Wednesday, February 25, 2009

Questioning Publicly Traded Fashion

I'm not an economist/financial analyst although I frequently wish I was and more so now, so that I could properly support or refute the hunches I have about the sustainability of certain business models and industry trends. 
My question for quite sometime has been roughly this, "Should fashion companies go public"? 
In November 2006 Forbes printed an article titled, "When Fashion Goes Public"
which described some "winning and losing fashion IPOs" (ie. Donna Karan vs. Coach) in addition to explaining the impetus for such a move. The impetus most common being heirs who would like to cash out versus a founding designer wanting to create a global empire. 

Fashion in particular, seems like a silly IPO venture and investment. Bernard Arnault, CEO if LVMH might disagree but even he is heavily diversified among "luxury goods", not solely vested in fashion. I see fashion as a volatile industry that revolves around biannual seasons, designer whims, fickle consumers, precarious relationships with retailers and a product that loses integrity and identity when its pumped out like a widget to maintain "growth". When a fashion company goes public there is a fiduciary duty to the stock holders to provide growth of a certain percentage every quarter. To me it seems this growth would have to come at any cost including the integrity of product and the bastardization of the the brand. In addition to any questionable cost cutting techniques such as perpetual factory moving to find the cheapest labor and/or materials substitution.

So what happened to dividends? Couldn't a company get to a certain profitable point, where quality product is crafted, everyone is getting paid and the company is running efficiently, then instead of demanding "growth", as an investor you hold equity in a company with a sound balance sheet and receive dividends paid from real profits?

Am i missing something? I know I'm rusty, the last time I took an economics course or finance course was in 1998.

What's wrong with private, "small" and profitable? Why does everyone need or strive to be a global lifestyle brand? I don't understand that. 

My favorite example of a small and profitable is Christian Louboutin. The last chapter of Deluxe: How Luxury Lost its Luster by Dana Thomas
tells the tail of Mr. Louboutin graciously turning down investors on a regular basis instead focusing on sustainable profit, design, craftsmanship and his customer of which he has many loyal.
Mr. Louboutin does not want to answer to an investor, he has the luxury of serving his loyal customer, employees and complete design control. 

The collapse of our financial system has broadened my questioning beyond the fashion industry to:
-What types types of companies are most fit to go public?
-Why is bigger always seen as better?
-Is asking a company to grow a certain percentage every quarter realistic or sustainable over time?
-At some point doesn't the law of diminishing returns apply, the market become saturated and/or emerging markets cease to exist?
-Won't some day the entire world be industrialized/middle class majority and everyone will be drinking Coca Cola? A human can only drink so much Coca Cola. What happens to the stock?