Benetton Group (BIT:BEN)

TOP CONTRIBUTORS

Kaitlynn Schneider FI414 sec. 002 Group 8

Dominic Olivetti

Kris Marin FI414 002 Team 8

Company Overview

"Benetton Group" Borsa Italiana (BEN) is a fashion apparel designer and producer, selling men’s women’s, and children’s clothing and accessories. Headquartered in Treviso, Italy, The Group is a subsidiary of Edizione Sri, represented in over 120 countries with 6,000 stores worldwide. ^[1] 2010 annual revenues were 2,053 million Euro, a .2% increase from 2009, and net income of 122 million Euro. ^[2] The Benetton Group is composed of three brands, United Colors of Benetton, Sisley, and Playlife.

In 1979 Benetton expanded internationally, and continued to have substantial growth throughout the 1980’s and into the 1990’s. North America accounted for 20% of Benetton’s sales in 1985, however today, the Americas account for only 3% of their annual revenues. ^[1] Benetton Group had their initial public offering on the Milan and Venice stock exchanges in July of 1986. In 1989, they had their IPO on the NYSE. As of 2008 The Benetton Group voluntarily delisted from the NYSE, due to international diversification of portfolios, as well as the new Sarbanes-Oxley Act requirements and fees. ^[3]

Business Segments

United Colors of Benetton

In 2009, 82% of The Benetton Group's revenues were from United Colors of Benetton sales, 51% of the United Colors of Benetton sales were from their adult line and 31% were from Kid sales. United Colors of Benetton is The Group’s most famous brand. It is built on the idea of diversity, showing through in their brightly colored, casual clothing, and expressive ad campaigns. The United Colors of Benetton has men’s, women’s, children’s, baby, and underwear, known as Undercolors, lines. UCB was successful in the 1970’s into the 1990’s, because of their innovative supply chain and logistical techniques, dying fully assembled, unbleached wool garments at the end of production to meet market demands.

The United Colors of Benetton is known for their no-holding-back ad campaigns, specifically their promotion of diversity and their 1990’s AIDS awareness. No social issue is too far, and in the United States in the 1980's, Benetton’s ad campaign scrutinized the death penalty; ads included close ups of inmates on death row. Other famous campaigns include partnerships with non-profits like the World Food Programme. ^[5]

SISLEY

Sisley accounted for 16% of The Groups 2009 sales. Originally a French denim brand, Sisley has become The Group's glamour brand, since its acquisition in 1974. ^[6]

Playlife

As of 2009 Playlife accounts for only 2%, a small potion of The Benetton Group’s revenues, which can be attributed to their small demographic reach of Western and Eastern Europe, and Northern Africa. Playlife is Benetton’s sporty, leisurewear brand; inspired by the North American college campuses. ^[7]

Business and Financial Metrics

Operating Results

As of 2010, Benetton’s operating results have shown stunted growth. Revenues grew only a dismal .2% from 2009 to 2010. Gross Operating Margin grew by .2% as well, however most major figures such as contribution margin, EBITDA, and net income have experienced declines of at least 1% over 2009. Low returns on equity (6.9%) and the low P/E ratio of 4.39 shows some signs of trouble ^[8]. ). Gap (26.84%, 12.0)^[9] and H&M (42.29, 7.86)^[10] are far outperforming their Italian competitor in these figures. Industry averages are quite high, with return on equity at 10.8% and price-to-earnings at 25.5 ^[11]. The price multiple is generally thought of as a solid barometer for investor confidence of futures earnings growth, and it can be inferred that investors are currently being wary of purchasing Benetton Group stock. Another figure illustrating this fact is their low market capitalization; it has fallen to an all-time low of 448 million Euro^[8].

Perhaps the most urgent concern to the Benetton Group is the rising costs of raw materials for their apparel ^[12]. As of this writing, the price of cotton has surged over 150% since August 2010^[13]. Many retailers who have kept prices low during the recessionary period have begun to raise prices once again, some pushing prices up by 20%. These higher raw material prices will be either passed on directly to the consumer or will serve to erode margins. Benetton Group’s contribution margin has been slowly declining, having fallen .5% over the last three years^[1]

Benetton Group will have some obstacles to overcome in the future. This Italian clothing giant that has thrived on basic apparel schemes is struggling to remain relevant among the ultra-competitive modern fashion segment. Considering that revenues have grown by only 2.62% since 2001^[14], Benetton must undertake major strategic initiatives in order to remain competitive.

Trends and Forces

The clothing industry is full of market forces that constrain a business but also offers unique conditions for the industry. Competition is extremely intense in the apparel industry as there are many brands that customers are very familiar with. Many of these brands are global icons that largely affect the industry. Buyer power is extremely high as consumers have many different choices of companies and many of these companies are willing to cater to unique demands. Supplier power is also strong as companies are at the mercy of price fluctuations in raw materials such as cotton. Textile companies are often seen as price makers. Rivalry in the apparel industry is intense as companies compete for low raw material and labor prices but also influence consumer’s tastes and preferences. Also, gaining entry into the industry is relatively easy. Many individuals even make customized shirts that you see on the sides of streets. In the end the industry is highly competitive.

