Italy, it appears, is in the midst of an identity crisis. The country’s slow economic growth, political corruption, declining quality of life, aging population, and ongoing struggle to keep up with its partners in the European Union have taken a toll on citizens’ morale. A December 2007 article in The New York Times
headlined “In A Funk, Italy Sings an Aria of Disappointment” described Italians’ general discontent and worry over their economic future.
The gloomy environment is not just in their heads: an increasingly globalized economy poses a real threat to Italy’s small- and medium-sized family-run businesses, which make up 90 percent of its companies. Italian luxury goods firms are no exception; they must compete against international conglomerates to attract buyers of products such as designer clothing, accessories, watches, jewelry, and fine culinary items.
|GIM Europe 2007 with Fabio Gnocchi of Etro|
Many economists, however, say the brightest spot on Italy’s economic horizon lies with these purveyors of luxury goods. They contend that Italian firms can capitalize on their culture’s legendary sense of beauty and style through effective branding of their trademark craftsmanship, and they point to the longstanding success of brands such as Armani, Bulgari, Gucci, and Ferrari. Financial stakes are high: the global luxury goods industry is worth between €100 and €150 billion, and most analysts expect the market to grow by 10 to 15 percent annually until at least 2010.
Here, this specific market situation is examined in more detail through an analysis of the national and international challenges and opportunities facing Italian family-run firms in the luxury goods sector. Can these firms survive in an age dominated by conglomerates? If so, how can they best export their strengths around the globe? To answer these questions and illuminate best practices in this sector, representatives from several luxury goods firms in Europe and the United States were interviewed, along with financial experts in the industry. The Market Situation for Family-Run Businesses in Italy
Italy is a country with a long history of successful entrepreneurship across sectors. In addition to fashion, art, literature, and music, Italians became known over the centuries for a wide range of excellent products—olive oil from Tuscany, cheese from Reggio Emilia, and vinegar from Modena, just to name a few. Entrepreneurs and their family enterprises have stood at the center of the Italian economy, which has greatly influenced Italians’ view of business.
Family-run businesses tend to focus on long-term goals and viability rather than short-term gains, because owners wish to pass their companies down to future generations. Yet a number of factors can hamper their economic growth and prevent them from focusing on innovation, anticipating market trends, and producing high-quality goods. Many suffer from a lack of strategic vision among the founders, family members’ inability to communicate effectively, excessive control by the entrepreneur, and conflicting opinions among family members on which direction the business should take.
In addition, as the global business world has changed, Italian companies have been forced to play a little catch-up. The Cold War era’s highly regulated markets are disappearing, gradually replaced by free markets. World markets are integrating the goods and services of China’s and India’s enormous populations. Formation of the European Central Bank took away the Italian Central Bank’s ability to lower the value of the lira, taking away one competitive advantage of Italian exports.
To make matters worse, the last fifteen years have seen the rise of luxury goods conglomerates, particularly in France. Luxury goods giants LVMH Moët Hennessy- Louis Vuitton (LVMH), Pinault-Printemps-Redoute (PPR), and the Swiss conglomerate Richemont amassed powerful brands partly in response to competition from designers in Asia and elsewhere. LVMH, for instance, acquired and developed many of Italy’s most renowned family-run brands, including Pucci, Bottega Veneta, and Gucci.
Single-brand, independent Italian firms have watched the frenzy of mergers and acquisitions with dismay and no small degree of resignation. Observing this market situation, Corrado Passera, who as CEO of one of Italy’s largest banks boasts famous family-run luxury goods firms as clients, predicts that most Italian luxury houses will not ultimately retain their independence.
Conglomerates make sense in the luxury goods sector, which requires large marketing budgets to drive sales and product visibility. Conglomerates also have more resources to weather tough economic times. But some think their success is exaggerated. A study by Bain & Company found that European mono-brands, of which the majority is owned by independent family businesses, actually grew 60 percent faster than multi-brand conglomerates, and with equal profitability.
