeist had the pleasure of enjoying a new adaptation of Shakespeare’s “Much Ado about Nothing”. This adaptation was not performed at the theatre but at the cinema. It was not directed by Kenneth Branagh or any other luminary of the legitimate stage, but rather by the quiet, modest, nerdy Joss Whedon, who until a few years ago was best known to millions as the brains behind the cult TV series phenomenon “Buffy the Vampire Slayer” (full disclosure: Zeitgeist worked on the show in his days of youth). Whedon was picked to direct a film released last year that can, without much difficulty, be seen as the apotheosis of the Hollywood film industry; “The Avengers”. A mise-en-abyme of a concept, involving disparate characters, some of whom already have their own fully-fledged franchises, coming together to form another vehicle for future iterations. “The Avengers” became the third-highest grossing film of all time, and it is a thoroughly enjoyable romp. Moreover, to go from directing on such a broad canvas to shooting a film mostly with friends in one’s own home – as with “Much Ado…” – displays an impressive range of creative ingenuity.

Sadly for shareholders and studio executives’ career aspirations, not every film is as sure-fire a hit as “The Avengers”, try though as they might (and do) to replicate the same mercurial ingredients that lead to success. Marvel, which originally conceived of the myriad characters surrounding The Avengers mythology, was bought in 2009 by Disney for $4bn. Disney for all intents and purposes have a steady strategic head on their shareholders. They parted ways with the quixotic Weinstein brothers while welcoming Pixar back into the fold. They were one of the first to concede the inevitability of closed platforms release windows – something Zeitgeist has written about in the past – they are debuting a game-changing platform, Infinity, which might revolutionise the way children interact with the plethora of memorable characters the studio have dreamt up over the years. However, such sound business strategy could not save them from the uber-flop that was 2012’s “John Carter”, which lost the studio $200m. This summer, the rationale for their biggest release has been built on what appears to be sound logic; taking the on- and off-screen talent behind their massively successful “Pirates of the Caribbean” franchise, and bringing them together again for another reboot in the form of “The Lone Ranger”. The New York Times said the film “descends into nerve-racking incoherence”; it has severely underperformed at the box office, after a budget of $250m. Sony’s “After Earth” similarly underperformed, suddenly throwing Will Smith’s bullet-proof reputation for producing hits into jeopardy.

These summer films – “tentpoles” to use the terminology bandied about in Los Angeles – are where the money is made (or not) for studios. As an industry over the past ten years, Zeitgeist has watched as these tentpoles have become more concentrated, more risk-averse and therefore less original, more expensive and more likely either to produce either stratospheric results or spectacular failures. Paramount is an interesting example of a studio that has made itself leaner recently, releasing far fewer films, and relying on franchises to keep the ship afloat. Edtorial Director of Variety Peter Bart seems to think there’s a point when avoiding risk leads to courting entropy. It’s an evolution that has escaped few, yet is was still notable when, last month, famed directors Steven Spielberg and George Lucas spoke out publicly against the way the industry seemed to be headed. Indeed, the atmosphere at studios in Hollywood seems to mimic that of a pre-2008 financial sector; leveraging ever more collateral against assets with significant – and unsustainable – levels of risk. The financial sector uses arcane algorithms and has a large number of Wharton grads whose aim should be to preserve stability and profit. Yet even with all this analysis, they failed to see the gigantic readjustment that was imminent. In the film industry, Relativity Media’s reputation for rigorous predictive models on what will make a film successful is rare enough to have earned it a feature in Vanity Fair. So what hope is there the film industry will change its tune before it is too late? Spielberg pontificates,

“There’s eventually going to be a big meltdown. There’s going to be an implosion where three or four or maybe even a half-dozen of these mega-budgeted movies go crashing into the ground and that’s going to change the paradigm again.”

Instead of correcting course as failures at the box office failed to abate, studios have dug in harder. Said Lucas,

“They’re going for gold, but that isn’t going to work forever. And as a result they’re getting narrower and narrower in their focus. People are going to get tired of it. They’re not going to know how to do anything else.”

