Article about Nicolas Ghesquiere/Balenciaga's business strategy...

[softgrey]

OCTOBER 17, 2005 **•*

Fashion: Tighter Belts Are In Vogue

Global luxury houses are looking to cut loose their unprofitable labels

Kneeling on the floor of his studio at Paris fashion house Balenciaga, Nicolas Ghesquière stares intently at a lacy, creamy white sleeve on a model's arm. An assistant stands by, ready to whisk the detached sleeve to an upstairs atelier, where it will be stitched onto an evening gown. Balenciaga's Oct. 4 ready-to-wear show is less than 48 hours away, and Ghesquière's face is etched with fatigue. The stark white studio is filled with leggy models waiting for final fittings of the outfits they'll wear in the show. Yet the place is eerily quiet, mirroring Ghesquière's intense focus as he gently tugs on the filmy fabric to make sure the sleeve hangs from the shoulder in a fluid line. It's that kind of attention to detail that has made Ghesquière, 34, a fashion superstar, described by Vogue and others as one of the most influential designers of his generation.

Yet the upcoming runway show is only part of the pressure Ghesquière faces. Gucci Group (GUCG ), which acquired the storied fashion house of Balenciaga in 2001, recently announced that it will put the company up for sale if it doesn't turn a profit by 2007. Balenciaga has been losing money for years, starting long before Ghesquière became its chief designer in 1997. Together with Gucci CEO Robert Polet, Ghesquière has hammered out a turnaround plan, and both say the recovery is on track, with a 115% sales increase during the first six months of 2005 over the same period in 2004. But Ghesquière admits that when he first became a designer, he never foresaw spending hours in budget meetings. "The rules have changed," he says. "Now you have to get involved in the strategy of the house."
Ghesquière is feeling the effects of years of overindulgence by the luxury-goods industry. Fueled by double-digit sales growth through much of the 1990s, global groups such as Gucci, Prada, and LVMH Moët Hennessy Louis Vuitton loaded up on prestigious but profitless brands. Gucci's purchases included Balenciaga, Yves St. Laurent, and the Stella McCartney and Alexander McQueen labels. LVMH picked up Fendi and Emilio Pucci. Prada took Jil Sander and Helmut Lang. The groups figured that with a dose of investment, marketing, and manufacturing efficiency, they could replicate their flagship brands' success. "They knew it would be impossible for these star brands to grow forever," says Claudia D'Arpizio, a Rome-based luxury-goods consultant at Bain & Co. "They needed a portfolio to balance their risk."
ACQUISITION INDIGESTION*
The bet didn't pan out. The aftermath of the September 11 terrorist attacks hit the industry hard, as did a sharp increase in the value of the euro, since most luxury apparel and accessories are manufactured in Europe. At the same time, turning around the new acquisitions proved more costly and time-consuming than expected. Meanwhile, "cheap-chic" retailers such as Spain's Zara and Sweden's H&M Hennes & Mauritz, put pressure on luxury apparel makers by conditioning shoppers to expect a fast-changing array of new styles on store shelves.
The bottom line? Four years after the shopping spree, most of the new acquisitions are still money losers. During the first half of 2005, Gucci's six smallest brands, including Balenciaga, McCartney, and McQueen, posted a $30.9 million loss on $160 million in sales. Gucci doesn't break out figures for the individual fashion houses.
Now patience is wearing thin, and Ghesquière isn't the only designer feeling the heat. Gucci has warned McQueen and McCartney that their brands will be sold if they aren't profitable by 2007. LVMH sold off its Christian Lacroix brand this year and has brought in new designers at Celine, Pucci, and Givenchy.
That's hardly what Ghesquière envisioned in December, 2000, when Gucci's then-design chief Tom Ford phoned up and invited him for a drink. Until then, the slender, dark-haired designer had spent most of his career laboring in the back rooms of fashion. After graduating from high school in France's Loire Valley, he moved to Paris where he landed a low-level job in designer Jean Paul Gaultier's studio. At 23 he moved to Balenciaga. The legendary couture house, which had languished since the retirement of founder Cristóbal Balenciaga in 1968, was trying a comeback as a ready-to-wear house. When the chief designer was fired, Ghesquière got the job.
It wasn't long before Ghesquière's designs were drawing rave reviews from the fashion press, and his elegantly cut, pencil-slim trousers began turning up on stars such as Nicole Kidman and Chloe Sevigny. Then Ford and Gucci CEO Domenico De Sole approached, offering carte blanche. "They asked: 'Nicolas, what would you like to do?"' Ghesquière recalls. "They offered support, logistics, and security, a broad shoulder to lean on."
