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Anonymous

Former CFO at Amplifon

Amplifon: Hearing Aids Distribution

Senior Vice President at Belmond, LVMH

Belmond: Creating Extraordinary Experiences

Former Marketing Director at Richemont, IWC Schaffhausen

IWC: Storytelling across Product Lines

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:01} Ugo, can you provide some context to when you joined Ferragamo and the luxury industry a few years ago?

{audio:0:00:12} I joined the luxury industry from a background in high-end retail, with the leader in the hearing aid market. We worked with an average selling price that’s possibly higher than the average selling price of the luxury world, in the region of €3,000 to €5,000 per transaction. I had a lot of knowledge of the retail experience.

{audio:0:00:53} At that time, Ferragamo was repositioning the brand with a managerial change because the CEO had just been replaced by gentlemen coming from the industry; younger ones with a desire to move the company toward a younger target population and refresh the brand. They wanted to get into the digital arena by relaunching a brand with a lot of history but was not as cool as it had been in the past. It seemed to be a very exciting experience; not a turnaround, but a significant improvement for the brand when I joined. I would say it's still a valid description of the situation because it’s a long process that hasn’t completely come to fruition, even now.

{audio:0:02:02} What are the core challenges in turning around a luxury brand in that situation?

{audio:0:02:11} It's a matter of working on many fronts. You need to refresh the company internally, accelerate the generation of newness and color, of excitement in the design arena to make the procedure faster. You need to put tools in place for monitoring the inventory, monitoring the sell-through, monitoring the open-to-buy in a much more structured way. It’s also a matter of getting new customers by creating a different image that is perceived by the customers in communicating about the products. This product has to be explained to a new target. It’s a matter of generating a new product and putting it into the windows and shops and getting people to stop and look into the windows. A 360-degree turnaround is needed.

{audio:0:03:31} How exactly does the open-to-buy work at luxury brands?

{audio:0:03:49} I would take one step back and think, how is the collection produced. A luxury brand makes the collection 100% internally. There is no buying from third parties. You don't buy products; you make products. You start with a designer that makes sketches, then you have the prototype, and you start industrializing the product. What you buy is, in fact, the raw materials. In the case of a company like Ferragamo, it's leather. Leather goes into shoes and bags and belts at the beginning of the business for all of Ferragamo. You then have third parties, labs that make the products on your behalf and all of this starts when you release the collection to the market. You present your prototypes, your collection, to the potential buyers, who are a combination of internal buyers, the representatives of the various countries in which there are DOS (direct-operated stores) and third party stores. The third parties are department stores, franchisees and the big online players that buy part of the collection. You create an order book, which usually happens 10 to 12 months before the products hit the stores. At this point, you know which of your products are liked and requested by the market. You launch production, issue orders to your labs and make that given quantity of a pair of shoes or a type of bag.

{audio:0:06:26} You will have pre-bought the leather. Leather is usually a bottleneck. You need to do the sourcing even 18 months before or you work with some stock you already have on hand. Then the production is made based on the orders you have received. When I was there, a big theme was to create a global core collection that was defined centrally so as not to leave full independence to the buyers – whether it was our own subsidiaries or third parties – to cherry-pick what they want. We would say that the 2022 collection contains at least 50% of the core products we, from central merchandising, define as representing our image. The balance is localization. The lifestyle and taste of our consumers are also a factor. If you go from very hot to very cold places – Chicago is not Hong Kong – you need to allow leave space for personalization.

{audio:0:08:01} The big challenge was to create commonality and try to have the right balance between the initial order and what is open-to-buy, which is the balance you buy during the course of a season, depending on how sales are evolving. I would say the right balance would be 50% on the upfront set of the collection and 50% bought during the evolution of the sale, depending on what sells more and what sells less and to rebalance from market to market.

{audio:0:08:47} So 10 to 12 months before the products hit the stores, you’re going to store managers and third-party department store buyers to see if they want to place an order based on the prototype?

