John le Carré once said ‘a desk is a dangerous place from which to view the world’. Nowhere is this truer than in global investment; generic information about companies and markets is abundant, but the best way to understand the culture of a company or country is to travel, meet, talk, listen and see.
I recently visited Milan – the bustling, wealthy city at the centre of Italian commerce and fashion. My time was spent with a variety of participants, from brands to distributors, both old and new.
Mixed feelings on high fashion
Both Tod’s and luxury brand Prada have struggled recently. The former has reported 15 quarters of negative like-for-like growth, while the latter has witnessed declining sales and falling margins. Some of these problems are macroeconomic, but with their competitors succeeding in spite of this, Prada and Tod’s market woes imply share losses and declining consumer interest.
Fashion is a problematic area for long-term investors. The consumer has an enormous and growing array of choice, and many luxury items are easy to make. The internet has also reduced barriers; good designers can break in on a very limited budget, without the former prerequisite of a store on Bond Street or Milan’s Via Montenapoleone. Sustainable competitive advantage is hard to find, and we see little at Prada or Tod’s.
Luxottica, meanwhile, is a more appealing proposition. The Ray-Ban owner dominates its category, with a near monopoly on producing frames for major luxury houses like Chanel and Armani. It is due to merge with one of our holdings, Essilor – market leader for the growing spectacle lens market. With our eyesight collectively deteriorating for many reasons from iPhones to old age, Luxottica-Essilor looks well placed; intersecting a long-term growth theme with attractive economics and a valuable competitive position.
Where are shoppers shopping?
I also visited a Milanese Eurocommercial Properties shopping centre. Prime retail property is a valuable bottleneck for those seeking a physical presence, and the centre was busy and fully let. Pedestrian traffic has also been positive, unlike US equivalents where footfall declines are leading to the ‘death of the mall’ phenomenon.
It is perhaps ironic, then, that Milan is also home to the world’s leading ‘digital department store’ – Yoox Net-a-Porter. The company has gained the trust of most famously cautious luxury brands, reflecting their very high standards of both presentation and service. Underlying growth was 19% in the recent quarter, with encouraging signs for ongoing margin growth.
Milan on a budget
While much of the Italian fashion industry is focused on luxury and exclusivity, my trip ended with a meeting with John Latham, Commercial Director of Primark. John was kind enough to show me around Primark’s first Italian store, which was frenetically busy, even on a Wednesday afternoon.
Primark’s business model requires high volumes to compensate for low margins; this single 56,000 square foot store receives 40 truckloads of product a week and had sold 10,000 pairs of women’s jeans in the past seven days alone. Primark’s European adventure has been hugely successful, and this early success in the Italian market proves they can thrive even in fashion’s spiritual home.
Though my views on the companies I met in Milan remained gratifyingly unchanged at the end of the trip, we continue to challenge our own assumptions. Our research trips serve as both education and stewardship as we monitor our investments, their competitors, and the realities in which they operate.
Julian Bishop is global equities analyst at Sarasin & Partners