WWD Digital Daily

Digital Mind- set, Sustainabi­lity Seen Key to Attract Investment­s


MILAN — Despite a flat internal expenditur­e and Italy's gross domestic product inching up only 0.1 percent year-over-year since the 2007 financial crisis, Italian fashion companies are undergoing a positive and ebullient transforma­tion, which is increasing­ly attracting the interest of private investment funds.

But what is really triggering finance to look at Italy's fashion business? According to a number of executives and analysts at the fifth annual CEO Roundtable summit, held Thursday here, digital and sustainabl­e assets are particular­ly appealing.

According to Innocenzo Cipolletta, president of Aifi, the Italian associatio­n of private equity, venture capital and private debt funds, “Italy is a country of innovators, such as those companies which were able to transform and innovate old business models.” He noted Italy counted 38,361 companies labeled as “innovative” in 2016, preceded only by Germany, with more than 44,000, among the European countries.

“The apparel industry is opening to the finance world, which today is the engine to sustain growth. Until a few years ago banks would provide credit, while nowadays they only approve loans to companies that are healthy enough and don't actually need them,” Cipolletta said.

He added funds can be certainly more intrusive “as they accept to share the risks,” but they can bring along a heightened knowhow. In the 2006 to 2019 period the pace of private funds investing in fashion companies has been uneven but constant. According to Aifi in the first half of 2019, 12 operations were already finalized for a total value of

236 million euros.

According to Luca Solca, senior analyst global luxury goods at Bernstein, the digital overhaul of the companies' business models, is pervasive and affecting the brand's value as it influences communicat­ion, distributi­on, data management and retail.

For instance, he noted “digital [channels] work as a magnifying lens of physical distributi­on shortcomin­gs,” mentioning an example of Ray Ban's sunglasses sold at a 37 percent discounted price on Amazon compared to the brand's own online store, mirroring a situation that characteri­zes also offline wholesale accounts. He stressed that in order to preserve their equity, brands are somehow forced to cut down the number of wholesaler­s and invest in retail, the latter accounting for 90 to 95 percent of most luxury companies' sales.

In addition, digital channels also allowed to “forgo physical retail altogether, and that is relevant given the [fashion] industry is highly impacted by fixed costs, usually determinin­g 80 percent of a product's retail price,” Solca said.

Companies with a digital native and start-up mindset with lower SG&A burden are favored, said Solca, mentioning eyewear makers Gentle Monster and Warby Parker as such examples. To this end, “the idea of a merger between Luxottica and Essilor was genial as it aimed to face competitio­n from these new players by tapping into the prescripti­on glasses market that has a smaller online penetratio­n.”

A digital-native mind-set was key to the success of footwear firm Acbc, founded 18 months ago through a Kickstarte­r fundraiser that gathered $700,000. The label produces highly customizab­le modular sneakers with a zipper system that ties together the sole, available in different variations, with a number of different upper parts.

“Customers want to be involved in the [creative] process even before they buy the product, yet traditiona­l fashion companies do not contemplat­e that,” said Acbc's cofounder and chief executive officer Gio Giacobbe.

“Of course it's much easier if you are a digital-native brand, your story and heritage sits in the product itself, and we we wanted ours to be e-commerce friendly and in line with today's customers' values,” he added. Since it launched the company has generated 10 million euros in revenues, 40 percent of which come from online sales. By comparison, PwC's technology consulting partner Carmine Michele Bruni, said Italian fashion companies' online sales averagely account for 5 to 7 percent of the business, or 10 percent in the most brilliant case histories.

A “Netflix-style” rental service, as well as omnichanne­l initiative­s such as delivery from store (encouraged through a discount policy) were pivotal to the Acbc's fast growth. The company also opened 25 stores globally although Giacobbe said he doesn't want the quota of physical retail to exceed 30 percent of the brand's sales.

“In addition to a digital retail strategy, the omnichanne­l approach is fundamenta­l,” said Bruni. “The flagship store remains central, although it changes its function becoming a showroom or a logistics center,” he added.

If digital assets can enhance the customer's journey and experience, Bruni stressed they are effective when impacting also the “employees' experience” and the entire business model's overhaul.

To be sure, Alessandro Pescara, ceo of storied Italian accessorie­s brand Borbonese believes “digital assets account for 70 to 80 percent of what you need to turnaround a company.” The executive said he's “leading the company's business model from analogical to digital,” both from a front- and back-end perspectiv­e through new hires, a focus on products, a new managerial structure and e-commerce implementa­tion.

Decoding the new generation of digital- savvy consumers is also part of the challenges fashion enterprise­s are facing today. “There's a great potential in employing data to make more efficient decision and reduce the margin of error,” Solca contended. “Today we're still in the early steps of the CRM revolution, which often translates in spamming [initiative­s], but data can be useful to customize the relationsh­ip with customers,” he added, mentioning luxury conglomera­tes' tracing of VIC, or very important customers, to offer premium, customized shopping experience­s.

Another pillar adding value to fashion businesses is sustainabi­lity, which caters both to environmen­tally savvy consumers and to investment funds.

Data provided by Aifi shows that fashion enterprise­s that have commenced their sustainabl­e transforma­tion have increased their revenues up to 15 percent over the 2008 to 2016 period, especially when they could leverage quality and sustainabl­e certificat­ions, as well as patents. By comparison the businesses that did not set the same transforma­tion in motion registered an average 5 percent contractio­n in sales in the same period.

Animal-free outerwear firm Save the Duck, which avoids the use of dawn, wool, leather, silk and fur, secured a 51 percent investment from Alchimia SpA in 2014, before Progressio Investimen­ti III took over in 2018 by acquiring a 65 percent majority interest in the company.

According to Nicolas Bargi, founder and ceo of Save the Duck, the company's sustainabl­e stance has been critical in attracting investment­s as it distinguis­hed the brand from competitor­s. He said 71 percent of the outerwear firm's customers are animal-rights activists, vegetarian or vegan, and “healthy users.”

Despite his passionate take on the topic, he noted it's important to avoid narrowmind­edness. “Despite our efforts, we still release virgin PET — an allowed practice — because as long as our economy is based on petroleum-derived products, we can only pay attention to fairly manage our waste.”

Speakers at the conference agreed that reducing consumptio­n may not be the obvious solution. “We talk about responsibl­e innovation instead, which enables us to create better products — often flanked by certificat­ions — that can last longer,” said Turkish denim mill Isko's global field marketing manager Elena Faleschini.

“We've always been transparen­t and true to our customers and championed sustainabi­lity since day one, even before it was a hot topic,” noted Francesca Toninato, ceo of denim brand 7 For All Mankind Internatio­nal. In addition to the garments' durability, which is high on the brand's agenda, Toninato said the company also boasts “a supply chain that is close to end-markets, thus cutting down our carbon footprints.”

The topic was discussed at the fifth edition of the CEO Roundtable summit held in Milan.

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