It’s referred to as the ‘House of Fraser Effect’; the moment a fashion or clothing brand begins a downward slide after appearing in one of middle England’s favourite department stores. The pejorative phrase hints at a well-trodden final resting place for the kind of brands that were once rich in character only to give it all up in a scramble for sales. Nicole Farhi was saved from going to the wall last month by the daughter of the Matalan owner. The founder had previously sold the troubled business to a private equity firm for £5m in 2010, with another private equity company taking control last year, pledging £15m. For the best part of 15 years, Nicole Farhi had a large and loyal fanbase and its catwalk shows were eagerly watched. In recent years, however, new brands appeared to do Nicole Farhi better than Nicole Farhi. Meanwhile, the original easy, understated brand was cutting corners on design and quality and increasingly sold through the likes of House of Fraser. There’s a crowded fashion graveyard of brands like Nicole Farhi that started life with a small but adoring following and bags of promise only to fall foul from growing too fast, often in ill-judged directions. It’s usually a result of a brand suddenly diversifying into lots of products or suddenly blasting its way indiscriminately into any department store in any corner of the world and dilute its magic. Why does this happen? A look at recent examples suggests this pattern of overexposure invariably comes after the arrival of private equity money. It begs two questions. Is it not possible to grow a controlled and profitable fashion brand without professional investors, and why do private equity backers frequently steer fashion firms into long term failure?
Nowhere is the phrase ‘cash is king’ more resonant than in the apparel business. Imran Amed, founder of The Business Of Fashion, spells it out. ‘Building a collection for the first time is expensive. Selling and delivering a collection is even more expensive. There are three routes for a startup in this situation: bank loans, that’s out; factoring (where a business sells its invoices to a company for cashflow, but isn’t so common outside the US); and then there’s investment.’ As soon as products are sold into department stores, costs rack up, often a full year before there’s even a whiff of payment. Growth becomes a spiralling and never-ending monster with increased orders putting huge pressure to find funds to fuel manu- facturing and marketing costs. Adam Brown, founder of swimwear brand Orlebar Brown, says: ‘With a product-based business, you very quickly hit cashflow problems unless you have £1m in the bank.’ For banks used to being shunned by banks for loads, a VC knocking on the door with cash and connections are hard to resist.
The circumstances of the founder are often just as critical as the needs of the business in bringing in external investors. Aged 24 in 1999, fresh out of university, and with £40,000, Peter Williams set out to reclaim campus prep from the US, with his vision of scruffy and mischievous posh boys and girls via his Jack Wills brand. After spending eight years building Jack Wills, Williams accepted an undisclosed offer for 27% of the company from Inflexion Private Equity in 2007. It was ostensibly to develop the business into new markets, but it’s thought Williams’ personal circumstances were more critical. He was at this point in his 30s, a bit less cavalier, a baby was on its way and the family were in need of a bigger house. He could be forgiven for uttering the words ‘securing our future’ around this time. More recently news broke that the company posted a £10m loss for the year to February 2013, despite sales of £122m. Williams, it was also reported in the FT, wanted out. The company is apparently seeking a £500m floatation and an exit for the founders. Personal reasons were also behind the sale of Agent Provocateur, an upmarket, racy lingerie brand which was the brainchild of Joe Corré, the son of punk royalty Vivienne Westwood and Malcolm McLaren. Corré and his then wife Serena Rees collectively owned the business, selling the company to private equity firm 3i in 2007 for £60m when the pair divorced.
"Investors I’ve spoken to have been adamant they want to keep our integrity... it would be silly to mess around with that..."
