WWD : What’s Going Wrong With German Fashion?

What’s Going Wrong With German Fashion?
Europe's biggest economy has seen a wave of big-name insolvencies over the past few months but local sector analysts say things are not as bad as they look.

Earlier this week, the company controlling some of Germany’s grandest department stores revealed it was insolvent.

The KaDeWe Group, which manages the KaDeWe department store in Berlin, the Alsterhaus in Hamburg and the Oberpollinger in Munich, blamed exceedingly high rents and the financial collapse of one of its two co-owners, Signa Holding of Austria, for its financial woes.

Various suppliers — including Germany’s VKE Cosmetics Association, whose members include the L’Oréal Group, Estée Lauder and LVMH Perfumes and Cosmetics — say KaDeWe has been slow paying some big bills lately. The VKE sent a letter to the store management at what is arguably one of the country’s most prestigious retailers but received no reply, German news agencies reported this week after the insolvency announcement.

There’s more to the insolvency than that, too, with speculation about a breakdown in the relationship between Signa, which owns 49.9 percent of the company, and Thailand’s Central Group, which holds the other 50.1 percent stake.

But this isn’t the only bad news coming out of Germany’s fashion sector. Over the past few months there has been what the locals have branded an “Insolvenzwelle” or “wave of insolvencies.”

This wave has been headline-making because it has included some of the biggest names in German fashion retailing and production, including Peek and Cloppenburg, Gerry Weber, Reno, Ahlers, Peter Hahn, Madeleine, Hallhuber, Salamander, Klingel and Görtz. Smaller brands that recently declared themselves insolvent included Lala Berlin and bag maker Bree, while other members of the ill-fated Signa family — one of the biggest department store chains in Europe, Galeria Karstadt Kaufhof, and Signa Sports United — also did so.

Insolvencies among apparel sector companies that generate more than 10 million euros annually have tripled since 2022, German management consultancy FalkenSteg noted this month. In 2022, there were just 11 such insolvencies but last year there were 33.

And, FalkenSteg researchers added, “across all [fashion] company sizes, the numbers [of insolvencies] rose sharply for the first time since 2020, to 160 cases.” That’s 57 percent more than in 2022, they said.

All this is happening at the same time as Germany’s economy is slowing and consumer sentiment is increasingly depressed. German national income — gross domestic product — shrank by 0.3 percent in 2023. It was the only European economy not to grow last year, and this year isn’t expected to be much better.

German consumers are also unhappy. “Both economic and income expectations as well as the willingness to buy are showing noticeable declines,” the country’s largest market research company, GfK, concluded at the end of January. German shoppers are worried about inflation, much less willing to spend and want to save more right now, GfK said.

They’re also less willing to spend on fashion, the German Retail Federation reported last summer, and prefer to save or spend on things like holidays.

It sounds bad. But is Germany’s fashion retail sector — the second biggest in Europe after the United Kingdom, worth around 70 billion euros annually — really doomed?

The short answer, as a number experts told WWD, is no.

“Simply put, it’s all a bit of an exaggeration,” said Jochen Strähle, a professor of fashion management at the Texoversum course run by Reutlingen University in southwestern Germany. “The textile and apparel trade has always been subject to change but it’s not going anywhere. What is happening at the moment is something of a turning point for the sector.”

“What we are seeing is the consolidation we have been expecting for several years,” confirmed Achim Berg, an expert for apparel, fashion and luxury with management consultancy McKinsey and Company, who is based in the central Germany city of Frankfurt. “That was something we expected to see when COVID-19 happened but it didn’t because of the subsidies and support the German government provided to retail in general, but also to apparel.”

Taken as a whole, fashion retail in Germany isn’t in trouble, sector observers agree, it’s just changing — and in a way that should probably have happened a while ago.

The country’s Federal Statistical Office recently reported the latest numbers available: Fashion sales actually grew by 9.3 percent in the first half of 2023, compared to the same period in 2022.

Local specialist publication TextilWirtschaft put the insolvencies into further perspective. Out of around an estimated 17,000 companies in Germany that sell or produce clothing, shoes and accessories, 160 insolvencies in 2023 meant that just under 1 percent of the total were in trouble.

Additionally, some of the current wave of insolvencies are not what you would call a genuine bankruptcy, said Leo Faltmann, director of FashionConsult, a business based near the city of Munster in western Germany, which specializes in strategy and restructuring for the apparel industry.

In Germany there are two kinds of insolvencies, Faltmann explained. One sees the court appoint an administrator, who then controls the company’s assets, dispensing of them in order to pay back creditors. The other is “a self-administrated insolvency,” which is similar to an insolvency filed under Chapter 11 of the U.S’ own bankruptcy code. Just as with a Chapter 11 filing, in Germany the troubled company’s management retains control of assets and is able to restructure and renegotiate things like rental contracts, with the objective of returning to some sort of financial equilibrium.

According to TextilWirtschaft’s research, around a third of the redundancies in 2023 were self-administrated insolvencies. “If you look closely at some of the bigger insolvencies, they have chosen self-administrated insolvency,” Faltmann added. “So in some ways, the idea that there is some spectacular wave of insolvencies has been exaggerated.”

