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.

For Luxury, what price service?

Whither the sage of a shop assistant? At a time when we as consumers have access to all the information we could want about a brand and its products via our smartphones, of what use is it to have someone tell me something that I am unlikely to take at face value, working as they are for said brand? Why even bother being in the store at all when I can be buying my item at home? The luxury goods company PPR (owners of Gucci, Saint Laurent Paris, Balenciaga et al.) could be said to have recently adopted a similar mindset. A new joint venture with e-tailer Yoox is sure to shake things up. Honcho Francois-Henri Pinault said recently, “While the whole industry has been resisting e-commerce for the last 15 years it’s now realising it’s inescapable”.

Not everyone believes such a move is inevitable. Chanel is steadfastly refusing to sell its principle collections – from ready to wear to handbags – online for the foreseeable future, according to a recent interview with the CEO. While this might strike some as akin to sticking one’s head in the sand, the reasoning the company gives centres around the unique experience of going into a store to buy a product, rather than sitting at home in one’s pajamas. From a strategic point of view, the idea is sound. Reducing avenues of purchase encourages a scarcity factor that high-end fashion must rely on. It also ensures that the products are seen in the best light possible, incredibly important when justifying such a premium. It’s interesting to note that though the thinking may be sound, it is certainly not appropriate for every luxury brand to be resisting the lures of online shopping in such a dramatic way. Chanel is – and always will be, in multiple ways – a very special company, an exceptional brand, in the literal sense. Like Apple though, it’s practices are to be emulated with caution, as a great paper by McKinsey Quarterly highlights. “Outliers are exactly that…”, the report states.

But what is the state of stores, and how important is service in these places? For luxury, we can assume a high priority of the physical shopping experience is connected to the person assisting you. Recent experiences at two different luxury goods stores highlighted jarring differences, monumentally affecting the way Zetigeist felt about the brand. Last month in New York, Zeitgeist visited Tiffany & Co. to find a Christening present. Without turning this article into a rambling letter of complaint, the section Zeitgeist found itself in was woefully understaffed, and when help was available, information turned out to be incorrect and, most importantly, not dispensed as if it were important to them. Zeitgeist left without buying anything. The experience was deflating enough to mention to the manager en route to leaving the store. Returning at the weekend to try again, the experience had not much improved. The item needed to be engraved. Taking it into one of the London stores upon returning home meant being greeted with the same mediocre level of service. No passion, no interest. This would be perfectly acceptable for somewhere such as Ernest Jones, but Tiffany is a massively, massively powerful brand. For many it is incredibly evocative, and speaks to nostalgia and deep-seated emotions with very personal connections. There is a dream that is Tiffany, that is replicated extremely well in their above-the-line marketing. It is completely absent in its physical embodiment, the store. Cartier, by comparison, manage to present a fantastical vision of their brand, while also maintaining a consistently excellent level of service in-store that brings cohesion to the image it evinces.

Louis Vuitton could not have presented a starker contrast to Tiffany. The brand had one brief flirtation with TV ads about four years ago. While also a powerful brand, it perhaps could not be said to elicit such powerful emotions as Tiffany, purely on the basis that Tiffany purchases might often be assumed to be gifts. Purchasing what is surely one of the cheapest things in the store, Zeitgeist was delighted to be led through the purchase process by an exceedingly-well trained woman, who was happy to go over the minutiae of the purchase, and knew answers to arcane questions when asked. It made the experience extremely pleasurable. Remarkably, the store went a step further, sending Zeitgeist a random act of kindness and imploring to get in touch if further assistance was required.

That kind of experience simply cannot be replicated online. If Amazon were to start selling Prada clothing anytime soon, the dissonance would be powerful. So while the luxury industry, and many in the retail sector at large, struggle with the idea of the shopper journey online, moreover how and where that connects with the physical journey, we cannot forget basics. The importance of good training, especially for demanding customer who are expecting a premium experience, cannot be overstated. Though smartphones and tablets may hold the data, it must be remembered that the purchase of a luxury product is often an irrational experience. The service and assistance received during purchase consideration may be an irrational influence, but it is an immensely powerful one. If a brand talks the talk, it must walk the walk, or face the consequences of failing to live up to its own promises.

Yves Saint Laurent – What’s in a name?

Zeitgeist has written before about the luxury goods company Yves Saint Laurent. Then-creative director Stefano Pilati opined, “[I]t’s such a contradiction, because we want to be luxurious and have 300 shops all around the world, but you can’t be luxurious with 300 shops around the world”. It’s always difficult to introduce dramatic innovation to a company that conversely prides itself on provenance and tradition. In trying to adhere to past methods, what starts out as a respectful outlook can lead to stagnation. It was evidently with this in mind that incoming designer for YSL, Hedi Slimane, has decided not only to personally redesign all retail environments – as he did at his last post at Dior Homme – but also to change the name of the brand itself, to Saint Laurent Paris.

It is not the first time a luxury label has grappled with a name change. “Gianni Versace” was similarly shortened some years ago to “Versace”; more recently Dolce & Gabbana’s more affordable “D&G” brand, announced it is to be shuttered due to consumer confusion over nomenclature. YSL’s name change is actually a return to tradition of course, as the brand used to be known as Saint Laurent Paris. This news was overlooked though on Twitter, where a lot of the knee-jerk reactions to the news were far from positive. The move will allow Slimane to stamp a real sense of authority on the brand, much as he did while at Dior, where many objective observers rightly claim he revolutionised contemporary menswear.

Most importantly though, the renaming should help move the brand away from the vestiges of any remaining cheap associations (evinced by the above person wearing a YSL polo shirt). In the 1980s, the company sold licenses to use its name to over 200 different companies, which led to poor-quality clothing being produced under the YSL marque, and a significant erosion of brand equity. A similar situation befell ’70s doyen Halston. Hedi Slimane’s Saint Laurent Paris has the opportunity to breathe new life into the company, while still maintaining a distinct sense of style that the eponymous designer would have been proud of.

All about Yves

The meaning of luxury, according to YSL creative director Stefano Pilati, has been somewhat lost of late, or at least transformed, as designer brands have jumped on the globalisation bandwagon, and now have to deal with the ramifications of the abundance / scarcity dichotomy.

“[I]t’s such a contradiction, because we want to be luxurious and have 300 shops all around the world, but you can’t be luxurious with 300 shops around the world.”

It’s an interesting comment, and one that certainly rings true. So many brands – in and out of the fashion world – designate themselves as being in the ‘luxury’ or ‘premium’ sector, it’s hard to know where the market starts and ends; it certainly helps dilute the meaning of words like ‘luxury’. However, with luxury groups aplenty recording impressive financial results of late, one would be hard pushed to see LVMH or PPR making any drastic redefinitions of what luxury is. You can read the rest of his comments to the fashion hipster’s bible, AnOther, here. Zeitgeist, for purely work-related reasons of course, is off to Paris at the weekend for the final days of the Yves Saint Laurent retrospective at the Petit Palais. Can’t wait.