TheChek News Flow

Buying property is not the smartest use of luxury cash flows

Sell signals come in many forms. Traditional City of London wisdom, for instance, holds that a splashy new headquarters is reason to steer clear of a stock. That is one way to look at Kering’s decision to spend €1.3bn on a building in Milan’s iconic Via Montenapoleone. 

To be fair, buying freeholds in key locations is not a new trend in the luxury sector. Brands want to secure their footprint in the face of scarcity and competition. Doing something special with the building and the store can also give them an “experiential” edge to help awe their customers. LVMH has been snapping up real estate in New York, Paris and Milan. Prada too has bought its New York building. That piles pressure on rivals to plant their own flags. 

Yet buying real estate is not the smartest use of luxury cash flows. On the face of it, Kering’s deal does not look too bad. The group is getting 11,800 square metres, of which more than 5,000 is retail space. At current Milan market rates, that could theoretically cost perhaps €50mn a year to rent. Assuming a typical yield of 3.8 per cent, it roughly justifies the building’s price tag.

But that is much lower than the double digit return on capital that Kering made in 2023, according to S&P Capital IQ. And it is unlikely to be making anything approaching current rents from long-term tenants such as high-end (and LVMH-owned) café Cova. 

Seen in this light, the push to secure prime real estate is essentially a round of beggar thy neighbour for luxury companies. Capex intensity is rising, from 6 per cent of sales in 2019 to almost 9 per cent, according to Bernstein. The dilution of returns is manageable for giants such as LVMH. But it is more painful for smaller brands — which might explain why Kering’s real estate strategy also involves finding co-investors to limit the total capital involved. 

The Milan building is by no means Kering’s only new project. Over the past two years it has bought real estate in Paris and New York, fragrance house Creed, sunglass maker Maui Jim and a stake in Valentino — for a total investment of perhaps €10bn. That is a big push for a group that generates €4.5bn of cash flow a year.

It also means Kering has a lot on the go. That is not a comfort given the dismal performance at its key Gucci brand, which recently warned on profits. Given Gucci accounts for around half of Kering’s sales, the stock’s performance depends on turning it around. Glitzy distractions, real estate or otherwise, should be eschewed.

Appointment hints at succession planning inside billionaire family behind French luxury group Kering

A grandson of French billionaire François Pinault has joined the board of Christie’s in the first sign of third-generation succession planning within the family behind luxury group Kering.

François Louis Nicolas Pinault, 26, replaced family patriarch and Kering founder François Pinault, 87, as a director on the board of the auctioneer on March 26, according to a filing published this week.

London-based Christie’s was founded in 1766 but was bought by Artémis, the Pinault family’s holding company, in 1998. 

The younger Pinault is a French national whose occupation is listed as “product marketing manager”, according to the document. The move was first reported by Bloomberg.

Kering, which owns brands including Gucci and Saint Laurent, has been led by the patriarch’s son, François-Henri Pinault, 61, ever since his father stepped back from the group he built in 2003. François Louis Nicolas is Francois-Henri’s eldest son.

Kering’s success has made the Pinaults one of France’s richest and most prominent families, although the group is currently facing more challenging times compared to rivals LVMH and Hermès as sales at Gucci slide.

Neither of François-Henri’s siblings are involved in day-to-day management at Kering, but they sit on the supervisory board at Artémis.

The appointment of a younger member of the Pinault family to a prominent board seat within the family holdings comes at a time of heightened interest about the ascension of a new generation within high profile family-controlled businesses in France. 

Two of the sons of LVMH founder Bernard Arnault are expected to join the board of the luxury leader later this month, giving four out of his five children seats. All five have roles within the group. 

In addition to housing the controlling stake in luxury group Kering and the family’s art collection, Artémis also has investments in sports apparel brand Puma, vineyards, luxury fashion brands Courrèges and Giambattista Valli and technology firms.

Last year, Artémis bought a majority stake in Hollywood talent agency Creative Artists Agency, which was presented as a move to diversify the family’s holdings away from pure luxury. 

