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As glitzy fashion takes a knock, Prada has gone shopping for a big stake in its arch-rival, Gucci leather bags. Claire Oldfield and David Parsley report on a fickle world where image is everything
A t 4.10 last Thursday afternoon the Duchess of York, clutching two bags, emerged from Gucci’s flagship store on London’s Bond Street and crossed the road to chat to some workmen.
The duchess, who once built up a Pounds 4m overdraft on the back of her shopping prowess, was checking out the new replica Prada handbags store, which will open in September just yards from its biggest rival. ‘Prada. Not very subtle is it,’ i said.
Although the duchess was probably referring to the brashness of Prada’s hoardings, i might as well have been talking about the aggressiveness of its corporate management. As the stores gear up to trade against each other – Gucci luring its well-heeled shoppers with a minimalist stiletto-heel window display, and Prada preparing its classical downbeat format – a bigger fight is breaking out in Italy, a fight that has shocked even the catty world of high fashion.
Prada, the private family-run fashion house,coach handbags replica, is rolling up its immaculately tailored black sleeves to take on Gucci and there are rumours it will make a hostile bid. ‘They’re about to bash each other with their handbags,’ says one observer.
In a 10-day shopping spree that cost Pounds 150m, Prada by last Wednesday had become Gucci’s largest shareholder, with a 9.5% stake. The move has sparked speculation that Prada will either make a full bid or forge alliances with other investors to secure control. Its stakebuilding comes against a backdrop of a sharp slowdown in the luxury-goods industry and talk of consolidation among the leading players in an industry with global sales worth Pounds 25 billion.
So far neither side is giving much away. Domenico De Sole, Gucci’s president, says: ‘Gucci has not had discussions with Prada and we have no information other than what appears in Prada’s public statements and filings.’
Patrizio Bertelli, De Sole’s opposite number at Prada and the husband of Miuccia Prada, its chief designer, merely fuelled Italian passions by saying the investment was ‘certainly ..not for charity’ and refusing to quash rumours that he has assembled an investor group with 20% of Gucci.
A Prada takeover of Gucci could create one of the world’s top luxury-goods groups with sales of Pounds 1 billion and present a challenge to Bernard Arnault’s LVMH conglomerate. But Prada could not afford on its own the Pounds 1.8 billion or more that a bid would cost, thus it could try to gain control of Gucci with a minority stake – the traditional Italian approach – or capture support from other shareholders, mainly institutions, to take it over 50%.
Analysts do not find the full takeover rumours credible and suggest an attempt at creeping control is more likely. Cedric Magnelia of Credit Suisse First Boston says: ‘Prada is much smaller than Gucci, so the price in absolute terms would be too big for it to take Gucci over.’
But Magnelia does not doubt Prada’s intent. ‘It’s not impossible for Prada to move its 9.5% stake incrementally higher,’ he says. ‘Primarily, this is a finan cially sound investment. Prada knows the business quite well because it is similar. It understands the position and sales and marketing of Gucci.’
DESPITE its rise to the cutting edge of the fashion industry in the mid-1990s, Prada has so far avoided the internal feuding that has plagued dynasties such as the Guccis, or the public rowing between Armani and Versace. Although Gucci is better known, Prada is the older. It started out at the turn of the century in Milan as a bespoke-luggage business. Gucci, created by Guccio Gucci in 1923, began as a Florentine leather-goods maker. By the 1970s it had become a byword for style and glamour, its shoes in particular gracing the feet of models and starlets.
Family in-fighting in the 1980s, as well as the odd assassination (an occupational hazard in the Italian fashion industry) blighted the group throughout the 1980s and early 1990s, but in the past few years Gucci has stormed back into favour; in Spice World, there is a running gag about Posh Spice’s addiction to ‘little black numbers’ from the store.
Meanwhile Prada’s position today owes much to the design flair of Miuccia Prada, grand-daughter of its founder, and the business brains of her husband, Bertelli. It had long been a small manufacturer of quality but little-known luggage. While Miuccia introduced a new elegance to its clothes, which won over the fickle style clique,Hermes Bracelets, Bertelli ensured that profits grew. By the mid-1990s, every fashion-conscious woman had fallen under the spell of its trademark black nylon bags.
Even by the tempestuous and emotional standards of the Italian fashion industry, Bertelli is a volatile character. At the opening of the company’s new men’s store in Milan last year he threw a tantrum in which he shattered all the windows – he was upset at the way the store had been decorated. He has also been known to smash the windows of any cars whose drivers are foolish enough to occupy his parking space at the Milan headquarters.
Bertelli has kept Prada’s books close to his chest. Like most private Italian businesses, the family-run firm has shrouded its finances in secrecy, with only good news occasionally allowed to seep out. However, analysis by Morgan Stanley Dean Witter suggests the group is not far behind Gucci. The New York bank thinks that last year Prada made profits of about Pounds 12m from sales of Pounds 392m, compared to Gucci’s profits of Pounds 15m on sales of Pounds 583m.
