Make a Profit with Italian Luxury

Salvo Spagna Make a Profit with Italian Luxury Made in Italy: The Essential Guide for Having Success in Buying and Reselling

ISBN 978-88-6345-521-2 2013 Il Sole 24 ORE S.p.A. Sede legale e amministrazione: via Monte Rosa, 91-20149 Milano Redazione: via C. Pisacane, 1-20016 Pero (Milano) Servizio Clienti Libri Tel. 02.3022.5680-06.3022.5680 Fax 02.3022.5400-06.3022.5400 e-mail: servizioclienti.libri@ilsole24ore.com Traduzione a cura di Maria Elisa Cardone Revisione testi a cura di Gianni Lombardi Fotocomposizione: S.E.I. Italia S.r.l. - Rovello Porro (CO) Stampa: Rotolito Lombarda via Sondrio, 3-20096 Seggiano di Pioltello (Milano) Prima edizione: maggio 2013 Tutti i diritti sono riservati. Le fotocopie per uso personale del lettore possono essere effettuate nei limiti del 15 per cento di ciascun volume/fascicolo di periodico dietro pagamento alla SIAE del compenso previsto all art. 68, commi 4 e 5, della legge 22 aprile 1941, n. 633. Le riproduzioni effettuate per finalità di carattere professionale, economico o commerciale o comunque per uso diverso da quello personale possono essere effettuate a seguito di specifica autorizzazione rilasciata da EDISER Srl, Società di servizi dell Associazione Italiana Editori, attraverso il marchio CLEAREdi, Centro licenze e Autorizzazioni Riproduzioni Editoriali, Corso di Porta Romana n. 108-20122 Milano. Informazioni: www.clearedi.org.

Table of Contents Introduction... pag. XV Made in Italy: dangers and opportunities...» XV Reputation...» XV Brand recognition...» XVI Profitability...» XVI Moneymaking and hidden dangers...» XVII Watch out for imitations...» XVII How to communicate with Italians...» XVIII First, stay out of trouble...» XVIII Watch out for driver-translators...» XXI National and regional culture...» XXI Sector-specific traditions...» XXII Fashion business practices...» XXIII Dress code...» XXIII The safest way...» XXIII Can a European brand be recovered...» XXIV Increasing the market value of a new product...» XXV Licensing...» XXVI Finding the right partner...» XXVI Part One - At Home...» 1 Apparel industry s business models...» 1 First case scenario: you buy what you want but you receive it in six to eight months...» 2 Second case scenario: you buy what is available now...» 3

VI Table of Contents Differences between developing and developed markets... pag. 4 Different purchasing policies and different countries of origin...» 4 Where one season less goods come from...» 5 Peculiar cases, bankruptcies, clearances, change of management» 5 Brand mix: target market-driven brand selection...» 6 Brand mix definition...» 7 Three basic questions to address when creating a brand mix...» 7 Five brand mix factors...» 8 The brand mix checklist...» 10 The brand mix business logic...» 11 Two mistakes to be prevented...» 12 The importance of size selection...» 13 Most common mistakes...» 14 Custom-made...» 16 Pricing strategy...» 16 Defining the budget...» 20 Just right...» 20 The most serious suppliers set minimum order quantities...» 21 Part Two - The Trip to Italy...» 23 How apparel companies are organized...» 23 Direct production companies...» 24 Partially outsourced productions...» 25 Licensees...» 25 Mixed production companies...» 26 Direct distribution...» 26 Indirect distribution...» 27 Licensed distribution...» 27 Mixed distribution...» 27 Modern distribution issues...» 29 Peculiarities of Italian companies...» 30 Prestigious brand rule of thumb...» 30 Getting into Made in Italy s labyrinth...» 32 Contacting fashion brands...» 33 A real case...» 35 What you are asked...» 36 How to request and obtain approval on trading Italian brands...» 38 Apparel...» 38

