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After Versace


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AFTER VERSACE

Can a fashion empire survive the slaying of its creative soul?

Long past midnight Gianni Versace blew a kiss to a French starlet. "Ciao carissima, ciao bella," the 50-year-old designer said as he worked the pulsating crowd in Milan's cavernous Cafe L'Atlantique discotheque. Versace had rented the high-tech nightspot for scores of models, friends, fashion buyers, and jet-setters to celebrate his Spring 1998 ready-to-wear collection. British pop star Boy George, one of Gianni's countless rock-and-roll friends, had even been flown down first-class from London to be disc jockey for the evening, a job he did with abandon until dawn.

It was pure Versace, as classic as his trademark $15,000 gowns worn by global glitterati from Princess Di to Madonna. The next morning at 8.30 a.m. he was back at his desk in the 18th-century palazzo in central Milan, once the home of the Rizzoli publishing dynasty, that served him both as home and corporate headquarters. From there he was driving the $1 billion fashion empire he owned and ran with elder brother Santo and sister Donatella toward its next planned triumph: an initial public offering of the glamour stock, putting a price tag of up to $1.5 billion on the family company Gianni Versace.

No longer. Gianni was murdered on July 15 at the gates of his $6.2 million Miami Beach estate, Casa Casuarina, where he had recently partied with Madonna. Two bullets to the head at point-blank range killed the hard-living, hard-working king of global chic as he returned from an early morning walk to the nearby News Cafe newstand. He died as he had lived, the center of media attention as hordes of journalists flocked to Miami Beach. But as Gianni collapsed, so did the hopes and dreams he and his family had long nurtured.

For months, everything had been meticulously readied to transform the one-man fashion whirlwind into a global brand wrapped in a publicly traded company that could outlive its mercurial creator. The final step was imminent. As Versace died in far-off Miami, and alleged serial killer Andrew P. Cunanan was being named as a suspect, bankers from top-drawer U.S. investment banks--Morgan Stanley, Merrill Lynch, and Goldman Sachs--sweated it out in Milan's blistering heat. They were expecting to discover on July 18 who would be picked to underwrite what was shaping up as one of Europe's hottest stock offerings in 1998.

Now the IPO is suspended as the family and the fashion world mourn. In financial markets, the question already is: Can Versace, with its vast international web of retail outlets and manufacturing companies, survive the slaying of its creative soul? And if it does survive, what would a post-Versace Versace look like?

There are grounds for optimism. Much of the product design at Versace was handled not by Gianni, but by a strong team of Italian, American, Korean, and French assistants. The best, said Gianni, earned $15,000 a month after tax. When Gianni was recovering throughout 1994 and 1995 from chemotherapy for a rare inner-ear cancer, the team churned out collections seamlessly. In the future, say insiders, Versace will have to turn to a charismatic new designer as did Gucci, which reversed its slide by hiring American Tom Ford in 1994.

"IMAGE THING." Still, no other major fashion house in the world is so closely identified with the lifestyle of its marquee-name designer. Even the suave Giorgio Armani, Versace's longtime rival for supremacy in the Italian fashion world, is a shrinking violet in comparison. From partying with his friend Sting to lunching with Princess Di, Gianni stole headlines, shocked the world with his sexy gowns, and drew in hordes of paying customers to his boutiques. Now, worry fashion business insiders, the damage to the business could be immeasurable if that glamorous image is shattered by unsavory revelations about Gianni, of possible financial misconduct, or even an association with his assassin. Already, the Versaces won substantial damages and a retraction after suing the Independent on Sunday for libel. The British paper had run an article claiming the fashion house had links to the mob. And Santo Versace is currently appealing a conviction in May for bribing Italian tax officials.

With the IPO approaching, Gianni himself had been playing down his role as the fashion world's most legendary party animal. "It's a moment [for me] to appear less and focus more on the product," said Gianni shortly before his murder. "This whole image thing belongs to the past."

Dropping the glitz and going for more sober-sided fashion, surprisingly, had been paying off at the cash register. His recent collections, with their cleaner and cooler lines, have been hotter than ever, says a big buyer, Saks Fifth Avenue President Rose Marie Bravo. Helping push sales: 10% to 15% price cuts on most Versace items from late last year.

Still, the transformation was hard on Gianni. Elder brother Santo, a down-to-earth number-cruncher and tough negotiator, had to force him to cap frenetic spending on art and trophy real estate in Europe and the U.S. Several months ago, say insiders, Santo even had Gianni's credit card quietly taken away, while the designer was rumored to have a growing pile of personal debt. Gianni was complying by cutting back on some of the wilder excesses that a $70 million annual promotion budget could buy. "I want [the company] to be perfect when we go to the market," Gianni told BUSINESS WEEK in June.