Analysts say there are a number of reasons behind the recent insolvencies. Some are beyond the control of local fashion retailers and producers. These include rising energy costs as a result of the war in Ukraine, which has led to mild inflation and a slight recession. This in turn translates to higher costs in everything from raw materials to wages. Rents have also continued to rise, with almost half of German retailers recently telling pollsters they felt particularly disadvantaged by these increases.

Additionally, political and social unrest — war in Ukraine and the Middle East, environmental challenges and dissatisfaction with the current German government — is weighing heavily on German consumer sentiment.

But there are also other reasons for the insolvencies which have more to do with long-running structural weaknesses and unsustainable strategies in the sector.

During the pandemic, the government brought in extra financial support and also suspended rules that said local companies must file for bankruptcy within a certain period after they realize there’s a problem, FashionConsult’s Faltmann told WWD.

“The companies that were not profitable before were, in principle, being supported by the state during the pandemic,” he said. Local insolvency reporting rules returned to normal in May 2021 and state support as part of the government’s Economic Stabilization Fund ended in June 2022. Tightening credit conditions and higher interest rates also made it harder for businesses in dire straits to refinance themselves after state support dried up.

Business models that had been challenged by issues like the rise of online shopping and the decrease in brick-and-mortar footfall, but had not done enough about them, are the ones fighting for survival.

“So we have all these insolvencies piling up,” Faltmann added. “But really it is structural change to the sector that is badly needed.”

For example, Germany has far too much inner-city shopping real estate, Faltmann said. Although the number of consumers going to brick-and-mortar stores plummeted during COVID-19 lockdowns, customer footfall in inner cities had been falling long before that, statistics show.

There were already a lot of empty storefronts in Germany’s smaller towns and cities. The pandemic saw even more of them and the trend becomes a vicious circle because, as observers say, the more of a concrete wasteland inner cities become, the fewer people want to go there.

The Signa Group’s many financial problems don’t help either. The Austrian real estate firm was responsible for the Galeria Karstadt Kaufhof chain of around 90 department stores — the chain has declared insolvency three times since 2020, received state bailouts of more than 700 million euros and previously had more than 170 stores. Anybody who’s ever visited smaller German towns and cities knows these are often a focal point in central shopping districts. Now they’re at risk. Some already stand empty.

So while the pandemic may have accelerated the trend for fewer shoppers in town, it didn’t create it.

After all, the share of online apparel sales in Germany has been growing for years and German online giant Zalando has benefited from this. Around 40 percent of all sales of fashion and accessories are now made online in Germany.

Asked whether Germany’s apparel sector has perhaps fallen behind other European nations or is more conservative in some way, Reutlingen University’s Strähle doesn’t think so. “Germany is the largest clothing market on the European continent, with some tough barriers to entry, which makes local producers and retailers more cautious about questioning their business models,” he suggested. “If you want to try something different, it’s a big deal and a lot of money. So people are less likely to experiment.”

McKinsey’s Berg also pointed to how the sector as a whole has developed over the past 10 to 15 years. “If you look at the top line development of the industry over that period, it’s all flat at best, with 1 to 2 percent growth or decline most of the time,” he told WWD. “So the industry as such is not growing. This means if you want to be successful in this market and you want to grow, you need to grow at the expense of somebody else.”

In particular there is pressure on mid-price apparel, Berg noted, with categories like premium and affordable luxury eating into that market from the top, then value and discount clothing pushing into it from the bottom. Many of the big-name German insolvencies are from the midmarket category.

In other words, Berg argued, the German market is very competitive. “And I think the reality we have now is not coming by surprise. Apparently some players have not taken care of their homework when it was due.”

At the same time, this will open up opportunities in Germany, Berg argued. “There are always pockets of growth,” he concluded. “If you look at the last five years, you see how sports was one of those pockets, casualization was another, so were sneakers. So there is always something in fashion. And if you have that consolidation in German apparel, and there are some not very competitive formats and players that are exiting, that also creates opportunities for other players to gain market share or compete in that segment.”

WWD : Chanel and What Goes Around Comes Around Trial Nears Conclusion

Chanel and What Goes Around Comes Around Trial Nears Conclusion
For weeks, both sides have been wrangling over trademark infringement, false advertising, an implication of an alliance that did not exist and claims of counterfeit goods.

After weeks of testimony, the court battle between Chanel and What Goes Around Comes Around is nearing the end, with the jury expected to start deliberating Monday.

Chanel filed a lawsuit against the New York-based resale company in March 2018, alleging that there appeared to be an affiliation between the two fashion resources that did not exist and that Chanel had authenticated the pre-owned items sold at WGACA. The years-long dispute finally went to trial in a New York federal court last month with both sides disputing trademark infringement, false advertising, an implication of an alliance that did not exist, claims of counterfeit goods and other issues.

Unexpectedly, the defense made its closing argument Friday afternoon before the plaintiff did. Yale Galanter of Galanter Law in Miami reiterated his opening remarks, stating, “This is a case about David and Goliath,” and suggested that the $17 billion luxury brand with “thousands” of stores didn’t like that WGACA, a three-store operation, was growing and wanted to make a statement by going after the reseller. He also claimed that Chanel contacted Dillard’s, Gap, Banana Republic and Van Maur (all of which had fragrance and beauty deals with Chanel) “and told them to stop doing business with WGACA.”

