The effect of the economic crisis on the luxury brand market

The Effects of the Economic
Crisis on
the Luxury Brand Market

3
INDEX
INTRODUCTION 4
CHAPTER ONE
THE MARKET OF LUXURY GOODS: GENERAL CHARACTERISTICS 6
1.1 The concept of luxury 6
1.2 The supply and demand of luxury goods 8
1.3 Luxury and Made in Italy 12
CHAPTER TWO
THE DIVIDE OF SEPTEMBER 2008 18
2.1 The market of luxury goods during the crisis years 18
2.2 The trend of Italian companies in the luxury goods industry 21
2.3 Beyond the crisis: new markets and new strategies 24
CHAPTER THREE
THE BVLGARI CASE 30
3.1 The areas of business: a changing environment 30
3.2 The kickbacks of the international financial crisis 33
3.3 Getting past the crisis: creativity, cost containment and the LVMH factor 36
CONCLUSIONS 40
BIBLIOGRAPHY 42
Volumes 42
Articles and Papers 42

4
INTRODUCTION
In the past few years, specifically after the outbreak of the financial crisis of 2008,
the luxury industry has been at the center of interest for not only economists, but also
mass media that dedicate a lot of attention to a category of companies that apparently do
not have to face the crisis and keep expanding in terms of profit and the breaking into
new markets in emerging countries. This interest is particularly vibrant in Italy, because
starting in 2010 the country was hit in a very violent way by the financial and economic
global crisis, while the companies in its luxury industry seemed to record a trend
opposite to the rest of the world.
The primary interest of this project starts from here, from the apparent virtues that
seem to distinguish Italian luxury brands. I wanted, first of all, to understand until which
point this commonplace actually has to do with the matter of fact and I chose the
Bvlgari brand for my research case study, a brand that is the recent victim of an
absorption operation by the French tycoon LVMH. Basically, I found that the Bvlgari
matter is characterized by two apparently contradicting aspects: the economic expansion
during the crisis, except a small negative window that lasted a few months between
2009 and 2010 and the externalization of property. From here stem the biggest
interrogatives raised by the research: What are the characteristics of the Bvlgari group
expansion? How solid was this growth and what were the critical aspects? The answer
to these questions does not only help us to understand the last chapter in the history of
the famous jewelry producers from Rome, which is the LVMH absorption, but also until
which point does luxury represent an industry sector able to prosper even when all other
product categories are going through a serious crisis.
The research obviously had to start with the correct understanding of the concept of
luxury goods and the fundamental characteristics of the demand and the offer in this
product category. The research then focused on the Italian market, clarifying what role
the luxury sector plays in the national economy and until what point the concepts of
luxury and made in Italy coincide. The second chapter analyzes the backlash of the
global financial crisis on the luxury industry, with particular attention given to
companies present in the stock exchange market. The comparison between the general
trend of companies that produce luxury goods and that of Italian companies has allowed

5
us to measure the economic impact caused by the peculiar Italian model in the luxury
industry, quite different from the French. Then highlighted were the main strategies
implemented by the most famous global brands to combat the crisis, emphasizing those
that proved successful and those that were penalized by the market. The last chapter
focuses on the Bvlgari case, summarizing the history of the brand, with particular
attention to the decades in which the company implemented a determined
internationalization and diversification process. The characteristics of the Bvlgari
group’s expansion and the company’s trend in the crucial period between 2008 and
2010 makes up the focus of the last part of the research. In this part, you can find the
explanation provided by CEO Francesco Trapani following the sale of the brand,
closing a very important chapter in the glorious history of Bvlgari.
For my research, I made use of different sources: from the papers of influential
sociologists and economists that worked on the concept of luxury and the characteristics
of the demand and the supply for products in this category, to reports published by the
Altagamma group, with the help of the Bocconi University in Milan, on the trend of
luxury companies present in the stock exchange market, to the financial statements
made available online by Bvlgari. Extremely valuable were newspapers, like Il Sole 24
Ore, that give the opportunity to freely examine their digital archives; this source
allowed me to at least partly understand the debate among experts, surrounding the
characteristics of the luxury market, but also the industry’s trend in these times of crisis,
the specific Italian case and the meaning that can be given to the phenomenon of
externalization of property that most famous Italian brands have experienced in recent
years.

6
CHAPTER ONE
THE MARKET OF LUXURY GOODS:
GENERAL CHARACTERISTICS
1.1 The concept of luxury
Throughout time, strongly inconsistent judgments, almost diametrically conflicting,
have been built around the concept of luxury. This term, in fact, refers to both, the idea
of exclusivity and the much less positive concept of excess. For some consumers,
luxury goods are strongly desirable, as well as complicated or impossible to obtain,
while for others they represent the symbol of squandering, in a society already thought
to give much value to what is ephemeral and superfluous1.
Said discrepancies in judgment, however, go hand in hand with largely convergent
views when it comes to defining the characteristics of luxury goods. Ever since ancient
and medieval times, when a strongly symbolic and mystical place, such as the East, was
associated to this category of goods and products such as spices and silk and gold,
luxury goods were considered to be objects characterized by a high price and quality,
which only a limited part of the population can benefit from.
With the rise of mass societies, starting at the end of the eighteen hundreds in the
Anglo-Saxon world, or during the first half of the following century in continental
Europe, the quality-price binomial is no more enough to accurately narrow the category
of luxury products. The definitions of luxury have then multiplied and ramified,
involving different disciplines of knowledge, such as sociology, psychology, and
obviously economy. Some scholars decided to condense the definitions provided by
experts in these different disciplines, and so a definition of the category of luxury
products has emerged that has the merit of being synthetic, exhaustive and sufficiently
agreed on by the scholars, all at the same time: besides possessing excellent quality and
1
Gaetano Aiello e Raffaele Donvito, “L’evoluzione del concetto di lusso e la gestione strategica
della marca. Un’analisi qualitativa delle percezioni sul concetto, sulla marca e su un prodotto di
lusso”, In http://www.escp-eap.net.

7
a high price, luxury goods can be distinguished by their aesthetic characteristics in terms
of design and creativity, their rarity and recall to a tradition of exclusivity as well2.
If these are the principal characteristics of luxury articles, then it becomes clear that
the emotional element plays a primary role in the motivation to buy the products. As far
back as 1899, the American economist and sociologist Thorstein Veblen believed that
the purchase of luxury products was motivated first and foremost by the desire of the
leisure class, a term which he used to define a class that was essentially unproductive, in
contrast to that of technicians and manufacturers who had the merit of taking society
forward, by dedicating their resources to the production of necessary or at least useful
goods for the community, of flaunting their wealth, status and power3. From this
perspective, luxury articles are a particular category of goods known as Veblen, which
have the distinguishing feature that they become more desirable as their price goes up.
Approximately half a century later, in 1950, American economist Harvey
Leibenstein identified a triple motivation for the purchase of goods of superior category:
the Veblen effect, linked to the need for flaunting one’s wealth; the snob effect, that is
to say the will to own something that is extremely rare to differentiate from the masses;
and finally the bandwagon effect, according to which a consumer is pushed to the
purchase of a specific product due to the desire of being accepted by a certain social
group4.
These considerations obviously do not completely cover the whole set of motivations
that can bring a consumer to buy a luxury good; if anything, we must keep focusing on
“those theories related to hedonistic consumerism, according to which the purchase of
luxury goods is not motivated by extrinsic factors, but rather by intrinsic reasons”5.
Anyway, the forms of luxury consumption intended for ostentation prominently
highlight the fact that there is a set of very diversified products at the heart of the matter.
In fact, it is evident that an article so rare that it can be considered as one of a kind,
cannot be bought under the bandwagon effect.
2
Bernard Dubois, Gilles Laurent, Sandor Czellar, “Consumer Rapport to Luxury: Analyzing
Complex and Ambivalent Attitudes”, 2001, pp. 8-17.
3
Cfr. Thorstein B. Veblen, La teoria della classe agiata. Studio economico sulle istituzioni, Torino,
Einaudi, 2007, pp. 32-40.
4
Harvey Leibenstein, “Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’
Demand”, The Quarterly Journal of Economics, 1950, vol. 64, n. 2, pp. 183-207.
5
G. Aiello and R. Donvito, p. 4.

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Today a distinction in three parts of the category of luxury articles is in fact
commonly accepted, based on some key parameters such as price, rarity, and quality. In
the first place we have unique goods, almost comparable to a work of art as they are the
result of an artisan work process; as for the astronomical cost that characterizes them,
they represent inaccessible luxury. There are then limited products, built through
precise craft techniques and with top quality material; they represent intermediate
luxury. A fitting example of this category is a Ferrari, different from unique goods
because it is produced in bulk, even though it can be customized to meet the buyer’s
specifications. Finally, we have accessible luxury, which includes a whole group of
products produced in bulk, set apart from similar articles not classifiable under “luxury
because of their high quality and price”6. This last category of products, precisely
because it is relatively accessible, is characterized by a much less rigid demand in
respect to the demand associated with unique or limited articles; and therefore offers the
biggest possibility of development for the luxury industry.
1.2 The supply and demand of luxury goods
Luxury goods, as known, make up a group of goods with very rigid demand.
Traditionally, this rigidness is related to the factor of income, according to a very simple
bipolar scheme for which rich people have access to this world of products while the
poor do not. It is true that at the end of the eighteen hundreds already, when the
economist Veblen was publishing, the process of industrialization taking place in
continental Europe and in the Anglo-Saxon world was broadening the range of people
that could access luxury, which was once limited to the nobles and the higher clergy.
Nevertheless, the dichotomy of those included or excluded in the world of luxury
remained practically unaltered until the last decades of the previous century, when a
phenomenon on a large scale started to make its way into the middle class, to which the
name of “democratization of luxury”7 was assigned.
6
Danielle Allérès, Luxe: Stratégies, Marketing, Paris, Economica, 2005, pp. 169-207 and Jean-
Noel Kapferer, Strategic Brand Management: Advanced Insights and Strategic Thinking, New
York, Simon&Schuster, 1992, pp.29-30.
7
Giampaolo Fabris, Il nuovo consumatore verso il postmoderno, Milano, Franco Angeli, 2003,
p. 176.

