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The Faded Colors Of Benetton


The Corporation: STRATEGIES

THE FADED COLORS OF BENETTON

Luciano Benetton, the marketing genius behind the most widespread apparel network in the world, is no shrinking violet. With his long, curly locks and toothy smile, the 59-year-old Italian loves being photographed, whether working out with barbells or wrapped in his trademark colored sweaters. Two years ago, the clothing emperor even posed nude for a charity ad campaign for the homeless.

But these days, Benetton is trying to project a more serious image--with good reason. The international apparel empire he runs along with brothers Carlo and Gilberto and sister Giuliana is struggling. European recession and a furor over Benetton's controversial ad campaigns kept sales virtually flat, at $1.69 billion, in 1994. As operating profits tumbled 5%, to $245 million, margins slipped to 13.9%, well below the 14.7% they've averaged since 1991.

That's only the latest bad news from the global retailing giant, whose lookalike stores from Brazil to India to Argentina make it the McDonald's of the fashion business. Company insiders say the Benetton family is increasingly riven by conflicts over strategy--and that long-dominant Luciano is losing power to his brothers. Many suspect that family infighting was behind the surprise resignation in January of well respected managing director Aldo Palmeri.

BAILOUT. The growing list of problems comes even as Edizione Holding, the Benettons' privately held investment company, is rapidly diversifying into unrelated businesses (table). After a move into sporting goods, the Benettons, along with partners, have recently spent $1 billion building a stake in Italian chains of superstores and highway restaurants. Yet investors in the publicly traded apparel group increasingly fear that the family's forays could divert attention from the core business. In the U.S., Benetton's American depositary receipts have skidded from 36 last May to around 17. That's far below the $30 apiece Benetton's ADRs fetched when they were issued in January, 1994. Institutional shareholders such as Lehman Brothers and Putnam Investments Inc., attracted to the shares by the chain's history of double-digit growth, have been bailing out. "They sold an equity story that got worse, not better," says Toby Radford, a London-based analyst for Lehman Brothers. "We've been major sellers."

Most damaging have been growing disputes between Benetton, based in Ponzano Veneto, an hour from Venice, and the owners of some of its 7,000 stores. A number of messy legal battles with store owners in Germany, France, and now Italy have dampened sales even as the sharp decline in the lira since late 1992 has sent other Italian exporters roaring ahead.

FAST GROWTH. The problems stem from Benetton's franchise-style operation and the company's effort to streamline distribution in the wake of a tough European recession. While most clothing retailers, such as Gap Inc., own their outlets directly, Benetton relies on a system in which local entrepreneurs put up capital for new stores. The method allowed Benetton to grow explosively, but it's showing increasing cracks and strains. In the late 1980s, American store owners charged in dozens of legal disputes that Benetton encouraged too many stores to be built too close together and failed to supply them adequately, forcing the company to pull back in the rich U.S. market. From around 500 stores in the late 1980s, only 150 remain.

Now, similar wrangles seem to be on the rise in Europe. In Germany, Benetton is enmeshed in a dozen separate lawsuits with store owners who are refusing to pay for several million dollars' worth of goods. The retailers have countersued, claiming Benetton's controversial ads--which have featured photos of dying AIDS patients and Palestinian refugees--have turned shoppers away in droves. In France and Spain, store owners, faced with threats of consumer boycotts, are also complaining.

Luciano Benetton counters that poor sales were the result of the European recession and price cuts the company ordered to maintain its market share. "The only problem when you cut prices is that your sales don't [necessarily] increase," he says. He asserts that the poor performance came primarily at stores with weak management. With a German court ruling expected in May, one verdict is already in: 1994 sales in Germany--Benetton's second-largest market after Italy--fell by $35 million, or roughly 16%, and analysts expect an additional 10% drop this year.

"TIRED CLOTHES." The highly public spat over advertising may be hiding a more serious operating problem. Benetton is embroiled in a lawsuit with Santomo Abbigliamento, one of Italy's largest operators of Benetton shops. Marco Prosperi, a Santomo executive, gripes that Benetton often ships goods late--and that it's lagging behind rivals who change their product lines far more frequently. "They're selling us tired clothes," Prosperi says.