Christie’s, which had sales of €6.2bn last year, is an important business for the Pinault family although it is not their largest.

François Pinault has a personal interest in the art world, and Christie’s lends the family both visibility and credibility in the rarefied world of art collecting. 

Over the past half-century, Pinault has amassed a collection of more than 10,000 pieces focusing on contemporary works that are shown in the museums he has built in locations including Bourse de Commerce in Paris and Palazzo Grassi in Venice.

Restructuring aims to make armed forces better prepared to defend Nato territory

Germany has unveiled the most sweeping military reforms since the cold war, with plans under consideration for the revival of national service part of efforts to make its armed forces better prepared to defend Nato territory.

Speaking in Berlin on Thursday on the military alliance’s 75th anniversary, defence minister Boris Pistorius said he had signed an order to reorganise the German military from top to bottom.

“It is a landmark reform . . . Our goal is to restructure the Bundeswehr in such a way that it is best positioned in the event of defence, in the event of war,” said Pistorius. “Nobody should have the idea of attacking Nato territory — this is what we [want to] convey.”

The measures are part of a huge shift in Germany’s attitude towards its armed forces, reflecting what Chancellor Olaf Scholz said was a Zeitenwende or turning point in security policy after Russia’s full-scale invasion of Ukraine two years ago.

A single operational command will take charge of four new component forces, with cyber warfare raised to an equal footing alongside land, air and sea operations.

Military officials drawing up the plans have been given six months to implement them. A key demand from the ministry is that the Bundeswehr will be made ready for compulsory national service in Germany, Pistorius said, should a decision be taken to reintroduce it.

A defence ministry proposal on a model of national service for young adults will be put before German politicians in the coming weeks, he added.

A so-called Scandinavian model in which any military service would in effect be voluntary and gender neutral, as is the case in countries such as Sweden, is seen as a likely candidate.

Pistorius said the measures would re-establish the Bundeswehr “for a new, old challenge”.

Berlin’s new approach has driven a significant uptick in German defence spending, with Europe’s largest economy this year meeting Nato targets to spend 2 per cent of gross domestic product on defence for the first time in decades.

Since taking control of the defence ministry in January 2023, Pistorius has emphasised that other cultural and structural changes are equally vital if Germany is to meet its Nato pledges and help deter Russian aggression.

Reform of the Bundeswehr’s structure has been a top priority. With a close eye on the way Russia has waged war in Ukraine, defence ministry officials and military brass have been plotting a radical overhaul during the past few months.

The Bundeswehr’s existing structure evolved piecemeal over three decades to broadly respond to “crisis management” operations in Germany and humanitarian situations abroad.

It has two operational commands, six military organisational areas and 27 separate planning and co-ordination agencies.

Although it is one of the largest military forces in Nato, with 182,000 serving men and women, its sprawling structure left it ill-positioned for the strategic challenges faced by Berlin and its Nato allies.

The reforms will enable the Bundeswehr to make “quick decisions”, Pistorius said, and give German ministers as well as Nato allies a clearer and more direct relationship with the military command.

Elevating cyber capabilities and unifying the military’s various existing components into four clear branches would also make it cheaper and more efficient to perform the urgently needed technical updates to fight a future war, he said, pointing to the Ukraine war as a learning tool.

“There is no war, and hardly any combat situation [we observe] in Ukraine, where digital command and control capability does not play a central role in ensuring that a battle can be [won],” he said.

While other banks offer poor returns, the Dutch group has promised billions of euros to investors

ING is perhaps best known outside of the Netherlands for buying the failed British merchant bank Barings in 1995. Not much of interest has happened since.

This year, however, with a surfeit of regulatory capital, it has promised billions of euros to investors via dividends and share buybacks. Its share price has shot up, ahead of European banks that have already outrun their global peers.  

This playbook is hardly original. After years of constraint, mostly due to regulatory restrictions during the Covid period, European and UK lenders are picking up the pace on payouts.