Such artistic ennui in audiences is admittedly sclerotic in its visibility at the moment. “Man of Steel”, another attempt at rebooting a franchise – coming only seven years after the last attempt – is performing admirably, with a position still firmly in the top ten at the US box office after four weeks of release, with over $275m taken domestically. It’s interesting to note that audiences have been happy to embrace the new version so quickly after the last franchise launch failed; though actor James Franco finds it contentious, the same has been true with the “Spider-Man” franchise relaunch.

Is M&A finally out of vogue in the Media and Entertainment sector?

Part of the problem in the industry, some say, is to do with those at the top running the various film studios. In “Curse of the Mogul”, written by lecturers at Columbia University, the authors contend that since 2005 the industry as a whole has underperformed versus the S&P stock index, yet such stocks are still eminently attractive to investors. The reason, the authors say, is that those running the businesses frame the notion of success differently. They argue that it takes a very special type of person (i.e. them) to be able to manage not only different media and the different audiences they reach and the different trends that come out of that, but more importantly (in their eyes) to be able to manage the talent. They asked to be judged on Academy Awards rather than bottom lines. The most striking thing in the book – which Zeitgeist is still reading – is the continual pursuit by said mogul of strategic synergies. This M&A activity excites shareholders but has historically led to minimal returns (think Vivendi or AOL Time Warner), often because what was presented as operational or content-based synergy is actually nothing of the sort. It’s a point Richard Rumelt makes in his excellent book, “Good Strategy / Bad Strategy”. Some companies are beginning to get the idea. Viacom seemed an outlier in 2006 when it divested CBS. Lately, News Corporation has followed a similar tack, albeit under duress after suffering from scandalous revelations about hacking in its news division. A recent article in The Economist states,

“Most shareholders now see that television networks, newspapers, film studios, music labels and other sundry assets add little value by sharing a parent. Their proximity can even hinder performance by distracting management… they have become more assertive and less likely to believe the moguls’ flannel about ‘synergies’.”

So in some ways it was of little surprise that Sony came under the microscope recently as well, part of this larger trend of scrutiny. The company has experienced dark times of late, with shares having plunged 85% over the past 13 years. The departure of Howard Stringer in 2012 coincided with an annual loss of some $6.4bn. Now headed up by Kazuo Hirai, the company has undoubtedly become more focused, with much more being made of their mobile division. Losses have been stemmed, but the company is still floundering, with an annual loss reported in May of $4.6bn. It was only a couple of weeks later that hedge-fun billionaire Dan Loeb – instrumental in getting Marissa Meyer to lead Yahoo – upped his ownership stake in Sony, calling on it to divest its entertainment division in a letter to CEO Hirai. Part of the issue with Sony is a cultural one, where Japan’s ways of working differ strongly from the West’s. This is covered in some detail in a profile with Stringer featured in The New Yorker. In a speech he gave last year, Stringer said, “Japan is a harmonious society which cherishes its social values, including full employment. That leads to conflicts in a world where shareholder value calls for ever greater efficiency”. But Sony’s film division – which includes the James Bond franchise – is performing well; in the year to March 2013 Sony’s film and music businesses produced $905m of operating income, compared with combined losses of $1.9 billion in mobile phones, according to The Economist. It ended 2012 first place among the other film studios in market share. Sony is the last studio to consistently deliver hits across genres, reports The New York Times in an excellent article. The article quotes an anonymous Sony exeuctive, “We may not look like the rest of Hollywood, but that doesn’t mean this isn’t a painstakingly thought-through strategy and a profitable one”. Sadly the strategy behind films like ‘After Earth’ begin to look flimsy when one glances at the box office results. While Hirai and the Sony board concede that have met to discuss the possibility of honouring Mr. Loeb’s suggestion – offering 15-20% of it as an IPO rather than selling it off in full – Mr. Hirai also commented in an interview with CNBC, “We definitely want to make sure we can continue a successful business in the entertainment space. That is for me, first and foremost, the top priority”. In mid-June Loeb sent a second letter, advocating the IPO proposal and saying “Our research has confirmed media reports depicting Entertainment as lacking the discipline an accountability that exist at many of its competitors”. The question is whether selling off its entertainment assets would remove any synergies with other divisions, thus making the divisions left over less profitable, or whether such synergies even existed in the first place. For Loeb, the “most valuable untapped synergies” are still in the studio and music divisions yet after decades as one company they still remain untapped. That point won’t make for pleasant reading at Sony HQ.