{audio:0:09:05} Yes, pretty much. The old or pre-COVID way of doing things was you present the collection in your internal showrooms, normally in conjunction with the main show with the media and buyers viewing the new collection on the runway. This way, you have the prototypes, the buyers are coming over, in our case, to either Milan or Florence. There are two weeks of excitement as people see, touch and try on the products. They could be thinking this is a great product for my end-user, or this might not be the right one for my market. This process involved a lot of manual interaction between buyers and sellers for the company.

{audio:0:10:33} Now, all of this has disappeared. It's done online. We have the product presentation online and maybe we send some samples of the fabric or the leather so the buyers can get a feeling for the product, but the image is something you see. There has been a proliferation of digital tools that allow you to see the collection in 3D, with someone wearing it and in different environments. Frankly, I don't know what the future will be like. It will probably be a combination of online and physical. I don't think we will be getting back to full physical as it used to be, but I also feel that there will be some physical interaction again as soon as possible. It's needed to get a full understanding of the product.

{audio:0:11:57} How has digital buying changed the dynamic for brands' risk and how buyers are looking at taking a risk on a product?

{audio:0:12:12} At the end of a day, it's in the hands of the end-users. The end-users drive everything because the buyers are just trying to get an interpretation of their preference. Right now, the formal part of life is diminishing dramatically. Now there is much more of a casual approach to life. It’s more about being comfortable, being green, being mindful of the environmental impact. There are different values in the consumer's mind and, as we speak, this is happening in a messy way. To what extent it's temporary or stable, I think the answer is again a balance. I think we will go back to what it used to be, but it will not be exactly the same as before.

{audio:0:13:39} What are the biggest challenges in getting the raw material in line to produce a collection? Is it less on the actual sourcing and buying side, or is it more on the design and getting the product correct for the market?

{audio:0:13:59} The big challenge, especially in a luxury brand, is to be a transcender, invent something that is liked by the consumer, something in which you can be different from the other. To have the right interpretation of what we want and gain market share vis-à-vis the others is something you see cyclically. A brand comes up with something different and is cool for a moment. They get leadership, then someone else comes with another idea, everybody kind of piggybacks on it and then someone else comes in with something new. Some brands are more fashion and are more exposed to these cycles and some other brands represent a more permanent perception of luxury. If you think about Hermès, it's stable, it doesn't fly, but on the other hand, it doesn't come down. But Dolce & Gabbana had a very strong moment and then it lost momentum for a bit, then it might regain. Versace was a very top brand for a moment, then lost a little bit of edge. It depends on how fashion or traditional luxury you are.

{audio:0:15:57} Ferragamo was more traditional luxury. Still, it was gradually fading away and fading away, so he is trying to inject some newness to have the right balance between this fading stability and some acceleration. The important thing is to find the right balance. If you do too aggressive a collection, you might alienate your traditional, loyal customers. If you don't put in any newness, you run the risk of all your customers gradually fading away.

{audio:0:16:45} As luxury brands see the revenue mix shift to more wholesale compared to direct retail, how does this change the way you incremental margins for brands?

{audio:0:17:28} Normally, the highest margin is the one that you're able to generate through your own stores. To the extent that you have a well-established network with the right balance of local cost, the incremental units generated through your own stores are giving you a higher margin because you can get the full 80% to 90% gross margin when you sell in your own direct store. So incremental sales there are significantly more profitable. Decreasing sales impact your P&L much more because when you sell to wholesale, whether it's a traditional wholesaler like a department store or an online wholesaler, you have roughly half of the marginality that you would get selling to the end-user. To the extent that you have quantities moving online through wholesalers, you put your margin at risk unless you can, at the same moment, decrease your fixed cost in the retail shops by shutting them down or closing. Once the shift of units becomes a gradual movement, the stores' closure means, all of a sudden, you lose both the margin and the cost, so you usually are reluctant and this shift puts pressure on your margins.