9
With this expression, we indicate a process of expansion of the consumption of
luxury goods, which began to occur in the most developed countries during the eighties,
and continued uninterruptedly at least until the beginning of the economic and financial
global crisis of 2008. Little data is needed to prove the proportions of this phenomenon:
In 1977, the Louis Vuitton brand was tied to a family business which boasted a turnover
of approximately ten million dollars, while twenty years later it has become an immense
empire with sales ranging around two billion dollars8.
At this point, it is natural to ask ourselves which factors played a part in this boom.
The democratization of luxury cannot be explained with the spread of larger wealth in
the middle class of industrialized countries, a process which started two decades after
the Second World War, and therefore too far back in time; at the base of this
phenomenon, instead, are changes of a cultural nature, or at least that is what sociologist
Giampaolo Fabris has observed. In essence, luxury at one point begins to lose those
negative connotations, related to the idea of squandering and superficiality, which it was
attributed by an ethic that was strongly influenced by Marxism and Christianity. The
purchase of luxury goods then begins to be considered by wide parts of the middle class
as a “reward one can give himself every once in a while, as a prize for the efforts
sustained in everyday life”9.
Another motivation that must not be overlooked in order to understand the diffusion
of luxury in an ever-larger segment of the population is related to the transformations
the social structure has experienced in the Western world: Both, celibates and childless
couples in which both adults have a job have grown, reason for which more people can
afford to splurge in luxury goods.
The factor of income, obviously, still influences the behavior of consumers, because
there still is a group of goods completely inaccessible to common people; some articles
however, the ones that constitute the category of accessible luxury, are beginning to be
purchased by the so-called luxury excursionists, people that for income reasons cannot
afford to live in luxury, but who still occasionally allow themselves this kind of
8 B. Dubois, G. Laurent, S. Czellar, pp. 8-17
9
G. Fabris Giampaolo, Il nuovo consumatore verso il postmoderno, Milano, Franco Angeli, 2003,
p. 176.

10
purchase10. Among excursionists we can notice a relatively younger clientele in respect
to the average age of habitual luxury consumers. These consumers are less loyal to a
specific brand than others and in order to allow themselves the trading up towards
luxury products, they must often compromise trading down towards low prices and
offers for a wide range of articles11.
It is, at least partly, to these luxury excursionists that we must attribute the
impressive growth in profits filed by companies in this product market. According to
some observers, said “tendency is distorting the whole industry, betraying its history
and vocation”12. In reality, the strategic management of brand in luxury companies
follows a series of rules in order to avoid that the product lose its characteristic of good
desirable by many but accessible to few. Exclusivity, brand identity, reputation, high
quality and customer loyalty are main features that go hand in hand with luxury brands.
High quality articles, accessible to the average client, offer important paths of
development for luxury companies, which however carry out strategic management
tactics “oscillating around a balance point that stabilizes the economic and financial
growth without distorting the brand’s identity”13. Among these strategies, for example,
appears the retention by luxury brands of at least a part of artisanal production, with
articles inaccessible to the average consumer. Luxury companies also avoid the brand
stretching tied to the granting of an excessive number of licenses for sale points, aiming
to find the “correct point of balance between diffusion of the brand and excessive
overexposure”14.
Besides the democratization of luxury, the process of globalization has helped to
increase and segment the demand for goods in this industry over the last two decades.
10
G. Aiello and R. Convito, Gaetano Aiello e Raffaele Donvito, “L’evoluzione del concetto di
lusso e la gestione strategica della marca. Un’analisi qualitativa delle percezioni sul concetto,
sulla marca e su un prodotto di lusso”, relazione presentata al Congresso Internazionale “Le
Tendenze del Marketing”, tenutosi presso l’Università Ca’ Foscari di Venezia il 20 e 21
gennaio 2006, p. 1. In http://www.escp-eap.net
11 Gaetano Aiello et al., “Le percezioni del concetto di lusso nei giovani. Un’analisi comparata a
livello internazionale”, International Congress “Le Tendenze del Marketing”, l’Ecole Supérieure
de Commerce de Paris ESCP-EAP il 26 e 27 gennaio 2007. In http://www.escp-eap.net
12
Dana Thomas, Deluxe: How Luxury Lost Its Lustre, New York, Penguin, 2007. pp. 25-33
13
G. Aiello and R. Convito, p. 6.
14
G. Aiello and R. Convito, p. 12.

11
The fall of the Soviet Union and the opening to the market economy for millions of
people that once lived under a regime of planned economy; the great Asian economic
development, which has increased the continent’s purchasing power; the overpowering
growth of some countries in Latin America: all these elements, together with the
computer revolution, have led to an opening of an enormous market for luxury goods.
Until the seventies, consumers of these articles were almost exclusively from the
Western world, with the relevant exception of Arab oil tycoons. Today the nouveau
riche from countries such as China, Russia, India and Brazil look with ever-growing
interest to Western luxury brands and it is this increase in international demand that has
had a crucial role in mitigating the backlash on this industry during the financial crisis
that started in 200815. Moreover, it is expected that the international demand continue to
grow in the short to medium term, for the simple reason that the number of nouveau
riche is expected to grow; two hundred million more between 2012-2017, according to
the estimations published by a study in 2011, by the Confindustria-Prometeia Study
Center16.
The internationalization of the demand for luxury goods has led not only to new
opportunities, but also to new challenges for the main brands in the industry, which
have replied by implementing ad hoc strategic decisions, such as going public, which
was already done by some during the nineties. The opening of new markets, far from
the luxury brands’ country of origin, has determined the need to attract new assets and
new clients. Going public has turned out to be a tremendous opportunity for luxury
companies, which have had the opportunity to finance their own development by
accessing the capital market and, above all, making the company’s brand much better
known and saving advertising money. Going public, furthermore, has encouraged
luxury companies’ management, often still influenced, until a little time ago, by
personal or family-style management, to set themselves business goals to reach and
confront themselves with the industry’s main competitors, in a context marked by an
ever-growing competitiveness. It is not a coincidence, then, if the luxury companies that
15
Irene Armaro, “Cina, Russia, Medio Oriente: i nuovi ricchi e il mercato del lusso. Intervista a
Edoardo Carloni sul grande successo estero degli alti brand italiani”, “L’Indro” on line
newspaper edition, article published on February the 20th, 2013. Online Archive of February
2013. www.lindro.it
16
Barbara Weisz, “Made in Italy e PMI: Export nei Paesi emergenti”. Online Newspaper Edition of
www.pmi.it, Online Archive of November 2013.

12
have gone public have been able to invest in so-called brand stores even in the streets of
the new luxury capitals in emerging countries, besides traditional centers in New York,
Paris, and Milan. Going public, finally, is a step that has favored merger and acquisition
operations, almost necessary for an industry characterized by small or medium
companies, especially in the Italian case, in order to achieve a more effective
penetration of the markets in emerging countries17.
It must be noted, however, that in the luxury industry and especially between fashion
maisons there is a certain resistance to the entrance into the financial world. Some
companies feel like they are sufficiently strong from a patrimonial point of view to
avoid going public, or they prefer letting an investment fund enter their capital. Well
known is the controversy started by Giorgio Armani in 2011, after a fashion show, when
he commented on Prada going public in Hong Kong that he depends on nobody, only on
his job and on his partners’. He has no debts, so he’s not going public.
1.3 Luxury and Made in Italy
Armani and Prada are just two of the numerous companies in the luxury industry that
have made Made in Italy famous all around the world, a brand that indicates the Italian
origin of the manufactured articles destined for the international market, with the
exception of those coming from heavy industry. The manufacturing of machines and
machinery, wood and furnishing, textile production and clothing, the agricultural sector,
leather goods and footwear, eyewear and, lastly, gold and jewelry are sectors which
Made in Italy has traditionally governed. Therefore, it represents an extremely wide
range of articles. This range is divisible not only by product types, but also by
parameters related to cost, quality, and the originality of the produced articles. Next to
consumer goods, destined to fight the foreign competition by calling to those areas,
design above all, that have led Made in Italy to its status in the world, such as the so-
called BBF, an abbreviation for good looking and well made goods, belli e ben fatti in
Italian, (which rank in an ideal intermediate position between products destined for
mass consumption and those accessible to few) and, finally, luxury articles18.
17
Carlo Pambianco, “Moda e Lusso, ecco le 50 aziende giuste per la Borsa”, on line edition,
published on Novembre the 24th 2011, in www.pambianco.com . Online Archive of Novermber
2011.
18
For further insight: Confindustria – Prometeia, Esportare la dolce vita. Il bello e ben fatto italiano
nei nuovi mercati: ostacoli, punti di forza e focus Cina, Roma, Sipi, 2013.

