UCB: Expandin g the Business

Case Study No. DIS0025 Reference

This case was written by Shahnaz under the direction of K. Ramanathan, Icfai Business School Case Development Centre. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case was compiled from published sources. Copyright 2008, Icfai Business School Case Development Centre No part of this publication may be copied, reproduced or distributed, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or medium electronic, mechanical, photocopying, recording, or otherwise without the permission of Icfai Business School Case Development Centre.

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UCB: Expanding through Unrelated Diversification

UCB: Expanding through Unrelated Diversific ation

The planned acquisition of Autostrade is part of the Benetton familys diversification strategy that is moving it away from the clothing business.1 Global Finance2 From the looks of Edizione Holdings balance sheet, the move to diversify from the fashion empire seemed a masterful stroke, especially as the venerable clothing business started to stumble, posting its first loss in 38 years in 2002. Although it rebounded to earn 108 million, or $132 million, last year, many analysts are not convinced by a revival plan the clothier unveiled3 International Herald Tribune Operating toll motorways and selling pizzas may be rather dull compared with the glitz of the fashion world, but at least they promise a steady cashflow for the next generation of Benettons.4 The Economist

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

UCB: The Chartered Legacy

UCB is a family-run fashion business whose history can be traced back to 1955, when Luciano Benetton started marketing his homemade sweaters to local stores in Italy. He was then joined by his siblings Giuliana, Carlo and Gilberto. UCB opened its first store in Belluno in 1968 (Annexure I). Its products include womenswear, menswear, childrenswear, underwear, toiletries, perfumes, watches, kitchenware and baby products. 2

UCB diversified into related products under different brands United Colors of Benetton, Under Colors of Benetton, Sisley, Playlife and Killer Loop. United Colors of Benetton offers menswear, womens wear and childrenswear. Under Colors of Benetton offers underwear, beachwear and sleepwear. Sisley offers fashion clothing while Playlife is the sportswear brand of the Benetton group. Killer Loop is a fashion brand for young adults, with a resolute and distinctive style. It is inspired by teenagers favourite role models and icons.5
Platt Gordon, Europe: Benetton family seeks Autostrade, http://findarticles.com/p/articles/mi_qa3715/is_200301/ai_n9197004, January 2003 2 Global Finance is a private equity firm which has investments in manufacturing, information technology, specialty retail, media, telecommunications companies and services industries. 3 Sylvers Eric, SPOTLIGHT: For Benetton, tradition and change, http://www.iht.com/articles/2004/09/18/wbspot18_ed3_.php, September 18th 2004 4 Veneto Ponzano, The Other Colours, http://www.economist.com/business/displaystory.cfm?story_id=E1_PTRGDTJ, September 9th 2004 5 http://www.benettongroup.com/en/Whatwemake.htm
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UCB: Expanding through Unrelated Diversification In 1969, UCB opened its first store outside Italy in Paris. In 1988, Benetton got listed on the Milan and Frankfurt stock exchanges. This was followed by its listing on the New York stock exchange in 1989. By 2007, Benetton Group had its presence in 120 countries through a network of 5,000 stores.6 UCB is a completely family-owned business with the Benetton siblings heading different divisions (Exhibit I). Luciano Benetton is the chairman of the Benetton group. Giuliana Benetton is the board of director of Edizione Holding the holding company of UCB that focuses on retail, restaurant and telecom business of the group and the Benetton Group. Gilberto Benetton is the president of Edizione Holding and Autogrill the catering and retail service business of the group and director of the Benetton Group. Carlo Benetton is the deputy chairman of Edizione Holding and the Benetton Group. In 2007, Luciano Benettons son, Alessandro Benetton took over as the groups executive deputy chairman.

