The industry faces twin challenges of size and distribution.
MILAN, Italy (ANSA) — Last month’s Salone del Mobile—Milan’s annual design extravaganza hosted by Italy’s luxury-goods association, Altagamma—was another successful “Made in Italy” showcase of many of Italy’s iconic design brands.
Owners and designers who gathered in Milan on April 1 for a seminar on the prospects for their industry included Alessi, Boffi, Flos and Kartell, among other experts and entrepreneurs who discussed strengths and weaknesses, as well as challenges and opportunities facing their version of “Made in Italy.”
In a presentation on the sector, Claudia D’Arpizio, a Bain & Company partner, pointed out that Italy has the largest slice of the global market for design, thanks to its firms’ innovative products, technology, and production know-how.
Another key Italian strength is its design firms’ high level of “vertical integration,” or control over the whole value chain, from design concept to production. Italian design companies rank first in the world in terms of exports as percent of overall sales, and they are also the most profitable. And demand for design, she said, is strong, especially in the so-called contract sector—hotels, airports and the like—and economically strong markets like America and Asia.
However, D’Arpizio warned that the country’s industry suffers from a common Italian malaise: too many small players in an industry where scale is important. Italian companies account for just over one third of the almost $30 billion global market for design (and almost 40 percent at the premium level), broadly split into the five “core” categories of living and bedroom, kitchen, bathroom, lighting, and outdoor. But Italian firms are relative minnows compared to their international peers, generating some $45 million on average in annual sales, compared with, for example, $230 million at their Japanese competitors and $180 million at their American ones. Not only does this limit growth, but it also drags on potential profitability. Design firms on average have a profit margin of around 8 percent, which D’Arpizio said is “good, but not excellent, and less than the double-digit profitability at many luxury-goods makers.”
Perhaps the greatest challenge faced by Italian design firms is how to get their products into consumers’ hands. The current wholesale-heavy business model leaves designers in the hands of multi-brand store networks that they don’t control—a bad proposition in a context in which many multi-brand retailers are themselves in financial dilemmas.
Yet, creating a wholly owned and profitable retail network isn’t economically possible for most design firms, as it requires lots of capital and a certain type of know-how—ask the luxury world—that design brands don’t have. A direct result of this difficulty is that most design firms don’t have a strong presence in markets where demand is strong—like the United States, emerging markets, and Asia.
During a panel discussion following D’Arpizio’s presentation, industry entrepreneurs shared some insights on their prospects.
“This is a sector where there is no brain drain. On the contrary, in terms of design, Italy is a net importer of creative talents from all over the world, while other industries are exporters,” said Claudio De Albertis, president of Fondazione La Triennale, which manages Milan’s world-famous design museum and hosted the event.
Claudio Luti, chief executive of Kartell, said that Italy’s design value chain is “unique in the world.” But, echoing D’Arpizio’s analysis of the distribution challenge, he said that in order for Italian firms to prosper, “They need to develop a new, open and multichannel approach to the market, without losing their ability to be innovative.”
Piero Gandini, chief executive of design-lighting firm Flos, pointed out that his industry suffered from a lack of competences in many areas other than design. “Product excellence is what we all obsess about—and it is our excellence. But the level of competence within our companies, design aside, is still too low,” he said. “If we’re still alive, it’s because our products are so good. But this is a challenge.”
Commenting on the need to make a broader push into foreign markets, Gandini said, “Before we talk about where to go, we need to equip ourselves with the right skills. Fashion companies know 50 times as much as we do in this.”
Efforts are underway to create such skills, said Roberto Gavazzi, chief executive of high-end kitchen-and-bathroom maker Boffi. “We have an internal school to train our employees, to help make up for the skills shortage Gandini referred to.”
Gavazzi also pointed out that his firm—perhaps one of the few of its kind—has a strong mono-brand retail network, and it works. “Sales in our owned mono-brand stores are growing at twice the rate of other channels,” he said.
Rounding out the panel discussion was Stefano Core, chief executive of design-furniture-and-interior-décor firm Driade.
While pointing out that “passion, distinctiveness and uniqueness are the success factors of our industry,” Core also said that the average firm’s small size is increasingly a limit. As an example, he pointed out that, if a firm wants to expand sales, it needs a qualified sales manager. But with fairly slim profit margins, he said, “Basically, your net profit is going to be paying your sales director’s salary.” Funds are even more lacking for important growth drivers, such as investment in distribution and customer-base building.