13
It is however an understatement to define Made in Italy as a simple brand. Rather, it
is a synthetic term that effectively includes an extremely varied and complex productive
reality, part of a fairly homogeneous growth path. As a well-known phenomenon around
the world, Made in Italy exploded between the seventies and eighties of the past
century, following the crisis of the great public and private industry that had led to the
Italian economic miracle in the engineering, steel and chemical industries. From this
point of view, the industrial structure above which is a direct result of the Made in Italy
concept is at the antipodes from that which characterized and continues to characterize
the biggest companies on the peninsula: these have been witnesses of a continuous
process of property concentration, while in some industrial districts at the same time a
widespread dissemination process of small properties was taking place, with a number
of workers not above a few dozens19.
In truth, the diffusion of the small and medium companies has always been a main
characteristic of the Italian industrial development: even at the peak of the economic
boom, in 1963, the number of workers in companies with less than ten employees was
33.8% of the total, while big industry with over 500 employees only covered 11.2% of
the population employed in the secondary sector20. It is reasonable to wonder, then, why
in Italy the number of small and medium companies has always been so high. The
answer to this question also helps understand a peculiar aspect of Made in Italy, that is,
the corporate specialization that has very ancient origins in some regions, dating back to
the communal age. What we know as the Made in Italy expression, in short, is a
phenomenon with two faces: on one side it is the result of a long and fertile cooperation
and cross fertilization between culture, art, craftsmanship, manufacturing ability,
territory, historical memories; and on the other side a face belonging to the last fifty
years, developed by a series of fortuitous coincidences, the low cost of labor, the
emergence of a new entrepreneurial class, the flourishing of some stylists and designers,
and the desire for redemption of the Italian population after the sorrows of the war.21
19
Giulio Sapelli, Storia economica dell’Italia contemporanea, Milano, Bruno Mondatori, 1997,
pp. 100-101.
20
.Sapelli, p. 35.
21 Marco Vitale, “L’economia italiana e le origini del made in Italy”, 9 novembre 2005, in
http://www.qualitas1998.net

14
Even the growth path of the main companies related to Made in Italy, especially
those operating in the luxury industry, has been somewhat homogenous, even if
sometimes differentiated under the temporal point of view. The most famous luxury
brands, in fact, all started with the specialization of production, which favored the
assertion of a brand identity associated to the idea of a unique and unmistakable style;
only at a later time was the path of differentiation pursued, thanks to the achieved
notoriety, which allowed the companies to widen their productive range and, in recent
times, under the push of internationalization, the path of acquisition became an option.
In the Made in Italy luxury, however, next to the companies that have long since
catapulted themselves in the territory of global competition, diversifying production and
implementing brand extension politics, there are numerous artisan micro-companies that
have historically aimed at the creation of a loyal and traditional client base and that only
in the last few years “have opened themselves to the international market, in a context
that is heavily marked by a very serious financial and economic crisis”22.
This is the main difference between Italy and France, the world’s two main
producers of luxury goods that have competed for this supremacy in the industry for the
last thirty years. While Italy presents a very ramified business structure, in France the
entire sector is dominated by a handful of companies that, for reasons of dimensions and
profit, stand out against the Italian competitors as real tycoons of the market. Cases of
acquisitions of famous Italian luxury brands have succeeded each other in the last few
years, especially by transalpine companies such as LVMH and Kering. Even if there
have been examples of the contrary (French luxury going Italian)23, acquisitions carried
out by the Bernard Arnault groups, leader of the LVMH holding and the richest man in
France and by Francois-Henri Pinault have found and are still finding large resonance in
the peninsula.
Both tycoons have launched a new trend according to which complete autonomy is
left to the Italian producers, “this way acknowledging the quality of the local
craftsmanship”24. Therefore, at a business level the sale of Italian luxury brands to
22
Stefano Micelli ed Enzo Rullani, “Idee motrici, intelligenza personale, spazio metropolitano: tre
proposte per il nuovo made in Italy nell'economia globale di oggi”, Sinergie, n. 84, 2011, pp. 128.
23 Simone Filippetti, “La rivincita del Made in Italy: Tamburi compra il re francese del lusso Roche
Bobois”, Il sole 24 ore, 3 aprile 2013. In http://www.ilsole24ore.com.
24
Anais Ginori, “Arnault-Pinault, si gioca in Italia il torneo del lusso”, La Repubblica, on line
edition, November the 18th 2013; “Lvmh e Kering, i colossi di Parigi che comprano il mercato

15
foreign groups shouldn’t have any particular repercussions. Actually, according to the
economist Claudia D’Arpizio, “often the entrance into one of the large groups brings the
access to remarkable financial resources able to support the growth and global
expansion of these brands. It is definitely positive that these made-in-Italy
representatives be able to generate such interest from foreign investors in a time of
severe national crisis. On the other hand it is a pity that we still haven’t been able to
create an Italian system able to stimulate and grow these companies while maintaining
them as Italian properties”25.
It is not a matter of national pride, or even bigot parochialism. If it is true that large
companies such as LVMH guarantee the growth of the Italian brands they have bought,
because they have the interest to do so, that does not preclude that the sale of large
brands has drained Italy of a number around ten billion euros, according to Coldiretti’s
estimation, only in the period between 2008-2013.26
To these criticisms or challenges that burden Italian luxury, another one must be
added that involves, in general, the whole Made in Italy sector: counterfeiting, with all
the other systems of unfair competition to it associated. According to an estimation
carried out by OCSE in 2005, the international market of counterfeited goods covers a
share equal to 10% of global commerce and the financial and economic crisis that burst
in 2008 has not significantly influenced this phenomenon27. The repercussions of
counterfeiting on economic systems are quite serious; suffice it to recall, between the
various implications of this phenomenon, the strengthening of organized crime, the
lowering of countries’ tax revenue, the damage to the health of both consumers and the
environment, since counterfeited products are often made without respecting a series of
norms that cover raw materials that should not be used.
del lusso italiano”, Il fatto quotidiano, Online Newspaper Edition, Online Archive of July the 8th
2013. http://www.ilfattoquotidiano.it
25
Raffella Ulgheri, “Ai francesi piace il lusso italiano”, L’Indro Online Newspaper Edition, Online
Archive of July the 9th 2013. www.lindro.it
26 Ibidem.
27
Istituto Nazionale per il Commercio Estero, “Il fenomeno della contraffazione e il suo impatto sul
Made in Italy”, 2012, p. 2.

16
Made in Italy is one of the main victims of counterfeiting, because those who
consciously purchase counterfeited goods are attracted by the idea of owning a product
similar to a brand item at a much more accessible price. Next to this type of crime
(because it is a crime, both for who sells and for who buys), a kind of devious
competition is widespread which, while within the limits of legality, damages Made in
Italy and especially the network of small and medium companies that operate in the
peninsula. This is the possibility of adding the Made in Italy label to those products
which last process of transformation or substantial processing was made in Italy.
Basically, the current regulation allows the attribution of this prestigious brand even to
those articles that were almost completely created abroad, which for this reason cannot
logically be result of the creativity and cultural tradition that constitutes the distinctive
characteristic of Made in Italy.28
In 2010 there was an attempt to contain this phenomenon intervening directly on the
regulations through the Reguzzoni-Versace law, which stated the Made in Italy labeling
could only be attributed to those products for which at least two substantial phases of
processing were carried out in the peninsula. Said norm, however, was met with
opposition from the European Union, in name of defense of the principle of free
competition, and it was not approved.29
Compared to the vast sector of Made in Italy, the Italian luxury industry was touched
in a very particular way by counterfeiting. On closer inspection, in fact, this
phenomenon does not directly hurt the biggest brands in the industry, for two reasons:
first, because purchasers of counterfeit articles do not belong to the category of
consumers that could every once in a while allow themselves the so-called accessible
luxury; second, because the diffusion of counterfeit goods with certain logos certifies,
paradoxically, the belonging of the brand that is victim of counterfeiting to the world of
luxury. Involuntary advertising, if you will. Counterfeiting, therefore, mainly penalizes
the other two sectors of made in Italy, that is, the one of consumer goods and the
aforementioned BBF, because in this case it can be asserted that the purchase of the
counterfeited product can be done in place of the original.
28 Francesco Cingari, “La Cassazione sulla tutela penale del Made in Italy”, Diritto Penale
Contemporaneo, 18 giugno 2012. pp. 25-60
29 Istituto Nazionale per il Commercio Estero, pp. 6-7.

