Monday, 19 July 2010

The Feeling Is Perhaps Not So Miuccia


patrizio bertelli, CEO of prada, with wife miuccia prada.

things took an interesting turn in prada's finances last week. there were reports of a chinese businessman, who allegedly acquired 13% of prada's shareholdings over the past two years. prada disputed the reports, saying that the family still owns about 95% of the company, while the remaining 5% by italian bank banca intesa sanpaolo. interestingly, prada then announced a day later, that they agreed terms for a new €360m loan from a consortium of banks, in part to service an old loan while also to finance new store openings.


prada fall winter 2010 / prada.com

for most years, prada has been profitable. with collections that are loved by critics and consumers (not an easy feat to achieve acclaimed reviews and commercial success), it is not entirely a huge surprise. for the first quarter of 2010, prada reported sales of €366m, a 26% increase as compared to the same period in 2009. earnings were up 480% from €11m to €60m. despite the stellar results in recent years, prada's finances have always been a huge woe. in particular the huge debt that they are carrying. back in january, the debt stood at about €1.3 billion.

an astonishing amount of debt, for what is largely a privately owned company.

eversince the financial bloodbaths of the investment banks, regulators and investors are not just interested about the sales and profits made (profit and loss statements), but also the resources used to achieve the sales (balance sheets). as prada is a privately owned company, financial data are not widely available. but it was suggested that the company was in debt as far back as 1998, which doesn't really surprise me either since most companies would choose between debt or equity (shares issue), and for a company wishing to stay independent and private, prada chose to take on loans and debts.

reading into the history of prada, i found it interesting that they actually acquired about 9.5% of shares in gucci back in 1998. with gucci being at the centre of a takeover war, prada sold their shareholdings to LVMH for a nice tidy profit. with prada's debts, it was apparent that they were unable to mount a successful takeover of gucci, hence the sale of shares. however gucci resisted the further takeover attempts by LVMH, and sold the majority of their shareholdings to francois pinault, which now forms the crown jewel of the PPR empire.


silvia fendi and karl lagerfeld, fendi spring 2010 / getty images

the cordial relationship between prada and LVMH post gucci shares sale continued into 1999. together, they bought 51% shareholdings in italian luxury house fendi for US$520m. however under pressure from their bankers to pay off the huge debts, in 2001 prada then sold their share in fendi to LVMH.


helmut lang fall winter 1996 / thefashionspot.com

besides the investment in gucci and fendi in the 90s, the more prominent investments from prada were the acquisitions of helmut lang and jil sander in 1999, which saw prada paying about US$100m each for the two companies. the move created a huge outcry, with many accusing lang and sander to be a sell-out to the more commercially driven prada. with the commercial acumen of patrizio bertelli at prada and the creative teams at lang and sander, the new structure should really work. but mergers and acquisitions often doesn't take into account of human emotions. and we all knew lang and sander both walked out of their namesake companies.

it was again reported that under pressure from bankers to finance their loans, bertelli needed a quick turnaround for helmut lang and jil sander, hence the more commercial approach and introduction of logo emblazoned accessories from helmut lang not long after the prada takeover. presumably under pressure to finance their loans, prada then sold their investment in helmut lang to current owners link theory, and jil sander to a private equity firm.

and it is interesting to see prada growing the company through acquisitions in the 90s, whereas other similar private companies the likes of armani and versace developed diffusion lines to grow organically.


left: prada cotton weekender, £475 / prada.com
right: prada cotton backpack, £340 / prada.com


the strategy of growing by acquisitions in the 90s seemed to have changed. prada is now concentrating their efforts on growing prada mainline as well as diffusion line miu miu. there were earlier reports that prada needed to raise cash fast in order to service their loans. is that the reason why we are seeing more lower priced and entry-level products, like the printed cotton bags above?


left: prada hemp tote, £320 / prada.com
right: prada printed nylon "BYOB", £180 / prada.com

is the need to desperately pay off loans the reason why we are seeing much more lower priced bags from prada mainline. i always maintain my view, that what we see in shops is not really a direct result of what is cutting edge or fashionable, but a byproduct of commercial decisions. of course, prada sold the above bags alongside other expensive and exquisite creations, treading along what miuccia wants (high fashion) and what bertelli needs (erm, cash).