Depending on your point of view, VCs bring much-needed commercial rigour to lovely-but-plodding clothing brands, and making founders rich in the process. Or VCs spell the beginning of the end for a brand’s identity and long term existence. It comes down to a matter of timescales. Private equity and VCs typically operate on six year horizons. Their aim is unapologetically to sell the business for as high a price as possible and as fast as possible. And as valuations are primarily measured as a multiple of sales, it inevitably means the balance between protecting the brand and maximising sales is tipped towards the latter. Brown completed an £8m investment round with private equity firm Piper as Courier went to press (early August), The deal allows Orlebar Brown to make a more aggressive foray in Europe and into the US. Brown spoke highly of Piper, emphasising similar values. ‘The ones I’ve spoken to have been adamant they want to keep our integrity. We’re small, just six years old and vulnerable. It would be silly to mess around with that.’ Ratcheting up a valuation and flipping the business has been done several times by Jimmy Choo founder Tamara Mellon. She has kept different sized slices of Jimmy Choo across four separate transactions for the one business in a 15 year period which has made her a £150m fortune. It’s been a consummate exposition of quickly delivering shareholder returns over a short period for a fashion brand. At the opposite end of the spectrum to Mellon is Nick Brooke, CEO of Sunspel, a business founded in 1860, but fallen on hard times in recent years. Brooke took over in 2006 through a distant family connection with the intention of reviving the business. Brooke says: ‘We’re 100% independently owned, so we don’t need to have things like a target market or a marketing strategy to demonstrate high growth.’ Brooke insists that it’s important to detach ideas of growth and speed, arguing that it comes down to how deftly a founder can stretch distribution and products.
Adam Brown co-founder of Orlebar Brown, in the studio.
Adam Brown co-founder of Orlebar Brown, in the studio.
The business of where you sell things has a peculiar complexity for fashion brands. Outside of fashion, it’s almost entirely a matter of maximising sales and margins; in fashion and clothing the impact on the brand is just as critical. Orlebar Brown launched online-only, supported with a sprinkling selection of independent stores around London. There are now three Orlebar Brown stores (accounting for 15% of its sales), it sells through independents and department stores (45%) and continues to work the web (30%). Brown says: ‘If I was web only I wouldn’t have needed money, but we would’ve grown much slower. The web is the greatest store, but you’re on a street with no footfall. You have to drag people over. Your life is generating traffic to that store. The flipside is that retail is very cash hungry.’ Brown is very sensitive to damaging the brand from expanding distribution, but says he isn’t remotely close to saturation. ‘We’ve got 217 stockists, our direct competitor [Vilebrequin] has 745. We need to reach more people. The secret is a few key [retailers], and deepen the relationship, so they are able to buy more products.’ Most investors’ instincts are to push the brand into department stores as well as rapidly build up an own-brand store chain in high footfall shopping centres and high streets to get sales pumping. Both Brown and Sunspel founder Brooke, are acutely aware of the risk from this path. Brooke has opened three of his own stores in what is as much a brand play as a sales one.
Jack Wills’ early forays in retail were particularly bold. Williams was clear that even the locations of shops communicated something important about the brands. The smattering of London stores came after Chelsea-on-sea type spots such as Salcombe, Aldeburgh, Rock and Burnham Market. His flagship London store was a disused warehouse on Redchurch Street that Williams doggedly pursued. He partnered with Shoreditch House to open a cinema and gallery along with a shop in 2010. Just like in the UK, Jack Wills’ advance in the US was done outside of the big metropolitan areas, instead by identifying the groups who led the herd Jack Wills was targeting. First US stores were Nantucket, Martha’s Vineyard and Boston. After Inflexion Private Equity arrived, Jack Wills’ distribution has rapidly expanded across the UK, even stretching to places like Kuwait and department stores.
Third party retail is the trickiest of beasts, carrying the most risk of wreaking havoc on a brand. When it works, placement alone in Selfridges or a hip independent retailer is in itself a potent promotion channel expressing endorsement. Where exactly the brand is placed in the shop also projects a lot to a customer too. To see Orlebar Brown swimming shorts next to the upmarket French brand, Vilebrequin in Selfridges helps customers interpret this otherwise new and unknown brand of swimming shorts. It’s known as ‘adjacency’. But it can work the other way too. Managing adjacencies can be tough. Department stores understandably act ruthlessly with brands if the product isn’t selling at the necessary speed. Brands that were once sitting adjacent to brands that the company was happy to rub shoulders with can easily find them- selves dumped next to downmarket brands. Prices can also be mercilessly slashed during sale times. Just like ‘bad adjacencies’, marked down prices can do untold damage to the brand. Superdry is a case in point of a brand that was once an edgy Japanese-inspired casual brand not so long ago but has recently encountered considerable turbulence. Many attribute it to blunt and aggressive third party distribution, sitting in places like Next and Littlewoods with what one executive described in industry-speak as ‘horrendous adjacencies’, as a result of surrendering control of brand for maximising sales.