In the five years through 2022 shareholder payouts provided a roughly 6 per cent yield. Dividends made up almost all of this, according to Citi. Between 2023-25 that total yield will touch 10 per cent, of which a third will come via buybacks. That shift comes partly because many banks trade below their book values.

But even among this group, ING stands out. By mid-2027, the Dutch bank has promised to hand out €12bn of dividends — a quarter of its market capitalisation. Before then, the lender says it will buy back nearly the same amount of shares. That explains why ING’s share price is up 30 per cent since early February, following some disappointing full-year results.

ING, and banks such as Italy’s UniCredit, can afford to dole out capital. Its common equity tier one ratio at over 14 per cent of risk weighted assets is well beyond its 12.5 per cent target. As important, its mid-teens return on equity is already keeping pace with its cost of equity. As a result, the bank trades close to its tangible book value.

This is a rarity in European banking, where poor returns have eroded shareholder value in recent years. Deutsche Bank, Société Générale and Barclays are notable offenders. Investors have accordingly priced these three at half (or less) of their respective book values.

This makes ING’s performance look more sustainable than most. True, just rerouting excess capital does not expand its business. It also risks serious flak from Dutch politicians and regulators who worry about threats to the banking sector, especially after the travails of America’s regional lenders a year ago.

One idea for growth is to squeeze more capital efficiency from its international wholesale banking business. This makes up a third of profits but almost half its capital requirements. Bringing the two in line could release €44bn of capital to recycle elsewhere in the group.

Even partial success should lift ING’s share price, already at five-year highs. Now that would certainly be interesting to investors.

Multinational raids lead to 22 arrests co-ordinated by European Public Prosecutor’s Office

Police in Italy and several other European countries have arrested 22 people and seized assets worth €600mn in connection with alleged fraud involving the EU’s post-pandemic recovery fund.

The Italian financial police said it had seized apartments, villas, luxury cars, watches and jewellery with a total value of more than €600mn. It added that over 100 suspicious financial transactions had been investigated.

The alleged fraud is likely to revive concerns about potential misuse of the EU’s €800bn recovery fund, a one-off joint borrowing programme that was launched to reboot the bloc’s economy after the Covid-19 pandemic.

Italy is the bloc’s biggest single recipient of the fund, slated to receive about €200bn in grants and loans.

Suspected fraud cases involving EU funds fall under the jurisdiction of the Luxembourg-based European Public Prosecutor’s Office, which co-ordinated the raids and the arrests in Italy, Austria, Romania and Slovakia.

The EPPO said that a multinational criminal association had successfully applied for €600mn in EU grants between 2021 and 2023 by setting up a network of fictitious companies and alleging the funds were needed for their international expansion.

The funds were granted to the fake companies by Simest, an Italian government-owned entity that was set up to help small businesses grow. The Italian financial police said in the statement that Simest had co-operated fully in the probe.

Of the 22 individuals arrested, eight were detained while 14 were placed under house arrest. An accountant suspected of involvement in the complex fraud had also been barred from practising, Italian authorities said.

Italy’s financial police said on Thursday the probe demonstrated adequate checks were in place to ensure the “proper implementation” of the funds and “recover illegally obtained” EU money.

The European Commission said it had noted the announcement, adding that the recovery fund “contains a very robust control framework”.

EPPO and Italian authorities said the scheme was based on an elaborate network of shell companies, including in Slovakia, Romania and Austria. It said these generated fake corporate balance sheets by using overseas cloud servers, crypto assets and artificial intelligence to “conceal and protect” their activities.

“The suspects transferred the funds to their bank accounts in Austria, Romania and Slovakia as soon as they received the advance payments,” the EPPO said.

It has added that all persons concerned are presumed to be innocent until proven guilty in Italian courts.

The former president and CEO of Gucci is kicking off a new chapter with a first investment in the Italian fashion brand Elisabetta Franchi.

MILAN – Marco Bizzarri is back in business, after exiting Gucci in September last year, and this new chapter of his professional life will see him as an investor in fashion, luxury and design.

