Fast Clothes

It's a lesson borne from painful memories. In the late 1990s, Benetton made an ill-judged foray into sportswear and sports equipment, leaving it with an array of businesses producing everything from tennis rackets (Prince) to ski boots (Nordica). After posting a net loss of €10m in 2002, the acquisitions went on the block the following year, selling for a fraction of the price paid only a few years earlier.

Faced with today's economic downturn, fashion retailers are bracing themselves for a slump in consumer confidence, particularly in the US. But in a conference call with analysts in early March, Foà said that Benetton hadn't experienced a dramatic dip in sales since the credit crisis, largely because the Americas make up only around 2% of overall revenue. "For now, one of our strengths is that our commercial presence in the US is quite small, while about one-third of our cost of goods is dollar denominated, so we have a positive hedge," he says.

Nonetheless, like other CFOs, Foà is scouring the balance sheet to see where it can be shored up, just in case. It's no surprise that he's homed in on Benetton's property assets. In a break from the past, he says Benetton will now consider undertaking a sale-and-leaseback or other options to free up capital. Excluding "the most strategic locations" (that is, flagship stores in cities such as Milan, Paris, Tokyo and Moscow) "we can evaluate an opportunity to dispose of some locations if, where and when we see an opportunity to generate cash — value that can be invested somewhere else to boost commercial development," he says.

While that is a big step, it doesn't address something much greater that could hold Benetton back. Unlike its main retail rivals, the backbone of its business model are the franchisees which run most of its 5,000 shops and use Benetton as their wholesaler. Benetton owns only some 350 shops bearing its name, accounting for around one-fifth of revenue and only around 15% of Ebit last year. Though the model has its advantages — among other things, expansion is less costly and inventory risk is reduced — it's harder for the company to compete in fast fashion given the lead time needed for the franchisees to place their orders every time Benetton has a new collection. Furthermore, the franchise model hampers the company in terms of how far and how fast it can execute its turnaround, says Deutsche Bank's Di Pasquantonio. "The franchisees aren't under any obligation to do what the group says," she points out. Implementing the vast changes that the new CEO/CFO team envision "is going to be a very long process."

But in today's world of fast fashion — where collections can last mere weeks rather than entire seasons — time isn't on Benetton's side. In this industry, Foà says, "you can't take anything for granted." Including turnarounds.

Janet Kersnar is editor-in-chief at CFO Europe.

Rapid Response

Retailers such as Benetton were once happy selling just four collections a year — two for autumn/winter and two for spring/summer. But that was before Zara changed all the rules.

Starting in the 1990s, the company based in La Coruña, Spain began refreshing its collections throughout the year, giving consumers more choice, more often. It now sells some 500m garments a year. This requires near real-time sales data flowing from tills in hundreds of shops around the world to manufacturers, which make sure that orders are filled in less than 72 hours. And because Zara's clothes stay on the shelves for no longer than two weeks, the average customer drops into one of its stores 17 times a year, compared with three to four visits to competitor stores. It's what Richard Wilding, a professor at the Cranfield School of Management in the UK, calls a "when-it's-gone-it's-gone approach."

Zara is still speeding ahead, finessing and adapting its supply-chain model further. Last year, it launched a inventory-optimisation project, with the help of mathematicians at universities MIT and UCLA, and sponsored by Zara's CFO, Miguel Déaz. With the new analytical model, the aim is to reduce the guesswork of forecasting when stores need to place orders. The old system was largely based on manual input by shop managers, while the new software system automatically analyses historical data and seasonal trends to determine the best use of available stock. While still in the early stages of development, Zara reckons that the system has already boosted sales by 4% through a more customised mix of items at each shop, while leaving less unsold stock.

Zara isn't stopping there, says Jérémie Gallien, a professor at MIT who helped launch the project. He says CFO Déaz has asked them to start on another model to improve pricing decisions during clearance sales.

Rivals are watching with envy. In a new survey by AMR Research, 46% of clothing retailers said that their two main priorities for 2008 are improving analytical capabilities and increasing supply-chain visibility, up from 26% in 2007. But with more than 60% of respondents saying that they don't expect to increase IT budgets to help them do this, getting up to speed might be a lot easier said than done.

Fine-tuning Finance

Emilio Foà isn't usually someone who looks a gift horse in the mouth. But while the finance team he inherited as Benetton's new CFO were "highly skilled, highly professional," he was struck by something as he leafed through a fat file on his desk one evening while preparing for his first board meeting: his new finance team were good at producing lots of data, not so good at producing information. What's more, a lot of the information — though arguably useful from an accounting perspective and for its efforts to become Sarbanes-Oxley compliant — wasn't what finance needed to help drive the company. "There was a level of sophistication in certain processes that was actually too high," he says. "So we were doing more than 100% of what was needed on some basic stuff, while missing parts of business support," such as forecasting and analysis.

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