The family was well into the detail work needed to get there. Just three weeks before Gianni's death, they split off $100 million worth of personal assets--including the Florida mansion, a lavish Manhattan townhouse complete with a massive bed from artist Julian Schnabel, and a museum packed with Picassos, Legers, and other masters--from the core fashion businesses.

But the Versaces were surfing a far bigger wave than even their own vast ambitions. From Sao Paulo to Hong Kong, and Beijing to Houston, la moda Italiana is sizzling. Even without a Versace listing, fresh capital is flowing into the sector as never before. Last year, Italy clocked $15 billion in fashion-related exports, vs. less than $3 billion by archrival France.

Stock-market fever, in fact, has Italy's booming fashion world in its grip. Rome's Bulgari jewelers went public in July, 1995, to finance global expansion and has seen its stock price soar 450%. Florence-based Gucci has doubled in value since its NYSE listing in March, and now is worth more than Italian tire and cable giant Pirelli. Rome-based Valentino has contacted Goldman Sachs about a listing and even Armani says he's mulling over taking his fashion empire to the market.

All face the same tough challenge as Versace: Making the leap from family-run fashion houses revolving around a single designer to global, professionally run brands. That's essential to stay on top of the world market for branded luxury goods that's expanding fast thanks to the collapse of communism and super-growth across Asia.

Versace tuned into the trend early. Way back in 1986, the closely held company became one of the first family-owned fashion groups in Italy to publish fully audited balance sheets. In the early 1980s, just as he started tentative expansion in Western Europe, Versace dove into Asia with a boutique in Singapore. Today, with 30 shops in Japan and 15 sales points in Hong Kong alone, the Versace group draws 25% of its sales from Asia. Already the first designer to set up shop in post-communist Russia, Versace had scheduled store openings from Bombay to New Delhi and Johannesburg.

The competition from bigger and better-equipped U.S. and French designers, of course, is fiercer than ever. Calvin Klein Inc., for example, opened a spacious store in central Milan close to Versace headquarters. And in late May, Klein inaugurated a tony emporium on Paris' ultrachic Avenue Montaigne. Santo Versace picks military lingo to explain: "There's a daily world war out there between the Italians, the French, and the Americans."

But Versace had a secret weapon: A nimbleness that LVMH or Polo-Ralph Lauren could only envy. The Versaces typically made decisions with lightning speed--a key competitive advantage in an industry where styles and fads change overnight. Tuesday mornings, for example, each Versace received computer printouts of which Versace items were hot sellers, and which weren't, at the group's 300 boutiques. Although collections are designed, presold, and manufactured six months in advance like the rest of the industry, Versace often pounces with what it calls "flash items" to respond to the changing marketplace. One such item, $200 jeans made from high-tech PVC fiber, was designed, manufactured, and delivered to boutiques in under five weeks.

ITALIAN ARCHETYPE. Such flexibility is the hallmark of Italy's best fashion firms. Experts sum it up in a word: family. Clan capitalism, in which family members work cheek by jowl, fires the success of the Salvatore Ferragamo shoe empire, the Ermenegildo Zegna menswear group, and countless other Italian outfits as well as Versace. "You just don't have that in France or the U.S.," says Saks's Bravo.

Despite its global reach and its plans to let in outside shareholders, Versace was always the archetype of Italian family entrepreneurism. Gianni was the undisputed creative genius who sketched from 6:30 a.m. and used his squad of young designers to follow up his ideas. Santo, widely acknowledged in the industry as one of the sharpest business minds around, kept an eye on finances, from the dozens of complex licensing and franchise arrangements to the ongoing negotiations to take the company public. Donatella, a designer in her own right responsible for the $100 million ready-to-wear Versus line, runs a virtual in-house ad agency managing Versace's major advertising campaigns along with American husband Paul Beck.

It's an organizational setup found throughout Italian industry. "Yes, we are the country of the Borgias, so family businesses can have a negative side," said Gianni, who cited the infamously sparring Gucci family as a case in point. "But if the roles are well-defined, it's a big plus."

The family link was there from the start. Gianni began designing in his mother's dress store in Reggio Calabria, in the poverty-stricken toe of Italy. He came to Milan in 1972 as a contract stylist for a Lucca-based knitwear group. But in 1976, elder brother Santo left his job as an accountant in Reggio to help Gianni set up on his own, while sister Donatella chipped in to help out on the company's first photo shoots. In 1978, Gianni presented the first women's wear collection under the Gianni Versace label at the first Versace boutique in the tony Via della Spiga. Sales were a modest $11 million the first year.