{audio:0:19:18} It’s roughly 40% incremental margin in wholesale channels, digital or physical?

{audio:0:19:26} Correct. That's why the movement towards digital should ideally be done through your own store rather than a third-party model. The marketplace is a combination of the two because you use the platform and pay a fee, but you retain the end-user relationship. It's a combination, but potentially you have more profitability if you can do it through your own dot com, especially if you have a brand strong enough that people will directly go to your site. If you want Ferragamo, you type it into the browser, and you land on our page, perfect. If a customer types in "luxury bag," and we want them to land on Ferragamo, we have to pay Google a hefty commission to get the search engines' proper ranking. If you have a strong, strong brand, people directly land on your website and you are in the ideal position. If you are one of many luxury brands, it’s not that easy.

{audio:0:21:02} What are your views of the e-concession model of FARFETCH and how they work with brands like Burberry, for example?

{audio:0:21:10} I’m not sure I’m familiar with their positioning.

{audio:0:21:16} In terms of using models like FARFETCH and Mytheresa, you mention how you could pay a fee to these platforms that probably falls between the incremental return of 80% in your own store and 40% in wholesale. Do you think that’s been more attractive for brands as they start to scale online?

{audio:0:22:17} The interesting part of these portals is their ability to attract customers, not showcase your products. Even though the profitability you have in these portals is not as good as your own direct dot com, you have the advantage of generating incremental traffic. So being there is like being ranked high on the Google search on "luxury bag." It gives you visibility because they do attract a lot of traffic. It's like being in a big department store; you have to share a commission with the department store. Still, you have the luxury of making incremental units because many people are just walking into this physical department store, or they connect into this online department store. It's a tradeoff between sacrificing some margin and getting incremental units. That's how brands look at these collaborations.

{audio:0:23:45} How do you look at it today at Benetton between first-party e-commerce versus using other platforms?

{audio:0:23:51} Currently, we are mostly focused on our own line's direct presence because it's growing extremely well, double and even triple digit. So all the focus is there. Also, our brand is not yet fully reestablished. We will see our movement into this platform at the second stage. We are also in the process of protecting our margins. So we are increasing the other selling price and, in fact, the tag price and we don't want to have the hard discounting that often happens on these platforms, especially if you are on a wholesale model. If you are in the marketplace concession model, you can control more of the margin, but at this stage, priority is in developing our direct presence. It’s going well, as I said, with very strong growth.

{audio:0:25:16} How do you look at that e-concession model versus your own first-party? For your own e-commerce model, you still have to acquire the customer online. You have to pay Google to acquire the customer, but you then capture the margin on the side when they purchase. In contrast, FARFETCH effectively pays Google for you and then rolls that into their commission and then you can control the price on their platform or the department’s platform. How do you look at the difference in the offer and the margin structure on FARFETCH’s e-concession versus your own first-party?

{audio:0:26:00} Currently, the cost per incremental click, per incremental customer, is better by buying presence online for our own website. We have a better return, better margin by doing it on our own. Google costs me less than FARFETCH or Zalando, to put it like that.

{audio:0:26:34} What about for your department stores or retailers that also list on FARFETCH? Do you think about the concession model and linking up your inventory with the retailers so you can be integrated on FARFETCH?

{audio:0:26:56} Our retailers are normally fairly small entities that have limited access to portals. They are significantly behind this, so they are still in the brick-and-mortar approach to the market. We are trying to integrate them into our omnichannel capabilities so that you can get the real store linked, even if it is not a DOS but is also one of our franchisee or independent stores, and get traffic generated from our own dot com that is led into the physical retail, either DOS or franchise.

{audio:0:28:08} You will look to maintain all of the delivery, all logistics on your own dot com and own the full experience for the customer.

{audio:0:28:21} Yes, we do have our own dot com. We do have our own logistics and the store network is a combination, as I said, of directly operated and franchised stores.

{audio:0:28:37}  How do you think brands will manage that mix between their own store and third-party channels online in the long-term?