Exhibi tI Governing Structure of Benetton Group

Shareholders Meeting (66.73% Edizione Holding S.p.A 33.27% free floating)

Independent Auditors PriceWaterhouseCoope rs S.p.A Executi ve L. Benetton, Chairman A. Benetton, Deputy Chairman G. Caccia Dominioni, CEO from June 1st 2007 G. Mion

Board of Statutory Auditors A. Cas, Chairman F.Duodo, A. Cortelazoo Board of Directors Non Executive C.Benetton, Deputy Chairman G. Benetton G. Benetton Indepen dent L.A. Bianchi G. Brunetti A. Malguzzi R. Singer

Supervisor y and Monitoring Body Legislative 2

Decree 23 1/ 01 L.A.

BIanc hi, Chair man Head of

Corporate Affairs Head of Internal Control

Internal Audit Committee & Audit Committee for sox purposes

All independent Directors G.Brunetti, Chairman L.A. Bianchi A. Malguzzi

Executiv e Commit tee L. Benetton , Chairma n A. Benetton G. Caccia Dominioni G. Mion Head of Internal Contr ol

UCB: Expanding through Unrelated & Corp. Remunera Diversification Discl Services, tion osur Head of e Committe Admin. Committe e All & Reporting, e CFO, independe Head of Head of IR nt Corporate Head of Directors Affairs Media & R. Singer, Chairman Communic ations, G. Brunetti Head of A. Admin. Malguzzi Tax

Source: http://investors.benettongroup.com/phoenix.zhtml?c=114079&p=irol-govCommComp

http://www.benettongroup.co m/en/whoweare/overview.htm

The Benetton Group stood 195th in the list of the worlds largest family businesses in 2007.7 The group produced 150 million garments every year and had a turnover of around 2 billion in 2006.8 (Exhibit II). In 2007, it planned to consolidate its position in growing markets like India, Turkey, East European and ex-Soviet union countries, Mexico and China with special emphasis on India and China.

Exhibi t II Financial Performance of Benetton Group

Year Revenues (in million ) Net Income (in million 2006 (a) 1,911 125 2005 (a) 1,765 112 2004 (a) 1,704 109 2003 (b) 1,859 108 2002 (b) 1,99 2 [10]

(a) These figures are IAS/IFRS compliant and not comparable with the previous years (b) These figures are compliant with Italian accounting procedures.
Source: http://www.benettongroup.com/en/whoweare/overview.htm

Benetton was aiming to position itself as an international wardrobe option with a range that will cater to the casual, formal as well as the party wear segments with various styles and cuts targeted at teenagers, young office-goers and adults above 25 years.9 Not only UCB, many European fashion houses like Moet Hennessy Louis Vuitton (LVMH), Prada, Gucci, Inditex are family-owned businesses. These businesses had their share of advantages as well as disadvantages. Guido Corbetto, who teaches a course on How to Manage an Inherited Company at the Bocconi University in Italy, opines, The advantages are that family businesses have a very strong culture and brand.10 But family-run businesses face succession battles, which even turn ugly like that of Gucci, Fiat, etc. In the case of Fiat, 4 years after the death of chairman Gianni Agnelli, his daughter Margherita Agnelli de Pahlen filed a suit in a Turin court, against three of her fathers trusted advisers, seeking a fuller accounting of his estate. While in the case of Gucci, Maurizio Gucci, a third generation heir, was shot dead. His wife Patrizia ordered the hit because he had sold his stake in the family business, depriving their children of their inheritance. Paolo, the second generation son of Aldo Gucci shopped his father for tax evasion and landed him in prison.11 Another trend among European fashion houses was that most of them were positioned as high-end retailers. Among Benettons competitors, Zara, a brand of the Inditex group12 , positioned itself as a high fashion concept offering apparel, footwear and accessories for women, men and children, from newborns to adults aged 45.13 Gucci, the luxury arm of Pinault-Printemps-Redoute (PPR),14 has positioned itself at the high end of luxury distribution.15 Prada, another Italian apparel brand concentrates on upgrading its store by extensive and innovative use of technology, to project itself as technologically advanced and thereby attract high-end customers. Christian Dior a luxury brand owned by LVMH that had transformed itself from the high-end luxury brand to 4