In an exclusive interview, the former president and chief executive officer of the Italian luxury brand revealed he is investing in Italian fashion brand Elisabetta Franchi through a personal holding called Nessifashion. Effective April 15, Bizzarri will become chairman of the company.

He is acquiring 23 percent of Elisabetta Franchi through Nessifashion, named after “nessi,” a regional term of endearment passed on through generations from Bizzarri’s father and on to his children.

While wearing a different hat from his CEO days, nothing much has changed in his manner and Bizzarri, firing on all cylinders, said he was enthusiastic about committing to “prioritizing investments in creative entrepreneurs, business leaders and great Italian brands.” He touted Elisabetta Franchi, who founded her namesake brand in 1998, as a “charismatic leader” who has developed her brand “with clear vision and strong leadership.” He also remarked on the strong growth potential of the brand.

“I was 37 when I first became a CEO and after 25 years of leading companies of different sizes, cultures and life-cycles and after nine years at Gucci, I was ready for a different challenge, still involved in fashion but also with a birds-eye view on similar sectors,” said Bizzarri.

The executive first dipped his toes into the investment fund pool in 2021, when he took a stake and became a partner in Orienta Capital Partners, which specializes in investments in small- and medium-sized companies with strong growth potential.

Franchi approached Bizzarri last year following his exit from Gucci and he recalled how he was “very curious about this self-made woman from Bologna. I was impressed by the company’s success and profitable business, and the woman behind the brand, the unique personal connection she has developed with her clients and her strong, deeply loyal community of women who want to be part of her lifestyle. In a world where communication often feels hierarchical, Elisabetta’s approach stands out as refreshingly authentic. She is very intuitive and was one of the first designers to embrace social media; she talks to her customers directly, remaining relevant and a point of reference for them.”

The designer’s parent company, Betty Blue, which is set to close 2023 with sales of 170 million euros and a margin of earnings before interest and taxes of 31.8 percent, relies on its own production chain. The brand is present in 78 countries and counts about 100 monobrand stores.

“She has continued to grow the company through the years, despite all the changes in the industry and with such high profitability. She is very much hands-on, and, while a designer, she is also a businesswoman alone in command for years, very energetic and of great intelligence,” said Bizzarri.

The company was expected to launch an initial public offering on the AIM segment for small caps of the Italian Stock Exchange in 2020, but the project was shelved due to the pandemic.

“I am very intrigued and curious to work with her and create a structure for the company that can be sustainable in time, so that she can focus on design,” said Bizzarri.

The arrival in February of Gabriele Maggio as CEO was a first sign of changes at the brand, which pointed to further international expansion and the strengthening of its position as a luxury fashion label.

Maggio, whose career in fashion spans more than 25 years, was previously president and CEO of Stella McCartney, which he exited in December, succeeded by Amandine Ohayon. Prior to McCartney, Maggio was general manager of Moschino and previously held several senior executive and board-level positions at both Gucci and Bottega Veneta. His curriculum also includes experiences at Giorgio Armani and Prada.

Claudia D’Arpizio, senior partner at Bain & Company, is also due to join the board of Elisabetta Franchi.

Asked about his experience at Kering, Bizzarri opened up about it for the first time since his exit.

“I spent 18 years with [Kering chairman and CEO] François-Henri [Pinault] and he always was and will always be a point of reference for me,” he said. “He gave me the possibility to manage some of the most beautiful brands in the world. And I will thank him forever for this. I think it’s not been easy for him to take this decision, because of the mutual respect that we have for each other, and our friendship, and for this I respect him even more.”

Bizzarri led a textbook turnaround at Gucci, selecting Alessandro Michele to succeed Frida Giannini as creative director in 2015. Michele left in November 2022 and in that time span, the size of Gucci had tripled, reaching sales of 9.73 billion euros. However, the brand was struggling with slower growth than many of its luxury peers, which prompted Michele’s exit. While Bizzarri’s contract had just been renewed for three years, the executive left Gucci last September as part of a major Kering management shuffle and was succeeded by Kering’s then-managing director Jean-François Palus.