But Versace's timing was superb. Milan was just starting to buzz as a fashion center in its own right, and success came quickly. Leaving classic, sober styling to the likes of Armani, Versace hit the fashion headlines with his sexually suggestive, brightly colored outfits. During the 1980s he cemented his love affair with young, rich buyers by cultivating energetically his image as couturier-in-waiting to rock star royalty from Elton John to Rod Stewart, Bruce Springsteen, and Tina Turner. It was a two-way street: Stars like John and Madonna would even step in as Versace models.

HOUSEWARES, TOO. Early on, Versace discovered the power of the brand. Building on his success in women's ready-to-wear, the growing group carefully carved out niches in the market, from menswear lines to the immensely profitable Versace Jeans Couture, a hot-selling lower-cost line designed for younger consumers (chart, page 79). In 1994, Versace rolled out his Home Signature collection of china, upholstery, bed linen, and other houseware items--and he was planning to unveil a cosmetics line next autumn.

This brand extension, or "product pyramiding" as it's known in the rag trade, is the backbone of the leading Italian luxury groups. Gucci is now leveraging its position in leather goods to make a splash in ready-to-wear clothes. "If you have a strong brand," says Salvo Testa, head of the fashion program at Milan's prestigious Bocconi University, "you can take your company just about anywhere."

Keeping a strong image, of course, is essential--and sometimes costly in the short run. Early this year, for example, Versace cancelled a profitable product-licensing agreement with Japan's Mitsui & Co. that brought in royalties of $6 million a year. Worldwide production, reasoned the Versaces, should be concentrated in just one place to ensure quality. That lesson didn't sink in at famous French fashion houses such as Yves Saint Laurent, Pierre Cardin, and Karl Lagerfeld, who largely lost control over licensing. Before long, markets were flooded with mass-produced brand-name products, fatally damaging their brands' luxury image. "The French used to lead in brand management," brags Gucci CEO Domenico Del Sole, who painstakingly restored luster to the leather goods group, "but now we're eating their lunch."

Gianni Versace, with its tightly organized head-office team of 250 designers, photographers, public-relations spinners, and bean counters follows, the model of most of the big Italian fashion houses. The bulk of revenues--a little over $1 billion last year at a wholesale level, or $2 billion at retail--comes from the 15% to 20% royalties received from 32 manufacturing companies that take Versace designs to produce everything from sunglasses and umbrellas to watches, socks, and suits.

In fact, Versace had taken the process one step further than most designers. It actually has majority stakes in 10 of those manufacturing companies, making it one of the few highly integrated groups in the business. "Versace is unique in its presence across the supply chain, from sourcing to production to retailing," says Yoram Gutgeldt, a textile and fashion-industry specialist at McKinsey & Co.

SMALL NUMBERS. Each company, though, is managed as an independent profit center. Alias, based in Novara about 25 miles from Milan, produces the top-of-the-line Gianni Versace Atelier clothes. Versace sent Britain's Princess Di four such outfits in April. Employing around 200 people, Alias racked up sales last year of $120 million--of which $21 million returned to the coffers of Gianni Versace in the form of royalties.

Those are still small numbers compared with the competition. New York-based Polo-Ralph Lauren Inc., for example, has three times the wholesale turnover of Versace and is gearing up for renewed expansion following its successful $750 million stock offering this June. Paris-based powerhouse LVMH, the goliath of the fashion and luxury-brand universe with its $6 billion in annual sales, recently ponied up $2.6 billion in cash for a controlling interest in San Francisco's DFS Group Ltd., the world's second-largest operator of duty-free stores. Santo and other Italians are worried stiff that the outlets in places such as Honolulu, Singapore, and Guam will now promote LVMH house brands from Guerlain perfumes to Christian Dior fashions and Louis Vuitton luggage at the expense of everyone else.

High levels of integration can pose risks. Even a fashion group as savvy as Armani has occasionally tripped up trying to be designer, manufacturer, and retailer at the same time. But if the logistics are managed well, integration allows a group like Versace to respond to increasingly short product life-cycles. Owning stores in key cities like New York, London, and Paris has allowed the Versace group to be in direct touch with customers without the filter of a franchisee. "You have to listen to the subtle messages the market is telling you," says Versace's Ballestrazzi.

Versace can also capture more of the rich margins at each step of the game. That's especially important at the retail end, where markups run from around 100% in the U.S. to as much as 300% and more in Japan. And if one or another of Versace's 50 wholly owned stores loses money, as does its flagship Paris store, "we make it up in the manufacturing end," says brother Santo.

He and sister Donatella now can no longer take their time planning the transformation of Versace from designer to brand. Because of their brother's murder, that transformation has been cruelly accelerated. But the sheer strength of Italian design in general and the business drive of the Versace clan suggest that the house Gianni built will continue to thrive--even without its soul.By John Rossant in Milan, with Gail DeGeorge in MiamiReturn to top


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