Galanter said WGACA had shared its sales numbers, order numbers and stock keeping unit numbers with Chanel during the legal proceedings and that that had led to Chanel discovering some of its own discrepancies in relation to some of its serial numbers. The attorney suggested that “not a single person who would walk into this courthouse” would be confused about any association between the two companies, and how Chanel customers are “sophisticated.” He also referenced a transcript from a key witness, Joyce Green, managing director of Chanel France. When asked if she had come in contact with any information from a customer or retailer being confused since November 2020, Green had replied, “Nothing like that, no.”

The testimony of another central witness for Chanel, Chanel’s executive operations director Joseph Bravo, who traveled to New York for three court appearances, was also dissected by both sides. In his final appearance, Bravo recanted his prior testimony that had falsely claimed that a zipper on a Chanel handbag imprinted with the zipper manufacturer’s name Lampo was not genuine.

Bravo also suggested that the bag’s shape was irregular, and that the zipper slider, font size of a Chanel logo, the color of the bag and the stitching were not right. Galanter reminded the jury how Bravo had declined to measure the bag (with a wooden ruler), preferring to do so by eye.

Conversely, during Chanel’s closing argument, Dylan Price, a partner at Sheppard Mullin Richter & Hampton, alleged repeatedly that WGACA had sold counterfeit bags. He also told the jury that the issue at hand is the “likelihood of confusion.”

Price showed a transcript excerpt from a former WGACA employee who had testified about “Frankenstein” bags, a term used to refer to items with some authentic elements and some replaced features. He also mentioned how WGACA sold Chanel items that had been repaired, refurbished and repainted — and how if asked by a consumer, Chanel would not authenticate an item. Price suggested that such refurbishing is a common practice in Japan, where WGACA sources more than 80 percent of its handbags (based on WGACA chief executive officer Seth Weisser’s testimony).

Chanel’s policy of not authenticating goods was challenged by Galanter, who spoke of the gaining strength of the resale market. Galanter raised the point of where non-Chanel customers are to go for repairs, if they can’t go to Chanel. He also called into question Chanel’s policy of never offering discounts or sales of any kind and asked where all of its excess inventory goes.

Another matter that was hashed over involved WGACA’s use of Chanel display material and its purchase of 779 such items including plastic trays and tissue boxes. Chanel’s attorney Price referred to prior testimony by Chanel employees, which emphasized that those items are “props” and are never given away or sold, and that that constituted infringement. WGACA provided an invoice listing those items from the Hong Kong vendor that they had been purchased from, and suggested that those items may have been passed along by Chanel or store employees.

Price informed the jury that it will be seeking $4 million in statutory damages for willful trademark infringement. “The only way they are going to stop doing this is to send a message to them to stop.” He also disputed that the case was “a David and Goliath” situation, claiming that WGACA had grown from $30 million to $150 million in sales.

An attorney for Chanel spoke repeatedly about WGACA’s “willful” use of the Chanel trademark in print advertising, email blasts, social media posts — showing multiple examples of how old Chanel ads and runway shots were used by WGACA in its posts, as well as prints ads with “Chanel” being the prominent name — even larger than What Goes Around Comes Around — as well as examples of how the resale company has featured Chanel’s interlocking “Cs.”

In addition to alleging false advertising and a false association between the two companies, the Chanel attorney claimed that WGACA had sold counterfeit handbags that carried serial numbers that had been voided, after more than 30,000 were stolen from the Corti Renato factory in Milan. Chanel’s team has argued that the fact its internal Orli system, which is used to track the production, quality control and distribution of its handbags, only referenced that the serial numbers had been voided indicates that any merchandise with those numbers signals a counterfeit item. The Chanel attorney also alleged that the retailer had sold three of those bags, after Chanel had provided the serial numbers that had been stolen.

Throughout the trial, including during Friday’s closing argument and WGACA cofounder Weisser’s lengthy testimony in the days prior, the defense has said the case is not about serial numbers and is about handbags. Weisser said Thursday, “Chanel is in the serial numbers business. We’re in the product and handbag business.”

Whatever business either company specializes in, WGACA did comply with a pre-trial Chanel request made in a 2015 cease-and-desist letter to add a disclaimer to its landing page.

The trial is being watched closely by many executives in the fashion, licensing and resale industries, given the potential precedent it could set in relation to future litigation. Trademark infringement is just one of the sometimes nebulous topics that have been debated at length. What defines “counterfeit” and “vintage” were wrangled over. Justice Louis Stanton, who is presiding over the trial, referenced Thursday how in another case involving a luxury fashion brand, even the company’s in-house expert could not say for certain whether an item was genuine. He advised the jury, “There are extremes in everything. There is a possibility of extremes in all of these situations.”

Before dismissing the jury, Stanton suggested that they may have the case by noon on Monday and advised them not to discuss anything about the trial with anyone over the weekend.

