Benetton: A Must-Have Becomes a Has-Been

Fifteen-year-old Stefany Carlet shopped at a Benetton boutique recently—for her aunt. "Benetton's for an older generation," the student said outside the retailer's flagship store near Milan's 14th century cathedral. "I prefer Abercrombie or Bershka because they are more trendy."

Benetton Group, the Italian clothing maker that courted controversy with edgy ad campaigns in the 1980s, has failed to keep up with its customers or competitors. While rival chains like Zara and H&M have found success by mastering fast fashion—churning out knockoffs of hot trends in as little as two weeks after they create buzz in runway shows—Benetton has stuck with creating its own designs and changes them only seasonally. That business model has led to a decade of stalled results. "Benetton has missed out on the mass fashion wave of the past 10 years and lost the opportunity to be a fashion chameleon," says Sanford C. Bernstein analyst Luca Solca. "The risk is the brand could always feel somewhat passé."

Benetton sales have risen less than 2 percent since 2000, to about €2.05 billion (about $2.8 billion), and analysts predict revenue will remain little changed this year. The company declined to comment for this story. Europe's biggest clothing retailers have left it in the dust. Sales at H&M operator Hennes & Mauritz of Sweden almost quadrupled in the past decade, to $15 billion, while analysts figure revenues at Spain's Inditex, owner of the Zara and Bershka chains, increased about sixfold, to about $17.5 billion. Sales at both are expected to increase at least 6 percent in 2011.

Investors have noted that disparity. Benetton's market capitalization has shriveled to about $1.2 billion after hitting $5.8 billion in 2000. During the same period, the market value of H&M and Inditex have both more than tripled.

The Italian company sells almost 80 percent of its products through franchisees and partners at wholesale prices, less than half the retail value. Analysts say that by not operating most of its own stores, Benetton hasn't been able to track demand and tweak merchandise assortments as well as rivals such as H&M and Inditex, which operate most of their retail locations. "Benetton was one step removed from its customers and late in realizing a falloff in customers that led to franchisees that started to leave in droves," Solca said.

The Benetton of the 1980s shook up the international clothing industry with advertising campaigns featuring killers on death row, a priest kissing a nun, and a white baby nursing at a black woman's breast. The resulting buzz helped fuel sales of the retailer's colorful clothing. By 1993 there were more than 7,000 Benetton shops worldwide and the company's success was the subject of a Harvard Business School case study. After the '90s, however, the brand faded and the founding Benetton family, which owns more than 70 percent of all shares, shifted investment toward its highway catering and sporting goods businesses.

Analysts say larger European mass fashion merchandisers are more vertically integrated than Benetton—tightly controlling everything from design to manufacturing to selling at retail—and have been quicker to shift production to lower-cost countries. "Benetton's high-cost business model fits poorly with the environment created by H&M and Inditex over the past few years," says AlphaValue analyst Véronique Cabioc'H. "The company still suffers terribly from competition."

Benetton shares have dropped 20 percent since the company appointed Franco Furno, former head of human resources at Benetton and at Gucci Group, and Biagio Chiarolanza, a 20-year in-house veteran who previously served as operations chief, co-chief executive officers in March 2010. That's the fourth top management change in 10 years. The company declined to make the executives available for comment.

Founded in 1965, Benetton gets about half its sales from Italy, where pessimism about the economic recovery has hurt consumer confidence. (Sales in the U.S. dropped to 4 percent of total revenues at the end of 2010 from about 12 percent in 2000.) The company has warned that conditions in southern Europe will make 2011 "challenging." "This year will be critical for Benetton to show it is able to manage cost inflation, preventing it from losing further ground against rivals," says Cabioc'H. "The market needs a sign that the company is taking action." Based on price-earnings multiples, one measure of the stock market's valuation of a company's prospects, investors aren't convinced. Benetton's shares trade at 6.5 times earnings, compared with the 19.6 p-e of Inditex and 18.3 multiple of H&M.

Benetton in 2010 completed a two-year reorganization plan that included renegotiating raw material costs and resulted in savings of $122 million. It's also investing $60 million in a Serbian textile plant to reduce the time it takes to get products to market and to help cut production costs. Still, the company's costs as a percentage of sales were 54 percent at the end of 2009, compared with 43 percent at Inditex and about 39 percent at H&M. Benetton's profit margin is less than half theirs as well.

"Benetton will only be able to be flexible with costs, attentive to quality, and fast in terms of getting fashion and products to market if it is perfectly integrated," says Daniele Demartis, a fund manager at Rome-based Agora Investments.

The bottom line: Benetton sales have increased less than 2 percent since 2000. Quicker responses to consumer tastes could help it keep up with rivals.

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