To gain the edge in such a competitive industry many retailers rely on marketing initiatives. These initiatives can build brand awareness and demonstrate a company’s strengths and unique offerings. Benetton has relied on edgy, bold, and sometimes controversial ads to stand out and build brand awareness. In recent years there has been significant growth in the apparel industry, especially in the performance apparel segment. This includes athletic and sportswear as many firms introduce separate segment lines to compete in this booming part of the industry.

The economic downturn has certainly had its effects as many companies have been forced to downsize and trim operating expenses. One particular effect is that firms have looked to their supply chain to reduce uncertainty, variation, and costs. Vertical integration has been a popular trend. In order to stay ahead during tough times firms must meet their consumer’s demands. Consumer’s preferences are always changing as it is the nature of the fashion industry. Due to the volatility the company has to stay one step ahead and respond well to new consumer tastes. As an effect of the customer’s unique demands, innovation is key and is the core of brand development. Growth used to be the core driver of the industry, however it is now innovation. Without innovation a firm will fall behind and fail.

There has been a shifting away from brick and mortar sales. With the internet online sales have become an important factor, although brick and mortar sales are the primary means of sales. Customers like to visit the stores and try on clothes. Another shift in the retail industry has been acceleration in the development of distribution channels. Through customization and specific orders firms use just in time manufacturing to optimize and speed up their supply chain and reduce slack. These moves result in high cost savings for the brand.

Clothing brands must figure out a way to differentiate themselves. “Lifestyle” brands strongly emphasize more than just clothes but a way of life. Consumers feel dedicated and loyal to these firms and these brands are becoming increasingly popular. Benetton is certainly a “lifestyle” brand. There has also been an emphasis on niche markets (meeting unique consumer demands). Companies find it necessary to customize their goods for consumers. Consumers have become very selective and demand that clothing companies are able to meet whatever need may surface. In addition a trend that has developed is that sales are more commonly being made directly to the consumer. Retailers have become less prevalent as companies open their own stores to create brand recognition and ease supply chain operations.

Competition

Benetton competes in the fierce fashion retail industry, which consists of many competitors. The three main competitors of Benetton are Inditex, Hennes & Mauritz, and Gap Inc.

• Inditex SA (MCE:ITX) Inditex is one of the world’s largest retailers, made up of over 100 companies operating in textile design, manufacturing and distribution. Started in 1975 in Spain, this international company is similar to Benetton in that it is vertically integrated, manufacturing as well as distributing its products. ^[15]

• Hennes & Mauritz-b- (STO:HM B) Hennes & Mauritz, better known as H&M, is also an international retailer started in 1947 in Sweden. Their business strategy is to provide fashion and quality at the best price. ^[16]

• Gap (GPS) Gap Inc., is an international specialty retailer founded in 1969 in San Francisco. Th brand has expanded into five different retail brands, including Gap, Banana Republic, Old Navy, Piperlime, and Athleta. ^[17]

^{[18] [16] [10] [19] [9]}

Benetton has the largest number of stores, outnumbering its three main competitors. This, however, has not proved to be an advantage to the company, as they are struggling behind their competition as of 2010. Gross profit margin, net profit margin, inventory turnover, and ROA were all significantly lower than these three main competitors. In recent years, Benetton has had trouble keeping up with the market in terms of delivering fashion at a high pace, and moving product swiftly throughout their chain to deliver the newest styles to consumers. The immensely low inventory turnover of 3.36 demonstrates the difficulties Benetton has had in selling products and replacing them with fresh styles. This is an important factor in the retail industry, because survival depends on delivering contemporary styles rapidly. This factor also contributed to the relatively low revenues, as they fell behind Gap and H&M. Benetton did have 84% higher revenues in 2010 than Inditex in 2009, however, 2010 Inditex figures are not available so we cannot compare these figures.

References

1. ↑ ^{1.0 1.1 1.2} "Benetton Group Investor Relations"
2. ↑ "Bloomberg Businessweek"
3. ↑ "ReferenceAnswers"
4. ↑ "Benetton Group IR Download Area"
5. ↑ "Benetton Group Campaigns"
6. ↑ "SISLEY HISTORY"
7. ↑ "Playlife"
8. ↑ ^{8.0 8.1} "Yahoo Finance- Benetton Group"
9. ↑ ^{9.0 9.1} "Yahoo Finance-Gap"
10. ↑ ^{10.0 10.1} "H&M 2010 Annual Report"
11. ↑ "Textile-Apparel Clothing Industry Stats"
12. ↑ "Benetton Group 2011 Outlook"
13. ↑ "Apparel Prices Likely to Rise as Cost of Cotton Leaps"
14. ↑ "Benetton Group Releases 2001"
15. ↑ "Inditex-Who We Are"
16. ↑ ^{16.0 16.1} "About H&M"
17. ↑ "Gap-Our Story"
18. ↑ "Inditex Annual Reports"
19. ↑ "Gap Key Facts"