being a top-end brand positions itself as a luxury brand, catering to high-end customers. The rise in competition and the emergence of new markets made it necessary for Benetton to expand itself to sustain its revenues. The failure of Benetton to expand in the US, where its rivals H&M and Zara succeeded by developing more sophisticated fast-fashion business models, led Benetton to look into diverse areas for expansion.
The Worlds 250 Largest Family Businesses, http://www.familybusinessmagazine.com/topglobal.html Ibid. 9 Shashidhar Ajitha, Benetton aims to get into more wardrobes, http://www.blonnet.com/2002/04/13/stories/2002041301950600.htm, April 13th 2002 10 Moore Malcolm, How Italys young heirs should run the firm, http://www.telegraph.co.uk/money/main.jhtml? xml=/money/2008/03/06/cnitaly106.xml, March 7th 2008 11 Ibid. 12 Inditex, Industrias de Diseo Textil, S.A., is a large Spanish corporation and one of the worlds largest fashion groups. It owns brands like Zara, Massimo Dutti, Bershka, Oysho, Pull and Bear, Zara Home, Often and Stradivarius. 13 http://www.grin.com/en/preview/32961.html 14 PPR is a French multinational holding company specialising in retail shops and luxury brands. 15 Menkes Suzy, No labels will be dropped for 3 years : Polet sets out strategy for a Gucci recovery, http://www.iht.com/ar ti cle s/2004/12/15/gucci_ed3__0.php?page=1, December 15th 2004
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France-based luxury fashion house Herms Group has reported a 7.3% rise in net income for 2007, thanks to an expanded store network and positive sales figures.16 Also LVMHs revenues from its fashion and leather goods division increased from 4,812 million in 2005 to 5,222 million in 200617, while Bennetons revenues increased from 1,765 million in 2005 to 1,911 million in 2006. Moreover, the slowdown in the US economy during 2007 was also expected to affect the sales of fashion apparel. It was opined that the slump in the economy and tougher competition in the fashion industry made Benetton to diversify into unrelated territories. Benettons unrelated diversification can also be attributed to its new leader, Alessandro Benetton who had an experience of running a private equity firm, 21 Invesmenti, before joining UCB. His approach to making money was to pick the right business models for the firms in which 21 Investimenti bought stakes18 The Benetton Group diversified into infrastructure, retail, agriculture, hotel and sports sectors, to maintain its revenues. Benetton invested heavily to upgrade its technology and logistics, and Alessandro Benetton looked to speed up the recovery of the group. UCB looked to restructure its unprofitable sports goods division. It wanted to completely divest its Prince Tennis racquets, Nordica ski boots and Killer Loop snowboards brands.

UCB: In the Path of Diversification

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

Exhibit III Benettons Diversified Investment Portfolio

Company Edizione Autogrill Telecom Italia Atlantia 21 Investimen ti Sintonia Compiled by the author Type Holding company Highway rest shops and airport restaurants Telecom Operator of toll roads Private Equity Holding company 2005 1995 2001 1999 1993 Year of Diversification

UCB manages its different businesses through two holding companies: Edizione 6

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

Bird Katie, Hermes reports strong sales led by perfumery division, http://www.cosmeticsdesign-europe.com/news/ng.asp? n=84115-hermes-l-oreal-fragrance, March 20th 2008 17 http://www.lvmh.com/comfi/pdf_gbr/LVMH2007Annua lReport.pdf 18 New Colours at Benetton, http://www.financialexpress.com/news/New-colours-at-Benetton/237574/, November 9th 2007 19 SPOTLIGHT: For Benetton, tradition and change, op.cit. 20 http://press.benettongroup.com/ben_en/about/holding/company/presskit/en/hc_en/html/
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Exhibit IV Benettons Share in Each Company

Ragio ne

Edizione Holding (100%)

Sintonia (71%)

Autogrill (57%) (Restaura nts)

Benetton Group (67%) (Clothing)