Table of Contents VII Interior design... pag. 39 Food Products...» 39 Doing business with Italian brands...» 39 Your first step...» 40 Your company s presentation...» 41 What does a Made in Italy producer consider in a potential partner...» 43 Comply with rules...» 44 Store interiors...» 44 Interior design and product display...» 46 How to get a distribution license...» 47 Franchising...» 49 Information from the brand company headquarters...» 53 Exclusivity clause...» 54 Contract duration...» 55 Where to buy Made in Italy products...» 57 Start from the top of the list...» 58 Why contact an intermediary rather than the brand company or an authorized distributor...» 58 Exceptions prove the rule...» 59 How to find your ideal supplier...» 60 Which target product categories should you go for...» 61 Visiting Italian companies...» 62 Letter of introduction...» 64 Key factors...» 65 Human resources recruitment and training...» 66 Your first meeting with an Italian brand company...» 66 Paperwork from suppliers...» 69 How to protect from fakes and counterfeits...» 71 Microchip technology...» 73 RFID technology...» 74 Protecting against seizures...» 75 Carriers from your country or carriers from Italy...» 76 Part Three - Choose Your Intermediaries Well...» 79 Realizing your consultants are not the right ones...» 80 The upsides of a competent advisor...» 82 Features of the luxury market...» 83 A secondary yet important market segment...» 85

VIII Table of Contents Luxury product buyers... pag. 86 Luxury market trends...» 87 Brand as a luxury product...» 88 The main luxury brands...» 88 Levels of luxury...» 89 Five dimensions of luxury...» 90 Luxury and fashion...» 91 Fashion cycles...» 93 Luxury types...» 94 Fashion cyclical nature...» 95 Shopping and store experience...» 97 Luxury retail features...» 98 Seven questions to ask...» 98 Is your store memorable...» 99 Three core issues...» 100 Customer relationship...» 100 Developing the best possible service...» 101 Integrate and develop your staff team work...» 102 Retail s most relevant feature...» 103 Luxury store types...» 104 Store types...» 106 Location: problems and opportunities...» 108 Planned shopping and impulsive shopping...» 109 What store are you thinking about...» 110 About the location...» 114 Why brand companies are hesitant to open new stores...» 114 What if a brand is unavailable in a capital city...» 115 Location analysis...» 116 Business analysis...» 117 Geographical analysis...» 117 Urban planning and gentrification analysis...» 117 Social and urban analysis...» 118 Evaluation of your store s area of influence...» 119 Commercial attraction by Reilly s law...» 120 Competitor analysis...» 121 Renting, buying or building your store...» 124 The American model...» 124 The French model...» 126

Table of Contents IX Floor matters... pag. 127 Rental store location types...» 128 Buying or building...» 129 The store - creation and merchandising processes...» 131 The store concept...» 132 Design and interior design...» 133 Closed store...» 134 Open store...» 134 Empty is luxury...» 136 Lighting...» 136 Visual merchandising...» 136 All-senses seduction...» 137 Every customer is different...» 139 Future buyers: desire and word-of-mouth...» 140 Store uniqueness...» 140 Customer experience...» 142 Customer in-store behavior...» 144 How many people walk into a store and actually end up buying something...» 144 How long does a customer remain in the store...» 145 Staff facilitates the sale...» 145 No one loves spending time in a parking lot...» 146 Customers only have two hands...» 146 Signs: can anyone read them and interpret them...» 147 Learning from street signs...» 148 Brand store material...» 149 Simple messages...» 149 Moving within the store...» 149 Window shopping while walking...» 150 A chair and some magazines for him...» 151 Men and women shopping...» 151 Keeping them busy...» 153 Shopping as a social activity...» 153 Studying and buying...» 154 Who uses technology...» 154 The elderly conquering the market...» 155 Clothing for the full-bodied and very tall...» 156 Elements of the shopping experience...» 156

X Table of Contents The time factor... pag. 158 Merchandising and store materials...» 159 Mistakes at a car dealership...» 160 Pricing strategies...» 161 Local price differences...» 162 Made in Italy uniqueness...» 165 Inventory: sell in and sell out timelines...» 167 Who I am and what I can do for your company...» 170 Spagna s staff...» 171 Spagna s experience...» 171 Spagna s working method...» 172 A successful entrepreneur s profile...» 172 Mistakes are facts of life...» 174 Exploring unknown territories...» 174 Tireless work is not enough to succeed...» 175 Long-term objectives...» 177 Quick reaction to change...» 178 Determined but flexible...» 179 Human resources...» 180 Goals and moods...» 181 Not satisfied, yet enthusiastic...» 182 Effective delegation...» 184 Creativity...» 185 Climbing the social ladder...» 186 Glossary...» 187 A...» 187 B...» 190 C...» 196 D...» 202 E...» 205 F...» 205 G...» 207 H...» 209 I...» 210 J...» 210 K...» 211 L...» 211

