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Finding the Right Fit: Smaller Brands Thrive Under New Ownership

Having the right parent or owner has become a hot-button issue in the luxury goods industry, with plenty of failures and successes to talk about.

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Karl Lagerfeld with Tommy Hilfiger is eager to grow
Christian Lacroix has new owners for his brand in the Falic Group
PARIS — Even in luxury goods, father typically knows best. But it depends on who's your daddy.

Take Karl Lagerfeld. The designer didn't mince words when asked about the qualifications of the assorted companies that have owned and managed his signature business in the past.

"The Bidermann [Industries U.S.A.] people were fighting with each other, never delivered and made big mistakes because the late Eighties were not the Seventies any longer," he said matter-of-factly, recalling a licensing deal that ended in 1987. "[They were] terrible parents; parents who thought they knew better, but had no idea."

Later in the Nineties, under the then-Vendome division of Compagnie Financière Richemont, Lagerfeld's business knew some better years. "But then they put in a new management and that was a disaster," the designer recounted.

Having the right parent or owner has become a hot-button issue for the industry at a time when Lagerfeld's label is now owned by Tommy Hilfiger Corp., and Christian Lacroix, after struggling for 18 years under LVMH Moët Hennessy Louis Vuitton, is gunning for better fortunes with the Florida-based travel retail firm Falic Group. And with Prada Group mulling whether to put Helmut Lang on the block, that brand also could find itself adopted anew.

What's more, Bernard Arnault, chairman of LVMH, in May said he might again be ready to welcome some new brands into his group, predicting some of his "important" competitors would fall on tough times and that he would be ready to buy "at the right price."

In the near term, though, Arnault has been selling off smaller brands like Lacroix. The Falic family, which bought the brand, has ambitious expansion plans for it, especially in America. "We think it's very well positioned," Simon Falic, chairman of the Falic Group, told WWD earlier this month. "So much money has been invested in this brand, and Mr. Lacroix is such a highly regarded talent in the fashion industry. I honestly believe we can double the sales volume in five years, maybe sooner."

A large part of that will come in the U.S., where Falic already has plans to open a Lacroix store at the Forum Shops in Las Vegas, perhaps by yearend, and afterward in New York and other cities.
But consultants, executives and analysts caution that luxury groups have so far had a poor track record of minding large families of brands, despite the mad rush in the Nineties to snap up companies left, right and center.

Betsey Pearce, a New York-based lawyer who represents fashion clients in contract negotiations and acquisitions, said questions of compatibility and expectations are rarely addressed when deals are initially struck.

"What's lacking objectively is what both sides have in mind," she said. "There's not enough attention put into constructing the mutual incentives, coming up with a business that's going to work for everyone. Too often, you've got each side seeking a win."

For example, she said buying a "beautiful designer" might represent a prestigious holding for a group, "but it may not hold the attention of the top management." There are also important cultural differences to consider, say, when a French group tries to manage an Italian or American brand, she added.

That said, observers allow that brands can flourish under new owners. As examples, they cite Bottega Veneta, now owned by Gucci Group; Burberry, only recently demerged from Great Universal Stores; Louis Vuitton, merged with Moët Hennessy in 1987 to become part of Bernard Arnault's luxury empire, and Chloé, the Richemont-controlled house that has become one of the most admired in the business.

Pearce also said she's optimistic that Joseph, which had been owned by Albert Frere's Compagnie Nationale à Portefeuille, has found the right parent in Onward Kashiyama, its longtime men's wear partner in Japan.

Another brand that seems to be benefiting from a change of ownership is BlissWorld, one of the niche beauty companies LVMH snapped up in 1999 and flipped last year to hotel and resort operator Starwood.

"I think even the brightest child can't blossom under parental stifling or restricted exposure and investment," said Ross Klein, senior vice president and chief marketing officer for W Hotels Worldwide, which already has four new Bliss spas in the works. "All brands, like offspring, need the nurturing of their parents and especially parents that aren't fighting internally while the decisions that can make or break the child suffer or go unattended."
At Starwood, Bliss has received more attention, including new investments in technology, a dedicated business development team and leader and also what Klein called the "the ultimate fuel for the brand" —the real estate required to increase the spa footprint.

Lagerfeld said chemistry and mutual respect are essential between a designer and the owner of his or her brand.

"Things can only work if everybody works well with everybody. The management has to make an effort — and the designers, too — if it is not coming naturally as it does at Chanel, where people work perfectly well together," he said. "Designers think they are geniuses — and managers often think they know better. That can make a bad mix.

"Groups should only keep companies fitting with their 'culture,'" added Lagerfeld, who acknowledged he's ended up with the wrong owners in the past. "But you cannot know before," he said. "You have to work with the people they give you to manage the business."

