To understand why Salvatore Ferragamo is winning over a lucrative new customer base, one only needs to look to its history of innovation, explains its chief executive.
In the basement of Salvatore Ferragamo’s headquarters in Florence, a small piece of iron and a wedge shoe tell a story about a tradition of innovation that is still very much evident in the Italian luxury business today.
Faced with iron shortages around the time of the Second World War, Salvatore Ferragamo himself couldn’t strengthen the high heels of the women’s shoes in his collection to the standard he wanted. Rather than compromise, he invented the wedge shoe.
Fast-forward to 2011 and, while he may be the first chief executive outside the Ferragamo family, Michele Norsa is just as innovative in how he solves new challenges in today’s climate.
Today’s issues include the quickly changing make-up of the brand’s customer base. In 2010, the Chinese overtook the Americans to become Salvatore Ferragamo’s number one shopper by nationality. And only last week, 8% of the business was sold to Hong Kong businessman Peter Woo and his family. The Woo family has been a partner of the group in Greater China for more than 20 years and helped distribute the brand in China, Hong Kong, Taiwan and Macau.
Salvatore Ferragamo enjoyed double-digit growth throughout 2010 across all markets, including the UK, thanks in no small part to Asian consumers. “Since February last year, we have been growing every month by more than 20% - even Japan has been double-digit,” says Norsa. The brand reported 2010 sales up 26% to E782m (£672.3m).
Business in the UK has been particularly strong, growing 30% year on year, but the make-up of shoppers is quite different at Salvatore Ferragamo’s two London stores. Norsa says at its Old Bond Street site, Russian, Arab, and Chinese consumers dominate. At its Westfield London store, customers are much more diverse, drawing in visitors from the many ethnic groups resident in west London.
On a global scale, the Chinese are the biggest spenders - both through the expanding store network in China itself, and their increasing spend when they travel abroad. That the UK business performed so well through the recession was down to tourist spend.
Fashion meets technology
So, how does Salvatore Ferragamo innovate in today’s climate, faced with the spending power of the Chinese, while also satisfying its traditional customers and other emerging markets?
Put simply, with technology. Using SAP for Retail software, Salvatore Ferragamo can deliver a standardised system to manage stock and sales that will work for all its international markets. The software will give the company centralised control of stock management and distribution, collating point-of-sale information so head office has a real-time view of what’s selling and where. The system has gained credibility in the luxury space, having been taken up by brands including Valentino and Prada.
Being a market leader in emerging markets while continuing to nurture its traditional US, Japanese and European customer base is now a top priority for Salvatore Ferragamo. As is a flotation, a strategic aim that Norsa has been tasked with since joining the company in 2006. To do this, Norsa wants to maximise efficiency and growth while retaining the Italian business’s sense of creativity.
And Salvatore Ferragamo is in good shape to move forward with its plans, having fared well in the recession, thanks to both its mix of channels and strong focus on retail. It operates through more than 580 doors around the world, 313 of which are directly operated stores. Wholesale made up 30% of its business in 2009, but while the retail business rebounded in 2010, wholesale is only starting to grow again this year. The company has also begun to embrace opportunities from selling online in the past 18 months. Norsa expects online to be in its top 30 stores in terms of sales in 2011.
Salvatore Ferragamo has now embarked upon a project to introduce one IT platform across the whole business to manage its stock and sales data. The system is first being introduced to its Chinese operation in the first half of this year, where improvements in the technology currently running are most needed. The systems go live in Japan and South Korea next year, and the US, Europe and Latin America will be up and running by the end of 2014. China has the greatest growth potential for the business, which already has 45 stores there - 10 of which opened in 2010.
Norsa says that with the brand’s commitment to manufacturing in Italy - all of its production, and even that of its packaging and shopping bags, has been moved back to the country from other countries, including some in the Far East - there is a financial risk from exchange rate fluctuations as all production is in euros, but the majority of sales are in other currencies. To manage that risk, you need to be able to measure it, which is where the new systems come in.
Norsa explains why the new IT platform is so important. “We need very reliable information. We are dealing in 25 to 30 currencies, and we need the [actual] exchange rates [at any one time],” he says.
Norsa says he believes the financial risk of manufacturing in Italy is outweighed by the craftsmanship and ‘Made In Italy’ promise that sets the Salvatore Ferragamo offer apart from its luxury peers. He says: “We have made a commitment to produce in Italy, and this will be one of our strengths with consumers. There is a cost, of course; we produce in euros, and 75% of our markets [trade] in US dollars or yen.”
Norsa predicts at least two or three more years of fast growth off the back of the continuing rise in the spending power of consumers in emerging market economies. However, don’t expect many stores in more mature markets. He says the UK market for the brand is focused on London. Similarly, the Japanese market has reached saturation point with 86 doors, including 77 standalone stores.
And even Russia cannot begin to compete with the potential of China. “Russia is a one-city market,” says Norsa. “90% of the business is in Moscow. China has 100 cities that are potentially good markets.”.
Targeting local markets
The need for product that is tailored to so many different local markets, therefore, is key. For example, in Asia, oversized bags are much less in demand as female customers tend to be smaller than in the West.
This is the sort of vital sales information that Salavatore Ferragamo will have at its fingertips once the new IT system is in place, and Norsa is confident it can develop products for new markets without risking its core business. Once the system is live across the whole company, it will have complete sight of its merchandise distribution. “A lot of my focus was on getting all the information in on time and getting everyone looking at it,” Norsa explains. The new platform will also allow the company to enter new markets more easily, as the software can be used in any market.
While the brand’s heritage very much draws on its association with supplying women’s footwear to Hollywood celebrities, men’s clothing and footwear is likely to become more important than it already is. Norsa says the brand has 20 or more luxury rivals in the emerging markets for women’s footwear and clothing, whereas there are only four or five in menswear. Some 39% of sales are from men’s products at the moment, but he expects this to increase, driven by sales in emerging markets.
What other vital sales nuggets the new IT system will throw up, we don’t yet know. But we can be sure that Norsa will jump on the financial opportunities.
2006 Becomes first non-family member chief executive of Salvatore Ferragamo
2005 General director, Valentino Fashion Group
2002 Chief executive, Valentino Fashion Group
1997 Various roles at textiles mill Marzotto
1994 President and chief executive, Benetton Sportsystem Active
1985 Chief executive, Sandys (then owner of Sergio Tacchini)
1971 First-class honours in business administration, Università Cattolica, Milan