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?


syama said...

Interesting analysis. Some thoughts that come to mind...Publicly trading a company would create transparency. This may be a good thing, especially as investors begin to require best practice methods that may not currently be in place.Fashion as creative process and profitable entity must be married.Private companies, although held to high regulations, have a lot of freedom in how they allocate their funds (profitable or not). Though, this may lead to higher quality of product and design, it may also mean financial irresponsibility. Large,nationwide retailers are implementing localized strategies to cater to "their customer". This just happened with Macy's INC, a publicly owned company. Shareholders saw a slight increase in the value of their stock when this announcement was made. Proper merchandising ensures that each market feels unique. I suspect we will see other large retailers implementing similar strategies. If Macy's was a private company we may not have seen innovations like this in their business strategy. New economic climates, globalization, and environmental sustainability are just a few ways in which markets will continue to change. The diversifying needs of a person in India 5 years from now and 20 years from now will keep companies innovative. As you and I approach our retirement in 30 years, we will be a new market. A "generation x, brand consciousness, environmental aware" age group that will have a different set of priorities and desires than the generation after us that retires. Markets get saturated, innovators evolve, and create new markets.

I dunno, I'm tired...its 10am on a Friday.

Anonymous said...

I don't have much knowledge of the fashion industry but I do know that many fashion companies don't have much luck when they seek capital from private equity sources rather than public either (evidence Peter Som and Narcisco Rodriguez). All companies need capital to run and they all go through a decision process that decides how they get it, i.e. debt, private or public equity, etc... I agree that any company when obtaining public equity is at the mercy of quick returns and faster growth factors, but that can also happen under a private equity structure. Very few companies out there are as lucky as Mr Louboutin to have generated the unprecedented buzz that leads a woman to spend $1000 on a pair of shoes that stomp all over city streets (I am one of those women that is willing and drooling for those very shoes) and maintain a smaller profitable model without any equity help. As the previous post states, being a company that seeks out public equity doesn't always mean they are bigger and less efficient, there are many that are operating privately with the same crippling problems.

Sue said...

I have absolutely no idea about any of these answers, knowing far, far less than you. But there has to be a better way that is less catered to our greed and our fears.

Thanks for dropping by my blog and the book recommendation. Natural Capitalism is at my public library, which I"m pretty chuffed about that.