Made In Italy

“All I know is, when I see a ‘Made in Italy’ label, I want to buy it!” This is typical of comments I hear from the sophisticated fashion set I run with in NYC. Italy’s creativity, artistry, and passion speak to us viscerally on every level, from design and fabric to style and construction. ‘Made in Italy’ can even evoke visions of classical Rome, with its intelligent aesthetic, as well  as la dolce vita  – a way  of life epitomized in Italian cinema of the  1950s and the \’60s.

In the summer of 2014, London’s famed Victoria and Albert Museum hosted a comprehensive design exhibit, The Glamour of Italian Fashion – 1945 to 2014, which has since moved on to tour internationally. The exhibit documents a postwar Italy, eager to return to its past splendor, and the confluence of economic interests pushing for development of a national textile and clothing industry. These circumstances were amplified by an expanding film industry that influenced fashion, and ultimately the development of ready-to-wear.

Valentino’s Creative Director Pierpaolo Piccioli aptly summed up why Italian fashion has such enduring appeal, commenting, “Couture is part of our memory. It is part of our memory of being Italians, because couture is linked to craftsmanship, to the execution, to the schools of art of the 15th century. It is a typical Italian tradition that we want to perpetuate and hand down, as we strongly believe that the memory of couture is the key to face the challenges of ‘Made in Italy’s’ future.

Italian DNA

Let’s face it, Italians live and breathe a different level of culture and taste. Since the time of the Roman Empire, the people who live in what we now call Italy have been immersed in a design heritage spanning architecture and sculpture, road design and painting, fashion and consumer products. Romans are spoiled, living in the shadow of the Coliseum and the presence of Botticelli’s frescoes and Caravaggio’s paintings in their churches and Michelangelo’s sculptures at the Vatican. Attention to design is reflected in all they do, from the shape of pasta to the industrial design of an espresso machine or an Olivetti typewriter, to, naturally, an extraordinary bag or pair of seductive shoes.

Traditional Constructs

A brief look at Italy’s manufacturing structure reveals that many skill sets pass down vertically through generations, combined with a horizontal division of work that depends on strong links to the local area (including local banks) and a strong reference to family ties. This familial system creates “a relationship of trust and cooperation that was first and foremost personal rather than exclusively commercial,” says Emanuela Scarpellini, Professor of Modern History at the University of Milan and visiting scholar at Stanford University and Cambridge University. This approach contrasts with the large, impersonal structure of firms. The localized model provides the flexibility and adaptability that supports manufacturing multiple design aesthetics and international brands.

According to Istat-National Institute of Statistics, in 2011 there were 130 Made in Italy industrial districts; 32 specialized in textiles and clothing; 24 in personal goods; and 17 in leather and footwear. Of the remaining districts, 38 are manufacturing sectors, 15 in food and 4 in jewelry. The others specialize in chemicals, metals and paper. Smaller firms in these districts measure success in terms of pride in their heritage and a focus on creativity and quality; growth is not the exclusive mantra. Many of the firms are family owned, providing a positive, stable environment, potentially negative family dynamics aside. These family owned firms are undercapitalized and encountering transition problems, which makes them targets for huge French luxury conglomerates seeking new growth opportunities and new brands.

Full Disclosure

Increasingly, Italy’s premium fashion houses are foreign owned. Chinese factories, their Asian workers and upscale Chinese consumers are now intertwined with the destiny of the Italian-made. The Exane BNP Paribas/ ContactLab March 2015 report, “The ‘Made in’ Controversy,” points out that 41 percent of individual leather goods operators in the Florence leather district are Chinese, up from 35 percent in 2011 and 28 percent in 2002; and 74 percent of the individual enterprises in the Florence leather district are Chinese, up from 69 percent in 2011.

Exane BNP Paribas researched 30 brands—ranging from Tiffany, Bulgari, Cartier, Bottega Veneta and Valentino to Ralph Lauren, Coach, Hugo Boss and Tory Burch,—surveying the manufacturing disclosures on their websites. Having a Made in Italy provenance denotes quality craftsmanship for both Italian and non-Italian goods. Whether a luxury brand discloses production location varies: 75 percent of high-end luxury brands and 80 percent of mega brands disclose. Interestingly, Chanel doesn’t, nor does Dolce & Gabbana. Prada discloses “Made in Prada.” Aspirational brands generally do not disclose, as disclosure of production in a third world country would not add to desirability.

