The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
SEATTLE, United States — Ask people who work in the fashion industry which traditional retailers are most likely to survive the great shopping mall shakeout, and they may very well suggest Nordstrom, the 117-year-old department store that, over the last 15 years, has grown from a humble regional chain to a high-low mecca that treats shopping as a sport, not a chore.
Nordstrom's current strategy was conceived not by outside consultants or a big-name chief executive, but rather the family that founded it more than a century ago. John W. Nordstrom's great grandchildren now run the company in an unusual configuration: three of them serve as co-presidents in place of a traditional chief executive. Even though Nordstrom is publicly traded, the family still owns a little over 30 percent of the business. Some brands trust the company more because of the perceived accountability that comes with having the family's name on the door.
However, Nordstrom's good standing with fashion brands and board members alike wasn’t enough to push through the family's $8.4 billion bid to take the company private earlier this year. Preferring to face the tectonic shifts upending American retail without quarterly shareholder pressure, they enlisted private equity firm Leonard Green & Partners to help finance the deal. But independent directors on the board rejected the offer, which would have earned current investors about $50 a share, suggesting the price should have been closer to $60 a share, and the talks fell apart,. The reality of the decision set in just a few months later, when the retailer missed first-quarter analyst estimates for sales at stores open at least one year. (The price of shares dropped 7.7 percent to $47 the day of the announcement.)
Nordstrom's situation underscores some of the complexities of running — and doing business with — a family-held company. “There’s a different risk-and-reward structure,” said George Stalk, a senior adviser at the Boston Consulting Group (BCG). “Family-controlled companies don’t make as much money in the boom times and don’t lose as much in the bad times. There is much lower risk-tolerance and, frankly, they don’t get into as much trouble. But investors can’t expect to be awarded as much.”
Nearly one-third of all companies that generate more than $1 billion in annual sales are controlled by families that own at least two-thirds of the business, according to BCG. But family plays an outsize role in the fashion sector, where many of the largest businesses are still run by the descendants of founders — or the founders themselves.
At fashion firms from Gap Inc to Hermès, family members are in charge. Not only do they own a significant percentage of the business, but they sometimes serve as operators, too. Other family-controlled fashion businesses include Alexander Wang, Chanel, Diane von Furstenberg, Fendi, Giorgio Armani, H&M, Inditex, Kering, LVMH, Missoni, Prada, Ralph Lauren, Salvatore Ferragamo, Swatch, Tod's, Uniqlo and Versace, to name just a few.
One-third of all companies that generate more than $1 billion in annual sales are controlled by families.
For investors, betting on family-run businesses has both benefits and drawbacks. One major attraction is that families typically like to take the long view, which often results in sensible financial decisions that keep the company stable in tough times. "Consistency in approach is critical in [fashion and retail] because it's not a hockey stick when it comes to performance," said Ron Frasch, an operating partner at private equity firm Castanea Partners.
Family businesses are also more cautious about how they allocate capital and think about debt. The financial leverage of family-controlled businesses is 27 percent lower on average than other companies, according to a 2016 BCG study. “By their nature, they tend to be less focused on the immediate ROI and more focused on success a generation or two away,” said Andrew Steen, a corporate attorney at Davis Wright Tremaine. “Or at least that’s what they aspire to.”
Because of this, according to BCG's Stalk, family businesses can be more willing to invest — albeit prudently — in new technologies. Nordstrom, for one, invested in e-commerce in the early 2000s, long before its competitors. Inditex-owned Zara's fast-fashion supply chain, which has served as a blueprint for fashion brands across categories and price points, is another leading example. There is also evidence, according to Stalk, that family businesses are better at retaining talent.
And even when a family wants to sell a business, the responsibility that comes with having your name on the door often factors into how the exit plays out. When Stuart Weitzman was shopping around his namesake shoe label in 2014, he said he was "going to sell the company to a real company," not another private equity firm. The business was subsequently sold in 2015 to Coach, Inc. — now known as Tapestry — for $574 million. Weitzman, whose children were not interested in succeeding him in the business, retired shortly thereafter.
But family can also impede progress.
Succession planning, for instance, poses a “continuous challenge,” according to Stalk. “By the time they’re in the second or third generation, the next generation may not be prepared to take over,” he said. “They need to be savvy managers and understand strategy. If there’s nepotism, that’s when you get the next generation failing.” Enacting a succession plan when the next generation is 30-35 years old can help, although Stalk said that doesn’t typically happen for another 10 years.
Then there are those who simply don't let go. In 2015, Mr Ralph Lauren, who long held a dual role as creative and business head of his namesake fashion empire, hired Stefan Larsson as chief executive, but Larsson exited the brand after less than two years following a creative clash with the founder and has since been replaced by Patrice Louvet. There are no public talks of a succession plan on the creative side, despite the fact that Lauren is now 78 years old. Chanel, run by the secretive Wertheimer family, has never communicated any plans regarding a successor to the house's long-time creative director, Karl Lagerfeld, who is 84.
Family-run businesses can also suffer from deep conservatism, potentially a major liability in a fast-changing world.
After years of steadfastly avoiding the issue, octogenarian Giorgio Armani, the sole shareholder of his multi-billion fashion business, recently decided to take a proactive — if unorthodox — approach to succession by establishing a foundation in his name to "safeguard the governing of its assets," making it extremely hard for another group to buy it down the road.
And while they are often heralded for taking a long-term view, family-run businesses can also suffer from deep conservatism, potentially a major liability in a fast-changing world where living in the past can prove fatal. While firms like Kering and LVMH have large and relatively diverse portfolios, which allows them to take more chances, the families that control companies like Prada, Salvatore Ferragamo, Hermès and Tod's are less diversified, which makes them naturally risk-averse. While some, like Prada and Tod's, have attempted to expand by adding brands to their portfolios, a reticence to shift strategies has often bogged them down and prevented them from making necessary overhauls to their product offering, marketing approach and sales channels.
Prada, Ferragamo, Ralph Lauren, Giorgio Armani and Tod’s have all seen sales decline over the past few years and are only now implementing turnaround plans, with mixed results. Ralph Lauren’s pull back from discounting and some wholesale partners has benefited the American house financially, but it’s still suffering when it comes to product and brand integrity. Prada saw a lift from a hit sneaker — the Cloudbust — but whether or not it can keep up the momentum remains to be seen. And H&M’s poor financial results reflect a range of woes — not least its failure to embrace digital.
Tension also often mounts when a family-run company seeks external capital in order to grow. “The biggest question is always whether the management is sophisticated enough to scale the business,” Frasch said. “Can the founders be the kind of people to listen to an investor's point of view?”
Sometimes, family members don’t even listen to each other. They often break into three camps: one that wants to continue to invest in the business, one that wants to cash out and a third that attempts to keep peace between the first two. This can be particularly damaging if the company is public. “Why do families fight? Because they can,” Stalk said.
One way to safeguard against bad decision making is by appointing a board of directors that includes independent members with real voting power. This is more of a challenge with private companies that are majority-owned by the families that run them, as they can populate the board as they please. “Within the family, you will frequently have various responses,” Steen said. “Sometimes there are concerns about giving up control, sometimes it’s a concern about change, but once you reach a level of sophistication, we certainly have to have those tough conversations with our clients.”
In the case of Nordstrom, a public company, the independent directors acted in what they felt was the best interest of the majority shareholders by blocking the family’s desire to take the company private. Whether or not they were right is debatable. But one thing is certain: family matters.