Another problem is the changing nature of media consumption habits. Not only are we watching films in different ways over different platforms, we are also doing much else besides, from playing video games, which have successfully transitioned beyond the nerdy clique of yesteryear, to general mobile use and second screening. This transition – and with it a realisation that competition is not likely to come from across regional boarders but from startup platforms – is largely being ignored by the French as they insist on trade talks with the US that centre on the preservation of l’exception culturelle. Such trends are evident in business dealings. The Financial Times this weekend detailed Google’s significant foray into developing content, setting up YouTube Space LA. The project gives free soundstage space to artists who are likely to guarantee eyeballs on YouTube, and lead to advertising revenue for the platform. From the stellar success of the first season of “House of Cards”, to DreamWorks Animation’s original content partnership announced last month, Netflix has become the bête noire for traditional content producers as it shakes up traditional models. We have written before about the IHS Screen Digest data from earlier this year, showing worrying trends for the industry; as predicted, audiences are beginning to favour access over ownership, preferring to rent rather than own, which means less profit for the studio. As much due to a decline in revenue from other platforms as growth in of itself, cinemas are expected to be the major area of profit going forward to 2016 (see above chart). We’ve written before about the power cinema still has. Spielberg and Lucas pick up on this;

“You’re going to end up with fewer theaters, bigger theaters with a lot of nice things. Going to the movies will cost 50 bucks or 100 or 150 bucks, like what Broadway costs today, or a football game. It’ll be an expensive thing… [Films] will sit in the theaters for a year, like a Broadway show does. That will be called the ‘movie’ business.”

In a conversation over Twitter, (excerpts of which are featured above), Cameron Saunders, MD of 20th Century Fox UK told Zeitgeist that “major changes were afoot”. Such potential disruption is by no means unique to the film industry, and should come as a surprise to one. Zeitgeist recently went to see Columbia faculty member Rita McGrath speak at a Harvard Business Review event. In her latest book, “The End of Competitive Advantage”, McGrath discounts the old management consultant attempts at providing sustainable competitive advantages to business. Her assertion is that any advantage is transient, that incumbency and success often lead to entropy, unless there is constant innovation to build on that success. Such a verdict of entropy could well be applied to the film industry. The model has worked well for decades, despite predictions of doom at the advent of television, the VCR, the DVD, et cetera ad nauseum. But fundamental behavioural shifts are now at play, and the way we devise strategies for what content people want to see and how they wish to see it need to be readdressed, quickly. Otherwise all this deliberation will eventually become much ado about nothing.

UPDATE (15/4/13): Of course, context is everything. The New York Times published an interesting article today saying investing in Hollywood is less risky than investing in Silicon Valley, though the returns in the latter are likely to be greater. Neither are seen as reliable.

This issue isn’t going away. We write again about it, here.

The Big Data Fallacy

The latest issue of Foreign Affairs features the cover article “The Rise of Big Data” by Kenneth Cukier and Viktor Mayer-Schoenburger, which mostly details some of the incredible ways companies like UPS, Google and Apple have come to rely on vast arrays of numbers in order to run their businesses better. But data has always provided a problem in that it gives a substantive assurance of certainty that has a propensity to foster overconfidence in those relying on it. The article attempts to address this:

“[K]nowing the causes behind things is desirable. The problem is that causes are often extremely hard to figure out… Behavioural economics has shown that humans are conditioned to see causes even where none exist. So we need to be particularly on guard to prevent our cognitive biases from deluding us; sometimes, we just have to let the data speak.”