Table of Contents XI M... pag. 212 N...» 214 O...» 214 P...» 215 Q...» 219 R...» 220 S...» 220 T...» 226 U...» 228 V...» 228 W...» 230 Z...» 230

Introduction Made in Italy: dangers and opportunities So many entrepreneurs and retailers worldwide long for selling Made in Italy products, as they embody the highest quality standards in the world in those industries commonly referred to as the three Fs: Food Furniture Fashion Companies selling Made in Italy products benefit from their reputation, brand recognition and profitability. Reputation For ages, Made in Italy s industrially-produced and handcrafted products have been considered among the best in the world for quality, aesthetics and taste. The concept of Made in Italy, in fact, grew from the world-renowned Italian

XVI Introduction supremacy in art history and craftsmanship. Most European and Western cultural heritage is Italian: Giotto, Michelangelo, Leonardo da Vinci, Canova, Palladio, Raffaello, Tiziano, to name a few, are among the greatest Italian artists who, for centuries, revolutionized and deeply influenced international art. Needless to mention, the largest and most articulate civilization in the world that produced millennial monuments and artwork was the Roman Empire. Brand recognition Italian brands are well-known and desirable around the globe. Companies that choose to market Italian brands have a greater return on sales with lower marketing costs in terms of percentage because these companies are able to save money on advertising and sponsorships. The richest and wealthiest consumers worldwide are aware of Italian brands and Made in Italy products. The launch of these products on the market does not need an expensive campaign and their advertising efforts prove to be more effective when compared to the advertising investments of other similar products. Profitability A Made in Italy branded product typically commands a higher retail price - with proportionate margins - when compared to other products offering the same level of quality, taste and function.

Introduction XVII Greater profits can be made with Made in Italy products because they typically grant greater commercial and operational margins. In the fashion business, for instance, sales experience shows that once a customer tries a Made in Italy product, the chances of him/her buying it increase exponentially. Made in Italy fashion products are in fact the world s top sellers and therefore they are more likely to be imitated. Moneymaking and hidden dangers As President Kennedy quoted in 1959, When written in Chinese, the word crisis is composed of two characters: one represents danger, and the other represents opportunity. In other words, where there is opportunity, there is also danger. Making money requires expertise and close attention to hidden dangers. This is especially important in the mining industry, and in the art, antiques and luxury collectibles business. In both art and antiques, trading in precious products ensures profit as long as the actual market value of the pieces is guaranteed by experts and trustworthy sources. Watch out for imitations This book outlines the most relevant issues that a non- European entrepreneur - most likely American, Chinese, Japanese and Indian - may encounter when searching the European market for authentic Made in Italy products to

XVIII Introduction resell in his domestic market. It is quite well known that both the European and the Italian markets are extremely intricate and abound with language and regulatory norms, as well as surprisingly diverse national and local habits and culture. Additionally, dealing in Made in Italy products exposes entrepreneurs to stolen, counterfeit or imitation goods. Even employees of Made in Italy s manufacturers often cannot recognize fakes. How to communicate with Italians Europeans tend to have their own unique habits and they often have trouble establishing business relationships with businessmen from the Middle East, Far East and Southern hemisphere. Even businessmen from young countries having strong bonds with European countries, like Australia or New Zealand, may have a hard time getting to know and do business with a European businessman. Italians probably have more peculiarities and idiosyncrasies than the rest of Europeans. It is therefore essential for people coming from historically relevant yet traditionally different countries to identify all the potential tricks that doing business in Italy requires. First, stay out of trouble The following is a list of problems that a good local agent will prevent you from facing, and will probably turn into opportunities:

Introduction XIX Counterfeit goods Made in Italy products are the most imitated worldwide because they tend to be marketed at premium prices everywhere. It is therefore necessary to be able to recognize counterfeits from originals, including fake originals. Fake originals Made in Italy products may be legally manufactured by licensors whose production process is compliant with the original product specifications. In some cases, to unlawfully increase profits, these licensors may decide to allocate extra production efforts to supply the black market. Non-experts can hardly recognize counterfeits and may run into serious legal problems in case of an imprudent purchase. Illegal originals In a similar way to the previously-described case, goods are produced using original raw materials and accessories, yet forego any of the manufacturer s procedures or authorizations. It is the case of stolen materials or accessories. It may be the case of original materials and accessories that are legally bought and traded on the market related to a certain production, but end up being used to produce goods having a completely different business purpose. For example, sail cloth is used in the sailing industry. However, it happens to be used by handbag manufacturers. Counterfeiters can attempt to buy sailcloth produced for the sail industry to illegally produce fake sailcloth handbags. Stolen goods Not only is this the most obvious illegal practice but it is also the most dangerous in terms of legal and financial

XX Introduction exposure: if stolen goods are detected at Customs, one risks being involved in a penal offense. As with the aforementioned cases, when caught red-handed, people risk being barred from traveling in Italy or elsewhere in Europe. Besides losing any advance payments, associated legal problems may arise. Originals ordered but imitations delivered This happens as well: buyers visit manufacturers warehouses, inspect products and ultimately issue orders for specific quantities. Later on, and far away from the warehouse, lower quality goods are substituted, in full or in part, for the originally ordered products. Sometimes the efforts and costs of returning the goods are too high. Buyers are thus forced to accept the damage with no repercussion to the seller, unless appropriate contract clauses were included to protect them from such risks. Non-existent brands When buyers are unfamiliar with Made in Italy products, they may be misled by fake brands: brands that do not exist as they do not correspond to any real fashion designer. In both this case and in the previously-mentioned case, legal protection is jeopardized once a contract is signed: from a legal point of view, a valid contract does not prevent buyers from paying for Zucci bags at Gucci prices. Authentic but outdated branded goods A bargain is buying a particular brand for less than its market price; however, if the market price is paid for outdated branded goods, it is a swindle and may lead to a loss. Expired goods In case of food products, receiving stock whose expiration date is near or even past may not imply food-related problems

Introduction XXI - as expiration dates happen to be extremely conservative - but rather great commercial problems, especially when products are expensive. Watch out for driver-translators A number of foreign entrepreneurs think that a good local translator is sufficient to get to know about Italian products. A driver-translator is someone who is a local and thus knows the surroundings, can drive, speak Italian and simultaneously interpret from your language into Italian. However, relying on a driver-translator is not enough. First of all, Italian products are different from raw materials or products lacking distinguishing features. Coffee or chemical experts, for instance, can distinguish the difference between a high and a low quality coffee or chemical product anywhere in the world. There are two types of problems with a driver-translator: cultural/social and technical/production. A textile expert can tell the quality of a certain cotton or silk fabric anywhere in the world. However, only an expert in Made in Italy can tell whether a tie is Italian, and if it is by Armani, Ermenegildo Zegna, Versace or others. National and regional culture Italians have an ancient history marked by great wars and religious conflicts. As a people, they may have a hard time

XXII Introduction establishing business relationships with businessmen from foreign countries, who may very well have similarly ancient backgrounds, yet distinctly different customs. What foreign businessmen generally underrate about Italy is that Italy is an extremely articulate country, separated from Northern Europe by the Alps and further split by the long Apennine mountain chain. Italy is divided into twenty different regions that speak different dialects and carry different traditions. Quite impressively, people from Lombardia and from Trentino - two bordering regions in Northern Italy - are historically and culturally as different as the English and the Welsh. Sector-specific traditions Every production sector has its own traditions and folklore that are deeply intertwined with the local environment in which it operates. Sartorial traditions, for instance, are different from those of shoes. A fashion designer in northern Italy definitely has different habits from a tailor in Naples. Therefore, in order to initiate business relationships with Made in Italy producers, a number of cultural and commercial issues have to be addressed. Depending on whether you are dealing with a company based in Milan or any other city in Italy, or even with a company based somewhere else in Italy with an office in Milan, the following may vary greatly: Italian history and culture; national practices, laws and folklore;