very clever.


prada spring summer 2010 by yang fudong / prada.com

prada could have concentrated on what they have on their plates at the moment and work towards paying off the huge loan. but they see china as a huge opportunity, a reason why they took on an additional €360m loan last week. this will allow them to finance the opening of new stores in china, which many agreed will be the biggest consumers of luxury products.

i personally think prada will do very well in the chinese market. if i can be crude and honest (that's the difference between blogs and magazines, no?), the first generation of the new found wealth affluent chinese consumers are big on logos and the carrie bradshaw culture: "i want my money where i (and others) can see them." i could be generalising and typecasting, but no offense intended. different cuts, different strokes. prada, with the clever use of their triangular logo on their accessories, and miu miu with their logos etched on almost every of their bags, will certainly do very well in that market.

and prada knew. they collaborated with chinese artist yang fudong on a mini movie/campaign called "first spring" which was shot entirely in china. it is my favourite prada campaign to date, and one that fuses chinese heritage and cultures so well without appearing to be patronising like many of the other fashion houses out there.

we know accessories is the most profitable part of the luxury retail business. penetrating the new market will be vital to them staying afloat. and talking of float, the many talks of prada floating on the stock exchange could be soon. markets are on the up, the successful float of the business would help repay prada's loans and ease the financial pressures. that would mean relinquishing some of their 95% shareholding, but also an exit plan for bertelli and miuccia who are in their 60s.


top: prada fall winter 2010 lookbook / prada.com
bottom: prada menswear fall winter 2010 / prada.com


so what is my point? none really. i just find it fascinating that prada is in so much debt. profitable with sales but achieved through massive financing and borrowings. perhaps we should really pay more attention to the resources used to generate the sales, at what sacrifice. but who am i to say their business model is flawed. for a family who wanted to keep the company private, control comes at a price.

it was reported that the company could be worth between €3 to €4 billion if it floats on the stock exchange. not bad for a family run business huh? the feeling is perhaps not mutual now, but they will have the last laugh.

and oh, my point is i really really like the coat above, which i think is moleskin cotton with wool double layered collars. after all the ditterings above, i decided that will be my winter investment coat this year. the buyer for the london stores better pick that piece or else words will be had. that will be my little effort to help prada pay off the loans. you're welcome, don't mention it.


prada lookbook fall winter 2010 / prada.com



+

26 comments:

  1. oh, i love to bits your Prada post, most especially the last paragraph :P

    i have always been a Prada fan -- the style and design is always directional and distinctive. i always get a pair of shoes from them season after season. i hope they can surmount the current financial problems.

    ReplyDelete
  2. Great post but hugely distracted by the Helmut Lang pics. Oh Helmut I do miss you! So... will you be buying shares?

    ReplyDelete
  3. Another well-written piece! Well done Joe!

    ReplyDelete
  4. enzo/BB: thanks :)

    rollergirl: helmut is amazing isn't he. complete missed the boat as i was still a poor student back then. purposedly showed the pics from 1996, to show how directional and relevant he is even today. yea we miss helmut!

    when prada does decide to do the IPO, will need to scrutinise their numbers. looking good so far!

    ReplyDelete
  5. Very well written, again.
    As an business administration student i really love the financial insights you're providing us with. This is the reason why yours is my favorite blog.
    Keep it up!

    ReplyDelete
  6. Hello,

    I'm a long time lurker and a big fan of yours. I just have to say - your posts such as this one made me a follower of your blog. It's just so refreshing to read something that analyses the fashion industry at all angles. I'm in management consulting and a big fashionista and to find both elements of my passions in a blog is - well - put plainly, just great.

    I've been in love with Prada since the late 90's and I know exactly what you mean. Earlier, most Prada bags didn't have the triangle logo on their bags; they usually just had them hot stamped on the leather. As we approached the mid-2000's, almost all of the accessories had them, including some clothing (and the bigger the better)! But yeah, brands have to make money, so that they can also do the things that they love.