The pressure to expand isn’t restricted to distribution. VCs often look to grow the range with products to reach as many as people as possible. Sunspel has moved beyond underwear and t-shirts to a range that stretches from cashmere jumpers, wallets and notebooks. Nick Brooke says: ‘We’ve discussed being narrower on products. There is always a risk in extending the range, but it’s a very considered risk from us. We explored womenswear but when we did it, we did it very slowly.’ Orlebar Brown has evolved from its home turf of tailored swimming shorts to a broader mix of products. Just over 50% of Orlebar Brown sales are currently swim-shorts, while 30% are t-shirts and polos. Both Brooke and Brown are staunch defenders of their respective brands’ authenticity, and conscious of going too far.
As more large companies start taking notice of Brown, he could be forgiven for being perturbed by the threat. ‘I’ve got a box of products, including from some huge fashion labels - four or five of them - which have tailored shorts with side-fasteners. These brands may copy us for a season or two but we need to own it. You can see the difference in quality. Look at their weight, stitching, zips, the ruching. We ignore the noise, and just do what we do with integrity.’ Brooke says Sunspel’s heritage speaks to customers in a powerful way. Like Brown, he talks of the need to have a broader mix of products to be taken seriously as a retailer. ‘Our sales may be underwear, t-shirts and polos, but it needs more if we expect people to walk into our shops.’ Sometimes it’s not more products that are the problem, but safer products that pose a risk to diluting a brand’s identity. Agent Provocateur is seen by many to have lost its way despite making profits of over £4m for the year to March last year, with sales up over 20% and AP’s expensive undies available in virtually every major market around the world. Many in the fashion and clothing industry say AP has lost the edge that made it cool and dangerous, that allowed it to maintain its high prices, and is now at risk of coming under attack from new challengers. But the response back from the management would be a perfectly credible assertion that it’s being run like a business, addressing a much larger audience than a more promiscuous high fashion crowd.
Most industry insiders say VCs have consistently damaged brands with potential by aggressively sweating any value to drive short term sales. The post-private equity Jack Wills triggered a collision course between the company’s creative roots that revered the brand with new pragmatic investors. The evocative lookbook was diluted to something more akin to a catalogue. Trousers were no longer rolled up and top buttons weren’t done up in shoots, headless torsos with clothes replaced full shots of models on the web-store. Advertising featuring highly sexualised college kids were gone, an emphasis was taken on logo-driven hoodies instead of a product mix which featured more daring clothing. Most significantly, Aubin and Wills was killed off. The strategy was clear, use the firepower to build Jack Wills. Highly regarded creatives left as highly regarded corporate execs arrived. Recent indications are that ex McKinsey partner and former Vodafone executive, Wendy Becker will be moved from COO to CEO as Williams takes a back seat. The question remains whether Jack Wills can continue to build sales and maintain its margins while its brand appears to be degraded.
Founders typically find bearing witness to the compromises to their original vision and values frustrating (despite the money when they sold their stakes), and end up calling it quits. Joe Corré decided it was time to part ways with Agent Provocateur, in October 2009. He is launching a countrywear range called ‘Jack Sheppard 1724’ this summer from A Child of Jago, a small independent store in Shoreditch. Peter Williams is believed to be plotting his own new venture, a cycling clothing brand. Sunspel and Orlebar Brown are two brands on an impressive rise, led by founders with majority or full ownership and a sharp sensi- bility about what the future of their companies looks like. Brooke is keen to hold onto full ownership with his co-founder, while Brown believes Orlebar Brown needs investment to grow.
Not selling to an investor appears to require a certain outlook from the founder, a preference for control rather than getting rich and enormous nerve. While some brands have demonstrated longevity with the owner at the helm, it increasingly appears that it’s just extremely difficult to build a world class apparel brand in the fickle and cash-intensive fashion world, requiring more business guile the further the business progresses from startup stage. So, the chances are that many founders will at some point find themselves unstuck as the challenges become increasingly tougher to grow the little clothing brand they set up so long ago.
Jack Wills did not respond to requests for comment on this article.