{audio:0:28:54} It's going to grow. It's going to grow dramatically. We think that anywhere between 25% and 40% could be online. It also depends on what type of product it is. There are products like the repeat basics that could be even north of that in the online channels. You talk about underwear, the standard polo, sweaters, where you know the product and just want to buy a different color than the one you’re wearing right now. If you like the style and want to have a different color and you see it online, you know everything you need to buy it online. On the fashion component side, you will be more keen to try it on and see it in real life. It's not going to be the same proportion of sales, but the basic will be possibly north of 50%. To the extent that you reestablish a strong brand, especially on repeated items, there is no reason to have someone in between. So if you have once bought a recurrent item from Benetton and you like it, you simply go on Benetton and you buy it. That's the best possible way for us.

{audio:0:30:45} How do you think these platforms are positioned? What do you think is the biggest risk for them in the long run?

{audio:0:30:51} I think the brands will be more willing to invest in their own dot com activity. The willingness to share with someone else makes a lot of sense if you are a very small brand. If you are a startup brand with capsules, to be partnering makes sense. Again, making the similarity with the physical department store, if you have a small brand, you cannot afford to have a fully-fledged retail store, so you simply present your store physically in the corner within a department store. Whether it's all the wholesaler, your section in the corner is the lighter investment, but the point at which you have a sizeable business and you are recognized, it makes sense to capture all the margin on your own by running your own store. And this is even more true in the online space because the investment of having your own website is not at all as big as running your own retail network that involves a lot of rental and labor commitments. Also, it reduces exposure to the fluctuations of the market when you have online facilities with limited fixed costs.

{audio:0:32:42} What’s the biggest challenge for brands building a presence and their own dot com?

{audio:0:32:51} There are some initial difficulties in setting up the logistics and, particularly, integrating with your own physical network. Setting proper omnichannel capability is not that easy. You need to integrate different systems; you need to have very smooth logistics and that's cumbersome work but can be done. It's engineering. And then you need to have a cool website that is exciting and presents the products, creates newness, so that you find the right combination of being able to come back and not lose too much time. You're finding what you want to find and finding some newness that invites you to explore. Finding the balance between not being too cumbersome in navigation and also being interesting, exciting with some game involved is really a challenge. But it's a game like setting a window in a physical store. It has to be new every two weeks but should also allow you to find what you're looking for, so when you get into the store you know that men’s is on the first floor on the right and kid’s is on the ground floor on the left.

{audio:0:34:51} I see that Ferragamo is now on FARFETCH and Mytheresa, where I don’t think they were last year. How did Ferragamo approach online?

{audio:0:35:03} It looks like they're also willing to be on the platforms. I would say that the luxury industry has gone from not wanting to be online, only selling physical so people can have the pleasure of being pampered in the store, to wanting to be online but only on their own site, so they have full control, to wanting an opportunity to capture new customers and then moving onto the platforms. This has been the historical evolution of the brands and now pretty much everybody is everywhere.

{audio:0:36:00} It seems like the e-concession business of FARFETCH is somewhat attractive to brands. It helps department stores link to Burberry or other brands' inventory systems to control the pricing. Do you think that's the future model here, more than the traditional wholesale model?

{audio:0:36:23} I think that it’s going to be an evaluation and probably will be the model, yes.

{audio:0:36:33} More pricing power. More control of the pricing for the brand? You can control promotions.

{audio:0:36:43} Yes, that is very important. Controlling the pricing, especially for a luxury brand, is very important. Suppose you sell at a discount at the end-of-season sales. In that case, it should be limited to either an environment that clearly distinguishes itself and they should present it as "last year's collection," or it could be this year’s collection in a given moment of a year. However, it’s not wise to sell the same product at full price on your regular channel. This is a thing that you really want to avoid.

{audio:0:37:31} We were talking about Ferragamo trying to move from an older to a younger generation. What are the challenges of taking risks with the collection to attract a younger generation?