That's a bad sign. Benetton, which led a retailing revolution in the 1980s with its breezy, casual clothes at highly affordable prices, increasingly looks like a fashion has-been. Even as retail competition is getting stiffer, store owners complain that Benetton comes out with only two seasonal collections a year. By contrast, U.S. market leader Gap changes styles every four to six weeks, while Zara, a fast-growing Spanish retailer, presents new items almost every month. "The trend is clearly going toward a much more constant change of product, and Benetton just has to learn that," says Keith Wills, European retail analyst for Goldman, Sachs & Co. But so far, Luciano appears little concerned. Dismissing the complaints, he argues that "two collections a year is perfect."

Elsewhere, however, Benetton shows signs of heeding its store owners' worries. The company spends just 4% of its total sales on advertising--much less than any other leading retailer. And until now, that ad spending has gone exclusively into the controversial campaigns--focusing on social issues such as AIDS, racism, and ethnic violence--that Benetton's quirky creative director, Oliviero Toscani, has spearheaded. Now, though, Luciano says "shock" images are a thing of the past. In recent months, Benetton has quietly begun television advertising in the U.S. for the first time ever. And since September, it has started placing traditional clothing ads in the U.S. and European press--a sign that pressure from Carlo and Gilberto to rein in Toscani may finally be succeeding.

Indeed, sources close to the company take that as proof that Luciano, who oversees Benetton's distribution and communication, is losing power to his more down-to-earth brother, 52-year-old Carlo. Insiders say relations between Luciano and his brothers are strained, with each running his own area independently. Carlo's fief has been manufacturing, while Gilberto oversees Edizione, the family holding company. Although his brothers long argued that Toscani's ads did more harm than good, Luciano allowed him free rein. With results faltering, those strains have made it increasingly difficult for the Benettons to agree on a strategy to stem the slide. "This company is very confused about direction now," says a banker close to Benetton. "Power has shifted from Luciano, but it's not clear where it's going."

One place it's not going is to outsiders: Observers believe the growing disputes led to the resignation of managing director Palmeri. A former banker credited with strengthening Benetton's professional management, Palmeri quit after only two years on the job, raising fears among investors that the family-run company can't keep independent executives. Neither he nor the Benettons would comment on his departure.

SPORTS HOARD. Investors also appear worried about the family's moves to diversify beyond its core 71% holding in Benetton stock. In the late 1980s, eldest brother Gilberto moved Edizione into sports equipment and sportswear. First, he bought Prince tennis rackets, then trendy in-line skate maker Rollerblade, Nordica ski boots, and Kastle skis. All told, Edizione has spent roughly $200 million building Benetton Sportsystem, which hit sales of $650 million in 1994.

The most audacious diversification came early this year. The Benettons teamed up with the Del Vecchios, another leading Veneto industrial family, to buy a majority stake in the GS-Autogrill supermarket and roadside restaurant group. Several weeks later, the two families picked up Euromercato, a major Italian superstore chain. Together, the deals topped $1 billion, of which the Benetton family put up about half. Although the moves put them far afield of the clothing business, Gilberto argues that it's a natural diversification. "We know markets, and we know distribution," he says.

But if broadening makes sense for the Benettons' private interests, the moves also mean that clothing represents an ever smaller piece of the family's holdings. Investors have taken that as a sign that the Benettons are losing confidence in the apparel market. "The implication is that they're facing slow growth in their core business," says Goldman Sachs' Wills. Analysts add that 1996 could be another year of little or no growth.

Luciano Benetton points confidently to improved results in Britain and growth in emerging markets such as Latin America and Asia. With three of the four siblings still working full time at the clothing company, he denies the family is losing interest. "I've spent my life in this company," he says. "But I admit, it's a very unusual company." Few would argue with that.

The Benetton Family Spreads Its Wings

In addition to 71% of the clothing group, holding company Edizione owns:

100% of Benetton Sportsystem. Since 1989, the group has acquired Rollerblade, Prince tennis rackets, Nordica ski boots, and Kastle skis.

1994 revenues: $650 million.

64% of GS-Autogrill. In January, the Benettons and their partners agreed to pay $610 million for a stake in this chain of supermarkets and highway restaurants.

1994 revenues: $2.7 billion.

100% of Euromercato. In February, the family and its partners agreed to pay $500 million to take over Italy's leading superstore chain.

1994 revenues: $800 million.By John Rossant in Ponzano Veneto


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