17
Another matter is, on the other hand, the production location of articles made in Italy.
In this case, the delocalization of a large part of the productive cycle abroad
significantly impairs the creation of certain goods. Moreover, some Italian luxury
brands are so well-known that they could do without adding the made in Italy label,
completely moving production abroad, and more precisely to countries with a more
favorable tax regime or a lower labor cost. This way companies continue to profit
relying on their brand identity, but disregarding the fact that said identity was built
thanks to an idea of quality that is inextricably tied to craftsmanship tradition and Italian
creativity.30
30 Serena Frattini, “Dopo la fuga dei cervelli, la delocalizzazione”, ManagerOnline.,
http://www.manageronline.it

18
CHAPTER TWO
THE DIVIDE OF SEPTEMBER 2008
2.1 The market of luxury goods during the crisis years
Already months before the bankruptcy of investment bank Lehman Brothers, on
September 15, 2008, a financial crisis was palpable, caused by, as economist Luigi
Spaventa stated, “a movement so impetuous that it derailed the innovation of finance”31.
In essence, the crisis was a consequence of pathological degenerations of a new model
of transfer of credit risk that became established at the end of the nineties, in which
“banks give out credits, but then give them away immediately, with their respective
risks, to a multitude of non-bank borrowers, in the form of structured instruments, based
on a pool of mortgages with disparate quality and ownership of the debt”32. As is
known, the most relevant case of credits given away in said way is that of mortgages
with collateral guarantee, so-called subprime mortgages, that in the first years of the
third millennium fueled a speculative bubble which exploded when the American
central bank abruptly raised mortgage reference rates, in the attempt to reduce
speculation and subtracting liquidity from the system.
If the crisis of subprime mortgages was the proximate cause for the most serious
financial crisis since 1929, the remote causes are to be looked for in the high cost of raw
materials and of some basic necessities, such as cereal, and in the strong international
economic imbalances, primarily between United States, where the level of savings kept
going down in the last decades in respect to the level of investments, and the emerging
economies of Southeast Asia, marked by a diametrically opposed trend. The bankruptcy
of numerous lenders determined an immediate reduction of stock values in the whole
world, what in the space of a few months went to hit the real economy, resulting in a fall
of investments, income and consumption.33
31
Luigi Spaventa, contributo pubblicato in Camilla Beria D’Argentine, a cura di, Proprietà e
controllo dell’impresa. Il modello italiano, stabilità o contendibilità?, Giuffrè, Milano 2008,
p. 137.
32
L. Spaventa, pp.138-139.
33
Alberto Franco Bozzolo, “Cause ed effetti macroeconomici della crisi”, in Fabrizio De Filippis e
Donato Romano, a cura di, Crisi economica e agricoltura, Edizioni Tellus, 2010, pp. 227-231.

19
Nevertheless, the trend of the world economy in the years following 2008 has been
strongly uneven both from the temporal and geographic perspective. It is important to
synthetically highlight these differences to better understand the equally uneven trend of
the global market of luxury goods. At least until the first half of 2009, the crisis
generally hit all main economies in the world, from the United States in which a decline
of 5% was recorded in GDP to the Eurozone, to Japan and the emerging economies in
Asia, where GDP suffered strong contractions, but stably remaining on a positive note.
During this period of time the luxury industry, according to data collected by the
Altagamma Foundation in collaboration with the Bocconi Business School, suffered a
strong decline in turnover and investments after years of constant growth. The collected
data includes the main players in the fashion and luxury industry, slightly over 60
companies selected through some criteria such as being in the stock market and a level
of sales not under 200 million euros per year.34
Well, from 2003 to 2007 the big luxury companies had driven the growth of the
whole industry, especially thanks to an increase in retail sales both through multi-brand
stores as well as those dedicated to one brand; the development of the retail channel was
one of the most important feats of investment and the companies that were directed
towards this route were rewarded from the perspective of profit. As soon as 2008
arrived, however, the main industries in luxury goods noted a significant decline in the
growth rate in sales in respect to the previous year (3,7% compared to the previous
9,4%), together with an similar decline in the return on investment, in the return on
capital, in the operating result and the gross operating margin. In the fiscal year of 2009
“the luxury industry reached its nadir”35, with a further decline in all of the
aforementioned areas and, specifically, with a growth rate in sales that recorded a
negative value for the first time (-5,3%).
34 Fondazione Altagamma, Ernst&Young Group and SDA Bocconi annually publish: “Fashion &
Luxury Insight: International Fashion and Luxury Listed Companies Annual Survey”. In
http://www.altagamma.it, Press Release Archive.
The following paragraphs are based on the data provided in these reports and the article by
Fondazione Altagamma and SDA Bocconi: “Il lusso a un nadir nel 2009. Ma il 2010 parte
meglio”. In http://www.viasarfatti25.unibocconi.it, Archives.
35
Fondazione Altagamma, SDA Bocconi, “Il lusso a un nadir nel 2009. Ma il 2010 parte meglio”,
18 ottobre 2010. Online Newspaper Edition. Online Archive of October 2010.
http://www.viasarfatti25.unibocconi.it

20
These are values that should not surprise anybody. The international economic
situation, de facto, was destined to penalize the luxury industry for the whole 2008 and
the first semester of 2009, since the falling incomes hit both the middle class of the
advanced economies, from which a large part of the luxury excursionists category
comes from, and the leisure classes in emerging countries. If anything, it has to be
understood up to which point the large luxury brands have indistinctly suffered from
this situation, if there are industrial groups that managed to carry out valid strategies
that limited the damage, and if the country of origin of luxury industries impacted their
performance, and finally, if there are sectors that fared better than others.
Starting in the last trimester of 2009 on the other hand, the situation drastically
changed. The economies in emerging countries and in some developed countries such as
the United States and Japan began to grow at a sustained rate again, launching a
recovery phase that suffered a progressive slowing down during the following years, but
that even now continues to go on. The European situation, however, is definitely more
critical, with the partial exception of Germany, also thanks to a broadening of the
sovereign debt crisis of some countries such as Greece, Portugal, Spain, Ireland and
Italy. Demonstrating the influence, in the last decade, that the nouveau riche from China
and from Southeast Asia, from Latin America and Russia, without forgetting those from
Middle East producers of oil, have gained in the market of luxury goods in respect to
the consumers from the old world, the financial year of 2010 recorded a clear inversion
of trend for the large brands in the industry: the income of the companies surveyed by
the Altagamma Foundation, for example, grew a whole 10,9%, while the previous data
had resulted in a negative value.
Said result, besides being a result of the market recovery, is also a consequence of
the company politics of the last years, characterized by the research for the operating
efficacy and a much more careful management of the working capital. It must also be
noted that the data published in the Fashion Luxury Insight report by Altagamma-
Bocconi seem to demonstrate the existence of a direct relation between the dimensions
of companies and their performance: larger companies have obtained the best results in
terms of return on investment and of operating results, respectively 2% and 3% more
than average.

21
The data from the last few years is even more gratifying, since the income for the
large luxury goods companies has grown by 13% in the financial year for 2011 and 8%
in the one after; and this loss of five points in the growth of sales, moreover, is
counteracted by a parallel raise in return on investments. Once again the dimension of
the company seems to be the decisive element for the explanation of the best company
performances, since the brands that register sales for over 5 billion euros are those that
count with the highest level of return on investments and of operating results. The
distinguishing aspect of the data from the last few years rather concerns the
geographical distribution of the high quality growth rate: America has once again
become “the leader in growth in the purchase of luxury goods”36, overcoming China
(+4% against +2,5%). Europe, despite the kickbacks suffered with the sovereign debt
crisis, recorded a 2% growth on purchases, thanks to the flow of tourists that
counterbalance the reduction of expense from local European customers: tourists,
actually, now represent half of the market in Italy, 55% in the United Kingdom and 60%
in France. Along with this information we must report the strong performances in the
Middle East, with Dubai on top; in Southeast Asia (Singapore, Malaysia, Indonesia,
Vietnam, and Thailand), new emerging destinations of luxury shopping.37
2.2 The trend of Italian companies in the luxury goods industry
The Altagamma World Observatory on the Luxury Markets has collected, in the
press release from October 28th, 2013, that in the long term Italian brands have gained
market shares, going from 21% in 1995 to 24% today, almost equaling the 25% owned
by French brands. This information, at first sight encouraging and flattering, especially
if compared with the trend of the Italian GDP in the same years, must be “corrected” by
at least two observations. First, as noted in said press release, in a consolidating market
it’s the French holdings that represent the driving force, owning as of today 29% of the
market against the 25% they owned in 1995. It must then be observed that the
aforementioned long term data only concerns larger companies, that is those that are
present in the stock exchange market and have sales for over 200 million euros each
36
Chiara Bottoni, “Lusso, il 2013 segnerà il sorpasso dell’America sul’ex Celeste impero”,
29 ottobre 2013, MF Fashion: Fashion e Luxury Made in Italy, Online Newspaper Edition.
Online Archive of October 2013. http://www.mffashion.com
37 Ibidem.