{audio:0:37:52} That’s an interesting point. An established brand has loyal customers that see the company's image in a given way that might not be cool anymore but is still relevant to them. If all of a sudden, the collection is completely different from what you used to see from that brand, you might feel alienated and think that it’s not what you were looking for and so just simply go away. You need to find the right balance.

{audio:0:38:39} Especially if you are a standalone brand, a company equals one brand and you would be moving step by step with some reluctance to taking bolder risks. While if you are a brand belonging to a conglomerate with many brands, you can decide to bet on this brand, on this theme. You know that you're risking, potentially, losing some loyal customers, but you also have a bit of upside because you're balancing it, representing only 20% of your total revenue. Gucci, to mention one, has been bolder than Ferragamo could be when they’ve repositioned themselves. Even though they represent a significant proportion of their group, they're not a standalone company, so the entire group would still be alive if they had done badly. While if Ferragamo makes a big mistake, well, they are in trouble.

{audio:0:40:01} Also, Ferragamo can't put as many marketing dollars behind a new unique collection as a big holding group could.

{audio:0:40:15} Yes, clearly, the ability to deploy tens of millions instead of hundreds of millions makes a difference. Present a new, disruptive collection and you just lose some advertisement. It might not be as successful as putting hundreds of millions into advertising and making it a credible new image because you have made a major investment. Absolutely.

{audio:0:40:52} How do you look at the fixed versus the variable cost of a typical luxury store?

{audio:0:41:03} Number one, the cost is represented by the rent. Rent can be anywhere from 25% to 50% of the four-wall revenue of the store. It could be that you have variable costs, plus the minimum guaranteed level. So the variable cost would be 25% to 30 %, but if you don't reach the agreed turnover and keep seeing the minimum, at that point, the minimum might make you fly to the 50% I had mentioned. At that point, the store becomes unprofitable because you need to have big stuff and normally you need to have a one-to-one relationship with the customer. The customer shopping in a luxury environment expects to be with one sales assistant following you through the entire process, or even more than one if you, for example, need a different size of the shoes you are looking at.

{audio:0:42:45} In the good performing stores, 25% of your sales is rent. In a poorly performing store, it's 50%?

{audio:0:42:55} Yes, and then there is the labor that can be between 10% and 20% of the P&L of the store. And that's about it. You have a gross margin of say 75%-80%. When you talk about blended, the gross margin could also be the end-of-season sales when marginality goes down. That also depends on whether you want to have the declining marginality loaded into the store or that you consider that being a cost absorbed by the outlet channel. Let's say an average 70% gross margin, 50% in rent, 25% in labor, you are in a locked position while you can have enough sales per square meter, you run it at 30% rent and 15% in labor and you are in the 20% to 25% contribution from a store.

{audio:0:44:18} How many people are typically in a Ferragamo store? It seems quite high for labor.

{audio:0:44:23} It depends on the size of the store. If it is 200 square meters, it could be three sales attendants. If it is a larger store, it could be 10 or 15. It also depends on whether you are in a mall, where you need to guarantee opening hours, 10 hours a day, 360 days a year, or on the high street where you might be not open during lunchtime. Still, you are open seven days a week because you will be doing business during the weekend. You need to have each person present in the store and another one covering the other shift of the week, so if the average presence is three people, you have six on the payroll.

{audio:0:45:32} How do landlords look at choosing brands for their property?

{audio:0:45:45} For them, having a strong brand is a big advantage. It could be seen as an anchor to attract lower-end brands, so if you position yourself as an anchor, you can get an even better deal because they will be using your brand to attract other players. When Ferragamo first got into China, they had a first-mover advantage, so they could be the anchor of a given mall. When the mall opened, they were able to choose the best location with the highest traffic at a pretty decent rate. Now I would say that this role is with Gucci, with Hermès. These are the brands that represent the anchor to the extent that when a new mall is opened, normally you would be pitched by the developer saying and by the way, there is already Gucci signed in, so are you willing to come? If a brand is very strong, it's able to get the best possible deal because it is more attractive to the landlord.