According to Boston Consulting Group, 87 percent of consumers from emerging markets care about product origin, versus 71 percent of consumers in developed markets. ‘Made In’ matters by region. For instance, around 70 percent of Chinese consumers want their watches to be Swiss; 62 percent want their perfumes and cosmetics to be French; 57 percent want their cars to be German; and 50 percent want their bags and shoes to be either Italian or French.

Money Matters

The Italian design legacy pays off. In December 2013, Italian luxury outerwear brand Moncler went public in what was Europe’s best IPO of the year. In a prime example of demand outpacing supply, the IPO was oversubscribed 31 times availability, and on its first day of trading appreciated 47 percent from the offering price, for a $3.5 billion market capitalization on its first day as a public company. This capitalization represented 4.7 times Moncler’s 2013 sales and 27.7 times its net income; on a PE (price to earnings) basis, Moncler’s IPO closed more than 50 percent higher than the prevailing S&P multiple Before Moncler, Brunello Cucinelli S.p.A. (maker of $3,195 cashmere cardigans) and Salvatore Ferragamo S.p.A. enjoyed strong demand for their IPOs, and were oversubscribed 17 times and 3.6 times, respectively.

According to Thomson Reuters, first quarter 2015 M&A activity in Italy approached the value of M&A transactions in all of 2014, as recent economic reforms have driven increased investments. At $20.6 billion, first quarter transactions rose 260 percent year over year—compared with $27.6 billion in 2014. Momentum is heating up in 2015, as the Italian government appears to be emerging from a three-year recession, and recent reform of the labor markets and moves to cut business taxes are making Italian businesses more appealing globally.

In its report on “2015 Global Powers of Luxury Brands,” Deloitte listed the top acquisitions in the luxury and premium goods sectors in 2013. Of the top 12, four of the acquired businesses are Italian: Loro Piana S.p.A., Pomellato S.p.A., Marcolin S.p.A. and Gianmaria Buccellati srl. The first two were acquired by French luxury houses, LVMH and Kering, respectively, and the remaining two were private equity transactions. Loro Piana fetched the highest purchase price—$2.8 billion for an 80 percent interest, or 5.48 times 2012 sales, followed by Pomellato, at 2.89 time sales. This compares with an S&P price-to-sales ratio of 1.45, and is evidence of the premium afforded to luxury Italian brands.

So what does this all mean? Given economic reforms and the bench strength of talent in Italy coupled with millions of consumers with an unrelenting desire for Italian made fashion and leather goods, we should continue to see M&A transactions with ownership of Italian brands going into international hands. The French luxury houses are good brand stewards, offering strategic, marketing and distribution know-how as well as a solid financial underpinning to their newly acquired luxury brands, while supporting creativity and nurturing growth. The portfolio approach, as the French luxury houses practice it, allows the larger mega brands within the portfolio to restrain growth in order to preserve brand value and maintain supply/demand equilibrium as smaller brands expand to meet growing demand. Financial and nonstrategic acquirers are more mercenary, and investment returns and shorter-term objectives often supersede brand building. For example, Proctor & Gamble recently sold its 43 beauty brands to Coty, Inc. (including Gucci and Dolce & Gabbana) after years of underperformance by the P&G beauty portfolio.

Google provided a boost to the Made in Italy brand in 2014 when it teamed with the Italian Agriculture Ministry, Union of Chambers of Commerce, Ca’Foscari University and the Symbola Foundation to launch a platform bringing Made in Italy to the Web (www.google. com/culturalinstitute/project/ made-in-italy). Young Millennials and Generation Zers were introduced to centuries of heritage and artistic treasures as well as new practitioners that give Made in Italy its robust meaning. Country of origin will continue to matter to the growing population of aspirational luxury shoppers from developing markets, and Made in Italy products will be a core holding for investors and luxury customers. While the majority of retailers and brands are fighting in a race to the bottom where no one wins, the Italians have had a different approach for centuries. Let\’s hope they stick to their DNA. If they do, the power of Made in Italy will be around for another millennium.