“However, I think this has been the best professional decision that I ever took,” continued Bizzarri. “Giving me the possibility to start a new professional journey with longtime friends and with incredible talents I had the chance to cross in my career. And at this stage of my life this is the best possible gift.”

In fact, Orienta Capital Partners was cofounded by Mario Gardini in 2011 and he and Bizzarri go way back as they are both from the Emilia Romagna region — as is Franchi — and worked together early in their careers in Bologna at both Arthur Andersen and Mandarina Duck in the 1990s.

Bizzarri started his career at Andersen Consulting, now Accenture. Leaving Andersen for Mandarina Duck in 1993 was a big leap — the first of many in Bizzarri’s career. He developed the brand’s international markets, setting up factories in Shanghai, Hong Kong and Hungary, and, after 10 years, he moved on to Marithé + François Girbaud for a brief stint. Incidentally, he pointed out that Mandarina Duck is based in Cadriano, which is a few minutes away from Granarolo dell’Emilia, where Franchi’s company is headquartered.

“I laughed thinking how it’s almost coming full circle,” said Bizzarri.

His first executive role within Kering, at the time called Gucci Group, dates back to January 2005, when he joined as president and CEO of Stella McCartney. After building Stella McCartney into a profitable company, Bizzarri was appointed president and CEO of Bottega Veneta in January 2009. The relaunch of Bottega Veneta completed, Bizzarri in April 2014 became Kering’s CEO of luxury, couture and leather goods, but was soon appointed president and CEO of Gucci in December of the same year.

Here, in a joint interview, Bizzarri and Franchi discuss shared views, women’s empowerment and the potential growth avenues for the brand.

WWD: [to Elisabetta Franchi] Why did you think it was the right moment to take in a shareholder?

Elisabetta Franchi: Back in ’98, when the company was established, it was a collaborative effort between my husband [the late Sabatino Cennamo] and me. However, by 2008 [the year he died], it had transitioned to solely me. This shift to the singular “me” also brought about a sense of solitude. You see, the collective “us” symbolized a dialogue and support. But when it became just “me,” my team and a mirror, it was undoubtedly challenging, and not because I am a woman; I believe this kind of transition is difficult for both men and women alike. And at times, when faced with important decisions, even though you may have a thousand highly skilled collaborators, the ultimate decision rests with one person. Finding myself at the helm of crucial decisions at times has been quite taxing.

WWD: In your path, did you follow your instinct?

E.F.: Yes, there are instances when I recognize that my intuition is correct and instinct plays a pivotal role yet, for me, the process of sharing and comparing ideas is essential. As the company grew, I was courted by numerous funds, and let’s say I even slipped away from some of them on my “wedding day” [laughing] when I felt their vision did not align with mine.

WWD: I gather you did not necessarily need a financial investment.

E.F.: Absolutely not. I was looking for either an industrial partner or someone to share my vision with. My company, I say this with great pride, I founded it with a small loan, and I’ve never had any debt. So it’s always been self-financed, and it became attractive to investors because of its very important financial statements and equally significant EBITDA.

WWD: Yes, a margin of 31.8 percent, that’s significant.

E.F.: Marco, in many ways, embodied the Prince Charming for me. And I was convinced he would never meet me.

WWD: [To Marco Bizzarri] Why did you think that out of so many brands out there, Elisabetta Franchi was the one to invest in?

Marco Bizzarri: When everything unfolded, I found myself at a crossroads, unsure of my next steps. However, there was one unwavering desire within me: to collaborate with individuals whom I admired and could select freely. Throughout my career, while I have had a say in the people I worked with, I was chosen by others too. It’s a profound gift to be able to work alongside individuals whom you genuinely admire and respect. During a lunch at [his son’s Stefano] Dalla Gioconda restaurant, I realized there was a spark. When it seems like the other anticipates what you’re about to say, it’s something very difficult to find. But, as you say, there are many brands, there are so many people I could work with. But I really wanted to find something that intrigued and fascinated me. I like the potential to bring together a team, to create something sustainable in the long run for everyone involved. Fortunately, for both of us, it’s not about finances or monetary gains; at this stage in our lives, it’s simply about doing what we’re passionate about.