Whatever the outcome, there have already been rumblings of an appeal by Chanel and Weisser, who has been in the courtroom every day. On Wednesday, Chanel’s in-house lead counsel Robin Gruber told WWD, “Chanel believes that we have put on a strong case. If the court’s decision is one we don’t agree with, we will bring it to an appeal.”

FT : Rocket revolution threatens to undo decades of European unity on space

Rocket revolution threatens to undo decades of European unity on space
Starting gun has been fired on competition to determine the continent’s leading rocket-maker

French President Emmanuel Macron was in combative mood when he addressed aerospace executives and innovators in Toulouse. 

“We have fought for months saying European sovereignty is European unity. Unfortunately, some of our partners have decided to become competitors,” he told the December gathering in France’s aerospace capital. “So take note, we’re going to push very hard to be the best.”

With those words, Macron launched the race to find Europe’s future rocket-maker of choice, capable of propelling the biggest and most sensitive missions into space. As the sector finally opens up to competition, there are signs that 50 years of European collaboration on accessing space may be fragmenting.

“Everyone has lost sight of the final objective, which is a European programme,” warned Pierre Lionnet, director of research at trade body Eurospace.

For decades, France’s ArianeGroup and its predecessor companies have been the prime contractors for jointly funded development of Europe’s Ariane family of heavy launchers. Until 2017, Ariane dominated the global market for commercial launches into geostationary orbit — 36,000km above Earth.

However, delays in delivering Ariane 6, problems with the smaller Vega-C produced by Italy’s Avio and the breakdown of collaboration on Russia’s Soyuz medium-lift rocket have left Europe without its own launch capability. Instead the bloc has had to turn to Elon Musk’s SpaceX, even for sensitive missions.

Josef Aschbacher, director-general of the European Space Agency, has described the lack of launch capability as a “crisis” for Europe’s sovereign access to space.

Aschbacher has long argued for a model on the lines of US space agency Nasa, under which Europe would not procure rocket systems but instead buy flight services from European commercial launch companies.  

Last November his wish was granted. ESA member states decided to launch a competition for the next generation of rockets, initially for an intermediate launcher and then for a successor to Ariane 6. ArianeGroup, owned by France’s Airbus and Safran, will no longer be the guaranteed prime contractor.   

The demand for competition came from Germany, home to some of Europe’s most promising rocket start-ups. It was the price France had to pay for German backing on a €1bn European support package for Ariane 6. Without the subsidy, the expendable Ariane 6 would struggle to compete with SpaceX’s reusable Falcon 9.

“Ariane 6 should have been able to compete on the commercial market without any subsidy,” said Toni Tolker-Nielsen, ESA’s acting director of space transportation. “It did not deliver and now member states want us to change the system.”

As the deal on competition was struck, Italy’s Avio withdrew its small Vega launcher from Arianespace, the subsidiary of ArianeGroup that markets and manages all of Europe’s launches.

Avio objected to ArianeGroup’s plan to target Vega’s market with MaiaSpace, its small rocket start-up.

“How can we have a sales and marketing organisation that is building a competing product?” said Avio’s chief executive Giulio Ranzo. “If Ariane is going to be a competitor, you don’t want it to have information on your rocket.”

Officials from the ESA — which is independent of the EU but acts as its procurement agency, and includes non-EU countries such as the UK and Switzerland — said the aim was not to replace incumbents such as ArianeGroup or Avio, but to spur them to be more efficient.

“We wanted to give them an electroshock. We have done that. We have completely changed the paradigm of access to space,” said Tolker-Nielsen.

But individual ESA member states, like many countries, all want their own slice of the expanding space economy, forecast by Morgan Stanley to be worth $1tn by 2040. Launch capability is key: Europe has close to 20 start-ups developing micro-launchers and most have plans for larger rockets.

“We have to avoid this becoming a competition between nations,” said Tolker-Nielsen. “It is not going to be easy.”

Competition means ESA will also have to review the principle of georeturn, in which member states are allocated contracts proportional to their investment in a rocket programme. Critics say this results in a non-competitive supply chain, favouring the biggest rather then the most efficient investors. 

But abolishing the system was risky, said Lionnet. “With georeturn, programme managers know what their budget is and who the suppliers are,” he said. It would also be difficult for governments, which “would not know if they had to invest €20mn or €100mn”, he added.

However, Aschbacher hopes freeing launch providers to choose their own suppliers while delivering fair returns to member states will both lower mission costs and stimulate Europe’s commercial space sector.

Nasa contracts not only fuelled the rise of Elon Musk’s SpaceX, but its reusable rockets dramatically lowered launch costs, creating a vibrant US space industry.

“We looked into the US model and the lessons learned,” ESA’s director-general told the FT. “We will give industry the freedom to do it the best possible way from their point of view”.

Not everyone is convinced, however. Lori Garver, a former deputy administrator at Nasa, said the space agency’s strategic turn could be difficult to replicate. “We had a unique situation with the richest person in the world, where our strategy was aligned with what he wanted to do anyway,” she said. 

European rockets will have to compete not just with SpaceX’s Falcon 9, but with its giant Starship, which is expected to lift payloads of up to 150 tonnes into orbit when it finally becomes operational.