{audio:0:47:24} In addition there’s the package concept. If you are part of Kering or LVMH representing a number of brands and you negotiate 10,000 square meters instead of 1,000 square meters, you get a better deal. A better deal means not only better rates but best positioning and, as a consequence, higher traffic and a higher return on your investment. The turnover rent can be very profitable for the landlord because putting a 30% or 25% rate on a company that has twice the traffic, I'd rather have 25% turnover rent on this company that has twice the traffic and the volume.

{audio:0:48:34} What exactly are the lease terms for the landlord?

{audio:0:48:39} They normally always have turnover rent plus minimum rate.

{audio:0:48:52} So there’d be a minimum rate per month based on the property and then a percentage of the turnover?

{audio:0:49:00} Let's say we think this store will generate $1m per month and rate is 30%, so $300,000 per month. If you make $800,000, you still pay 300,000. That is the minimum at which we set the rate. If you sell two million, you will be paying $600,000 because of the 30% fixed.

{audio:0:49:37} It’s like a fixed and variable cost in one, effectively.

{audio:0:49:42} So there are huge economies of scale of the large players like LVMH and Kering where they can negotiate with the landlords more square meterage, better rates, better anchor brands. It's tough for the small players to compete.

{audio:0:50:09} Let's say they do have an advantage. Medium brands are still in a very profitable business with very healthy margins, so it's not a bad industry to be in if you are a luxury brand even though you are not the top, top part of a conglomerate. It can still be a very profitable business, especially if you are in a time of expansion. A good example is Moncler. Moncler is not at all a big brand in comparison to, again, LVMH or Kering. Still, they are very profitable because they are in positive momentum. They are cool, have newness and become anchors even though they don't have the volumes of the others. You can be a very nice business in a medium brand. But if you are a conglomerate, you have an advantage.

{audio:0:51:26} In comparison to the real world of the other industries other than luxury, even medium brands are nice businesses in absolute terms, let’s put it like that.

{audio:0:51:40} The economics of a midscale brand like Ferragamo, Moncler, Benetton, you mentioned on a store level, are 70% margin blended. Maybe you then have promotions and discounts to get you to 60% to 70% gross margin on the P&L. How do you look at the translation from EBIT to operating cash flow and how the working capital works for mid-scale brands?

{audio:0:52:18} It depends on the ability to move from having the bulk of the collection decided upfront and limited space for open-to-buy or the ability, on the other hand, to have a small initial setup of the collection than more open-to-buy because, in this case, you have a significantly smaller risk on the working capital. Another element of the working capital is what business model you have to the extent that you are retail. You don't have the burden of accounts receivable. So yes, you carry the stock, but once it's sold, it's direct cash into your pocket. Once in a wholesale business, you might have to finance working capital for a few months, so that is an advantage if you run your own profitable retail to the extent that you have the right size of the lease and don't have an excessive burden on the rent. That's the balance. Working capital becomes a problem if you make a mistake on the collection. If you have a luxury item that is very fashionable and, in this new season, fashion is not liked, you are stuck with an inventory that becomes obsolete in a few months. Then you will have to massively discount it or possibly destroy it because you don't want to go beyond a certain level of discount and you don't want to get into channels that would be diluting your brand.

{audio:0:54:25} That creates a problem of sustainability because, from a financial point of view and brand protection, you should burn some items rather than discounting harder, but doing that is not considered to be sustainable and rightly so. Either you have some way of at least recycling or have a nightmare, for which I'm not sure the solution has been found, especially when you talk about shoes. Shoes are complex items made of leather, but there is also iron inside, some rubber elements and you need to dismantle the shoe and rework it from scratch if you want to properly dispose of and recycle it. I don’t think there is a solution for this yet. It is one of the future challenges.