But the relationship soon grew tense. Ford and De Sole wanted Ghesquière to close the atelier, a workroom on the upper floor of Balenciaga's Left Bank townhouse where eight employees turn out prototypes of Ghesquière's designs and experiment with fabrics and clothing-construction methods under his direction. Gucci considered this an unnecessary expense, since its factories in Italy provide such services. Ghesquière argued that taking the atelier away would be like robbing a scientist of his laboratory. He threatened to quit, and Gucci relented. But then the designer was told that Gucci would no longer finance his runway shows, forcing Balenciaga to stage small, bare-bones shows at its headquarters. Ghesquière says he was ready to quit when in late 2003 Gucci unexpectedly announced the departure of De Sole and Ford.
Ghesquière says he has a more cordial relationship with Polet, who was named Gucci CEO in mid-2004 by parent PPR Group. But if anything, the financial pressure has increased. Polet, a former Unilever executive, admits to being a tough boss. "I told him: You can keep the atelier, but you are going to have to make a profit, or you will close," the CEO says.
The two men struck a deal: Ghesquière could keep his cherished atelier, but he would have to hold the line on other costs while boosting sales. To attract customers, Balenciaga this year introduced "Capsule Collections" of some of its most popular designs, made without the costly embellishments, such as hand-stitched insets, that are often seen on the runway. The prices range from $345 to $575 -- well below the $2,000-and-up prices that many Balenciaga ready-to-wear items command. About half of Balenciaga's sales now come from the Capsules and other derivatives of runway designs. The simpler clothes are quicker to produce, so that Balenciaga can get its merchandise into stores more quickly. That gets customers coming in more often, increasing the odds they'll splurge on something like a $7,200 fur-trimmed coat, a Balenciaga best-seller.
There have been sacrifices, too. Balenciaga has scaled back plans to open boutiques -- there is already one in Paris, another in New York, and a third opening soon in Hong Kong. Instead, it has set up in-store departments at upscale retailers such as Barneys in New York and Harvey Nichols in London. To compensate for Balenciaga's slim advertising budget, Ghesquière generates free publicity by making discreet gifts to celebrities. Balenciaga has successfully used this strategy to drive sales of its hottest handbag, the Lariat. "Nicolas really does have a business head," says James McArthur, a senior Gucci executive who recently became CEO of Balenciaga.
Could Balenciaga turn profitable even before 2007? The company won't divulge sales figures, but Polet, McArthur and Ghesquière say the turnaround is ahead of schedule. The reaction to Ghesquière's Oct. 4 runway show bodes well. "C'est magnifique," Women's Wear Daily said of the collection, a mix of frothy gowns and sleek pantsuits with ruffled baroque collars. Adding to the buzz, the Paris Museum of Fashion & Textiles is planning a major Balenciaga retrospective next year. That's likely to spur demand for updated versions of classic Balenciaga designs that Ghesquière is selling under the Balenciaga Edition label. As Ghesquière is learning, even the most beautiful clothes look better beside a strong balance sheet.

*businessweek.com

 

[Pastry]

Fascinating article (as always)! Thank you.

 

[LoveLetter]

This article is similar to the one published last year or so. Nothing new, actually.

 

[Ella]

This was really interesting to read after his S/S 06 collection. Thanks for posting the article.

 

[softgrey]

This article is similar to the one published last year or so. Nothing new, actually.

the 'capsule collections' are new...
and so is the news that they are ahead of schedule on turning a profit...

 

[The Baron]

I have some friends who fell in love at the Balenciaga boutique who will be glad to hear about the Capsule Collections.

I wonder if there will be Capsule items for men, too. Pleasepleasplease!!

 

[jssy4eva]

good article...i have a question.....if they do sell the company and no one buys it then what happens? will the designer just go out of business? or do they have to fund their own collections?

 

[softgrey]

to answer your quest jssy...

they could close the company and basically then everyone would be out of a job...
then the designer could try to go work for someone else or start his own company...

just like anyone else who is unemployed...

