UCB: Expanding the Business

Case Study Reference No. DIS0025

This case was written by Shahnaz under the direction of K. Ramanathan, Icfai Business School Case Development Centre. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case was compiled from published sources.

Copyright © 2008, Icfai Business School Case Development CentreNo part of this publication may be copied, reproduced or distributed, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or medium – electronic, mechanical, photocopying, recording, or otherwise – without the permission of Icfai Business School Case Development Centre.

Learning to Lead

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UCB: Expanding through Unrelated Diversification

UCB: Expanding through Unrelated

Diversification

“The planned acquisition of Autostrade is part of the Benetton family’s diversification strategy that is moving it away from the clothing business.”1

– Global Finance2

“From the looks of Edizione Holding’s balance sheet, the move to diversify from the fashion empire seemed a masterful stroke, especially as the venerable clothing business started to stumble, posting its first loss in38 years in 2002. Although it rebounded to earn €108 million, or $132 million, last year, many analysts are not convinced by a revival plan the clothier unveiled…”3

– International Herald Tribune

“Operating toll motorways and selling pizzas may be rather dull compared with the glitz of the fashion world, but at least they promise a steady cashflow for the next generation of Benettons.”4

– The Economist

United Colors of Benetton (UCB) is an international fashion house started by four siblings in Trevisco, Italy in 1965. It is well known for its ‘United Colors’ catch-phrase, its casual and lively apparel and its quirky advertising campaigns. During the early 21st century, Benetton looked to diversify away from its clothing business. It held shares in infrastructure, catering, agriculture and telecom companies. The success of its diversified ventures proved that Benetton had made the right moves. But analysts were sceptical whether it would reap the desired benefits in the long run and whether Benetton would continue to be successful in its new ventures.

UCB: The Chartered Legacy

UCB is a family-run fashion business whose history can be traced back to 1955, when Luciano Benetton started marketing his homemade sweaters to local stores in Italy. He was then joined by his siblings – Giuliana, Carlo and Gilberto. UCB opened its first store in Belluno in 1968 (Annexure I). Its products include womenswear, menswear, childrenswear, underwear, toiletries, perfumes, watches, kitchenware and baby products.

UCB diversified into related products under different brands – United Colors of Benetton, Under Colors of Benetton, Sisley, Playlife and Killer Loop. United Colors of Benetton offers menswear, women’s wear and childrenswear. Under Colors of Benetton offers underwear, beachwear and sleepwear. Sisley offers fashion clothing while Playlife is the sportswear brand of the Benetton group. Killer Loop is a “fashion brand for young adults, with a resolute and distinctive style. It is inspired by teenagers’ favourite role models and icons.”5

1 Platt Gordon, “Europe: Benetton family seeks Autostrade”, h tt p ://f i ndar t icl e s . c o m / p / ar t icl e s / mi _qa3715 / is _200301 / a i _n9197004 , January 20032 Global Finance is a private equity firm which has investments in manufacturing, information technology, specialty retail, media, telecommunications companies and

services industries.3 Sylvers Eric, “SPOTLIGHT: For Benetton, tradition and change”, h tt p :// ww w . i h t. c o m / ar t icl e s / 2004 / 09 / 18 / w b s po t 18_ed3_ . php , September 18th 2004

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4 Veneto Ponzano, “The Other Colours”, h tt p :// ww w . e c ono mis t. c o m / bu si ne ss / d is p l a ys t or y . c f m ?story_id=E1_PTRGDTJ, September 9th 20045 h tt p :// ww w . b ene tt ongroup . c o m / en / W h a t w e m a k e . h t m

UCB: Expanding through Unrelated Diversification

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In 1969, UCB opened its first store outside Italy in Paris. In 1988, Benetton got listed on the Milan and Frankfurt stock exchanges. This was followed by its listing on the New York stock exchange in 1989. By 2007, Benetton Group had its presence in 120 countries through a network of 5,000 stores.6

UCB is a completely family-owned business with the Benetton siblings heading different divisions (Exhibit I). Luciano Benetton is the chairman of the Benetton group. Giuliana Benetton is the board of director of Edizione Holding – the holding company of UCB that focuses on retail, restaurant and telecom business of the group – and the Benetton Group. Gilberto Benetton is the president of Edizione Holding and Autogrill – the catering and retail service business of the group – and director of the Benetton Group. Carlo Benetton is the deputy chairman of Edizione Holding and the Benetton Group. In 2007, Luciano Benetton’s son, Alessandro Benetton took over as the group’s executive deputy chairman.