So far, Lagerfeld seems confident with Hilfiger Corp. and seems to be enthusiastic about the setting up of his Lagerfeld Gallery label in New York.

But some observers downplayed the ownership question, saying brand potential and scale are the most vital factors of success.

"If you are Helmut Lang and you are trying to fight against Chanel, whether you are owned by a group or an individual investor, the game is going to be difficult," said Antoine Colonna, luxury analyst at Merrill Lynch in Paris. "It's not enough to change the owner to have a different formula. We're talking generally about smaller brands and they will in any case find it difficult to deal with the big ones."

The fact that Emilio Pucci is thriving under LVMH, whereas Christian Lacroix did not, suggests the former had "an incredible differentiation factor," whereas Lacroix could never surpass the status of a niche brand, he said.

Still, Colonna allowed that having a bunch of small, under-performing brands represents "a management distraction" for the groups who "don't have infinite management reserves."

Floriane de Saint Pierre, who runs an eponymous executive search and consulting firm in Paris, agreed that failed or stalled brand rejuvenations are not always the fault of bad parents. "I don't think there are ideal owners," she said.
In fact, reviewing recent transactions, she spied a common denominator: "When the founding designer sells his or her company, it is almost always a disaster," she said, mentioning Jil Sander, Helmut Lang and Donna Karan as examples. (Notable exceptions would include Carolina Herrera, vastly improved under Puig Group, and Valentino, showing better profitability initially under Marzotto SpA and now the new Valentino Fashion Group, she noted.)

Designers whose firms become part of big groups often continue to run companies on their own terms, though, which is often at odds with new shareholders seeking a return on their investment. "Also, to take some distance, when a designer sells his business, are you sure a designer wants his company to do better?" de Saint Pierre asked.

To be sure, the struggle of smaller, often loss-making brands has helped contribute to lesser growth prospects for the entire luxury industry, according to Michael Zaoui, managing director and chairman of mergers and acquisitions for Morgan Stanley in Europe. His calculations suggest that overall earnings growth prospects have been reduced by a third compared with what the market expected in 2000.

Other factors raining on luxury's parade include intense competition from fast-fashion retailers such as Zara and H&M, saturation of retail space for luxury in the West and growing pressure on margins as manufacturers are reluctant to raise prices further or move production to low-cost countries, he added.

One of the best solutions for conglomerates is to divest themselves of loss-making minor brands. However, Zaoui said there have been very few mergers and acquisitions in European luxury and that European private equity funds, extremely active in many other sectors, aren't participating.

"There are probably more sellers than buyers and sellers are not convinced by the prices in today's market," he said. "Sellers still want the multiples of 2000."

On the plus side, several observers say conglomerates, often guilty of applying the same formula to all their holdings, are wising up. Hence the selling off of some smaller brands.

"It's just not possible for a group to take that sort of approach," said Johann Rupert, Richemont's executive chairman. "Jewelry, watches, leather goods, textiles all have different distribution strategies and each require a different expertise. Watches are mostly wholesale, but Cartier jewelry is almost never sold wholesale. Textiles are a totally different story. These product categories are as different as wine, beer and Coca-Cola, and have to be treated individually."
Colonna agreed luxury groups are becoming more flexible. For example, when LVMH first bought Donna Karan International, it initially ran it like a European luxury brand, with an Italian manager, Italian manufacturing and an emphasis on directly operated stores. Now, LVMH has adopted a vastly different model skewed to the U.S. market and the wholesale channel.

Likewise, Gucci Group has sought to create more differentiation between its brands, particularly Gucci and Yves Saint Laurent, which then-Gucci Group creative director Tom Ford once distinguished by saying one store's format was vertical while the other was horizontal, Colonna recalled. Today, YSL is charting a more distinctive brand image, "which will be more visible in the years to come," Colonna added.

"One-size-fits-all does not exist," said Michael Burke, chief executive officer of Fendi and a 20-year-plus veteran of LVMH and Christian Dior. "There are things I learned at Dior that are useful for Fendi, but it's not cut and paste. You have elements, but you have to adapt them to each brand."

To be sure, Fendi's fortunes have improved under sole LVMH ownership. It had faltered when jointly owned by Prada Group, along with members of the Fendi family.

"The concept of arm's length between sister companies is crucial," Burke stressed, describing LVMH as a "federation" of brands, rather than one where corporate powers-that-be dictate global positioning for all brands. "It was always very decentralized and brand-centric," he said of the French conglomerate.

But he acknowledged LVMH's prowess lies mainly with brands that have global potential across different channels of distribution.

Lagerfeld agreed: "I think the big groups should concentrate on big, global names. They are good at that. Developing smaller businesses with 'difficult' designers not so well known by the general public is difficult because of the shareholders and the investment needed."