 

[jssy4eva]

thanks softie......

 

[softgrey]

 

[kimair]

here's the story from wwd that ran during the day of the f/w05 show...

and thanks softie for posting the new article!

Tuesday, March 01, 2005
Ghesquiere's Reality Check
By Miles Socha

PARIS — Nicolas Ghesquière, one of the most influential designers of his generation, has been asked to experiment with something new at Balenciaga: profits.

And he says he’s more than up to the challenge of meeting the 2007 breakeven deadline imposed by Balenciaga’s parent, Gucci Group. In fact, he wants to get there sooner, by the time his employment contract expires in July 2006.

“This is realistic and I’m not the only one to believe it now,” Ghesquière said in an exclusive interview. “The mood of the house is very positive. People are very encouraged by what’s happening inside.

“Even if we’re not a priority in the group — and [it’s] clear we’re considered a small brand — I still want to prove that we can be bigger than that. That’s my challenge for the next year and a half.”

During a frank conversation at Balenciaga’s 17th century studios on the Rue du Cherche-Midi here, Ghesquière proved he’s as comfortable talking about the bottom line as balloon-shaped hemlines. He mapped out a breakeven strategy based on:

• Building on Balenciaga’s current momentum at wholesale. Spring-summer 2005 orders zoomed 80 percent versus a year ago. Pre-fall collection orders were up 120 percent.
• Introducing more “accessible” products, like the new greatest-hits collection of pants and knits he did for pre-fall.
• Focusing on fast-growing markets like Japan, where the business has tripled in two years.
• Regaining control of the fragrance business once the current license expires with Jacques Bogart Group at the end of 2005.
• Keeping a tight rein on spending. “We have to squeeze,” Ghesquière said, referring to budgets, not his strict silhouettes.

Ghesquière also disclosed he is “not at all” opposed to licensing — often a dirty word in luxury circles, and certainly during the era of Tom Ford and Domenico De Sole at Gucci Group. “If we find a good partner who believes in Balenciaga — yes, why not,” he said. “I’ve already made a few contacts.”

He declined to elaborate, but later allowed that classic men’s suits and trousers could be a category ripe for a partnership.

Emblematic of his desire to improve the business and extend the brand’s reach are the cheaper pants and knits, unveiled to buyers here last January. Ghesquière reinterpreted best-selling styles from the past at prices about 30 percent less at retail: $345 to $520 for pants, and $335 to $450 for knits.

“That was my idea,” he stressed. “It’s not a marketing strategy, and it’s not coming from someone else. You don’t sign on with these kinds of groups if you don’t want to do business and make money. I like to experiment, but I also like to make beautiful, wearable clothes. I always mix them.”

He said he plans to expand such capsule collections to classifications like silk and leather, allowing more “access points” for the brand and the chance for Balenciaga devotees to build a wardrobe.

“What is really interesting about being a designer today is that you can occupy those two positions: being a forward thinker and at the same time someone who sells clothes,” Ghesquière explained. “In Europe a few years ago, you had to make a choice.”

And he said his decision last year to introduce select archival items, reinterpreted for modern times, helped the powers-that-be at Gucci, and the industry at large, better understand the link between the house’s rich heritage and the experimental collections Ghesquière turns out. It also gave customers a new “access point” to the brand, via eveningwear, since many of the items Ghesquière selected are dressy.

“My big challenge now is to make Balenciaga become a brand, and give that feeling that we can feed the stores like a brand.”

Dressed in a gray flannel blazer and a crisp shirt as gleamingly white as his new leather sneakers, Ghesquière spoke in an animated fashion about the future of Balenciaga — and readily acknowledged relations with Gucci Group were strained in 2004, almost to the breaking point.

The designer was said to have gotten off on the wrong foot with Robert Polet when the former Unilever frozen foods honcho was named chief executive officer of Gucci Group last July. Last fall, speculation was mounting that Gucci might sell the house, or turf Ghesquière in favor of a designer who might be easier to manage. Seizing a possible opportunity, luxury rival LVMH Moët Hennessy Louis Vuitton swooped in and approached Ghesquière about its longstanding vacancy at Givenchy, according to Paris sources.