Introduction XXIII local history and culture; the company with which you are dealing; interpretation of the law. Fashion business practices People in the fashion business adopt different practices compared to people in the food product business. Moreover, people in the fashion business may act differently depending on whether they deal with specific segments; e.g., high fashion, accessories, shoes. Dress code As much as having knowledge of wines is important when visiting a wine producer, dressing appropriately is crucial when meeting an entrepreneur in the fashion business. The safest way Made in Italy s quality resembles that of the antiques market and it requires a certain expertise. A truffle from Alba may be worth thousands of Euros or it may be a counterfeit of unbelievably low quality. If you want to buy truffles and have only seen them in restaurants featured in the Michelin Guide, or even worse, in cooking magazines, how can you

XXIV Introduction protect against buying counterfeit goods? The use of drivertranslators is risky from this point of view because they only report, in a polite way, what the seller means. If a seller says this is a top quality truffle from Alba, a driver-translator simply translates this claim because he does not have the expertise to know otherwise. Often, buyers are left alone to uncover any problems because it is generally believed that entrepreneurs are business experts. This is how an unwary buyer can be caught in a trap with the help of the drivertranslator who is unaware of the false claims and is just being kind and courteous with translating. As far as apparel, a supplier may claim that a piece of clothing is Made in Italy because its label says so. However, there are ways to discover whether the Made in Italy label was applied during the production process or later on, in post-production. An expert knows which paperwork can be requested to avoid excessive costs, fraudulent sales, or even legal and Customs problems that an unwary buyer can encounter. Can a European brand be recovered Some European brand names have marketing problems and constitute great potential deals for buyers willing to market them in non-european countries. Because of branding mistakes or market evolution, a certain brand may have problems in a market segment while continuing to grow in other segments, possibly in a different country. When a brand

Introduction XXV is having a hard time in Italy or elsewhere in Europe, it still offers opportunities for a foreign trader. In a nutshell, the foreign trader can: buy at a bargain price in Italy; rely on the typical margin for high quality products in his country. However, this kind of opportunity can only be successfully spotted by businessmen who know the Italian and European market. They can rarely be discovered by Korean, Chinese or American entrepreneurs blindly venturing into the highly complex and varied European market. A further opportunity lies in identifying companies producing brand products that are currently having difficulty on the market. With the strategy devised by your advisor, you can create a partnership aimed at purchasing the brand name at a convenient price for you. Increasing the market value of a new product Yes, you can! Identifying a local brand name that is still unknown to the market or forgotten by the local market to launch in your country is definitely an interesting opportunity for you. Such is the case of the US brand name Timberland. In the eighties, Timberland shoes were a locally-distributed working shoe. They were imported and launched on the Italian market as sturdy and high quality shoes to be used for both work and leisure. From Italy, their distribution spread throughout Europe and Timberland became a truly international brand. The same commercial strategy can be

XXVI Introduction successfully applied to similar or smaller scale Italian and European local brand names. Licensing With appropriate financial resources, the exclusive licensing of a brand name in your country or region offers great prospects for profitability. In this case, in fact, an independent commercial strategy can be adopted. This freedom translates into the licensee s ability to apply prices at his own discretion, with subsequent margin fluctuations, which is rarely possible when sharing a brand name with others in the same country. Finding the right partner Finding the right people and companies with which to do business is essential to making money. In Italy, relying on an experienced and well-connected agent is the first step to running a profitable business. The time for checking your agent s references is well spent. The same goes for the supplier that you intend to buy from. Who did your agent work with? Can he provide references of people with whom he worked that can confirm his experience and a fruitful collaboration? Can he provide references of clients and suppliers that have been working with him for years?

Introduction XXVII This obviously does not mean that you should exclude new companies from consideration as your suppliers. However, it makes sense to verify the prospective partner s commercial reliability, possibly starting with small orders before committing to bigger purchases. Too often Indian, Chinese or Japanese entrepreneurs visiting an Italian manufacturer of high quality products place sample orders and then later big orders whose quality turns out to be much lower than expected, based on their visit and sampling. A mere double checking by a competent and expert agent would prevent this from happening. Italy is filled with traps: only those who know them can avoid them.

