Creative licensing

By Lauren Goldstein Crowe, Financial Times
Published: Feb 19, 2008

In the annals of fashion business history, 2007 will go down as the year that the bankers got behind the controls. Previously content to invest in luxury via an LVMH or PPR and let those companies manage the brands, Wall Street's soldiers marched on to New York's Seventh Avenue, Paris's Avenue Montaigne and Milan's via Montenapoleone armed with big bucks and bigger ambitions.

They did not go home empty handed. Valen - tino, Halston and Betsey Johnson were a few of the big names that ended up in the hands of private equity players; Proenza Schouler, Peter Som, Matthew Williamson and Stephen Webster also took on substantial investments from private equity funds.

In the flurry of acquisitions, one of the US's most famous brands, Bill Blass, ended up owned by something called NexCen. NexCen? It sounded so private equity even the company's publicists were confused. But it isn't - NexCen is a new form of luxury group with a strategic plan that is almost unrecognisable in today's fashion world.

And, thus, Bill Blass, with its newly appointed creative team of Peter Som for women's wear and Michael Bastian in men's wear, is not just an example of yet another fashion revival but a test case for a new approach to the business. If it works, it may well mark the most radical shakeup to conventional company wisdom in the past 20 years.

The business history of luxury goods goes like this. In the beginning, some men made nice things and opened stores so they could sell those things to rich people. Eventually, the products bearing the names of these men were selling so well that the men decided to foist the making and the selling of the products onto other people in agreements that were called licences and franchises. For a while the licences and the franchises were good and everyone made a lot of money. But then they got out of control and no one knew what was being made in different countries or how the stores were being run. So the management of many of these companies was turned over to professionals, and the first thing they did was cut off the licence and franchise agreements in order to regain control.

Eventually, they signed new agreements, but these were few and far between, and for nice and complicated things, such as sunglasses, not bad things, such as frying pans.

It was assumed that this theory of luxury management - no domestic franchises, few licenses and very strict control - would be the one luxury goods companies would operate under forever more. And they have. Pretty much. But then, particularly in the US, the department stores to which these brands would sell their goods began to consolidate and gain power. So, instead of buying the goods, marking them up and selling them, these stores began to demand that the designer companies guarantee the profit margins on their products; if those margins were not met, the designer brand companies had to pony up the difference.

Suppliers had little choice but to comply, so fashion companies went overseas to source from cheaper producers, promised the stores their margins, and began to worry more about things like inventory levels and shipping dates, instead of product design and marketing.

Helping them finance the transition from companies that designed, produced and sold their goods to ones that designed, sourced and sold their goods was Robert D'Loren. D'Loren is an architect turned banker who gained a degree of fame in banking circles in the 1990s by helping music companies secure debt against their intellectual property via UCC Corp, an investment and advisory firm. He then began to advise companies such as Bill Blass, Oscar de la Renta and Max Mara - a logical move as the primary asset of design companies is also their intellectual property. But in these cases the security was the minimum fees guaranteed by licence agreements. While advising Neil Cole, brother of Kenneth and the owner of Candie's (high heels for teenagers), D'Loren became convinced that the design it/source it/sell it model was so broken it was no longer worth patching together - at least in the US.

"Basically, the brand company became an agent for an overseas factory," D'Loren explains.

"They took inventory in as a principle, but sold it into a channel where they had no control over margin. That's a dumb business." Thus, in 2004 D'Loren and Cole turned Candie's into a group called Iconix, and sold the sole license of Candie's to Kohl's department stores, making Kohl's responsible for sourcing and for whatever margins it achieved on what it sold. In return, Iconix received a licensing fee. Iconix then bought other brands all with the same idea: that they would own only the trademark, and the making and selling of the goods would be done by the factories or, as is the case with Candie's and Kohl's, stores. Iconix would do the design and the marketing and receive guaranteed licensing fees.

If these fees ever dropped beneath a certain level, Iconix could step in and regain control. The stock market loved the idea. Iconix shares went from about $2 in January 2004 to a high of $24.48 last October. (The shares are now down along with the rest of the retail sector.) Although D'Loren had a long and illustrious career in financing, the Iconix experience made him realise that the opportunities in owning brands' trademarks were more interesting and, potentially, much more lucrative, thanks to Wall Street's fondness for brands. In 2006, he resigned from the board of Iconix, launched NexCen and started acquiring.

In little over a year, NexCen has amassed what seems at first a bewildering array of brands.

There's The Athlete's Foot, the first franchised shoe chain with 700 locations worldwide selling sports shoes by the top brands and, now, clothes, thanks to a NexCen licence agreement with Li & Fung, the $10bn Chinese sourcing giant. There's interior design brand Waverly, which sells everything from paint and wallpaper to sheets and stationary; Pretzel Time and Pretzel Maker, high-end pretzel concessions; Maggie Moo and Marble Slab ice cream stores; and, most recently, The Shoebox, a chain of nine New York stores selling shoes by the likes of Jimmy Choo, Chloé and Marc Jacobs, which D'Loren plans to expand across the country with franchise partners. NexCen also plans to make between three and five fashion acquisitions in the next two years, for a total of 15 brands.