Most importantly, Europe could struggle to guarantee enough recurring demand to help bring down costs. The requirements of its projects, such as the Galileo navigation service, the planned IRIS² broadband constellation or scientific missions, are tiny in comparison with the US. “We don’t have a large volume of demand for launcher systems as the Americans do,” said Lionnet.

Space consultancy Euroconsult estimates European governments’ annual spending on space in 2022 — either through national programmes or ESA — was less than a third that of the US.

To succeed, member states would have to agree to pool their institutional launch needs to feed these European competitors, even if others might be cheaper. ESA tried to do this for years but had “not succeeded”, said Tolker-Nielsen.

Europe’s rocket start-ups welcome the competition, but some insist firmer signals are needed to convince investors. “ESA needs to act like real anchor clients,” said Ezequiel Sánchez, executive president at Spanish rocket company PLD Space, arguing that ESA should pursue a “full launch contract for missions”.

But pooling demand may be pointless if national interests prevail.

“Instead of trying to find a common solution which is best for everyone . . . some see this as an opportunity to build more on their own side,” said Eurospace’s Lionnet. “But there is no good national solution for European sovereignty in launch. Interdependency must be the rule.”

FT : Veolia urges cutting red tape on permits to speed up renewable projects

Veolia urges cutting red tape on permits to speed up renewable projects
French waste and water group is rolling out €250mn plan to install solar panels on closed landfills

The chief executive of French waste and water group Veolia has urged European governments to do more to cut red tape on permits to speed up renewable energy projects.

Estelle Brachlianoff made the plea as Veolia aims to produce 300 megawatts of electricity from solar panels mounted across its closed landfills in France, enough to power a town of 130,000 people, in its first large-scale attempt to reconvert the sites.

One of the obstacles to a rapid rollout of solar farms in France and elsewhere across Europe is finding land to install the panels.

Using the landfill sites Veolia already owns or operates is one solution, but a series of permits are still needed, from fauna and flora controls to construction authorisations.

Veolia’s solar plan for 40 different projects will cost about €250mn and is part of a €4bn investment the company is making to expand its energy activities as it doubles spending in the sector between now and 2030.

It also aims to bring financial partners — from local investors to banks — into the solar projects.

The speed at which permitting authorisations are granted means that Veolia’s solar panels could take four years to get connected to the power grid, which Brachlianoff said was too slow.

It was also penalising Europe at a time when clean energy subsidies through Joe Biden’s Inflation Reduction Act were helping US businesses, she added.

“Everyone is trying to do renewable energy as quickly as possible and we’re not asking for subsidies here,” Brachlianoff said in an interview.

“We’re not talking about sensitive sites in the middle of a city. So for me, this is a perfect example of how we might be able to figure things out so that we can move faster. As things stand today, you have to ask for different authorisations one after the other.”

Veolia, which traces its origins back to the 19th century as a water service company, makes roughly a quarter of its annual revenues from energy on sales that reached nearly €43bn in 2022. It is yet to publish results for the whole of last year.

Energy was Veolia’s fastest-growing division in the first half of 2023, a year after it completed its near €13bn acquisition of many of the activities of longtime French rival Suez following a bitter takeover battle. 

The group’s energy activities are largely aimed at using existing resources such as capturing excess heat from industrial processes or burning non-recyclable waste. 

Its focus on the sector is partly aimed at providing efficiency measures in buildings to save energy, which more and more companies are doing.

This fits with Brachlianoff’s plan to grow a market in utilising unused local energy reserves, including bioenergy and power produced from waste, which she said could provide up to 400 gigawatts of power in Europe as the region tries to become energy independent.

“That’s huge. It’s the equivalent to the energy demand of the whole of Italy. It’s a third of all European fossil fuel imports,” she said. 

“When public authorities ask us what we need to go faster (on energy), they expect us to say money. The answer is not money . . . it’s the rhythm, the authorisations, the delays,” she added. 

The group will use the electricity from the projects for its own plants and operations as well as offering it to other companies and local authorities. It already operates a standalone solar farm on a restored landfill site in Essex in Britain.

FT : New boss seeks to make H&M even faster at fashion

New boss seeks to make H&M even faster at fashion
Daniel Ervér says rise of Chinese competitors ‘requires us to react quicker’ to new trends

H&M’s new boss has pledged that the Swedish fast-fashion chain will invest more in reacting quicker to new trends, including by bringing some of its manufacturing from Asia closer to its main markets.

Daniel Ervér, the 42-year-old company veteran who became chief executive on Wednesday, told the Financial Times that H&M would use improvements in profitability and cash flow last year to invest in its customer offering.

“One part is being faster to market,” he said. “We are digitalising processes. We are developing nearshoring capabilities — being quicker to react to new trends. We also want to leverage data from customers to be more precise in how we run our supply chain.”

The family-controlled group has been under pressure for more than a decade, losing its crown as the world’s largest fashion retailer to Spain’s Inditex — the owner of Zara — as well as suffering from a decline in profit margins.

H&M spent last year prioritising profitability over sales growth by closing stores and raising prices. But its full-year results, released on Wednesday alongside news of Ervér’s appointment, showed its profit margin missed analysts’ expectations in the fourth quarter, prompting a 10 per cent drop in its share price.