WWD: At this stage, what are your goals and growth objectives with the arrival of Marco and the fund?

E.F: I did not want to confine myself within a company solely created and molded by my own efforts. When you initially establish a company, it feels like your own, but over time, it evolves into something that I believe should be able to thrive independently, regardless of your direct involvement. So, with Marco’s arrival, our first priority is to establish a foundational team, an initial structure where my skills might have been lacking. Those who resonate with our journey inherently grasp our vision, while those who do not may never fully align with our mission. With Marco, I am optimistic that we will further the brand’s global reach. We have a balanced presence, with 50 percent of sales in Italy and the remaining 50 percent abroad, but there are untapped markets, particularly in America.

M.B.: Certainly there are different phases in the life of a company, and while it’s true that she didn’t establish a management, over 25 years she has maintained the company’s relevance, both in terms of operational processes and aesthetic appeal. This is no small feat considering the numerous companies that have faltered in similar timeframes. Operating within a sector dominated by large conglomerates poses its own set of challenges. Financially, these giants are formidable and it’s not easy to find individuals willing to work for a small-sized company in a location that’s not Milan or Paris, and that’s crucial. Today, there’s a unique opportunity for significant expansion, both geographically and in terms of product categories. However, there will be a transition that requires not just organizational restructuring but also a shift in mindset — learning to trust others to handle tasks she’s long been accustomed to managing herself. Surrounded by experienced professionals who understand the nuances of business operations, Elisabetta is well-positioned to navigate these transitions.

While decisions ultimately shape success or failure, there’s also a factor of luck. And I see myself as lucky. There are many colleagues and collaborators who hold positive memories of our time together. I’ve earned their trust by delivering good work and building successful companies. So when I reach out to them and suggest working together again, they’re usually eager to jump on board. In 99 percent of cases, that is [chuckling].

WWD: The company employs 300 individuals, so in light of the further development are you planning on expanding the team and the human resources?

M.B.: It really boils down to finding the right individuals. The company is thriving as it stands, but we need to ensure we don’t disrupt the momentum; that’s paramount. It’s not merely a matter of reorganization; it’s about fine-tuning and refining.

E.F.: I believe this is where Marco’s strength lies because when we started talking, I expressed my concerns as he is accustomed to dealing with substantial figures, but from the start, I was surprised by his remarkable ability to adapt to the specific business circumstances he faces. To me this is absolutely crucial; I don’t want to change the identity of the brand.

M.B.: You can’t apply cookie-cutter formulas. Our aim is to nurture the company’s evolution, not to overhaul it.

WWD: Where do you produce?

E.F.: It’s 80 percent made in Italy, all around the Emilia-Romagna region.

WWD: You have been very careful in avoiding the dilution of the brand. Is children’s clothing the only license?

E.F.: I have just partnered with Pronovias [and the collection will be available starting in the fall]. Over the years, my loyal customers asked me to design bridal gowns for them. I thought it was a world that needed to be approached seriously, not just by designing five dresses and putting them in the store. Accessories are also a potential product extension with the help of Marco as now apparel represents 85 percent of sales.

I remain steadfast in my belief that the brand caters to women who embrace their femininity and this should not be viewed as a weakness but as a strength. I’m not just a designer, I’m a woman and the driving force behind this company and this is a profound message of female empowerment.

WWD: Have you reconsidered the idea of going public?

E.F.: During the first roadshow, I realized I was speaking a completely different language — picture me, a petite woman in my pencil skirt, navigating the intricacies of the IPO process. But I embraced the challenge and mastered the trade. Brunello Cucinelli once said to me, “If you can handle it, it’s a fantastic world.” And I believe it could be one of the projects on the horizon, why not?