The sentiment here is admirable, and the context perceptive. But the final part of the quotation (my emphasis) assumes wrongly that data can speak objectively, that there is a fundamental ‘truth’ in a number. All too often though the wrong things are measured, or not all variables are measured. What data does not record, or worse, cannot record, can often be overlooked. While ostensibly data is there to provide assistance with building models and predicting future trends and movements, it sometimes leads to a very narrow view of one particular future, and fails to account for possibilities, that, though while unlikely, could potentially be devastating. This is what Nicholas Taleb writes about in his by turns unreadable but seminal work, Black Swan. The fictional, paranoid loner Fox Mulder of the hit series The X-Files had it right fifteen years ago when he lamented “in a universe of infinite possibilities, we may find ourselves at the mercy of anyone or anything that cannot be programmed, categorised or easily referenced”. The financial system before 2008 was a victim of such narrow thinking. 

Hendrik Hertzberg, in his Talk of the Town column “Preventive Measures” in this week’s The New Yorker, made the adroit analogy with the 2002 film Minority Report in our quest to categorise and predict acts of crime. Hertzberg points out that in reality this “turns out to be a good deal more difficult than investigating such an act once it occurs”. Indeed, such prediction methods are being implemented, just with somewhat less efficacy than in the Tom Cruise movie. The stop-and-frisk procedure currently employed by the New York Police Department points to a sustained effort to engage in preventative measures to reduce crime, effectively what Cruise and his myrmidons were doing, albeit without the help of psychic imagery as in the film. While the psychic “Pre-Cogs” turned out to occasionally disagree, the success rate with stop-and-frisk is even less attractive. “In the final months of 2012”, writes the New York Times, only 4% of stops resulted in an arrest. But what is this low figure telling us…?

Hertzberg also alludes to the dilemma of mountains of data, produced without concern for oversight or management; producing more just because it’s possible to produce it, rather than thinking about the implications:

“This fall, the National Security Agency, the largest and most opaque component of the counter-terrorism behemoth, will [open] a billion-dollar facility [analysing] intercepted telecommunications… each of the Utah Data Center’s two hundred (at most) professionals will be responsible for reviewing five hundred billion terabytes of information each year, the equivalent of twenty-three million years’ worth of Blu-ray DVDs… that’s a lot of overtime.”

The other problem this data poses – and increasingly this goes for many industries that are jumping on the Big Data bandwagon – is that intelligence departments and businesses alike are now technically able to put quantifiable targets and figures to what they want to achieve, without considering whether such targets are actually applicable. Police claim the low stop-to-arrest ratio implies that they are preventing crimes by stopping someone before they act. There is nothing to argue otherwise. The New York Times article alludes to the debate over what ratio or percentage the Supreme Court would be comfortable with under the tenet of “reasonable suspicion”. This leads down a dangerous path where we treat data as an answer to a question, rather than as supporting evidence to an answer.

Up in smoke: Trends in buying movies and content ownership

Like the main protagonist in The Artist, film audiences are increasingly falling out of love with physical film. A recent IHS Screen Digest webinar presented some interesting notes on home entertainment trends around the world. Most of it was far from good news for media companies.

Emerging markets are where a lot of industries are currently looking to for growth, from WPP to the Catholic church. The film industry is seeing growth here, too. China, which last year relaxed its quota on the number of foreign films it allows into the market every year, has seen record box office takings of late, with the release of Titanic being a major highlight. Russia, too, is seeing a new audience for film. On a macro level, countries like India and Brazil are seeing a significant growth in the middle classes. In other words, a group of consumers that has a larger amount of discretionary spending. Some of this spending will be allocated to home entertainment, in the form of video players, be they DVD or Blu-ray. However, this jars with the global decline in physical media spend, as viewers switch in droves to streaming platforms like Netflix and Amazon’s Lovefilm. Data from the IHS webinar revealed that the global growth in video players will not serve to offset the decline of spend on physical media.