Part One - At Home Apparel industry s business models In order to open a clothing store or to renovate an existing one, it is necessary to be sure your commercial objectives are clear as well as the business model you intend to adopt. The most relevant factor in store chains business models is the purchasing policy for clothing and accessories offered to clients. A store is typically based on two different purchasing business models:

2 Make a Profit with Italian Luxury First case scenario: you buy what you want but you receive it in six to eight months The advantage in this first case is to have access to the widest range of products and maximum freedom in choosing the most appropriate items. The disadvantage is having to select products well in advance, at a point in time (six to eight months prior to delivery) where the previous season s business outcome is still unknown. The weather factor may be detrimental to the supply of most apparel: coats, jackets and cashmere sweaters in the winter; bathing suits and ultra-light apparel for the summer. From a business perspective, the weather factor has a greater impact on sales in the winter, as heavier apparel is often the most expensive, both for the winter fabrics used and for specific production processes and transportation costs. Moreover, trendy pieces tend to increase business risk: if they do not sell, they will become even harder to sell the next season. However, it is important to display one or more very trendy pieces in the store windows. In spite of being more difficult to sell, they are more appealing than classic pieces. As usual, a balance must be found. Buying new collections can be risky from a financial perspective as well. Lots of manufacturers require a 30% advance payment upon placing the order with the balance due prior to shipping. This means importers are financially exposed for at least six months before realizing incoming revenues. Nonetheless, they can order anything they like in any size, style and even with customization, where available.

Part One At Home 3 Therefore: Downsides Upsides Second case scenario: you buy what is available now In the first case, you order the goods and receive them when they are available. In the second case you can see the goods you are buying and will pay prior to shipping. The upside is that you can buy whenever you want, but the downside is that you can only choose from what is available; that is, the previous season s unsold stock or the current collection. You may even suffer from size, color and style shortages. There are strategies aimed at solving these kinds of problems, though, and your financial exposure can definitely be reduced; i.e., from one to three months between when the balance is due to when revenues start coming in. Therefore: Downsides Upsides m

4 Make a Profit with Italian Luxury Differences between developing and developed markets Two considerations have to be taken into account to differentiate between developing and developed markets. In developing markets, any business model will work and new collections generally find their market share quite easily. In developed markets (Europe, US and Japan), betting on new collections is paradoxically more risky because consumers typically no longer have room in their wardrobes. Most consumers in a number of developed countries have become used to buying only during sales. It is therefore necessary to refine a number of skills: Different purchasing policies and different countries of origin When buying goods from new collections, you buy directly from the brand manufacturer or from an authorized

Part One At Home 5 distributor. On the other hand, when buying goods from, countries or origins may be the most diverse. Where one season less goods come from One season less goods come from different places; thus, it becomes more difficult to verify their quality, authenticity and legitimacy. They include: In all of the above cases, one or more commercial transactions on the goods could complicate the verification of their quality due to added value or damages, like deterioration from store display. Peculiar cases, bankruptcies, clearances, change of management Today most producers work on ordered quantities in order to minimize stocks. These types of goods are not generally obtained from producers directly but rather from intermediaries. They often are the unsold stock of middlemen.

6 Make a Profit with Italian Luxury Besides negotiating and sign the deal, potential buyers are confronted with the difficult task of verifying the authenticity of the goods. One thing is asking the producer to guarantee the authenticity of the goods in case of controversy; another thing is asking the middleman for the same guarantee. A middleman, in fact, may be acting in perfectly good faith yet has himself been deceived. In case of goods, verification of authenticity is essential and becomes even more important to identify advisors with expertise in and. In case authenticity remains unverified, the goods: In all the above cases except for the fourth one, the goods can be seized by Customs, sanctions may apply, and more serious, legal consequences can arise for the incautious buyer. He may even risk being arrested upon re-entering the country on the next visit. Brand mix: target market-driven brand selection Selecting the right, or the set of brand names to carry, is not only a crucial decision but it is also fundamental to the success of a store or chain of stores.

Part One At Home 7 A company store only carries a single brand and typically requires a specific agreement with the original brand company. However, a brand mix can include quite a variety of brands, possibly from different countries. Brand mix definition The brand mix is the brand portfolio designed to cater to the needs, desires and aspirations of a well-defined target customer group. A brand mix must include consistent brands, both from a logical and from a marketing point of view. Product category, image, price, target customer, destination market and store locations must be kept consistent in creating a brand mix. Three basic questions to address when creating a brand mix Target-related What are the target customers you expect to walk into your store, mall or chain? Location-related In which shopping area is your store located? Competitor-related What competitors are located in the same shopping area or area of influence? Answering these questions is the next step.