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.
ARMIDALE, Australia – Paolo Zegna is in his shirt sleeves and an Akubra hat striding through driving rain on an Australian sheep station 16,000 kilometres from the Milan headquarters of Ermenegildo Zegna.
“We’ve been kicked sideways because of a 40 percent drop in annual rainfall and the forecast was projecting this to be the biggest single day of rainfall in the past 40 years, so we’re pretty excited,” says Charles Coventry.
Coventry steers Zegna, chairman of the €1.2 billion luxury textiles and menswear brand, to the shelter of a barn at Achill farm, a sprawling property 30 minutes east of Armidale in New South Wales. The property has been in Coventry’s family for four generations. In 2014, Emernegildo Zegna purchased a 60 per cent stake in Achill, to vertically integrate production and tell a marketing story of sustainability and transparency.
“Achill is the farm that allowed us to close the circle,” says Zegna. "Customers today want to know where did it come from, who made it, were the animals and the environment treated well? We can now say that we go from sheep to shop; you come to Zegna and you have a guarantee that from the very first step to the very last, everything is under control.”
Zegna’s well documented story of provenance and prudence centres around the firm’s need to safeguard supply of superfine Merino wool for its suits and sweaters. It is a strategy that is now being replicated across the globe as luxury operators invest in vertical integration to lock in materials vital to their brand’s success and to promote their sustainability credentials. From tanneries and nature preserves to reptiles and vicuna, companies are buying up raw supplies and rare skills necessary for their survival as part of a trend that also caters to increased consumer demand for transparency.
From farm to fashion boutique
“Vertical integration allows you to secure sources of precious materials and expertise that give you a competitive advantage, and it is also a way of marketing to convey to the customer that your products are unique and of superior quality,” says Mario Ortelli, head of the luxury goods sector at Sanford C. Bernstein.
While vertical integration is primarily about boosting the bottom line, it is also about marketing a company’s sustainability credentials to the increasingly conscious consumer.
“At the very least, they do not want to have a connotation of buying something that is against sustainability, and more than that, they want to be seen to be actively supporting sustainability — that is why these luxury companies like Kering are investing in vertical integration,” says Ortelli.
In January, Kering acquired a python farm in Thailand as part of a number of measures the conglomerate is taking under a 10-year plan to strengthen its sustainability credentials.
Paolo Zegna with a farmer in Australia | Photo: Kara Rosenlund
Ahead of the Thailand python farm acquisition, along with another in China, Kering chairman and chief executive François-Henri Pinault told Bloomberg: "It's not an endangered species, but if we don't change anything, this will become an endangered species, because there is no transparency in that trade. We decided with Gucci to go much beyond that. And the only solution in that case is to integrate ourselves into the farming of python. The luxury segment of (the fashion) industry is leading the race in sustainability because we have the resources."
Although luxury brands owning the source of raw materials is not new, recent increases in the cost of those materials, especially in calf leather, fine sheep wool and exotic skins, has led to a renewed sense of urgency to secure supply.
Investment in the vertical integration of materials began almost a decade ago, when in 2009, LVMH entered into a partnership with Tannerie Masure, an esteemed Belgian tannery and in 2011 and 2012, when it took control of Heng Long and Tanneries Roux. Around the same time, Hermès acquired Tanneries d'Annonay, a factory in France's traditional leather heartland and Kering took over exotic leather specialist France Croco in 2013, while Chanel acquired Bodin Joyeux, a lambskin business founded in 1870.
More recently, luxury brands have moved into acquiring live supplies. Hermès now owns an alligator farm in Louisiana and two crocodile farms in Australia while LVMH has purchased the Johnstone River crocodile farm, north of Queensland.
When former Hermès CEO Patrick Thomas faced the Reuters Global Luxury Summit in Paris back in 2009, he explained that it can take three to four crocodiles to make one Hermès bag. He famously quipped: “We cannot face demand. We have massive over demand. The world is not full of crocodiles, except the stock exchange!”
The acquisitions were made after the boom in the leather accessories market, coupled with the decline in meat consumption around the world, stretched the supply of luxury-quality hides.
“Over the past 25 years the number of available skins has dropped significantly, as a direct result of the decrease in meat consumption around the world,” says Marc Brunel of Premiere Vision Leather, one of the most influential leather fairs for the global fashion industry.
Leather of the quality required by luxury houses can often only be sourced from Europe, with a focus on the smoothest of calf leather. But Switzerland, France and Italy have reported a 10-30 percent drop in veal consumption over the last ten years, according to Premiere Vision figures. Since calf leather is a by-product of the veal industry, luxury companies have now acquired tanneries and live supplies in their quest to source alternative quantities of perfect quality skins.
“It’s this scarcity (of supply) that makes raw material prices particularly volatile and the procurement of raw materials so complex,” says Brunel. “Luxury groups must therefore be strategic and ensure they…anticipate and plan their raw materials sourcing to pursue their growth.”