Asked what these brands have in common, D'Loren says: "Everything we do is specialty and luxury. Even Maggie Moo and Marble Slab - we're the Starbucks of ice cream." D'Loren believes the stock market hates risk. The more risk a company has, the less reward the Street gives it. So he is building a group with very little operational risk, which owns the IP of as many of those players as possible in order to achieve the vertical integration that, say, Gucci has by owning its factories and its stores.

Who is going to get the licence agreement for Bill Blass home products, for example? Waverly. Where will the Bill Blass shoes be sold? The Shoebox. Who will get right of first refusal to open The Shoebox stores or, for that matter, the next round of Marble Slab stores? The scores of Athlete's Foot franchise partners, particularly those operating in 45 foreign countries. The 30-year licence for Bill Blass shoes was given to shoemaker Camuto, which is convenient, because Camuto took an equal share in The Shoebox acquisition. Now Camuto already has guaranteed floor space in a new retailer before a shoe has even been sketched and NexCen already can predict its licence fees.

So now D'Loren has a guaranteed licence fee from the company making the shoes and a guaranteed franchise fee from those selling the shoes and guaranteed floor space for any further brands he buys. And, he carries next to no risk. NexCen does not sell the stuff, and it does not make the stuff, it just collects the money. Analysts predict 2008 margins to be about 58 per cent.

It would all sound jolly if we hadn't been here before. After all, weren't these the kinds of agreements that luxury goods executives spent most of the 1990s getting themselves out of? D'Loren admits they are but says: "It is not a sustainable business model in today's world. This is a cyclical business, and when things tighten up, Gucci is going to wish they didn't own all those stores. NexCen is set up for sustainability through those cycles." But there is a reason Gucci owns as many of its stores as it possibly can - and earning the margin is only one of them. The other is that with franchise partners it is harder to control the look, feel and quality of the stores.

"You have to have very tight control from showrooms to when the product is hung on the rack," says D'Loren. "That's what good licensing has to be." The big question for NexCen is: does D'Loren know - and care - enough to institute the same sort of control over the image of his brands, particularly the oh-so-delicate luxury ones, that Diego Della Valle does at Tod's? Eric Beder, an analyst at Brean, Murray, Current & Co, says: "At Iconix, it was the job of Neil Cole to look after the brands. It was D'Loren's job to take care of the deals. Now the big question is: can he manage brands? Does D'Loren care enough about the product? And if not him, then who does?" Alex Bolen, chief executive of Oscar de la Renta, who brought in D'Loren to handle the company's re-financing, agrees with Beder's assessment. "Bob is extremely bright and a talented financier and dealmaker, but the question is: 'Can he execute the plan?' The skill set required to manage Maggie Moo is different that that for Bill Blass. Does he have that kind of team in place? Given Bob's past success, I wouldn't bet against him." D'Loren points out that 75 per cent of NexCen staff is creative and, indeed, the Blass appointments were greeted with high approval in the fashion community and Peter Som's first Autumn/Winter collection was received with qualified critical plaudits.

But other luxury goods executives say that for NexCen to succeed with Blass, it is going to take more than Som staging successful runway shows. D'Loren is going to have to trust Som to oversee every aspect of the design, no matter who is making it or what it is. And that is not as easy as it may seem, particularly when a designer is a paid consultant, with his own brand to look after on the side.

"To be successful you have to do an immense amount of work," says Domenico De Sole, the former chief executive of Gucci Group and the man who is credited with being the luxury goods executive most responsible for the current anti-licensing management theory in luxury. "You have to know who you are working with and you have to be on top of them." "Peter was hired to do women's wear and Michael to do men's," says D'Loren. "They have oversight over the licensees, but our in-house team monitors them, making sure that all the designs across all the categories look alike." At NexCen headquarters in New York there is a licensing executive with 30 years experience at companies including Nautica and Calvin Klein working solely on Blass. "We're dictating what each showroom will look like, each rack, the bags and all the design," D'Loren says.

But even more tricky than control of the look is the question of production. D'Loren is resolute that "production is absolutely a commodity", and that there is no point in going back to a system where designers oversee the manufacture of their own clothes. But if a Blass deal is struck with a manufacturer in Italy, does it really make sense to have that manufacturer selling to US retailers? What about all of these Seventh Avenue relationships? D'Loren admits that it would be hard for a small Italian suit maker - say, Kiton - to handle sales to Bloomingdales. In that case, he says he would consider setting up a team to assist with sales in New York. But what he hopes is that a master licence - say Peerless Clothing, who make some of the suits for Calvin Klein and Ralph Lauren - will be in charge of managing the smaller makers.

It is still hard to see how this will work in the very picky and personal field of luxury. And much will depend on how each deal is done. Still, the most immediate question from D'Loren's point of view is how to convince the stock market of his genius. NexCen's stock took an almost 25 per cent hit when the group announced its third quarter results in November and, as of late December, the stock was still hovering around $4.50 a share, down from a high of $13.

If it works, NexCen might be the kind of luxury group that is able to weather the tough times - by selling more pretzels - and take advantage of the boom years - by selling more $3,000 dresses.

And in the face of the economic abyss luxury goods analysts keep threatening, that could be the kind of idea that might just lead to a whole new school of management theory.