{audio:0:55:32} How do brands move more towards open-to-buy models, so smaller upfront capital risk, more open-to-buy to reduce the working capital burden?

{audio:0:55:45} It's a combination of having the designers work more on a continuous flow of capsules of releases rather than putting all the effort into two big moments. It's a matter of having a shorter lead time in production. On the other hand, the movement towards having an online ordering for the buyers, the internal buyers, allows you to follow this flow of having a moment, possibly 12 times a year, in which you buy the new release. But this has to be done, as I said, online. You cannot think of someone flying from Shanghai to Florence 12 times a year. If you do it twice a year, it's okay, but you put all your eggs into two baskets. If you want to have this constant release of products shared with your buyers, you need to move toward this hybrid model of some online buying and some physical buying. That's something that's happening as we speak. It’s the evolution of the industry.

{audio:0:57:22} How do you look at the challenges of traditional retail networks like Ferragamo effectively reducing their store count, their directly owned stores and then either moving their distribution online or through third parties?

{audio:0:57:47} When you decide to reduce the physical network, getting rid of some unprofitable stores, which is something we are doing at Benetton as well, it’s a matter of potentially getting rid of long-term obligations with the landlord. That’s one of the biggest challenges. Not necessarily the store where you would like to get away from, but the store with an expiring contract, and especially if you are in a country like the UK, where leases tend to be very, very long, it can be a nightmare.

{audio:0:58:38} Especially if you're trying to do it in a moment in which the entire retail industry is stepping back and reducing. Potentially, there is an excess of space that will not be rented out easily and not at all at the current level. That is a challenge for the entire retail industry. I would say the luxury industry is probably in a better position because the high, high-end streets are limited. There is always some interest to get into those places. It's the mid-market where this becomes tougher because this excess of space becomes more visible. If you’re thinking about a New Bond Street or Via Monte Napoleone, I think it’s always possible to find someone else willing to get in. For a brand willing to step back, it isn’t that difficult. But on the other hand, think about Fifth Avenue in New York. It used to be really fashionable, and now there are a lot of empty spaces and it's becoming not at all easy to get out of a contract because it's not easy to find someone willing to step in.

{audio:1:00:24} Then you have the issue, like you said, from a unit economics perspective, where you're deleveraging your store base, which is effectively your highest margin channel, and moving your business to wholesale.

{audio:1:00:41} Yes, it used to be the highest, potentially the best performing one, to the extent that you have the right size of a store related to traffic you get. But if traffic has dramatically moved away, it becomes a loss-making contract and you are less able to renegotiate the contract with the landlord or scale down space. Something else that is happening is adjusting store size to be there not with three floors, but with just one floor.

{audio:1:01:21} Ferragamo had nearly 400 stores. If we look 10 years out, how many do you think they’ll have? Half of them?

{audio:1:01:32} Not really. I think that there will always be an interest in seeing the product physically. Buying a luxury product is also the pleasure of buying it and not only having the goods with you. Being able to go into a high-end store, being pampered and showing off your presence there is part of the pleasure. I think that part will remain, maybe not to a full scale as it is now, but it will remain. What we have seen is a pandemic situation that kills the tourist traffic for nearly two years. It's putting on a lot of pressure, especially if you have a big infrastructure, a high fixed cost. Having lighter variable cost solutions and not having a major investment in the cathedrals is very important.

{audio:1:02:57} What are your biggest challenges today at Benetton?

{audio:1:03:06} Here, we were in the middle of turnaround because we were in a loss-making situation even before COVID. It’s different from the Ferragamo situation, where it was a profitable company that was not making as much money as in the past. What we need to revamp here is we were losing money and we need to make money. In this situation, it's complex because we needed to do everything simultaneously and with very limited time because every day that lapses, more is lost. The complexity of doing all the things at the same time is like changing the engine on a flying.

{audio:1:04:02} On the other hand, the brand is strong, the management team is committed, so I think we are in the ideal position to leverage some of our historical values. Sustainability, for example, is a big theme of the moment and is a theme we were probably one of the first, if not the first company, to talk about in the 80s and the 90s. It's part of our DNA and we need to re-own the concept that was one of our founding concepts.