Exhibit IGoverning Structure of Benetton Group

Shareholders’ Meeting(66.73% Edizione Holding S.p.A

33.27% free floating)

Independent AuditorsPriceWaterhouseCoopers S.p.A

Board of Statutory Auditors A. Casò, Chairman

F.Duodo, A. Cortelazoo

ExecutiveL. Benetton, Chairman

A. Benetton, Deputy ChairmanG. Caccia Dominioni, CEO from June 1st

2007G. Mion

Board of DirectorsNon Executive C.Benetton,

Deputy Chairman G. Benetton

G. Benetton

Independent L.A. Bianchi G. BrunettiA. MalguzziR. Singer

Supervisory and Monitoring Body Legislative Decree

231/01L.A. BIanchi,

ChairmanHead of Corporate

Affairs Head of Internal Control

Internal Audit Committee & Audit Committee for sox

purposesAll independent

Directors G.Brunetti, Chairman L.A.

BianchiA. Malguzzi

Executive Committee L. Benetton, Chairman

A. BenettonG. Caccia Dominioni

G. Mion

RemunerationCommittee All

independent Directors

R. Singer, ChairmanG. BrunettiA. Malguzzi

DisclosureCommittee CFO,

Head of IR Head of Media &

Communications, Head of Admin.

Tax& Corp. Services, Head of Admin.

& Reporting, Head of Corporate

Affairs

Head of InternalControl

Source: http://investors.bene tton group .com /pho enix.zhtm l?c=114079&p=irol-govCommComp

6 h tt p :// ww w . bene tt ongroup . c o m / en / w ho w eare / o v er vi e w . h t m

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The Benetton Group stood 195th in the list of the world’s largest family businesses in 2007.7 The group produced150 million garments every year and had a turnover of around €2 billion in 2006.8 (Exhibit II). In 2007, it planned to consolidate its position in growing markets like India, Turkey, East European and ex-Soviet union countries, Mexico and China – with special emphasis on India and China.

Exhibit IIFinancial Performance of Benetton Group

Year 2006 (a) 2005 (a) 2004 (a) 2003 (b) 2002 (b)

Revenues (in million €)

Net Income (in million €)

1,911

125

1,765

112

1,704

109

1,859

108

1,992

[10]

(a) These figures are IAS/IFRS compliant and not comparable with the previous years

(b) These figures are compliant with Italian accounting procedures.

Source: http://www.bene tton grou p.co m/en /who weare/overview.h tm

Benetton was aiming to position itself as “an international wardrobe option with a range that will cater to the casual, formal as well as the party wear segments with various styles and cuts targeted at teenagers, young office-goers and adults above 25 years.”9

Not only UCB, many European fashion houses like Moet Hennessy Louis Vuitton (LVMH), Prada, Gucci, Inditex are family-owned businesses. These businesses had their share of advantages as well as disadvantages. Guido Corbetto, who teaches a course on ‘How to Manage an Inherited Company’ at the Bocconi University in Italy, opines, “The advantages are that family businesses have a very strong culture and brand.”10 But family-run businesses face succession battles, which even turn ugly like that of Gucci, Fiat, etc. In the case of Fiat, 4 years after the death of chairman Gianni Agnelli, his daughter Margherita Agnelli de Pahlen filed a suit in a Turin court, against three of her father’s trusted advisers, seeking a fuller accounting of his estate. While in the case of Gucci, “Maurizio Gucci, a third generation heir, was shot dead. His wife Patrizia ordered the hit because he had sold his stake in the family business, depriving their children of their inheritance. Paolo, the second generation son of Aldo Gucci shopped his father for tax evasion and landed him in prison.”11

Another trend among European fashion houses was that most of them were positioned as high-end retailers. Among Benetton’s competitors, Zara, a brand of the Inditex group12 , positioned itself as a “high fashion concept offering apparel, footwear and accessories for women, men and children, from newborns to adults aged 45.”13

Gucci, the luxury arm of Pinault-Printemps-Redoute (PPR),14 has positioned itself “at the high end of luxury distribution.”15

Prada, another Italian apparel brand concentrates on upgrading its store by extensive and innovative use of technology, to project itself as technologically advanced and thereby attract high-end customers. Christian Dior – a luxury brand owned by LVMH that had transformed itself from the high-end luxury brand to being a top-end brand – positions itself as a luxury brand, catering to high-end customers.

The rise in competition and the emergence of new markets made it necessary for Benetton to expand itself to sustain its revenues. The failure of Benetton to expand in the US, where its rivals H&M and Zara succeeded by developing more sophisticated fast-fashion business models, led Benetton to look into diverse areas for expansion.