During the interview, Ghesquière didn’t flinch when such scenarios were mentioned. And he’s aware of his reputation for being uncompromising, stubborn — even difficult. Still, he steered the conversation back to the positives, such as the rocketing sales and improving financial picture, and credited them for improving relations dramatically.

For example, he noted that sales at Balenciaga’s flagships in New York and Paris have increased 138 percent and 56 percent, respectively, since they opened in 2003 — and both were profitable last year, ahead of schedule.

A change in Ghesquière’s attitude also seems to have worked wonders in soothing over prickly relations with the head office.

“I used to be more defensive and less comfortable because I was feeling threatened, but I’m not any more. I feel more comfortable with the process,” he said, referring to life under a conglomerate. “My position before was to build a strategy that fit the house and my way of working. That’s why I had to be a little authoritarian.”

Retailers confirm the Balenciaga business picture is improving rapidly.

“This is the story of a company that really looked at its problems and found a solution,” said Julie Gilhart, vice president and fashion director at Barneys New York. “Everything is good now. We’ve grown our business so incredibly.”

Evelyn Gorman, owner of Mix in Houston, said Balenciaga handbags are “difficult to keep in stock” and she has been flooded with calls from customers asking to reserve rtw items from Balenciaga’s hit spring-summer collection, which crossed classic marine style with a Space Age sensibility.

Much of the tension in recent years between Ghesquière and his Gucci Group executives relate to production issues. In brief, Ghesquière wanted to maintain extensive ateliers in Paris — his fashion “laboratory” — and build a “bridge” to the Italian factories designated by the group as a platform for its emerging brands: Balenciaga, Alexander McQueen and Stella McCartney.

To that end, Ghesquière set up a product development team in Paris to have more control over his collections, maintain exclusivity and keep a tight grip on quality. That meant Balenciaga had fixed expenses higher than most other brands in the group, Ghesquière acknowledged, describing the integration process as “difficult and painful.”

What’s more, the arrangement had glitches, and Ghesquière acknowledged serious delivery and fit problems hurt the business, particularly with his influential spring 2003 “scuba” collection only an eel could squeeze into. “It was a very difficult season,” he acknowledged. “We were penalized.”

He also acknowledged that a narrow price spectrum, focused at the upper ranges of designer rtw, also had a negative impact. “We had to give an accessible price point,” he said. To wit: the spring collection currently in stores even has T-shirts for 115 euros, or about $150 at current exchange.

Balenciaga’s impressive Rue de Cassette showrooms, approved during the go-go De Sole days, also came back to haunt Ghesquière. The cost of operating it, plus his product development team, did not sit well with the new suits at Gucci Group, which nixed Balenciaga’s budget for advertising and — for a few weeks, at least — its fashion show last fall.

“I knew my priority was to have this team to develop the collection,” Ghesquière said. Ultimately, he convinced his corporate parent to reverse the decision about the show, allowing him to invite 250 people to the Rue de Cassette space last October to unveil one of the strongest shows of the season. “I don’t mind doing small shows. I think it’s very chic and I like to show inside the house,” he added.

Ghesquière described as “very good” his relations with Polet and new PPR chief executive François-Henri Pinault, who officially succeeds Serge Weinberg later this month.

Not that everything is hunky dory. For one, Ghesquière takes sharp exception to being lumped into Gucci’s “emerging brands” category. “It doesn’t help to be considered an emerging brand. I’m fighting that. I don’t think a house with 70 years of history can be considered an emerging brand. It’s not Nicolas Ghesquière; it’s Balenciaga,” he said firmly. “I think they are starting to understand that now.”

Ghesquière also said he is not happy that Balenciaga is the only fashion house in Gucci Group without a chief executive of its own. That’s been the case since Pascal Perrier, named Balenciaga’s ceo in 2001, was named director of licensing development at Gucci Group in October 2003.

The designer acknowledged the search for a ceo was interrupted by executive turbulence at the group level — the exits of De Sole and Ford and the arrival of Polet — but assured it will resume. “I hope to have someone soon,” he said. “We miss not having a ceo for sure.”

As for his own employment contract with Gucci Group, negotiations to renew it have not yet commenced, and Ghesquière, who owns a 9 percent stake in the house, said anything is possible. “I want to stay, but it depends what are the plans for the house, too,” he said. “I’ve very attached to the house and I want to make it a success.”