Analysts and investors have pointed to the Swedish group’s large manufacturing footprint in Asia and its relative inability to react fast to breaking fashion trends compared with Inditex, which has many factories closer to its main European markets. It has also been hit by the rise of lower-price retailers such as China’s Shein and Temu, as well as Primark before them.

Ervér said the new competition “requires us to react quicker” but that “really nailing price and fashion” is “doing something that lower-cost can’t”.

He added that after several years of closing more stores than it opened, H&M had “great opportunities” in 2025 and 2026 to increase the number of its shops. This year it is likely to close more stores than it opens in numbers, but to open more in terms of revenue. It had 4,369 stores at the end of November, down from 5,076 in 2019.

“We have had a big focus on profitability, especially over the last year. It was necessary to start to generate cash flow. It allows us to invest in the customer offering,” said Ervér, who started at the Swedish group as a summer trainee 18 years ago and most recently was head of the H&M brand.

Some analysts and investors have urged the group, whose shares are three-quarters controlled by its founding Persson family, to appoint an outsider to shake up the retailer and its strategy.

“Nothing radical will be done with insider after insider in charge,” said one shareholder.

Ervér said his appointment was a matter for the board but that he was confident “that we have a very good direction for where we’re heading” and argued H&M’s strength was its “core business model”.

The company’s operating profit margin fell from more than 20 per cent in 2010 to just 3.2 per cent in 2022, before rebounding to 6.2 per cent last year. Its target for this year is 10 per cent.

The new chief executive said his leadership style was to set a “clear and compelling direction”, then “be daring to make some bold decisions and choices” as well as be “inclusive and empowering”.

He added: “Creating long-term value for customers, employees and also the shareholders is tremendously important. Our focus will be on profitable growth.”

FT : Novo Nordisk ‘surprised’ by high European demand for weight-loss drugs

Novo Nordisk ‘surprised’ by high European demand for weight-loss drugs
Chief executive says customers very willing to pay for Wegovy from their own pockets

Danish drugmaker Novo Nordisk has been “surprised” by the readiness of European consumers to pay for weight-loss drugs from their own pockets, as the region’s largest company invests in new supply to meet runaway demand.

The company’s weight-loss drug Wegovy and diabetes treatment Ozempic powered it to record sales in 2023 and a current market capitalisation of $508bn.

Wegovy’s effectiveness — participants lost an average 15 per cent of their body weight in a trial lasting more than a year — and a string of celebrity endorsements have made it very popular.

Chief executive Lars Fruergaard Jørgensen said the company had found “a very high willingness” among Europeans to pay for weight-loss drugs personally, even where they were not used to doing so.

“The uptake we see has surprised us initially. We wondered, was that only a US phenomenon? We tested it out in Denmark and Norway, we saw more or less the same,” he told the Financial Times. “It’s perhaps the first time that you see a large population willing to pay out of pocket for medicine.”

Wegovy and Saxenda, another older weight-loss drug, made $4.7bn in sales in the US last year, an increase of 193 per cent from 2022. But sales also doubled in Europe and the Middle East to almost $1bn in 2023 after Wegovy was made available in the UK, Switzerland, Denmark, Norway, Germany, Iceland and the United Arab Emirates.

In Europe — where Wegovy is not yet generally available in public health systems — 80 per cent of sales are paid for personally by consumers, with the remainder reimbursed by health insurance or states. In the US, more than 90 per cent of sales are completely or partially covered by health insurance, the company said.

The willingness to pay upfront is because people “have tried all kinds of interventions” to lose weight, Jørgensen said. “When there’s finally something that works and brings improved health and quality of life for the individual, there’s very high willingness to pay.”

In Jørgensen’s native Denmark, he said that about 1.5 per cent of the adult population, just under 100,000 Danes, are paying for the drug. In the UK, Wegovy is available in limited supply on the NHS but patients using private healthcare can pay up to £300 for a month’s supply. Costs are similar in Denmark and Germany.

High demand has led to supply problems, with the company committing $6.5bn in capital spending this year to increase production. Jørgensen said that private patients exhausting supplies were “a concern”. He added that: “Vulnerable patients . . . have an opportunity of getting care via the healthcare system. Obviously, that means the healthcare system has to acknowledge obesity as a disease. That’s not yet the case in all countries.”

To help convince healthcare providers and to increase take-up, Novo Nordisk is in talks with healthcare systems about contracts that allow them to spread the costs of Wegovy over many years.

But healthcare providers must also decide whether weight-loss drugs represent value for money. The UK’s National Institute for Health and Care Excellence has recommended Wegovy for people with a BMI of at least 35, or 30-35 if they have other health conditions. The US Centers for Disease Control and Prevention defines a BMI of 30 and over as obese.

A Novo Nordisk trial published in November studied more than 17,600 people aged above 45 with obesity who had cardiovascular disease, but not diabetes, comparing Wegovy with a placebo. About 458 patients taking the placebo died during the trial, compared with 375 people taking Wegovy, an 18 per cent reduction in the risk of death.

