WSJ: Fashion Journal

Style -- Fashion Journal: How New Backers Are Altering High Fashion --- Shoppers May See More Ads, Stores and Pricey Tchotchkes After Private-Equity Infusion

By Christina Binkley
24 May 2007

The Wall Street Journal

Flush with cash, private-equity investors have been gobbling up everything from Chrysler to Harrah's casinos. Now, they are wooing luxury-goods purveyors at every party and fashion show, drawn by booming sales in what once seemed like risky, frivolous ventures.
Recently, Valentino gowns, Kate Spade handbags, Jimmy Choo shoes, Taittinger champagne, and Jil Sander have all been "in play," as they say on Wall Street, as have dozens of other high-fashion brands.

We've already got a taste of what happens when corporate money and discipline are injected into fashion companies. Luxury conglomerates LVMH Moet Hennessy Louis Vuitton SA, PPR SA and Cie. Financiere Richemont SA put their cash and management expertise to work in the late 1990s, reviving brands like Louis Vuitton, Gucci and Bottega Veneta. They opened stores around the world, and unleashed a hurricane of new products, so that handbag makers now sell cologne and clothiers sell handbags and everyone sells sunglasses.

The private-equity investors who are entering the luxury market today want their results in short order. "They have to be in and out of the market in four or five years, and we all know it can take longer than that," says Guy Salter, deputy chairman of the British luxury-goods association Walpole, who has been watching with skepticism. "The jury is still out" on whether these new investors will improve the luxury business, Mr. Salter says.

While deep-pocketed investors promise opportunity for these fashion houses, what will the new era in fashion financing mean for consumers?

-- Love that designer? Don't get too attached. The recent negotiations for Valentino have been conducted without so much as consulting with Valentino Garavani, the brand's 75-year-old designer and founder. It isn't clear whether Mr. Garavani would stay with Valentino after control of the company changes hands. In a corporate world, designers are no longer stars but employees. Witness Gucci. Despite a fierce outcry from fans, Gucci replaced iconic designer Tom Ford with the little-known Frida Giannini. Far from a fiasco, the move actually improved sales.

-- Classic labels could go teeny-bopper. Labels looking for a quick pick-me-up tend to try to appeal to new consumer groups, often younger ones. This has left some longtime fans of companies such as St. John Knits, Jil Sander and Bally shoes feeling alienated as the brands shifted their focus, and styles, to younger shoppers. At St. John and Bally, the companies are backtracking to reconnect with their traditional customers. "Bally tried to be a little too relevant in the fashion industry when their core customer wasn't really too interested in fashion," says James Hurley, an analyst with Telsey Advisory Group in New York.

-- Expect more stores. Growing revenue means opening new stores -- and we're seeing store openings feted from Moscow to Mumbai these days. This offers convenience for consumers and more opportunities to buy. But finding Bally shoe stores in Beijing and Bahrain alike also smacks a bit of Gap.

-- Watch for possible quality declines. One of the first things private-equity investors do is start producing high-profit-margin products like purses, scents, jewelry and watches. But these days, handbag-making is more about the label than the expertise -- and the focus is no longer on the highest quality but the highest return on investment. Expect many goods to be made in China and to be of cheaper quality than in the past. The short-term thinking of private-equity investors can also encourage destructive decisions like producing an oversupply or downscaling to reach a broader audience.

-- Dying brands could come back. One of the more intriguing things that these investors can do is revive dying brands. Azzaro, a Paris fashion house founded by former-couturier Loris Azzaro, is set for a comeback now that it is owned by Barcelona's Reig Capital Group, which manages the money of a rich Andorran family.

-- You'll see more advertising. New financial owners attempt to raise the profile of their brands. Sagra Maceira de Rosen, a former J.P. Morgan analyst who is now buying up luxury assets for Reig Capital, says she recently made a decision to spend cash on advertising the group's Vasari line of jewelry rather than assembling more stock for its stores in Spain, where inventories were low. "Having more stock was not going to bring more traffic into the stores," she says.

-- The fittest will survive. The more competitive environment will mean a shake-up for laggards who don't keep up. The seven-decade-old Rochas fashion house, which closed last year after Procter & Gamble Co. pulled the plug, is a case in point. "The weak firms will fall away faster," says Lew Frankfurt, chief executive of Coach.

Other industries went through this process in the 20th century. Airlines, grocers, banks, drugstores, auto makers and computer companies also began as small, entrepreneurial businesses, then grew and consolidated. Every town once had its own version of Henry Potter -- Bedford Falls' banker in "It's a Wonderful Life." Now our iconic banker is Sandy Weill, former chairman of Citigroup.

To private-equity investors, the luxury business is one of the few unplowed fields left. The Loro Piana family receives regular feelers from investors for their eponymous company, known for its fine cashmere. Sergio Loro Piana reiterated last week that his family has no intention of selling. In February, he told me the same thing at his family's store in Milan, as his wife and brother chatted with retail-store buyers. Mr. Loro Piana's mother was keeping her eye on her two gray-haired sons as they served champagne and plates of yellow risotto. It's impossible to measure how this level of attention affects Loro Piana sweaters, but it must be a factor. It's hard to imagine Sandy Weill policing the risotto.