7 “The World’s 250 Largest Family Businesses”, h tt p :// ww w .f a mily bu si ne ssm aga zi ne . c o m /t opg l oba l . h t ml 8 Ibid.9 Shashidhar Ajitha, “Benetton aims to get into more wardrobes”, h tt p :// ww w . b l onne t. c o m / 2002 / 04 / 13 / s t or i e s / 2002041301950600 . h t m, April 13th 200210 Moore Malcolm, “How Italy’s young heirs should run the firm”, h tt p :// ww w .t e l egraph . c o . u k / m one y / m a i n . j h t ml ?xml=/money/2008/03/06/cnitaly106.xml, March 7th 200811 Ibid.12 Inditex, Industrias de Diseño Textil, S.A., is a large Spanish corporation and one of the world’s largest fashion groups. It owns brands like Zara, Massimo Dutti, Bershka,

Oysho, Pull and Bear, Zara Home, Often and Stradivarius.13 h tt p :// ww w . gr i n . c o m / e n / pre vi e w / 32961 . h t ml 14 PPR is a French multinational holding company specialising in retail shops and luxury brands.15 Menkes Suzy, “No labels will be dropped for 3 years : Polet sets out strategy for a Gucci recovery”, h t t p : / / w w w . ih t . c o m / a r t i c le s / 2 0 0 4 / 1 2 / 1 5 / g u c c i _ e d 3 __ 0 . p h p ?page=1,

December 15th 2004

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“France-based luxury fashion house Hermès Group has reported a 7.3% rise in net income for 2007, thanks to an expanded store network and positive sales figures.”16 Also LVMH’s revenues from its fashion and leather goods division increased from €4,812 million in 2005 to €5,222 million in 200617, while Benneton’s revenues increased from €1,765 million in 2005 to €1,911 million in 2006. Moreover, the slowdown in the US economy during 2007 was also expected to affect the sales of fashion apparel.

It was opined that the slump in the economy and tougher competition in the fashion industry made Benetton to diversify into unrelated territories. Benetton’s unrelated diversification can also be attributed to its new leader, Alessandro Benetton who had an experience of running a private equity firm, 21 Invesmenti, before joining UCB. “His approach to making money was to pick the right business models for the firms in which 21 Investimenti bought stakes…”18

The Benetton Group diversified into infrastructure, retail, agriculture, hotel and sports sectors, to maintain its revenues. Benetton invested heavily to upgrade its technology and logistics, and Alessandro Benetton looked to speed up the recovery of the group. UCB looked to restructure its unprofitable sports goods division. It wanted to completely divest its Prince Tennis racquets, Nordica ski boots and Killer Loop snowboards brands.

UCB: In the Path of Diversification

UCB’s diversification can be traced back to the 1980s, when it ventured into Formula 1 racing with a view to promote its clothing brand. But Benetton’s diversification of its holdings began in 1995 (Exhibit III). “The Benetton family’s decision to diversify its holdings began in earnest in 1995, when bought the government’s stake in Autogrill, which runs highway rest stops and airport restaurants. In 1999 the Benettons took a controlling stake in Autostrade, Europe’s largest operator of toll roads.”19

Exhibit IIIBenetton’s Diversified Investment Portfolio

Company Type Year of Diversification

Edizione

Autogrill

Telecom Italia

Atlantia

21 Investimenti

Sintonia

Eurostazione

Holding company

Highway rest shops and airport restaurants

Telecom

Operator of toll roads

Private Equity Holding

company Railway

infrastructure

1995

2001

1999

1993

2005

Compiled by the author

UCB manages its different businesses through two holding companies: Edizione Holding and Sintonia (Exhibit IV). “The two holding companies have the objective of facilitating the expansion plans of companies in which they participate and strengthening their presence in the relevant sectors, also through new shareholdings in Italy and abroad, enhancing the wealth of international relationships acquired over the years.”20

16 Bird Katie, “Hermes reports strong sales led by perfumery division”, h tt p :// ww w . c o sm e t ics de si gn-europe . c o m / ne ws / ng . a s p?n=84115-hermes-l-oreal-fragrance, March 20th 200817 h tt p :// ww w . lvm h . c o m / c o m f i / pd f _gbr / L V MH 2007Annua lR epor t. pd f 18 “New Colours at Benetton”, h tt p :// ww w .f i nan ci a l e x p r e ss . c o m / ne ws / N e w - c o l ou r s - a t - Bene tt on / 237574 / , November 9th 200719 “SPOTLIGHT: For Benetton, tradition and change”, op.cit.20 h tt p :// pre ss . b ene tt ongroup . c o m / ben_en / abo u t/ ho l d i ng / c o m pan y / pre sski t / en / h c _en / h t ml/

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Exhibit IVBenetton’s Share in Each Company

Ragione

Edizione Holding (100%) Sintonia (71%)

Autogrill (57%) (Restaurants)

Benetton Group (67%) (Clothing)

21 Invesmenti(Private Equity)

(2%) TelecomItalia

(33%) Atlantia

(26%) Rome

Airports

(25%) Other

Airports

(33%) Eurostazione

Compiled by the author

Edizione Holding has its shares in the Benetton Group, the core fashion apparel business of the group, and Autogrill, the catering and retail service business of the group. Real estate and agriculture businesses of the firm spread across Europe and the Americas. It also looks after Benetton’s private equity company, 21 Invesmenti.