Tightening their grip on the supply chain
“The advantages are that they will never go out of stock of their own materials and they know exactly the quantities they need to produce, and they know the specific material coming from that farm is only for them, so only they will have the top quality,” says Tommaso Cancellera, general manager of the Italian Footwear Manufacturers Association.
Managing their own animal stock also gives luxury brands the potential to better maintain animal welfare standards. This is an area that has dogged several brands when PETA (People for the Ethical Treatment of Animals) and similar organisations have called out third-party suppliers over cruelty.
An added bonus of vertical integration is the perception of exclusivity and being a market leader. “Controlling supply gives desirability and a point of difference,” says Don Oshman, the founder of Hidenet.com, an online resource for the leather industry.
This is embodied in Loro Piana’s continuing expansion of the vicuña nature reserves and preservation initiatives it began in the mid-1980s before opening the 2,000-hectare Dr. Franco Loro Piana Reserva in Peru in 2008, then purchasing a majority share in an Argentinian firm with legal permission to shear wild vicuña in an area of approximately 85,000 hectares in 2013.
“The efforts of Loro Piana to preserve the vicuña and to source that material are particularly unique, as they are helping the vicuña and also helping the business of the company,” says Ortelli. “Vertical integration gives them enormous authority and credibility when they are talking to their customer.”
It's not an endangered species, but if we don't change anything, this will become an endangered species.
If you control the supply of materials, you can also sell lower qualities to third parties. “Second and third-rate skins often serve different purposes and go to other uses,” says Brunel. “As an example, some skins can receive decorative treatments or more fashion-oriented finishes and thus meet the needs of fashion houses seeking novelty or more creative effects.”
Hermès owns six tanneries through its subsidiary HCP (Hermès Cuirs Precieux), a division of the luxury group that is dedicated to sourcing, tanning and finishing high-quality hides and skins and also sells them to third parties.
“The quality of the skins is top notch and are what you would expect from a company which is under the Hermès umbrella,” says American handbag designer Tyler Ellis, who buys alligator, lizard and python from HCP. “Having the Hermès name behind a product does provide a comfort level around brand legitimacy and excellency, but I choose to work with HCP because of their expertise, the authenticity of their product and the high quality of their craftsmanship — which are all attributes shared by my label.”
Each skin from HCP is stamped as complying with the Convention on International Trade in Endangered Species, allowing Tyler to secure a reliable and legal supply that can’t be challenged anywhere: which is important if you are buying one of Ellis’ $12,250 alligator totes.
Sincere sustainability or shrewd business?
But just how much of the race to control luxury materials is about altruistic sustainability and how much is about shrewd business to ensure a reliable supply chain at higher profit margins?
"What I see around is often a lot of talking, but also, up to now, a lot of ignorance and superficiality – with some conspicuous exceptions," says Albini Group chairman Silvio Albini, who has rented a cotton farm in Egypt to supply his luxury shirting fabric business which sells to Balenciaga, Céline, Berluti, Saint Laurent and Louis Vuitton. "Going a bit against the flow, step-by-step, we have integrated vertically."
According to Coventry, the answer is a combination of both sincerity and shrewd business. “Zegna shares our concern about the environment, looking after the landscape, planting trees and managing pastures,” he says.
“I do think we will be a more profitable business as a result of the joint venture, as the culture that has been introduced from Zegna is to run the numbers more deeply and more vigorously. We have investors who have done rigorous testing of where they think it’s best to reshape the business, and we are shaving off risk elements of to make it stronger and more stable.”
More luxury brands will have to follow Zegna’s lead and take charge of their supply chains to ensure that each stage of production is ethically and environmentally accountable for a younger generation of luxury consumers, who are demanding an even deeper commitment to sustainability. And the luxury goods industry is now at a pivot point where support for sustainability is mounting to a critical mass: no action is no longer an option.
Instead of battling over natural resources, brands need to become more creative and learn to elevate non-precious materials.
To this end Kering group manages an environmental profit & loss (EPL) tool to assess how the company is tracking against explicit targets for 2016. For example, in 2012 Kering set a target that by 2016, 100 percent of leather would come from livestock from responsible sources that do not result in conversion of sensitive ecosystems or agricultural lots into grazing lands. Burberry has also set explicit goals for environmental initiatives, and other companies such as LVMH and Richemont produce annual sustainability reports.
“Brands need to think beyond their own profit margins to shape a more sustainable future that will benefit all of society,” says Chris Sanderson, co-founder of The Future Laboratory trend forecasting agency.
He says luxury companies must look beyond the vertical integration of raw materials, and instead find new animal alternatives such as the lab-grown leathers and other materials being developed by New York-based start-up Modern Meadow.
“Instead of battling over natural resources, brands need to become more creative and learn to elevate non-precious materials through craft and new technologies.”
Sanderson cites a recent project developed for the Petit H atelier of Hermès, in which Jorge Penades moulded together shredded leather and natural bone glue using new codes to create sustainability. The raw materials used for the piece were offcuts and leftovers from Hermès main line.
“Rather than relying on the outdated notions of material value, (luxury brands) need to invest in innovative processes and techniques that will transform everyday resources into a precious material,” says Sanderson.