    ReplyDelete
  7. damn..you are good Joe. intelligent and thought-provoking with a hinge of comic relief..i am no surprised the likes of 'mini-Suzy Menkes' would make a stop at your blog as a reference to quality writing.excellent job!!

    ReplyDelete
  8. I love it when you write stuff like this. I think this and your modeling shots (which are missed) are what makes your blog stand out from the rest of the fashion blogs out there.

    Nice post, Joe. I hope you're not sick anymore.

    - Allan

    ReplyDelete
  9. oh and this post is so timely. I just bought a fragrance from Prada: Infusion D' Homme. I can't stop smelling myself. I smell sexy.

    ReplyDelete
  10. Great read! I l00o000 your blog ;)

    ReplyDelete
  11. christian: thank you :)

    rgm: glad you posted a comment after lurking for some time in the background. also glad to hear i am not talking nonsense in front of a mgt consultant! thanks for the kind words :)

    ali: thank you, you're too kind :)

    of fudge: whhhat you don't like other stuff, like the painstaking interview with barnaby hardy, or my gorgeous shoes collection? *wails*

    yes am getting better thanks. ok i go check out their new fragrance...

    ReplyDelete
  12. & anon, thanks for the l00o000 hehe

    ReplyDelete
  13. Prada is our ALL TIME FAV brand for accessories! Have you seen the Prada book? It's A+++AMMAMAMAZING!!!!! We love your blog! It's fantastic and your review on their financials is very interesting.
    Have a ROCkin' Summer!!!!
    xoxoBeckerman Girls

    http://beckermanbiteplate.blogspot.com

    ReplyDelete
  14. Very well written, Joe.

    And greetings from the Arctic Circle. =) I was thinking earlier when I landed at the Bodø airport how cool it would have been if I had one of those Prada backpacks. Instead I'm using a boring black Samsonite which I've inherited from my brother 4 years ago. Just sharing. =)

    ReplyDelete
  15. Excellent piece! Very insightful, very well structured! I love reading it!

    keep it up Joe :)
    buy more too! :P

    ReplyDelete
  16. I like the Barnabe Hardy interview, too! In fact, I will check that out when I meet Mark and Alvin in Paris. can't wait. I wish you could join us. :-)

    ReplyDelete
  17. I read your post on Prada. What a great article. So informative. As an entrepreneur andlover of fashion its great to see behind the scenes of such a progressive label. And I appreciate your candor on China. All the best

    TC
    Travertine Spa Collection

    ReplyDelete
  18. Been a long time reader of your blog and I just feel compelled to comment on this great piece of writing...Keep it up!

    ReplyDelete
  19. That coat is indeed lovely (yes, cotton moleskin) and part of the first fall deliveries. It is already in Prada boutiques and Barneys NY here in NYC. I'm sure it will be available soon.

    Best of luck and great read!

    ReplyDelete
  20. Love the post. I wish I knew more about the financial side of the big maisons, it's always fascinating to read about stuff like this! :)

    ReplyDelete
  21. LuxuryObsessed: the coat is lush isn't it! i walked past prada on tuesday evening, shop was closed but i got a glimpse of the coat, it's there!!!

    need to pop back to their shop sooooon!

    ReplyDelete
  22. Loving all the information i have learned reading this blog!
    Rianna xxx

    ReplyDelete
  23. i like how you've started by giving infos about PRADA's financial status and finishing it off by telling how you like one of their coats, heheheh :p - that was funny (in a good way). i wish i had your writting skills...well, i do hope you'll be able to help PRADA with their debt. I like PRADA (aside from BALENCIAGA - i love!!!).

    http://burnedparchment.blogspot.com/

    ReplyDelete
  24. I guess I should join the rest in saying that is why I follow your blog.
    great fashion industry insight.
    great writing too.

    ReplyDelete
  25. JUST WANTED TO SAY THAT ON THAT FIRTS PIC THATS NOT Patrizio Bertelli, CEO of Prada, I WOULD CHANGE IT BEFORE SUZY MENKES SEES IT.

    LOVE THE POST ANY WAY!!!

    ReplyDelete

what's he wearing?