Sintonia, on the other hand, has its shares in ‘Atlantia – Autostrade per l’Italia’ that manages the “most extensive toll highway network in Europe”21. Sintonia also has its share in Investimenti Infrastrutture, an infrastructure company and Sagat, a company that manages the Turin airport. Sintonia holds 8.4% share in Telco, which again holds a 23.6% share in Telecom Italia.22

Benetton entered the Italian highway network through Autostrade, with a view to move away from its clothing business. “Benetton is thought to be keen to gain total control of Autostrade as part of its decade-long strategy to diversify its interests away from its original clothing business and into transport and service-related companies – a business area that ‘has no limits’, the company’s directors say.”23

Apart from its Telecom Italia business, the Benetton Group has been successful in all its other ventures. Confirming this view, Gilberto Benetton says, “If I could redo it all again I wouldn’t change any of the big investments we have made. It’s clear that the investment in Telecom Italia is worth half as much as when we invested, but it remains a sector with great hope.”24

Unlike most Italian family-run businesses, which hold a majority share in their companies, the Benettons looked to dilute their share in UCB. Gilberto Benetton says, “We are aiming to sell up to 49 per cent [in the venture] and we are looking for three partners, possibly from Asia, the Middle East and eastern Europe who will bring business and not just financial resources.”25 By doing so, Benetton hoped that they would get technical expertise as well as financial resources to expand their business, thereby reducing the risks involved in expanding into newer markets.

21 h tt p :// pre ss . b ene tt ongroup . c o m / ben_en / abo u t/ ho l d i ng / c o m pan y / pre sski t / en / h c _en / h t ml/ 22 Ibid.23 “Benetton Wants Highway Network”, h tt p :// ww w .f a s h i onun i t ed . c o . u k / ne ws / ar c h iv e / bene tt on1 . h t m, January 3rd 200324 “SPOTLIGHT: For Benetton, tradition and change”, op.cit.25 Michaels Adrian, “Benetton seeks to diversify via new marriages”, h tt p :// s ear c h .ft. c o m /ft Ar t icl e?queryText=abertis&page=5&id=071018000801&ct=0, October 18th 2007

In 2007, Benetton looked to enter the Asian, Middle East and Eastern Europe markets. It concentrated especially on India and China. Luciano Benetton, chairman and founder of the Benetton Group said, “Both of them comprise half of the world and we need to come here.”26

Although Benetton’s moves to diversify have reaped benefits, analysts remained sceptical about how long this could be maintained. Government resistance over some of its consolidation plans has proved analysts right to some extent. “Benetton increasingly has diversified away from its former core business of knitware and clothing into utilities and infrastructure, but it has run into government resistance over the planned merger of its Autostrade company with Abertis of Spain, to create a European motorway giant.”27 But Benetton remains hopeful that as in the past, its investments will continue to be successful. As Luciano Benetton puts it, “I’ve always slept soundly at night – I guess because things have always turned out well with our investments.”28

26 Kurian Boby, “Benetton plans string of megastores — `Focus in India to remain on distribution, retailing’”, h tt p :/ / ww w .t h e hindub u s ine ss l i ne .c om / 2004 / 1 1 / 08 /st o r ie s /

2004110801810100.htm, November 8th 200427 Owen Richard, “Benetton pools €4.5bn for infrastructure unit”, h tt p :// bu si ne ss .t im e s on li ne . c o . u k /t o l / bu si ne ss / i ndu s t r y _ s e c t or s / re t a ili ng / ar t icl e637417 . e ce 28 “SPOTLIGHT: For Benetton, tradition and change”, op.cit.

Annexure ITimeline of the Benetton Group

Year Event

1955 Luciano Benetton started selling his homemade sweaters to local shops in Italy

1965 Creation of the Benetton Group

1968 Opens its first store in Belluno, Italy

1969 Opens its first store outside Italy

1974 The Sisley brand is launched

1980 First store opens in New York

1982 First store opens in Tokyo

1983 The group enters Formula 1 as the sponsor of the Tyrrel team

1988 Gets listed on the Milan and Frankfurt stock exchanges

1989 Enters east Europe and former Soviet markets

1991 Benetton launches its Colors magazine

1994 Fabrica, Benetton’s communication research center is created

1995 Benetton gets a stake in Autogrill

1999 Benetton gets a stake in Autostrade

2001 Benetton enters Telecom Italia

2007 Alessandro Benetton takes over as the deputy chairman of the Benetton group

Compiled by the author