22
year; it still remains to be clarified, however, if a similar positive trend involves the
uncountable Italian SMEs that operate in the market of luxury goods and that are
however, inevitably, more difficult to survey. Only in this way could we find out, first
of all, until which point high quality products and Made in Italy are areas worthy of
investments in the critical situation that Italy is going through, and secondarily, if the
positive performances of the most important Italian brands can be in any way an
example for smaller companies, or if they are result of strategic decisions and marketing
that cannot be replicated by smaller industry parts. 38
During the first two years of the international economic and financial crisis, actually,
the large Italian luxury companies not only suffered a decline in income, just like it
happened to the main brands from other countries that produce high quality goods, but
they even stood out for the negativity of their performance (-11,8% in income in the
financial year of 2009). With the market recovery of the United States and especially of
emerging countries, ever since the last trimester of 2009, even the larger Italian luxury
companies have started to grow again and in the financial year of 2012 they recorded
performances better than other countries. According to Nicola Misani from SDA
Bocconi, a decisive role was played by the results of companies such as Brunello
Cucinelli, Prada and Salvatore Ferragamo that recently went public. In fact, three Italian
brands (Yoox, Prada and Ferragamo) appeared in the “top ten” for income increase,
while the results are under average when it comes to profitability and operating
margins.39
The positive trend, however, only concerns the largest Italian companies (those
present in the stock exchange market, with a turnover higher than 200 million euros),
while the performance for SMEs is much less exciting. The data collected by David
Pambianco in relation to SMEs that produce high quality products in the fashion and
textile industry, and their financial statements (companies with a turnover between 10
and 250 million euros in the financial year of 2012 were taken into consideration)
demonstrate that there is an “average difference of 8 percentage points between the
38 Fondazione Altagamma, SDA Bocconi, “Nel 2012 moda e lusso crescono meno ma guadagnano
di più”. In http://www.finanza.com.
39 Fondazione Altagamma, SDA Bocconi, “Il lusso a un nadir nel 2009. Ma il 2010 parte meglio”.
In http://www.viasarfatti25.unibocconi.it

23
profitability of these companies and the profitability of bigger companies”40. What
penalizes small companies, according to Pambianco, is their failure of inclusion in the
rich emerging markets because of the limited financial and managerial resources they
have at their disposal. From this stems his proposal for leaving the crisis behind, which
passes mainly through strengthening the capital of companies by letting an investment
fund inside or even going public. As we will deeper explore in the next paragraph,
however, this hypothesis is not agreed on by everybody, because some claim that the
Italian luxury system, at least for what concerns the fashion industry, is closely tied to
small companies and instead often “has lost its freshness when projected on a scale
more suitable for large enterprises”41. In other words, unlike the French, Asiatic,
American models respectively pivoted on the big holdings, on the keiratsus, and the
corporations, where the logic of large scale development reigns, in the Italian model its
strength lies in the figure of the designer-entrepreneur; when it is time to compete on a
global level, on the other hand, “the difficulty of attracting capital becomes a factor that
definitely limits the big leap and often entails loss of independence”42.
As much as the data about profitability penalizes SMEs, overall, we can speak about,
ever since 2010, a positive trend for Italian producers of luxury goods, which is more so
important for those companies, small or big, that have had the chance to go
international. The matter becomes much more complex when it concerns the universe of
brands that share the Made in Italy label. As is known, the trend in the Italian export is
at a clear countertrend in respect to the national economy as a whole: while the latter
keeps suffering (even 2013 recorded a decrease of the GDP), exports have created an
income of about 180 billion in the commercial balance. It’s the Made in Italy
companies, especially those in the textile, clothing, leather, alimentary and small
mechanical industry, that drive the whole export market.
40
Monica D’Ascenzio, “Alleanze e nuovi capitali per le Pmi della moda”, Il Sole 24 Ore,
19 novembre 2013. On line edition. Archive of November 2013. www.ilsole24ore.com
41
Alessandro F. Giudice, Il volo dei calabroni. Come le PMI italiane vincono la legge di gravità,
Milano, Franco Angeli, 2012, p. 151.
42
“Keiratsu”: system, series, grouping of enterprises, order of succession) is a set of companies
with interlocking business relationships and shareholdings. It is a type of informal business
group. The keiretsu maintained dominance over the Japanese economy for the last half of the
20th century.

24
There are some difficulties, however, because the financial weakness of many
companies in the Made in Italy brand becomes a disadvantage when it comes to
competing in the international market, reason for which it becomes a serious possibility
that they become a target for big foreign holdings, as it has already happened and keeps
happening in the luxury industry43. The fact that many companies haven’t been able to
survive from 2008 to now, must not be dismissed: according to two studies by Crbis
D&B and Cgia from Mestre, about 50,000 Italian companies have declared bankruptcy,
due to a number of reasons among which we must highlight the unfair competition from
companies that do not pay taxes, the low cost competitions from foreign conglomerates
(such as IKEA for furniture) and, finally, the poor management of the economic activity
(the case of the Ginori brand, gone bankrupt in January 2013, is from this point of view
a perfect example)44.
In general, Made in Italy brands have suffered a crisis if they haven’t been able to go
international, which seems to confirm the importance of elements such as the quality
and the originality of the products to beat the foreign competition. The need for
internationalization, though, brings the matter of strategies to adopt back in the
spotlight, an area around which uncountable experts and commentators have confronted
each other ever since the outbreak of the crisis.
2.3 Beyond the crisis: new markets and new strategies
The premise of a report by Confindustria, published at the end of 2008, quotes a
phrase by Chinese thinker Lao Tse as an opening line: “what the caterpillar calls the end
the rest of the world calls a butterfly”45. The meaning here is quite clear: economic
crises, in their dramatic nature, especially when considering the kickbacks the smaller
single individuals have suffered, are still also positive moments of renovation and
restructuring, if we look at the industrial world as a whole. To survive, in other words,
companies are forced to make choices of cost rationalization and of repositioning in the
43 See “I.t.a.l.i.a. – Geografie del nuovo made in Italy 2013”, by the Fondazione Symbola,
Unioncamere e Fondazione Edison. http://www.unioncamere.gov.it
44 See Davide Mazzocco, “Made in Italy: dall’inizio della crisi fallite circa 50mila imprese”, 8
gennaio 2013, https://it.finance.yahoo.com
45
Centro Studi Confindustria, “L’economia italiana nella crisi globale. Assetti internazionali,
politiche economiche, competitività del Paese e reazione delle imprese”, Scenari economici,
n. 4, dicembre 2008, p. 5.

25
market, that they would be otherwise reluctant to employ. This reasoning applies, more
so, to Italian companies operating in the luxury goods industry, as it is all about
companies whose strength is the quality of their products, but whose biggest limit lies in
the management, still not as organized.
It’s precisely the quality, according to the main experts in the field, that has to be an
essential prerequisite for Italian companies; this means that the challenge presented by
the global competition cannot be won by implementing the same strategies employed by
companies in the textile industry in many countries outside Europe, playing with low
costs when it comes to labor and product costs46. Internationalization is the second
prerequisite unanimously considered to be essential in order to overcome the crisis, as
the luxury market is necessarily bound to respond to the nouveau riche from emerging
countries. This in itself presents a strategy and instrument problem, as the majority of
Italian companies in the industry does neither have the financial resources, nor the
managerial qualities necessary to establish themselves in the distant Asian markets. The
road for the capitalization of the companies seemed to be, at the beginning of the crisis,
an almost mandatory choice for SMEs in luxury; suffice it to think that the co-author of
the Fashion and Luxury Insight 2009 report, Giorgio Brandazza, had stated that
dimension is undoubtedly the most important performance key driver, to the point of
raising doubts about the sustainability of the niche companies’ business models.47
Yet, in the last years, alternative paths have been emerging that seem to allow
numerous small companies an effective repositioning in the global luxury market,
without the need for them to lose their specificity as small companies, prevalently
driven on by family business; these new roads are agreements with international
distributors and e-commerce.
The first option is having lots of success in markets with enormous potentials such as
in Russia and China, thanks to aggressive local operators that aim to build malls to host
not big international brands of luxury as much as single-brand Made in Italy stores. In
many cases the entrance for Italian SMEs is eased by the fact that they do not even have
to pay the employees in the various retail stores, and the cost for the companies
46
Aldo Bonomi, “Il made in Italy di qualità è la spinta per battere la crisi”, Il Sole 24 Ore,
27 ottobre 2013. Online Newspaper Edition. Online Archive of October 2013.
www.ilsole24ore.com
47 Fondazione Altagamma, SDA Bocconi, “Il lusso a un nadir nel 2009. Ma il 2010 parte meglio”.
In http://www.viasarfatti25.unibocconi.it.