Looking ahead, Ghesquière said he wouldn’t rule out a couture collection for Balenciaga, or even a signature label.

“For the moment, I feel very good with ready-to-wear. It’s very elaborate and I’m using more and more couture techniques,” he said, noting that he works with Lesage for embroideries, Lemarie for feathered pieces and Robert Goosens for jewelry. “It’s my way to work with couture,” he said.

He also reiterated that he would some day like to launch a Nicolas Ghesquière brand.

“It’s one of my dreams. I would love to do my own line. I don’t know when and I don’t know how, but I would like to do it. And today I would say it would be in addition to Balenciaga,” he said. “Balenciaga is part of my identity. If I want to start my own line, I have to find a very specific and special concept. We are far from this.”

For now, his priority is ensuring that Balenciaga continues to fire on all cylinders, including the vital leather goods category.

Balenciaga continues to enjoy strong sell-through of its iconic “lariat” bag with braided handles and dangling zipper pulls, which now comes in satin versions for evening and in a $15,000 crocodile version for luxury addicts. Handbags now represent about 30 to 35 percent of brand sales, and Ghesquière said building the momentum is a priority. “I’m very happy to do a bigger bag collection and a bigger shoe collection,” he said. “The shoes are doing very well.”

Men’s wear, which had been held back by poor sizing and high pricing since its launch in 2002, also reached a “turning point” this past fall season, according to Ghesquière. However, it accounts for only 7 percent of rtw sales.

The designer is also eager to revamp Balenciaga’s fragrance business and is already in discussions with YSL Beauté, Gucci Group’s beauty arm, about transferring the license to it, or possibly elsewhere.

“I want to rebuild the legacy of perfume,” Ghesquière said, noting that scents like Le Dix were in the same league as Chanel No. 5 in the Fifties and Sixties. “This is an access to the brand, too. The name is good for perfume.”

And a hit fragrance could just be the ticket to renew investments in the brand. When it acquired Balenciaga back in 2001 as part of an acquisitions spree, Gucci said it planned to quickly open Balenciaga flagships in London, Milan and Tokyo. Of course, none of that came to pass.

“Once we’re going to break even, we may open new stores again. I can hardly wait for that,” Ghesquière enthused, noting that the U.S. would likely be the priority. “Once we get to [profitability], I think it’s going to be a different life.”

 

[nqth]

Thanks for the article, again softgrey:-)

Nothing (in business side) he does is new, imo, gift for celebs or simplier designs of runway collections. But does it mean that the main line is still very "haute"? That the house is not producing pap entirely? How one can sell two coats, one 10 times more esp. than the other, just bc of "hand stitching"?

 

[softgrey]

i don't really see a conflict there nqth....
the people who want it and can afford it will go for the handstitched...
but most can't afford it...and this way at least there is something for them...

i guess the strategy is that at least they get some sales...
it means you need to do a higher volume...
but that has always been the way to make more money...
right?..

 

[fashionista-ta]

Sounds like an extremely strong strategy to me ... is there anyone else who has all these elements implemented?

I'm also impressed with how diverse Nicolas is ... lots of designers have a business partner to do all this ...

 

[nqth]

In a way it is like Comme Comme I think, but made from past collections. It is a very clever move, no doubt about it:-)

But it sounds like he still can not find his way to sell the main line, which is Balenciaga's "heart", and make it more pap than hc:-) I don't know much about Balenciaga tho.

 

[LoveLetter]

Thanks, kimair...

 

[Spacemiu]

I'm surprised they are having problems even with the sales of thous bags

 

[tricotineacetat]

Thanks Softie for that amazing article on page 1

I honestly never knew they didn´t stage a bigger show event for the runway collection simply because they had a disagreement about the in-house ateliers... it´s funny because I always thought the way they showed the collection was so appropriate in their own studios... a lot of designers did it back in the glorious days of couture, and with all those pieces being so haute, it only makes sense that the presentation itself is more exclusive and intimate as well.

 

[Caffeine]

DId anybody realloy see the 'capsule collection' in store? i didn't even notice such a thing when I visited. Does it carry a different label?

 

[Caffeine]

I just googled, and it turned out that "Balenciaga Edition" is probably the name of the collection unless they have more than one capsule collections...I was actually puzzled by the name in the magazines a couple of days ago......