As well as shifting from hard copy to soft copy products, consumers are also beginning to show a marked preference for renting over owning. This trend extends far beyond the film industry of course. Companies like Spotify spearheaded the idea in the music industry, the phrase “access trumps ownership” has long been a mantra there. The philosophy is affecting many lifestyle aspects, as demonstrated by The Economist’s recent front cover article. In Western Europe, rental is now the transactional consumption choice for digital movies. IHS data reported that the average US citizen rented 5.3 films last year. The company predicted that revenue from rentals will go up, returning to where they were in 2009, but in large part only because rental prices will go up. Dovetailing with the increasing consumer reluctance to buy physical discs is that the medium also appears “less and less attractive” for retailers. Blu-ray, which was supposed to revive the disc format, has not taken off in the way that was hoped; IHS data showed most Blu-ray owners still purchase a lot of movies on DVD rather than paying a premium for the HD version.

The move from physical to digital formats is troubling to media companies because, IHS report, “transactional online movie spending will not reach levels of physical spend” anytime soon. Indeed, theatrical is predicted to take up an ever larger slice of the pie (see above). This is without considering relative externalities, such as piracy, which remains a huge problem in Asia. And while consumer spending on online movies will almost double in AsPac, the share in wider consumer spending on movies in the region will not move beyond the current share before 2016.

One solace could be found in cinemas, a special haven for a medium without distractions, providing ample opportunity to leverage some of the more irrational desires and behaviours of consumers. We wrote briefly about various opportunities recently, and it’s reassuring to see the news earlier this month that Digital Cinema Media in the UK, an advertising sales house jointly owned by Odeon and Cineworld, will “in the coming months” launch a mobile app that will attempt to track cinema visits in order to feed data back to advertisers. In return, audiences will get exclusive content, vouchers or free ice cream. Given that the cinema is surely one of the few areas where you can pretty much guarantee a captive audience, this sounds like a great idea. How much it will offset lost revenues from home entertainment though remains an open question.

UPDATE (30/4/13): Data gathered can sometimes be misleading of course because it fails to report things that are not being measured. Such is the case with the current trend, recently reported by The New York Times, of sharing multi-platform viewing accounts for products like HBO Go among friends and even strangers. This trend represents a threat to revenue, but also an opportunity to create further loyalty, if used wisely. Forbes questioned the legality of such activity in a follow-up article.

Taking flight – Opportunities and obstacles in democratising luxury

I don’t think democratic luxury exists. I don’t believe in something for everyone… How can we possibly put these products on the Web site without the tactile experience of luxury?”

– Brunello Cucinelli

The democratisation of fashion took a beating this past week as news reached Zeitgeist that Fashion’s Night Out was to be no more. Spearheaded by Anna Wintour at the height of the global recession, the idea was for a curated evening; a chance for stores to open their doors late, inviting a party atmosphere and focussing spend on a calendar event. The Wall Street Journal wrote that last year, “Michael Kors judged a karaoke competition at his store on Madison Avenue, rapper Azealia Banks performed at the MAC store in Soho and a game night was held at a Kate Spade store.” The evening festivities were replicated across New York, London and other cities.
Zeitgeist happened to be on Manahattan’s Spring Street last September when the most recent FNO was held, waiting patiently for a perenially-late friend who works next door to Mulberry. While waiting, it was absolutely fascinating to see the sheer of variety of people out on the street. While the crowds were mostly composed of women, the groups ranged from college-aged JAPs and the avant-garde to hipsters and stay-at-home mothers. Most gawped excitedly as they beheld the Mulberry boutique, enticed by the glimpses of free food and drink, as well the sultry bass tones of some cool track. One elegantly dressed fashionista strode hurriedly past Zeitgeist, lamenting to her cellphone “Oh God, it’s Fashion’s Night Out tonight”.
Ultimately perhaps it was such feelings among the fashion set that caused FNO to come to an abrupt end. But Zeitgeist got the sense that, while undeniably a celebration of fashion and an opportunity for brands to showcase their attractively experiential side – particularly to those who might usually be deterred by luxury brands and their perceived sense of formality – there weren’t a great deal of people actually buying things. It’s quite possible that the whole strategy of attracting a crowd who would not otherwise frequent such stores backfired; they turned up, sampled the free booze, felt what it must be like to shop at such-and-such a label, then moved on to the next faux-glitzy event with thumping music. This then was a failed attempt to bring luxury to the masses.