However, modelling by healthcare data company Airfinity based on the trial data estimated that to prevent one heart attack, stroke or cardiovascular-related death, 67 people would need to take Wegovy for 3.3 years on average, at a cost of $1.3mn.

Jørgensen said: “I think most healthcare systems would acknowledge that if you cater for BMI with a certain level of comorbidities, there is a very strong case.”

FT : Private equity group EQT revives plans for $20bn Galderma IPO

Private equity group EQT revives plans for $20bn Galderma IPO
Listing of skincare group spun out of Nestlé in 2019 would be one of Europe’s largest listings of recent years

Private equity group EQT is reviving plans for an initial public offering of dermatology company Galderma as investors hope Europe’s market for new listings may finally be reopening.

Galderma, spun out of Nestlé in 2019, is preparing for an IPO in Switzerland that could come as soon as the first half of this year, said people familiar with the matter. Bankers have said the unit could be valued at roughly $20bn.

The people cautioned that the deal’s timing and size had not been finalised and were subject to change. EQT declined to comment.

A listing for Galderma would mark one of the biggest European IPOs in recent years, and come after performance last year slumped to the lowest level since the 2008 financial crisis.

The company’s growth has been driven by specialist skincare products such as Cetaphil, brands that treat issues including acne, rosacea and sensitive skin. It has also had success with so-called “injectible aesthetics”, products like botox and filler.

Last year Galderma received approval from the US Food and Drug Administration for two new injectibles — one that targets cheeks, the other “under-eye hollows”. The company has set out to develop the largest injectibles business in the market, taking on competitors such as AbbVie and Merz.

It reported record net sales of $3bn in the first nine months of 2023, according to its latest results, a rise of about 9 per cent on the same period in 2022 when currency fluctuations are eliminated.

Stockholm-based EQT has previously looked at listing Galderma, but private equity groups have had a challenging time selling their portfolio companies on public markets as interest rates have risen and post-IPO performance has been patchy. This issue has been particularly acute with large assets such as Galderma, which are too big to sell to their buyout peers.

Last June, Galderma raised about $1bn in a private placement from existing and new shareholders to strengthen its balance sheet and fund expansion.

While EQT had previously targeted raising up to €3bn in an IPO, the private placement helped lower Galderma’s borrowing levels and may allow the company to target a smaller offering this time, the people said.

Private equity executives are expecting more activity in 2024, as investors in buyout funds have begun increasing pressure on the groups to sell long-held investments and start returning cash.

Other private equity-owned companies that could list in Europe this year include Italian luxury sports shoe brand Golden Goose, owned by Permira.

Consumer goods giant Nestlé sold Galderma for $10bn five years ago to an EQT-led consortium that included Singapore’s GIC and the Abu Dhabi Investment Authority.

The company accelerated its IPO planning after the Covid-19 pandemic helped turbocharge the market for so-called “tweakments” like fillers and botox.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Over 3,000 real estate professionals attended the annual Inman Connect New York conference in Midtown Manhattan

Cover:
-Over 3,000 real estate professionals attended the annual Inman Connect New York conference in Midtown Manhattan, marking the largest gathering since a Missouri court penalty against select brokerage firms and the National Association of Realtors (NAR), the industry's top lobbying group. The verdict has put brokers in an uncomfortable role of pushing for reform of the same organization that helps safeguard their golden goose, an industry-standard 5%-plus commission. NAR, founded in 1908, is part standards body, part Realtor advocate, and part industry lobbyist. It owns the trademark to the word Realtor and sets standards for the regional databases known as Multiple Listing Services (MLS). Membership in NAR is almost required for anyone looking to market a home.

Interview:
-Barron’s interviewed Jonathan Curtis, the chief investment officer of Franklin Equity Group and lead portfolio manager of the Franklin Technology fund. He has over 30 years of experience in the tech sector. He started his career as a software developer and test engineer and has been picking tech stocks for Franklin since 2008. Franklin Technology, a Luxembourg-based fund, returned over 54% in 2023 due to bets on most of the Magnificent Seven, a group of top-performing tech companies. Curtis sees more gains ahead for both the stock and the sector due to his bullish view on artificial intelligence. In a recent interview with Barron's, Curtis discussed his favorite stocks and the future of AI, predicting that the strength in the Magnificent Seven will broaden out this year, as he believes this is the start of a new business cycle in tech.

Tech Trader:
-The tech sector's top five companies, with a combined market value of $10T, reported earnings within 48 hours of each other. The week's earnings race was a draw, with Meta Platforms and Amazon.com up, Apple down, and Microsoft flat. The tech giants' results offered key insights into the outlook for technology, markets, and the planet. Microsoft posted a beat-and-raise quarter, besting Wall Street estimates in every category, with 28% growth in its Azure cloud business on a constant-currency basis. Microsoft's Copilot software for Office adoption was double the September-quarter rate. Meta, a more under-the-radar AI play, holds significant promise for targeting advertising and content to Facebook and Instagram users. CEO Mark Zuckerberg has committed to increasing his bet on AGI, or artificial general intelligence, which could magically solve all the world's troubles if it doesn't wipe out humanity.

