The past year has had a hard impact on the fashion and luxury industry. As highlighted by a Bain and Altagamma report in January, the overall luxury market-encompassing both luxury goods and experiences-shrank by 20 to 22 percent at current exchange rates, and is now estimated at approximately €1 trillion globally, back to its 2015 levels.
And while its latest update notes the recovery seen in the first quarter of the year – the market is expected to reach between €250-€295 billion – the outlook for 2021 still remains uncertain.
In such conditions, it comes as no surprise that there is feeling of increasing risk within the industry today, as the uncertainty over how the pandemic will evolve and the endemic weakness of a system that is almost completely reliant on China for its business growth begins to put more pressure on the market.
And nowhere is this most apparent than Italy.
The birthplace of globally renowned brands such as Gucci, Prada, Brunello Cucinelli, Fendi and many others, Italy is also the beating heart of leather goods know-how, the place where some of the most prestigious high-streets of luxury are located, the paradise of outlet shopping and much more.
Italian brands have proved since the last century how to be clever in terms of product creation and technical savoir faire, conquering the appetite of many different customers: from Japan in the ‘80s and ‘90s, Russia and the Middle East in the 2000s, and of course, now to China, with an acceleration that began in 2008.
Indeed, fashion and luxury would not be as relevant as they are today in the economy of the most advanced countries, without Italy. But a game of Risiko is in the air this year. Risiko is the Italian version of Risk, the board game of diplomacy, conflict and conquest (as highlighted by Wikipedia), and it is in Italy that is the biggest and most strategic part of the game that is being played today.
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Despite Italy’s strengths, many of its fashion and luxury brands have demonstrated weakness in their business vision, company governance and a sort of a haze that seems to have taken over their founders and key executives that has prevented a healthy growth of most of its brands.
While heritage and great product are strategic assets, today fashion and luxury brands cannot just rely on that. As Prada, one of the few successful, independent Italian fashion groups, demonstrated in the last five years, a total reset of the strategy is a must to keep the pace with the harsh competition. And to be successful, the shift must start with a mindset and brand vision but has to be strictly followed within the business model and the digital transformation.
This endemic weakness of the system has allowed (mainly) French groups to acquire unsteady brands like Fendi and Bottega Veneta, that have been very successfully relaunched thanks to the French skills in setting up new chapters of established but shaky or too niche companies.
Italy has already been the battlefield of French groups in the ‘90s when the Pinault family business acquired Gucci and LVMH bought Fendi. The Pinault versus Arnault fight to acquire Gucci and Fendi (with a little help from Prada's Patrizio Bertelli who supported Bernard Arnault against arch-enemy Gucci Group) was without any doubt the “mother of all battles” and that set up a competition that even today is very hard to settle (despite LVMH being more than three times bigger in revenues compared to Kering, with a 2020 turnover of €44.7 billion versus €12.6 billion).
And while in Italy successful, profitable luxury groups of a certain size have yet to be established, in France and Switzerland, the foundations of their luxury conglomerates has been fruitful thanks to Bernard Arnault, Francois Pinault (and his son Francois-Henry) and Johann Rupert. These three visionaries took bold decisions in investing in the expansion of the groups they lead, reaping so many interesting fruits that Bernard Arnault was acknowledged by Forbes as the world's richest man (and family) in the world with a net worth of $186.3 billion.
Which brings us to today, with Italian brands particularly weak due the ongoing effects of the ongoing global COVID-19 pandemic, mergers and acquisitions have become the next mantra of the fashion and luxury industry.
A mere glance at the most recent events over the past year and a half confirm the bubble of activity happening in Italy, with brands like Moncler, Tod’s and Armani in the news, confirming Italy’s status as a fertile hunting ground for those groups or investment funds willing to expand their power in the industry or to take advantage for short term financial gains.
But the trouble with being acquired by a luxury conglomerate or private equity group, is that these companies have their own risks to consider. Luxury conglomerates risk becoming trapped in the rat race for growing revenues and margins, becoming giants with feet of clay, hugely dependent on share value and on the appetite for short term results of avid investors.
The need for big buzz and high visibility can weaken the resistance to choosing the long-term, slower but steadier way of growing a brand like Hermès and Chanel, that lead the way for establishing brand value and equity. Case in point, pre-owned Hermès Kelly bags were the second most sought after product for women, according to the latest Lyst 2021 ranking.
The question remains over about how much these corporations will be able to increase volumes, grow margins and keep an aura of healthy exclusivity and whether this even remains possible.
In this game of risk, there are also bright spots to consider. Optimism about a US recovery and the growth of e-commerce provide new opportunities for brands to develop into.
Smart fashion and luxury brands will try to diversify as much as possible and start considering once again the United States as a very key market for their products, as relying solely on China would be the most dangerous of all games.
The digital transformation provides another opportunity for brands wishing to survive and thrive this challenging time but it will not come without sacrifice. In order to succeed in the digital transformation, fashion and luxury brands will have to sacrifice its certainties, the old comfort zone and business model, its dark side rich of parallel worlds (and markets), its lack of interest for innovation, its ivory towers and secret garden, its male-focused lobbies and the rigid approach of those who have won lots of trophies in the past.
Enhancing digital transformation is not just investing in contents to be posted on Instagram, is not paying influencers to dance on TikTok and it’s not even having focus groups of GenZers working for them full time.
It’s about being authentic, true to the values that are highlighted in the corporate websites, opening to a new world made of people that have different point of views and making the effort to integrate them in the most effective way. It’s about creating new business models that fully integrate online and offline businesses in a transparent manner and going beyond the customer-centric stereotyped approach, it’s about taking care of their employees, customers, stakeholders and, eventually, their shareholders. Not vice versa.
The last opportunity of the fashion and luxury industry to consider is to return to that candid energy that has made many brands a success, which is often at risk due to an unstoppable financial pressure that throws smoke even in the eyes of the most skilled managers, pushing them to believe that an infinite growth is not only possible but also beneficial.
The agile mindset and the enthusiasm of its founders, the vision of its best top executives and the faith of the artisans and craftsman in the beauty of creating treasured items should be kept in a very precious crystal bottle as a reminder to everybody of how precious and fragile is the successful formula for fashion and luxury brands and how much care should we take in handling it.
Unlike what James Bond would suggest, it has to be “stirred, not shaken”.