On a macro scale, the cause for democratisation is hardly helped by the global financial crisis. Although over four years old, the ramifications and scarring done to the economy are still sorely felt. This is illustrated in the unemployment figures around the world, tumultuous elections and anecdotal tales of hardship. More starkly, they are being backed up by solid quantitative research that proves we as a world are less connected now than we were in 2007. In December last year, The Economist reported on the DHL Global Connectedness Index, which concluded that connections between countries in 2012 were shallower (meaning less of the nation’s economy is internationalised) and narrower (meaning it connects with fewer countries) than before the recession. Meanwhile, just this past week, the McKinsey Global Institute published a report showing financial capital flows between countries were still 60% below their pre-recession high. This kind of business environment hardly fosters egalitarian conduct, and indeed such isolationist thinking was on show at Paris Fashion Week recently, where designers clung to their French heritage as a badge of honour. Exactly at the time when art needs to be leading the way in cultural integration, as emerging markets not only continue to make up a larger part of the customer base, but also develop their own powerful brands, it seemed that designers, like the financial markets, retreated to what they knew and found safe.

The world is less connected today than in 2007

Where the ideology of democratising fashion has seen more success is of course online. We’ve written before about how luxury is struggling with the extent to which they invest in e-commerce. One of the principle hurdles is that the nature of luxury – elite, arcane, exclusive – is more or less diametrically opposed to the nature of the Internet – open, borderless, democratic.
Yet the story of Yoox – the popular and, in online terms, long-lasting fashion ecommerce platform – and its founder is one of just such democratisation. (It is particularly stunning to read of the difficulties the founder, a Columbia MBA graduate, Lehman Brothers and Bain & Co. alum, had in attracting VC funding). It also, crucially, points to the importance of recognizing multiple audiences, and how they like to shop differently depending on context. John Seabrook, writing in The New Yorker, reports that when Federico Marchetti set up Yoox in 2000, the world of ecommerce for fashion was regarded as a not particularly salubrious environment. Rather, the magazine compares it to outlet stores like Woodbury Common, fifty miles north of New York. Luxury brands like Prada and Marni could be found there, offering deep discounts on their wares, and it was for that reason – and the lack of control over their own brand – that they didn’t like much to talk about such places. This, despite the fact that they attracted 12 million people in 2011, “almost twice the number of visitors to the Metropolitan Museum”. Yoox was likewise greeted with much trepidation by fashion retailers. The article quotes an analyst from Forrester Research:

“It was a matter of principle with luxury brands that only people who shop on eBay use the internet – and their only interest was in getting a low price.”

Marchetti’s only available source of designer clothing was from last season and beyond, as no brand would sell their current collection. He curried favour with some of them though by advertising the prices without noting the discount customers were getting. Other than that, luxury brands took little or no notice.

Online shopping though would prove to be “one of the largest disruptions of the luxury-goods industry since the birth of the department store”. There are three kinds of online store today; those that sell deep-discounted goods on end-of-season wear, those that sell in-season clothing, and those that have flash sales of small numbers of clothing or accessories. It turned out there was an audience for all of these types of website. Bridget Foley, executive editor of WWD is quoted in the article saying “[T]here has been a sea change in attitude… I think [it] surprised the fashion industry… Just because you love clothes doesn’t mean you love shopping“. This struck Zeitgeist as one of the more important insights in the lengthy article. Though retailers often harp on about the importance of the retail environment, the need to touch the product, to be in an atmosphere where everything has been curated down to the finest detail, online neutralises all of that. This idea threatens those in the luxury sector, as the thinking goes that any such premium on products may seem less justifiable away from a Peter Marino-designed armchair and a nice glass of champagne. Such ideas are being challenged though. Not only is the nature of the store changing – from robotic sales staff to customers as models on the catwalk – but so is the view of the luxury customer as a homogenous, static group, devoid of context. Zeitgeist was at a Future of Media summit at the Broadcast Video Expo last week, where, as behavioural economics suggest, MD of Commercial, Online and Interactive for ITV Fru Hazlitt insisted that consumers had to be targeted in ways that were pertinent to them, not only as demographic groups, but in ways that recognised the context of how approachable they were likely to be at the time, given the programming they were watching. Fru admitted that in years past, broadcasters like ITV had seen advertising as “space to rent out”. Now they were thinking deeply about how and when is the right moment to reach their target consumer. It is the same in fashion. There is not one single way to reach the consumer; buyers of luxury goods do not want to be solely restricted to being able to buy your wares in a physical store.