26
becomes, basically, just the rent and a percentage on the sales. For both, the number is
largely smaller than what it is in Italy48. The key of success in these investments lies
mostly in the consumers’ taste and in the idea of quality and originality associated with
Made in Italy products: in the nineties and at the beginning of the new millennium the
big brands had literally invaded emerging markets, which in some senses ended up
trivializing their offer, while on the contrary the interest for quality, but less known
products, increased.49
E-commerce is the other channel of distribution that is allowing many companies to
meet international demand at sustainable costs, also thanks to specific sites for the sale
of on-line luxury products like Net-a.porter, created to immediately sell clothes
presented at fashion shows, cutting therefore the time necessary for these to reach stores
and Yoox; it is estimated that the fashion and luxury on-line industry recorded a growth
of 41% in income during the financial year of 201150. It is, after all, a market promoted
through sponsored advertisement on search engines, which is being used more and more
by both big international brands and SMEs, to sustain their sale activities and
positioning strategies51.
Even big luxury brands that have been able to easily coast through the economic
crisis, still displaying increases in income, have experimented new distribution channels
such as e-commerce, but in their case the decisive factor has been investing in previous
years on a vertical integration strategy and developing the retail channel. From the point
of view of brand strategies, moreover, the data on income and profitability indexes
demonstrate that the best performances belong to companies that have been able to
create a brand-extension in new product categories and that have been able to impose
themselves on new emerging markets. Some examples related to the main Italian brands
can help explain the matter better. Gucci’s strength is considered to be the tight control
48 Andrea Curiat, “Design e moda, Russia a misura di Pmi”, Il Sole 24 Ore, 28 febbraio 2011, In
http://www.ilsole24ore.com, Archives.
49 Vera Moretti, “Le pmi della moda Made in Italy sbarcano in Cina”, Infoiva: il giornale delle
partite Iva, aprile 2013. In http://www.infoiva.com, Archives.
50 Elisa Scarcella, “La moda e il lusso fronteggiano la crisi con l’e-commerce”. In
http://www.eccellere.com/, Archives.
51
Sull’importanza raggiunta dai media digitali nella comunicazione delle aziende della moda e del
lusso, Jarvis Macchi, Lusso 2.0. Le nuove strategie digitali dei marchi di alta gamma, Lupetti,
2011, pp. 30-40.

27
over single-brand retail stores scattered all over the world, all owned and managed
directly by them, which “represents a consistent advantage when it comes to arriving in
new markets, such as in India” 52. Prada, on the other hand, has made of the expansion
in the Chinese market the key element in their development strategy, besides
undertaking prestigious cultural and artistic activities, in collaboration with top tier
agencies and institutions, in order to strengthen the cultural-chic of the brand.
Widespread is also the strategy of starting co-productions together with the main
brands in the technological field (Prada, Armani and D&G, for example, have
collaborated, respectively, with LG, Samsung, and Motorola), with the goal of bringing
in new customer segments to their brand, mainly younger people, without this going to
lower the quality. Another winning strategy employed by the main luxury companies,
finally, is the one of creating sub-brands to extend their potential targets, within their
core-business; under this point of view the most famous example is Armani’s, with sub-
brands such as Emporio, Exchange, and Privé.
In general, these are strategies that require significant financial resources, hard or
impossible to replicate at SME level. This explains, at least partly, the reason why a
very substantial number of Italian luxury companies have ended up in foreign hands in
the past five years: the change of ownership implies the influx of fresh capital thanks to
which companies can implement the aforementioned strategies and therefore not only
survive the crisis, but also increase their profit. To explain the extent of this
phenomenon, which involves both companies producing high quality goods, but more in
general also the whole Made in Italy universe, it is enough to mention that from 2008 to
2012 more than four hundred Italian companies have been sold to foreign brands. And if
in the past decades it was mostly European and American holdings that bought the best
Italian companies, new brands from the Middle and Far East have started doing the
same. Undoubtedly, previous owners got a lot from these sales, considering that foreign
groups have spent around 55 billion euros to buy Italian brands53, but the important
thing to understand is what are the repercussions of such a phenomenon on the national
economy.
52
Interbrand, “Classifica dei brand italiani globali a più alto valore economico”, 5 dicembre 2008,
p. 6. The following paragraphs are based on this source.
53 Mario Bello, “Made in Italy addio: tutte le aziende italiane vendute all’estero”. In
http://www.nanopress.it, Online Archives.

28
It is a widespread perception that the recent ownership change of the most important
Italian brands has been a low blow to the Italian economy, because even in the cases
where the sale is not paired with a transfer of the production site, externalization of the
property implies, at least theoretically, a reduction in tax revenues. Nonetheless, a study
carried out by Prometeia for ACE, Company for foreign promotion and
internationalization of Italian companies, aimed at analyzing the impact of the foreign
acquisitions on the performance of Italian companies, has found that when foreign
holdings have bought Italian brands, when they are considered as synonym of
excellence and high value, and not on the edge of bankruptcy, then the results have been
generally positive; for the companies, of course, but also for the Italian territory, since
the increase in income and productivity lead to a growth in employment. Italian
companies, in fact, which became part of multinational groups have not only grown on
the sales front, for example by serving new markets, but also more productive,
employing better work organization systems. Notably, the passage of control abroad did
not in any way penalize the employment dimension. On the contrary, new capital and
earnings in the exchange market, have allowed companies to increase their number of
employees and therefore improving the relationship between the companies and their
reference territory54. What is more, the study concludes, luxury brands owned by foreign
holding do not lose their national identity, as demonstrated by Valentino, owned by an
emir from Qatar, but which remains without a doubt an Italian company, so selling
abroad should not distort the Made in Italy brand.
If the Italian productive excellence is not at risk, it is still true that the phenomenon
of externalization of property highlights once more – as observed by the Altagamma
director Andrea Illy – that capital, propensity to risk and business vision are all scarce in
Italy; accused is that class of entrepreneurs-owners that have not been able to transform
their family companies under the managerial point of view, very often tying their
destiny with the company’s55.
The case of the Bvlgari brand, recently bought by the LVMH holding, allows us to
closely analyze the case of one of the most famous Italian luxury companies in the
54 Prometeia, “L’impatto delle acquisizioni dall’estero sulla performance delle imprese italiane”,
citato in “Più lavoro, fatturato e produttività: se il made in Italy emigra, ci guadagna”, La
Repubblica, 9 febbraio 2014. In http://www.repubblica.it/economia, Online Archives.
55 Giovanni Iozza, “Made in Italy, vendere non sarà morire. Però è un po’ un rinunciare”. In
http://www.economyup.it/, Online Archives.

29
world: the different stages that marked its explosive growth, the internationalization and
then going public; this way we can try to understand if the ownership change, which
arrived at the end of these stages, was really the inevitable consequence of Italian luxury
companies’ limits in development models, as indicated by Andrea Illy.

30
CHAPTER THREE
THE BVLGARI CASE
3.1 The areas of business: a changing environment
The expansion of the Bvlgari group followed the same path of production
specialization, and after that, a pronounced horizontal diversification, which was the
base of success for many other luxury companies. As highlighted beforehand, the initial
specialization aims to create an aura of exclusivity and quality around the brand; once
those characteristics are achieved, the brand can considerably increase its income by
testing the water in other product categories, without obviously distorting its original
identity.
At the origins of the Bvlgari group is the story of a man, Sotirio Bvlgari, from a
country in the Epirus, in which for centuries the processing of precious materials,
especially silver, had been common56. He chose to try his luck by immigrating to Italy at
the end of the eighteen hundreds, where he founded his first store in Rome in 1894. To
his talents as a craftsman/artist, Sotirio combined his abilities in marketing, which
definitely helped the success of his business. This was demonstrated by the opening, in
1905, of the famous store in via Condotti 10, in Rome, still open to this day: the slogan
back then recited Old curiosity shop, the title of a famous novel by Charles Dickens;
having sensed that the potential Anglo-Saxon clientele constituted the main target for
his products, Sotirio had chosen to lure it in this original way, at least if compared to the
largely provincial mentality that still dominated Italian advertising back then.
At the beginning of that century as well, the first diversification of production began,
as pieces created by using more precious metals, diamonds and others, were starting to
be sold alongside silver articles. The store’s windows were less and less crowded, and
the few objects in them were supposed to lure clients in thanks to their exclusivity:
basically, Bvlgari was losing its characteristic of being an antiquarian shop to buy
luxury jewelry in.
56 For further insight: Amanda Triossi and Daniela Mascetti, Bvlgari, Milano, Mondadori, 2009.

31
In 1932, when the founder died, the family business went to the sons Giorgio and
Costantino. Even though there was an economic downturn (these were the years of the
Great Depression), they decided to invest in enlarging the company anyway and in
renovating the stores in via Condotti; the project, assigned to prime quality architects
and designers, was so appreciated that both the interior and exterior of the shop were
replicated in the Treccani Encyclopedia under the store entry. The Bvlgari company
survived the problems of autarchy and the Second World War, and restarted its activity
at the end of the nineteen forties. Two were the factors that helped the brand record the
large success it did after the war: Costantino, a big expert in gold and jewelry, author of
monographic studies particularly appreciated among the employees at work, a
characteristic that clearly contributed to strengthen the Bvlgari name, chose to abandon
the models coming from the Parisian ateliers, still inspired by the decò style, in order to
develop work inspired by the lines and shapes of classic and Renaissance art. This new
style, immediately met by the appreciation of the clients, became Bvlgari’s distinctive
trait, and what still makes it unique and inimitable. The second factor of the company’s
success was of exogenous nature, the revitalization of the city of Rome thanks to the
studios in Cinecittà, which called to the best of the international jet set, something that
did.
The third phase of Bvlgari’s development began in the Seventies, when the company
was in the hands of Sotirio’s grandsons (Gianni, Paolo and Nicola). These were times of
large transformation for the whole luxury industry, as it started to lose the negative aura
it was long attributed by an ethic that condemned waste and ostentation. At this
moment, Bvlgari decidedly undertook the path of horizontal diversification of
production, starting from the watch industry.
In truth, ever since Sotirio’s times, Bvlgari produced watches, but it was mainly
productions which fell within the area of jewelry and that nourished a very low
turnover. Halfway through the seventies, however, a real business unit stemmed from
the company, the Bvlgari Time Neuchatel, exclusively devoted to watchmaking. The
larger step to product diversification was taken however in 1990, when the CEO of
Bvlgari, Francesco Trapani, a descendant of Sotirio, graduated from the best economy
schools in the US. He launched Bvlgari Parfums, through which stemmed the
proposition of extending the product range of the company to the so-called accessible
luxury. At the end of the decade, a line of eyewear and accessories (leather goods) was
launched, while in 2001 a cooperation agreement with Marriott International was struck,