So where do Italian firms fit into this complicated picture? Consider Etro, a growing family fashion and textiles house based in Milan. Like most independent family-run businesses, Etro has focused on growing slowly in a structured way. And like Salvatore Ferragamo, Missoni, and a slew of other Italian houses, Etro must transition from the vision of its original founder to that of the next generation, which in its case are four second-generation members with a history of peaceful cooperation, making Etro something of an anomaly in this industry and others, where clashes among siblings are common and many if not most family-run firms face problems associated with succession.
With its ample internal capital and collaborative family members, Etro has managed so far to retain its independence. But that is not always the case. Most family-owned firms who historically financed their businesses through personal resources now realize they need to seek alternative funding to compete globally and penetrate new markets. Many first-generation owners are now handing control to their heirs, who tend to be highly educated, more internationally minded, and more knowledgeable about global financial options. Financing Options in Italy’s Luxury Sector
As would be expected, various financing options come with distinct sets of risks and advantages. Bank loans are one common alternative for businesses without enormous internal reserves. For the family, bank loans are appealing, posing little threat to their control of the company. Unfortunately, Italian banks have been cautious about lending money to family-owned business, especially since the 2003 fall of Parmalat, which defaulted on over €14 billion in debt. Another choice for firms is the debt market, which provides owners with an infusion of capital and continued control of the company. But issuing debt can be expensive, and investors are increasingly concerned that firms will not be able to meet bond payments.
The public market offers another option. Going public can increase brand awareness and provide a significant infusion of capital. The investing public, however, can be quite fickle and uninformed of the vagaries of the luxury goods industry, and entrepreneurs selling public shares also risk diluting their control.
Thus selling to strategic buyers, those who want to purchase the company for strategic reasons rather than purely financial motives, is another option for families needing funds but not eager to bow to investors’ whims. Benefits associated with this choice include economies of scale of distribution channels, raw materials, and management expertise. Selling to strategic buyers can also reduce risk and exposure in the market and insulate against industry swings. On the other hand, challenges include ego-related clashes between families and top designers, conflicts rising from an owner’s reluctance to give up control, and brand dilution.
Financial sponsors, those ready to buy companies for financial rather than strategic motives, represent yet another choice. Private equity firms, hedge funds, and venture capitalists offer closely held family firms several benefits: operational and management expertise, cost-saving measures, synergy-producing strategies, and valuable connections. Such sponsors can revitalize depleted firms and provide credibility with investors if and when the companies decide to go public. On the downside, financial sponsors’ goals can clash with those of business owners. While the family’s top priority could be brand sustainability, the sponsor will look for the greatest return on its investment, often over a shorter timeframe. Thus sponsors may wish to establish exit strategies that the family may not desire, such as eventually selling the firm to another financial enterprise or going public through an IPO. To maximize success, the firm and sponsor should have similar interests, and the sponsor should know the luxury goods industry well. Routes to Growth
As firms search for ways to leverage their brands globally, three main growth vehicles have become prevalent. First are the mergers and acquisitions exemplified by the brand portfolios of conglomerates LVMH, PPR, and Richemont. Second are line extensions, which involve offering consumers different designs at tiered price points, as exemplified by Armani’s wide range of clothing lines and luxury goods. Third is extending brand awareness through product placements, gala events, and e-tailing.
Despite the growing popularity of the conglomerate model, there is no optimal route to growing a family-run luxury goods business, managing its succession, or growing a particular brand within it. The optimal strategy will always depend on the company and its products, goals, and personalities. Yet there are some general guidelines in this context: investors like to see that families can incorporate outsiders into the existing business model, and believe that family firms need good middle management; they also advise businesses to guard the brand and find the best management possible.
Regardless of the strategies they choose, Italian luxury goods firms should continue to exploit the world’s desire for Italian-style luxury. These firms ultimately rely on each other for brand imaging, and the country has a large enough pipeline of entrepreneurs to continue to build the luxury goods industry as part of a happier, more prosperous Italy.