Chanel are one of the few remaining luxury brands to resist fully integrating online

Behavioural economics played a role in Marchetti’s initial framing of the audience for the website as well. He hired pedigreed fashion writers, as well as artists, architects and designers to make special projects that lent the website an air of curation, of something more special and rarefied that what one might find – or more importantly the way one might feel – at an outlet mall. Marchetti wanted the customers “to see themselves as connoisseurs, even if they were really just hunting for bargains”. The New Yorker article goes into some anecdotal detail about the way people shop on Yoox, which crucially differs not only from the way they would shop in-store, but also from other e-tailers. For online shopping in general, the experience is one where you can purchase ten items, and return nine of them with very little hassle, with credit for multiple rather than a single brand, and certainly no raised eyebrow from a pretentious shop assistant. Regarding specific sites, Yoox, unlike Net a Porter, for example, does not try to force a set of looks onto the user. Behavioural economics tell us that people irrationally value something more when they’ve been made to work a bit to get it. Such is the case now shopping for luxury items, which makes clothing not in-season (i.e. not currently in every shop window), both cooler and cheaper. It’s an act not to be discouraged. A Saks representative says customers who shop online as well as in store buy four times as much merchandise as customers who shop only in the store. What will worry retailers though is that the convenience of the online store outweighs the experience of the physical boutique. The New Yorker quotes a shopper: “I’ll never buy a dress at the Prada boutique again after getting these really amazing ones on Yoox.”

As well as setting up the Yoox website, Marchetti’s company now also powers the online stores of more than thirty fashion houses, including Armani and Jil Sander. Last summer, PPR joined in too, after conceding that their in-house expertise was not up to snuff. The latest development is making designs available to any customer as soon as it hits the runway. Burberry, as well as separate sites like Moda Operandi, have spearheaded this innovative change, which is effecting editorial as well as buying methods previously seen as unshakeable. The demand for this type of instant purchasing seems to be fueled by a niche – albeit a sizable one – that is not representative of the majority of luxury shoppers. The accessibility of a brand and its products is a tricky one to tread, one which Zeitgeist has written about several times before. Tom Ford performed a volte-face this year, after debuting his womenswear collection with no press and VIPs only, relented this year at London Fashion Week by letting bloggers write about the show. Chanel still steadfastly refuses to fully engage with online shopping. The tension is keenly felt in the New Yorker article, where Amazon’s new entry into the world of fashion is referenced. The CEO of Valentino is unconvinced: “Valentino is high luxury… People going to Amazon are not going to Valentino“. This smacks a little of pride and ignorance, for they most assuredly are, though perhaps not with luxury purchases in mind… yet.

It comes back to the idea that there are myriad types of luxury consumer. The industry has not fully acknowledged as of yet that the buying behaviour of a descendant of the ancien regime in Paris is unlikely to buy in the same way as a newly-minted businessman in Shenzhen. They may know that these types of buyers exist, and they may even create different products for each. Importantly though, they are not recognising that these people may go about purchasing in a different way. It’s not just a purchase journey that has changed massively in recent years, as McKinsey’s consumer decision journey illustrates above. It’s also, as ITV’s Fru Hazlitt insists, about recognising that different people shop in different ways, wholly dependent on context. Though Fashion’s Night Out may be on permanent hiatus, and though the global economy may be sputtering along in second gear, the opportunities to leverage deep insights into consumer purchase preferences are there for the taking. Yoox, along with a deeply complicated algorithm, are trying to tap into just this. But the process must start with realising that yes, actually, someone might want to pick up that Valentino dress while surfing on Amazon.