32
for the realization of a new brand of luxury hotels. The last horizontal extension of
production before the absorption of the Bvlgari brand by LVMH was carried out in
2007, with the launching of a cosmetics line. While a large part of these productive
diversifications were motivated by the desire of increasing the company income,
through the creation of objects that could attract luxury excursionists, the choice of the
joint venture with Marriott, on the other hand, was motivated mainly by the need for
more visibility.
The productive diversification was followed, ever since the seventies, by an
expansion of the sales network. If in the years of the Italian economic miracle, the
company leaned mainly on the store in via Condotti 10, in Rome, the first single brand
stores started to arise in the main destinations for world luxury shopping, New York,
Paris, and Montecarlo. The desire to expand this network, practically reaching most of
the world’s important capitals, was at the base of Francesco Trapani’s decision to list
the company on Milan’s stock exchange, following the path already walked by other
known brands like LVMH and Vendom. The debut happened in July 1995; according to
what Trapani stated in an interview for the journalist Giorgio Lonardi, the goal behind
the operation was “the development of the Bvlgari brand. Today we have 38 stores to
our name in 16 different countries, which will become 67 by 1998. Without counting
the investment in communications, which represents 10% of the income. Just to make
an example, we printed a million catalogues of our products”57.
On the Eve of the debut on the stock exchange the Bvlgari family owned almost
100% of the capital; the initial project was to increase the capital of the company to 170
billion lire, reducing the family’s shares to 62%. It is to be believed that the CEO was
really convinced of the interest of the financial markets towards the operation, as he
refused the proposal by the Stock Exchange Council to not exceed the limit of 8,000 lire
per share, by fixing the price at 8,600. This bet turned out to have a positive effect since
the demand was much larger than the offer, which was closed in a few hours filling the
Bvlgari group’s wallets with 200 billion lire. In the following years the Bvlgari family
maintained the majority stake, until in 2004 when they settled on 51.9% of the capital.
Said percentage remained virtually untouched until the purchase of the group by the
LVMH tycoon, in 2011.
57
Giorgio Lonardi, “Bvlgari e la Borsa piena di gioielli”, La Repubblica, 25 giugno 1995, in
www.larepubblica.it

33
The productive diversification was followed, ever since the seventies, by an
expansion of the sales network. If in the years of the Italian economic miracle, the
company leaned mainly on the store in via Condotti 10, in Rome, the first single brand
stores started to arise in the main destinations for world luxury shopping, New York,
Paris and Montecarlo. The desire to expand this network, practically reaching most of
the world’s important capitals, was at the base of Francesco Trapani’s strategic
decisions.
3.2 The kickbacks of the international financial crisis
In 2007, on the Eve of the outbreak of the global financial crisis caused by the
bankruptcy of the American investment bank Lehman Brothers, the financial situation
of the Bvlgari group appeared to be solid. The income recorded during that year was of
1,093.3 million euros, against the 1,010.4 million euros of 2006, with an increase of
8.2% to the exchange rates. Trapani commented on this data with satisfaction (“we are
very happy with the results of 2007”), but did not hide some concerns regarding the
future due to the incoming global financial crisis. “Nevertheless – he added – I must say
that the sellout of our property stores comforts us. We had a good Christmas and a good
January as well and we are not witnessing signals of slowing down so far”58.
In truth these signals would arrive quite early because the profits relative to 2008, for
the first time after six years of uninterrupted growth, recorded a drop in the first nine
months of the year that can be quantified to around 22 percentage points. The financial
analysts, however, were still convinced that in the long term the company could
overcome the crisis, and the Bvlgari group was paying, at the end of 2008, an interest of
only a quarter of a point more to Euribor for its 300 million euro debt. Some negative
opinions were still raised, such as how the American bank Citigroup suggested selling
the shares with a target of 3 euros, while other financial institutes’ assessments went
around 5 or 6 euros, as its estimates reflected a lower level of income for the fourth
trimester of 2008 and for the whole of 2009 in all geographical areas and for all product
categories.
58
“Bvlgari: Trapani, per 2007 non cambia politica su dividendi”, Il Sole 24 Ore, 31 gennaio 2008.
In www.ilsole24ore.com. Online Archives.

34
Citigroup’s predictions were effectively confirmed by the development of the
company’s performance. The income in 2009 was around 926.6 million euros, against
1,075.4 in 2008, recording a decline of 13.8%. All product categories, furthermore,
recorded a decrease in sales. These were not surprising results, considering that the
whole luxury industry suffered heavy backlash during the first two years of the financial
crisis; still the Bvlgari group’s data was clearly much worse than the industry’s average;
the cause of this performance can be traced to specific issues in the growth during the
previous years.
First of all, Bvlgari paid for unfavorable geographic exposure, result of decisions that
were effective in the nineties, but anachronistic in the third millennium. The tables
below illustrate the group’s income divided by geographic areas in 2007 and in the
previous year.59
Table 1: Bvlgari’s income divided by geographic areas in 2007 and 2008.
Income in absolute value (a, in million Euro) and percent (p).
Geographic area 2007 income
(a)
2007 income
(p)
2008 income
(a)
2008 income
(p)
Italy 141.4 13% 131.4 13%
Europe (except Italy) 285.9 26% 256.3 25%
United States 176.4 16% 157.4 16%
Japan 231.7 21% 256.6 25%
Far East (except Japan) 197.6 18% 149.8 15%
Middle East 40.4 4% 40.5 4%
Other 17.6 2% 16.7 2%
Total 1091.0 100% 1008.7 100%
59 Interbrand, “Classifica dei brand italiani globali a più alto valore economico”.
www.interbrand.com. Online Archives.

35
Even the biggest investments by Bvlgari in the first years of the third millennium
seem to confirm a certain conservative tendency in management: the principal
destination of the money reserved for the opening of new selling points was Paris,
where two new stores were opened (two were already active) in very exclusive
locations. It should be noted that the Cartier group, that like Bvlgari has its core
business in watchmaking and jewelry, had at the same time started to invest in China
and to look at it as the potential first luxury world market and, for this reason, was
building an expansion strategy that envisaged, among other things, an exhibition in the
Forbidden City entitled Cartier Treasures: King of Jewelers, Jewelers to Kings, in
which over 350 objects by the French company were to be exhibited, such as creations
of priceless value from the Cartier historical archive, authentic treasures created for
princes and kings of the East and West.
A look at the revenue trend per geographical areas between 2008 and 2010 clearly
demonstrates just how much Bvlgari suffered with its geographical exposition centered
in traditional luxury markets, the United States, Japan and Western Europe.
Table 2 Bvlgari’s income divided by geographic areas between 2008 and 2010.
Income in absolute value (a, in million Euro) and percent (p).
Geographic
area
2008
income
(a)
2008
income
(p)
2009
income
(a)
2009
income
(p)
2010
income
(a)
2010
income
(p)
Italy 125.6 11.7% 108.9 11.8% 119.1 11.1%
Europe
(except Italy)
296.1 27.5% 242.6 26.1% 253.1 23.7%
United States 154.4 14.4% 112.2 12.1% 138.6 13.0%
Japan 229.2 21.3% 176.3 19.0% 198.1 18.5%
Far East
(except Japan)
206.8 19.2% 215.6 23.3% 288.4 27.0%
Middle East /
Other
63.3 5.9% 71.0 7.7% 71.7 6.7%
Total 1008.7 100% 926.6 100% 1069.0 100%

36
Between 2008 and 2009 the sales figures for the Bvlgari group in America and Japan
were in constant decrease; a drop that can be quantified, in 2009, between -27 and -23
percent. On the other hand, the sales figures in the Far East, excluding Japan, were
steadily rising, and this area, without benefiting from investments larger than others,
saw its income raise in 2008 and 2009 from 18% to 23% of the total and even 27% in
2010, gaining the first place.
3.3 Getting past the crisis: creativity, cost containment and the LVMH factor
From 2008, the Bvlgari group fought the economic downturn with a strategy based
mainly on cost containment, as was suggested by those financial analysts that, on the
Eve of the last trimester of 2008, had predicted quite a grey future for the Italian jewelry
company, at least in the short term60.
The approval, in March of 2009, of the Bvlgari financial statements, came with a
note from the CEO Trapani, with the intent of reassuring the investors on the strength of
the group and the direction undertaken by the management, but without hiding all the
issues they were going through: even though ever since 2008 started, the group
implemented a policy of cost containment and of careful control of the investments to
combat the progress deterioration of the economic situation, the abrupt and sudden drop
in sales of the last trimester, followed by the financial crisis and the fall of the stock
market, have negatively affected the results of the whole year. 2009 is going to be a
hard year as well, in which we will focus on – besides the launching of new products in
all categories – on an even more strict policy of cost containment to make the group
ever more effective. Finally we expect to see a much more careful management of the
storage in order to neutralize the effects on the generation of income and a further
investment reduction.
The reduction of operating costs turned out to be the most critical decision, as the
room for maneuver was quite slim: on one hand, logically, they did not want to touch
the money reserved for advertising and promotion, but on the other hand the choices
related to the development of commercial activities weighed heavily on 2008 and its
income, suffice it to think about the rental costs, which had gone up by 20% throughout
2008. In the first three trimesters of 2008, then, operating costs after advertising and
60 Riccardo Designori, “Bvlgari, nuovi minimi da giugno 2003”, Milano Finanza, 20 novembre. In
www.milanofinanza.it. In Online Archives.