{audio:1:04:49} How would you compare the value set of Benetton from a brand like Ferragamo?

{audio:1:04:59} A big difference is we are much more democratic, so we want to have a branded and recognizable but definitely democratic product while Ferragamo, a luxury placed on exclusivity, is, I would say, the opposite of democratic. It's an aristocratic product. Having a luxury item is being willing to distinguish yourself, having something different and having a higher status. In contrast, this status element is not embedded in the Benetton product. With Benetton, I might be cool, I might be green, but I’m not high status because it’s affordable.  That’s probably the biggest difference.

{audio:1:06:03} How does that change how the business is run from a management and organizational structure perspective?

{audio:1:06:09} You need to think about mass versus a small number of customers. You need to have a sales ceremony that is clearly different if you are in an average selling price of, say, north of €500 and when you take away one zero to talk about Benetton, you cannot offer the same service. You still need to give a perception of nice service. For example, the self-service activity has to be present in a Benetton store where you can do part of a journey on your own. If you need some support, I will give it to you, but you cannot expect to have every single step fully serviced by a shop assistant, or you might have to wait a few seconds before you are assisted. You need to think that you have a different customer in front of you with different expectations. To do it in exactly the same way wouldn't work.

{audio:1:07:38} Does it make sense to have a Moncler/Ferragamo merger? With the challenges to scale that we mentioned in the landlord relationships and rent payments, are there huge synergies merging to midscale brands like that?

{audio:1:07:56} I would think so because even the big groups started as a strong brand and then they made one, two, three, 10 acquisitions, but they started somewhere. Yes, it would make sense to have two, three midscale brands because they would get more relevant to the landlord, to the media buying, whether it's online or on paper, so they can make synergies. Also, when you talk about e-commerce, the engine, the technological platform could be the same and you could share some investments. The website's look is completely different depending on the brand, but the engine behind it could be shared. Like carmakers that have the same chassis, you can have different engines and looks, but the car is the same and this is synergy, so there are advantages in joining forces.

{audio:1:09:11} And just keep different production manufacturing facilities for different brands.

{audio:1:09:17} There is a lot of complexity and a lot of craftsmanship in making luxury products, so even Ferragamo had a different partner for high heels versus ballerinas versus men's shoes or sneakers or boots or bags or belts. Each one of these products had different specialized small companies behind them because of the different skill sets. I would expect that when you put different brands together, there will be some synergies, but they will be limited. If you mention, for example, Moncler and Ferragamo, I see a very limited manufacturing partnership.

{audio:1:10:24} So it’s all on the front end, in marketing and driving demand.

{audio:1:10:30} While if you were to put together Tod’s and Ferragamo, yes, you could have similar products, some factory synergies because when you make formal shoes, you can make them for both brands; when you make sneakers, you can make them for both brands.

{audio:1:10:53} Given your experience in the mid-scale luxury space, what is the big challenge or risk with these businesses?

{audio:1:11:06} To not be relevant anymore, in the mind of the consumer. Losing momentum, being seen as a me-too product and getting to the spiral of pricing rather than coolness, which is where Benetton went and where we are trying to take it out of. This is potentially, but not to that extent, the risk that Ferragamo could have run if actions were not taken to revamp, for example, with Paul Andrews, a new stylist and a new management team moving away from there. Brand dilution and brand irrelevance, that’s the biggest risk.

Salvatore Ferragamo & Luxury Retail Unit Economics

How luxury buying processes are changing post-covid

Challenges for subscale luxury brands taking risk on new collections

Incremental margins direct vs wholesale channels

Landlord negotiations and typical rent terms and prices

How open-to-buy strategies can improve working capital for brands

How Benetton approaches online distribution

Merger opportunities between subscale brands; Ferragamo, Moncler, Tod’s, etc