Making Retail Truly Emotional

A great ad featured during a commercial break in the Academy Awards broadcast tonight on ABC. There’s no shortage of data out there pointing to the decimation of the retail sector, and we have written on the subject before. Stores cannot be promoted from a practical viewpoint any more; the internet has put paid to that. The irrational, emotional connection is what companies like JCP – after enduring troubles with another rebrand – are counting will bring customers into store. It’s a nice ad that feels genuine.

UPDATE (28/2): Great advertising sadly can’t always save a company from poor financial performance. The stock dipped today by over 20% as the company backtracked on a previous strategy, deciding to hold daily sales after completely swearing them off a year ago. Walter Loeb, a retail consultant and former senior retail analyst at Morgan Stanley, proclaims the company “lost its core customer during the transformation”. Oops.

UPDATE (25/3): James Surowiecki, writing in The New Yorker, has a good piece on jcp’s trials and tribulations, here.

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.

Selling the extraordinary

“Everything has become more experiential”

– Dante D’Angelo, brand and consumer development director at Valentino

It is an odd state of affairs indeed for the retail sector at the moment. On the one hand, consumers are flocking to digital devices like never before, particularly for their shopping. Conversely, this means that the physical experience of shopping becomes rarer, creating more opportunities for specialism. An article in the Financial Times a few weeks ago read as if a commercial plague had swept through the UK high street over the past few years. With 4,000 stores affected, 2012 was, according to data from the Centre for Retail Research, the “worst year since the start of the credit crisis in 2008”. Names of erstwhile stalwarts like Woolworth’s, Jessop’s, Peacocks and Clinton Cards have all fallen under the knife. As we wrote at the beginning of last month, what little salvation there is lies in embracing digital technologies.

The luxury sector however has its own special, gilt-edged cards to play. In St. Tropez, the Christian Dior boutique’s ample courtyard has recently been made use of with an all-day restaurant. Louis Vuitton have a cinema screening classic Italian films in their Rome boutique. It’s no wonder such brands have also branched into the hospitality sector, the former working with the St. Regis to develop branded rooms, the latter into full-scale hotel management. Ferragamo have been involved in the hotel sector for years. Two recent examples show how companies can extend the experience for visitors, and help drive revenue at the same time.

The auction house Sotheby’s will tomorrow auction a rather large collection of surrealist art. One of the few things that definitively puts it ahead of Christie’s is that it has its own cafe, which, last week and this week, is pushing the surrealism theme into its catering (see above menu). It’s a simple, creative idea that creates a cohesive brand, celebrates a big event, and ultimately hopes to drive revenue from peripheral streams around the auction. The RA’s current Manet exhibition is taking a leaf from this tactic, opening later but charging double the usual rates for a special experience, including a drink and a guide. The other interesting news of note was a new tactic being employed by the fashion company Valentino. Not content merely with having a major exhibition at London’s Somerset House, the label is also tinkering in an innovative way with its event structure. As detailed last week in Bloomberg Businessweek, Valentino is opening a new boutique in New York later this year, during which the typical glitterati will be in attendance. However, the new idea comes in the form of the company inviting prized customers to the opening for the chance to rub shoulders with said VIPs, for a steep price. Similarly, Gucci is offering its non-VIP customers tours of its Florence workshops for the first time.

Something that Zeitgeist has been noticing for a couple of years now, recently echoed by Boston Consulting Group (BCG) senior partner Jean-Marc Bellaiche, is the importance, particularly for those in their 20s – like Zeitgeist – that people place in defining themselves by what they’ve done rather than what they own: “In an era of over-consumption, people are realizing that there is more than just buying products… Buying experiences provides more pleasure and satisfaction”. On a macro level there is significant bifurcation in the retail market; not everyone will be able to afford in creating extraordinary experiences for their customers. A recent BCG report helps illustrate this, noting that while the apparel sector as a whole saw shareholder returns fall by 1.3% for the period 2007-2011, the top ten players produced a weighted average annual total shareholder return of 19%. Expect then for retailers – those that can – to increasingly provide exclusive experiences to their customers, beyond the celebrity, whether it be early product releases, tours, or events. Just don’t expect it to come without a pricetag.