The Trader:
-Philip Morris International's stock has fallen 1.1% since the start of 2024, lagging behind the Consumer Staples Select Sector SPDR's 3.1% rise. The stock is stabilizing in the low $90s, and earnings could be the catalyst for the shares to head higher. Sales for the quarter are expected to grow 10.5% to $9B, and the increased adoption of the company's smokeless products, including its IQOS heated tobacco, and should offset declines in traditional cigarette sales. Smokeless tobacco products are growing at an annual clip of just under 5% globally and could hit $124B by 2029.
-Copper is rallying, up 8% to $3.87 a pound since mid-October. The market is expecting increased demand for auto makers, consumer-goods manufacturers, and copper due to the better-than-expected economy. The Federal Reserve is likely to cut interest rates, and China is releasing $140B in monetary stimulus. As copper approaches the low-to-mid $3.90s, a breakout could signal confidence in the economic outlook and potentially lead to prices reaching $4.20, a level briefly touched in January 2023. Copper, closely associated with China, is testing resistance of a 'coil' developing for the past year.

Features:
-Demand for travel outside of China has been significantly reduced due to Covid-19, with the capacity of flights leaving and entering China reaching just over half of the same period in 2019. Domestic flights made up 92.6% of domestic flights last month, while flights into or out of China made up only 7.4%. Analysts are now more realistic about the recovery of Chinese leisure spending, including overseas travel, compared to their highly optimistic forecasts. The pessimism is based on the continued failure of consumer spending to rise. Morgan Stanley analysts predict that demand may take longer than expected to recover from 70-80% of pre-Covid levels.
-GE has published its final annual report on February 2, with the company splitting into GE Aerospace and GE Vernova in the coming weeks. Aerospace is GE's aviation business, while Vernova includes GE's power-generation businesses. GE Healthcare Technologies was spun out in 2023. The company will no longer be known as General Electric since its inception in 1892. CEO Larry Culp, who joined the board in 2018 amid significant business turmoil, believes that the company's financial health is in good shape. GE's industrial businesses generated free cash flow of $5.6 billion in 2017, $4.5 billion in 2018, and $3.9 billion in 2019. However, things have improved, with GE generating $5.2 billion in 2023 and expected to generate more than $6 billion in 2024.

Europe:
-Ferrari's stock has risen after the sports car maker reported a solid fourth quarter, with earnings per share of €1.62 ($1.75) on sales of €1.52B ($1.64B). Despite lower deliveries, sales rose 11%. Ferrari expects 2024 earnings per share of more than €7.50 on sales of €6.4B, in line with Wall Street projections. Shares were up 11.6% at $387.08, while the S&P 500 and Nasdaq Composite were up about 0.7% and 0.8%, respectively. Ferrari stock is on pace for the largest percent increase in more than three years, with a 2% year-to-date increase and a 37% increase over the past 12 months. However, this is more akin to luxury brand than maker-like stock performance: BMW shares are down about 3% this year and Mercedes-Benz Group shares are up about 1% in 2024, but down 9% over the past 12 months.

Emerging Markets:
-“On a zero-to-10 scale, Brazil today is a seven,” says Daniel Gewehr, head of Latin American equity strategy at Itaú BBA. Brazil's central bank has reduced interest rates from 13.75% to 11.25% due to easing inflation, with an expected 9% increase later this year. This could drive listed company earnings up 14% year-on-year at an index level. Domestic-related stocks, such as car-rental leader Localiza and jewelry chain Vivara, are seen as the most attractive. Emerging markets portfolio manager Verena Wachnitz believes the market is cheap due to earnings growth. Localiza is the only top-10 Brazilian stock in the index, while B3, parent company of the Bolsa exchange, is seen as a potential beneficiary. However, the effect on big banks like Itaú Unibanco Holding and Banco Bradesco is less clear, as lower rates may lead to lower interest margins, fewer nonperforming loans, and potential loan growth.

Commodities:
-A drone attack by Iran-backed militants in Syria and Iraq killed three US troops in Jordan, leading to retaliatory strikes and concerns about a tipping point in the Mideast conflict. Despite this, crude prices have barely budged and US gasoline prices have fallen since Hamas attacked Israel on October 7. Traders are hesitant to attribute much risk premium to oil prices, as barrels of oil are still being transported worldwide despite heated rhetoric, attacks, and blockades. In 2019, Iranian-backed forces attacked assets in the Persian Gulf, causing oil prices to spike 10% in a day. RBC Capital Markets analyst Helima Croft sees a "very real risk of a return to the 2019 playbook."

Streetwise:
-Allen Media Group's $14.3B offer for Paramount Global is likely to appear more generous as time passes, according to a bearish investment bank's buyout math. The $30B offer, including debt, works out to $21.53 per nonvoting share and more for voting shares. Investors are betting that Shari Redstone, Paramount's controlling shareholder, is unlikely to accept the offer. Just three years ago, BofA Securities valued Paramount at $53 a share. However, by early last year, BofA had marked down its value for Paramount to $32 a share and lowered its price target to $9, believing that Paramount was overly resistant to a sale. This week, BofA remains with $9, stating that Paramount is an attractive takeover target.