21 Invesmenti (Private Equity)

(2%) Telecom Itali a

Compiled by the author

(33% ) Atlan tia

(26%) Rome Airpo rts

(25%) Other Airpo rts

(33%) Eurostazi one

Edizione Holding has its shares in the Benetton Group, the core fashion apparel business of the group, and Autogrill, the catering and retail service business of the group. Real estate and agriculture businesses of the firm spread across Europe and the Americas. It also looks after Benettons private equity company, 21 Invesmenti. Sintonia, on the other hand, has its shares in Atlantia Autostrade per lItalia that manages the most extensive toll highway network in Europe21. Sintonia also has its share in Investimenti Infrastrutture, an infrastructure company and Sagat, a company that manages the Turin airport. Sintonia holds 8.4% share in Telco, which again holds a 23.6% share in Telecom Italia.22 Benetton entered the Italian highway network through Autostrade, with a view to move away from its clothing business. Benetton is thought to be keen to gain total control of Autostrade as part of its decade-long strategy to diversify its interests away from its original clothing business and into transport and servicerelated companies a business area that has no limits, the companys directors say.23 Apart from its Telecom Italia business, the Benetton Group has been successful in all its other ventures. Confirming this view, Gilberto Benetton says, If I could redo it all again I wouldnt change any of the big investments we have made. Its 8

clear that the investment in Telecom Italia is worth half as much as when we invested, but it remains a sector with great hope.24 Unlike most Italian family-run businesses, which hold a majority share in their companies, the Benettons looked to dilute their share in UCB. Gilberto Benetton says, We are aiming to sell up to 49 per cent [in the venture] and we are looking for three partners, possibly from Asia, the Middle East and eastern Europe who will bring business and not just financial resources.25 By doing so, Benetton hoped that they would get technical expertise as well as financial resources to expand their business, thereby reducing the risks involved in expanding into newer markets.
http://press.benettongroup.com/ben_en/about/holding/company/presskit/en/hc_en/html/ Ibid. 23 Benetton Wants Highway Network, http://www.fashionunited.co.uk/news/archive/benetton1.htm, January 3rd 2003 24 SPOTLIGHT: For Benetton, tradition and change, op.cit. 25 Michaels Adrian, Benetton seeks to diversify via new marriages, http://search.ft.com/ftArticle? queryText=abertis&page=5&id=071018000801&ct=0, October 18th 2007
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In 2007, Benetton looked to enter the Asian, Middle East and Eastern Europe markets. It concentrated especially on India and China. Luciano Benetton, chairman and founder of the Benetton Group said, Both of them comprise half of the world and we need to come here.26 Although Benettons moves to diversify have reaped benefits, analysts remained sceptical about how long this could be maintained. Government resistance over some of its consolidation plans has proved analysts right to some extent. Benetton increasingly has diversified away from its former core business of knitware and clothing into utilities and infrastructure, but it has run into government resistance over the planned merger of its Autostrade company with Abertis of Spain, to create a European motorway giant.27 But Benetton remains hopeful that as in the past, its investments will continue to be successful. As Luciano Benetton puts it, Ive always slept soundly at night I guess because things have always turned out well with our investments.28

Kurian Boby, Benetton plans string of megastores `Focus in India to remain on distribution, retailing, http://www.thehindub usine ssline.com/2004 /11/08/storie s/ 2004110801810100.htm, November 8th 2004 27 Owen Richard, Benetton pools 4.5bn for infrastructure unit, http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article637417.ece 28 SPOTLIGHT: For Benetton, tradition and change, op.cit.
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Annexu re I Timeline of the Benetton Group

Year 1955 shops in Italy 1965 1968 1969 1974 1980 1982 1983 1988 1989 1991 1994 1995 1999 2001 Event Luciano Benetton started selling his homemade sweaters to local Creation of the Benetton Group Opens its first store in Belluno, Italy Opens its first store outside Italy The Sisley brand is launched First store opens in New York First store opens in Tokyo The group enters Formula 1 as the sponsor of the Tyrrel team Gets listed on the Milan and Frankfurt stock exchanges Enters east Europe and former Soviet markets Benetton launches its Colors magazine Fabrica, Benettons communication research center is created Benetton gets a stake in Autogrill Benetton gets a stake in Autostrade Benetton enters Telecom Italia

2007 Alessandro Benetton takes over as the deputy chairman of the Benetton group
Compiled by the author