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."


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.

By Carol Matlack in Paris

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