37
promotion expenses had increased by 10% compared to 2007; it may be true that the
containment policies started to see an effect in the fourth trimester, but at the end of the
year the operating costs had still increased and not decreased compared to 2007. A
positive aspect, however, concerned the older decision by the Bvlgari group to
strengthen the single brand store network: these sales points did in fact hold strong,
while the wholesale network implemented a very aggressive de-stocking activity.
Throughout 2009 the operative cost containment strategy helped this aspect,
something that must not be underestimated since some expenses, such as rent and
depreciation, are hard to compress. But the best result in the battle to combat the crisis,
was obtained by the Bvlgari group on the fight against financial debt. 2008 had closed
with a debt of around 300 million euros, a number significantly higher than it was in
2007, because of the expansion policy the company had implemented. The debt at the
end of 2008, on the other hand, amounted to 216.8 million euros, 29% less than the
previous year. It was also a debt completely covered by long term funding and
committed credit lines with an expiration scheduled over 36 months later. A main role
in the reduction of the debt was played by, not the operative cost containment strategy
(said costs remained quite the same), but by the reduction of investments and of storage
management (the latter went from 728 million euros in December 2009 to 615 at the
end of the following year). Therefore, the gearing (relationship between net debt and net
assets) went from 37% in 2008 to 28% in 2009, marking a strong solidification of the
company’s situation.
The critical aspect of operative costs was what prevented the company, in the first
months of 2010, despite the positive trend in income, from affirming itself on a positive
level in terms of revenue. Furthermore, even when sales and income started growing
again, Bvlgari kept suffering from the negative trend in the sale of precious metals,
especially gold and platinum61.
61
“Relazione degli Amministratori sull’andamento della gestione del Gruppo” , rilasciata il 31
dicembre 2010, in http://www.zonebourse.com, Online Archives.

38
Overall, the company was able to begin growing again during 2010, benefiting from
the well thought out choices from the two previous years. Why, then, did they just a few
months after (June 2011) end up selling the company to the French tycoon LVMH? The
following is the answer given by Francesco Trapani, who played a central role in the
operation:
“I had looked forItalian and foreign companies to create a strong network, but I
didn’t find anything suitable to make the company stronger and better to compete in
the market in twenty years. Nobody wanted to get involved, they did not want to lose
individuality, while I was not afraid to enter into a large group, implementing a
strategic choice, because I believe that the big groups will be even more important ten
years from now”. The CEO also added: “To achieve even more success, this
operation was necessary. It satisfied the investorsbut a controversy arose since Italy
is losing a very important name, but a name that hasstarted to grow again,before and
after the deal, and the Bvlgari brand still remains Italian: it is not in the hands of
Italians anymore, but it is still a company based in Italy, and managers come from
both countries: everything happens with an idea of strong integration, where
nationalismis dissolved, in favorof much more satisfying work.LVMH does,anyway,
respect the brand’sphilosophy and its independence, there is a top teamthat manages
every brand and then the group checks the results, with the intent to favor the best
quality possible.In the Asian market, China represents the first country in order of
importance for Bvlgari and the watchmaking branch of LVMHthat I will be directing:
it is undergoing a period of incredible growth, supported by our initiatives related to
art. Japan is suffering now on the otherhand, but we expect the situation to get better
next year. In case of sale, the brand is not the founder orthe investor’s toy anymore. It
is necessary to know how to get in the game to make the community prosper and
stimulate business"62.
The answer to the question, then, seems related to the issues that any company in the
luxury industry is destined to encounter in a phase in which internationalization is the
key to success, if it does not have the resources to carry out investments for the long
term without suffering at the asset level. Technically speaking, the agreement stipulates
a share exchange after which the Bvlgari family enters into the LVMH family, while the
latter, besides buying the participation of the Bvlgari family, launches a mandatory
takeover of the remaining shares of the Bvlgari company owned by the minor investors,
62
Monica Codegoni Bessi, “Luxury Summit. L’entrata in LVMH di Bvlgari dalle parole di
Francesco Trapani”, ModaOnline.it, 1 luglio 2011, in http://www.modaonline.it.

39
at the price of 12.25 euros per share. Considering that at the end of the week previous to
the closure of the operation, these were quantified at 7.58 euros, it is clear that the
French luxury tycoon paid a very large amount in order to buy the Italian company.
Even so, for the international press the operation was a great market decision by
Arnault’s group and at the same time the right choice for Bvlgari, which otherwise
wouldn’t have had the possibility to produce an ambitious investment policy, needed to
make it in the market of the noveau riches, China above all.63 What was almost
unanimously considered a healthy step for Bvlgari, was seen in a negative light for the
financial Italian system. The Wall Street Journal, for example, wrote that the Bvlgari
offer makes the Italian stock exchange a victim of fashion and adds that “the exit of
Bvlgari is a low hit for the Italian stock exchange the where the total capitalization of
the market has been dropping every year”64. This does not mean that this sale was a low
hit for the Italian economy as well, since the Bvlgari group continued increasing income
under LVMH, under a company governance clearly favoring the Italian component. It is
clear that the operation, however, as let slip by the same Francesco Trapani in the
aforementioned statement, highlights an Italian weakness: the shortage of capital that,
together with the low propensity for risk, prevented our textile industry, with a few
exceptions, from growing large. Small and medium luxury companies might continue to
grow, even under foreign control, but the externalization of properties in the other
product categories often means the closure of factories and the transfer of production
elsewhere.
63 Elysa Fazzina, “Bvlgari a caro prezzo, ma per Lvmh ne vale la pena”, Il Sole 24 Ore, 8 marzo
2011. In www.ilsole24ore.com. Online Archives.
64
E. Fazzina

40
CONCLUSIONS
The Bvlgari group’s story illustrates the contradictions that have afflicted the Italian
luxury industry in the past few years. Luxury definitely represents a product category
that has been able to get past the crisis, working on two factors: on one side, the positive
trend of developing countries and their economies, from which the nouveau riche come
from, those who are nurturing and will keep doing so in the future the demand of these
goods; and on the other side, the ability of the most famous brands to maintain their
nature, working on their exclusivity prohibitive prices, associated to quality, reason for
which whoever wants to treat themselves to a thrill or to exhibit their status is forced to,
in some way, purchase a luxury good. This does not imply that all companies in the
world of luxury have been able to overcome the crisis; precisely because the key to
success lies in being able to satisfy the noveau riche and their demands,
internationalization becomes the mandatory choice. A choice that implies important
investments, and therefore the presence of capital and a strong management.
Italian luxury brands, on the other hand, distinguish themselves for being tied to
individual biographies, or at most few generations of a single family. Creativity,
inspiration and certainly the ability of intuition were key points in the past;
internationalization, however, brought a very important challenge to these family
companies, who often have had the need to sell their properties to save and increase
production, albeit maintaining the made in Italy brand. Here lies the paradox: to remain
Italian, to keep manufacturing in Italy, companies are sold to foreign tycoons. On the
financial side, Italy has proven to be lacking in capital and especially to not display any
kind of bravery, so no big luxury holdings have been able to grow and impose
themselves on the market.
The Bvlgari group successfully carried out an expansion of its production right when
the phenomenon of luxury excursionists was affirming itself. Strong from this
horizontal diversification, it was able to finance a strong geographical expansion by
opening various single brand sales points in the most important streets in the world for
shopping. The vice behind this phase, coinciding with the nineties, was conservatism:
Bvlgari aimed at solidified markets, not those that were developing, at least if compared
to other companies in the luxury industry. When the crisis hit, dropping heavily on the

41
economies of developed countries, the backlash was quite harsh. The Milan stock
exchange market and the data regarding it highlight how Bvlgari suffered these events
more than other Italian luxury brands, who had anyway shown much worse results than
the foreign competition.
The paths followed to overcome the crisis were those followed by most luxury
companies: renewed emphasis on the quality of products and on the areas of core
business, cost containment with a resizing of the investments but without taking money
from the advertising campaigns; a strategy that could have guaranteed the survival of
the brand, but not a sustainable growth. The positive trend that had distinguished the
Bvlgari group under the CEO Francesco Trapani seemed to have come to an end. To
bring the group back in style there had to be a massive recapitalization and, possibly, an
operation aiming to create an Italian luxury cartel that would depower the internal
competition, freeing up energy to face the challenges brought by internationalization
and foreign competition. As stated by Trapani, he planned on looking for partners to
carry out this operation – within Italy – with the intent to create a tycoon company that
could hold strong against holdings such as LVMH. Once this attempt had failed, there
was only one unavoidable choice: to embrace the enemy.

42
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The effect of the economic crisis on the luxury brand market