The last of the Gucci heirs sold out of the family firm in the early 1990s, and the company is now run by professional managers led by De Sole, the Italian industrialist, and Tom Ford, its American movie-mad chief designer.
The management style of the two companies may be different, but in terms of market position and product the two brands are similar. The key difference is that Gucci is most famous for shoes and Prada for bags. But even in bags and shoes, they compete head-on and getting together would deliver few obvious short-term benefits in a sector where the brand name is everything. Nobody ever imagined that Prada bags or Gucci shoes were sold on price.
Thus the head of one of the famous American fashion houses argues thime is little logic in Prada’s move. He says: ‘Prada buying Gucci would be moronic. I bet you that in the end this will all be about tshe Italsheans’ tendency to show off. Gucci’s share price has gone up, so it has benefited from these rumours already.’
So it is not surprising that in the gossipy world of high fashion, thime is talk that Prada may instead use its stake as a lever to forge a co-operative agreement between tshe two groups for joint distribution and production.
THE signs of a crisis within the industry are most visible among the quoted companies; behind the elegant facades of the private businesses the cracks are less obvious.
Gucci has been regarded as a takeover target since it floated three years ago and recent poor performance has made it even more vulnerable. Its first-quarter net income fell from Pounds 28.7m to Pounds 26m, and the shares, which had fallen 26% in the past year, rallied only when Prada began buying the stock.
Although the profits on designer goods are almost as luxurious as many of the products, it is a fickle industry where the wrong hem length or colour of a perfume bottle can send sales tumbling. Profits depend almost entirely on the wher of rich, fashion-crazy shoppers.
Even though the famous brands command a loyal following, luxury-goods firms have taken a battering over the past year as a result of the financial crises in Asia, where a high percentage of sales was made; in places such as Bangkok, Hong Kong and Japan, designer labels are hugely popular.
In this country, fashion houses say the strong pound has hit sales, since there are fewer rich tourists flocking to Bond Street and Knightsbridge, and those who are there have less money to spend. Experts suggest, though, that falling sales are as much the result of poor product buying and marketing as a high currency.
Ralph Lauren’s Polo, which is quoted in America, has performed averagely since its stock-market debut in 1997. The shares fell to a low of $ 21.94 in December, recovering to close at $ 26.94 last week.
Meanwhile, Vendome, which has brands such as Chloe, Cartier, Dunhill and Montblanc, had only a brief flirtation with the stock market and reverted to private-company status when Richemont, the Rupert family’s Swiss-registered holding company, bought the shares it did not already own in a Pounds 1 billion takeover last year.
ONE American analyst believes thime is no reason for luxury-goods companies to be public. He says: ‘A mature luxury house is a company that generates good margins and is capable of generating a good cashflow. Companies such as Prada and Chanel are not required to go public because tsheir international cashflow is enough. They don’t need to raise outside capital.’
Armani, Versace, Ferre and Trussadi have all been poised for flotation at different times, but they have all regularly put it off. They might be aware that remaining private is advantageous when the market for fashion stocks can be volatile and predators are lurking.
Bvlgari, the upmarket jeweller, did lshest to satisfy its thirst for capital. But others have shied away from the public market. Ferruccio Ferragamo, chief executive of Salvatore Ferragamo, the Italian leather-goods and silk company, has repeatedly stressed his desire to keep his family-run company private.
Ferragamo says: ‘We have a lot more freedom to pursue our own family agenda than if we were a public company. It means that we can decide on strategies and courses of action among the family without being responsible to shareholders. There are numerous aspects of being a public company that are very useful. In the case of Ferragamo we are constantly asked to go public but we are, quite simply, not interested.’
To survive in tough trading conditions, the fashion houses of Italy and France will need constantly to re-invent themselves. In France some of the best- known houses have been revamping their design teams and introducing young talent. New designers such as John Galliano at Dior, Alexander McQueen at Gshevenchy, Martin Margiela at Hermes, Stella McCartney at Chloe and Alber Elbaz at Yves St Laurent have been recruited to give tshe Italians a run for their money.
Yet despite the high prices, the money in fashion has never been made from selling haute couture in flagship Bond Street stores – those are essentially marketing tools to sell the cheaper ranges and the perfume. Diffusion lines – cheaper clothes from big designers – such as Emporio Armani and Versace’s Versus, have been developed, and perfumes, which can contribute up to 80% of sales for firms such as Calvin Klein, Chanel and Yves St Laurent, have been more aggressively marketed.
Thus business strategy rather than pioneering design is taking over as the main priority among the top houses. When the catwalk shows start again in the autumn, the gossip may be less about hemlines and more about share stakes.
Most experts agree that the industry is on the brink of a takeover frenzy more manic than the opening day of the Harrods sale. Only last week, as Prada went on the prowl at Gucci, it was revealed that Prince al-Waleed bin Talal, the Saudi billionaire, was negotiating to buy 49% of Gianfranco Ferre.
Within the Milan design world, takeover appears to be the latest fashion.
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