UK: COMING UP FAST - Getting a sure footing in foreign markets - London-based Patrick Cox is already used to ...

UK: COMING UP FAST - Getting a sure footing in foreign markets - London-based Patrick Cox is already used to ... - COMING UP FAST - Getting a sure footing in foreign markets - London-based Patrick Cox is already used to doing business overseas. But havin

by JO JOHNSON, who writes for the FT Lex column [PP] 127, 131Photograph (omitted).
Last Updated: 31 Aug 2010

COMING UP FAST - Getting a sure footing in foreign markets - London-based Patrick Cox is already used to doing business overseas. But having grown his business to a multi-million pound concern, his next steps could be tricky. Jo Johnson reports.

Stuffy people sometimes say that if you want to judge a man, examine his shoes. Patrick Cox, the Canadian-born designer, prides himself on his traditional English shoemaker's training; indeed there is nothing that pleases him more than selling a pair to a pukka City gent.

But as discreet signals of potential boardroom gravitas, his shoes are a disaster. They shout frivolity and high-kicking camp, late nights, and attitude. It is no wonder, then, that, for the best part of a decade, his Wannabe loafer has been the shoe of choice for football stars, party queens and other fast company. The next time you see an AMW (actress, model, whatever) stepping out of a cab, wearing baby-doll pigtails and a tight, bright and spangly T-shirt in this month's pink saying something like 'Pussy' or 'Grrr', the odds are that her brightly coloured shoes are cherished Cox creations.

When I met Cox for lunch at an Italian restaurant near his Knightsbridge headquarters, he admitted that the first thing he did on meeting someone was indeed to look at their shoes. 'People might for a second think I was shy, but in fact I just can't help checking them out.'

I had contemplated buying a pair of his shoes to pre-empt any ridiculing of my ancient brown Campers, but he barely gave them a glance. 'I'm not a shoe snob,' he offered kindly at one point. When I explained that there was nothing I liked less than buying new shoes as they normally cut my feet to ribbons, he looked genuinely horrified and assured me that his shoes, which range in price from £30-£250, would never, never do that.

Cox himself is hyperactive, with a reputation for hedonism, a passion for Blondie and a hyena-like laugh. Since he is something of an export himself, he has a rare perspective on expanding overseas from a UK base.

Aged 20, he was tired of Toronto's provincial fashion world and lusted for London. 'It was 1983 and the middle of the New Romantic era. Duran Duran and Spandau Ballet dominated the airwaves and new magazines like ID, The Face, and Blitz were creating a buzz.'

Young Cox checked into Cordwainers, a technical college devoted to shoemaking, in the East End. Although Cox is Cordwainers' most successful alumnus, he is scathing about the course: 'It taught me nothing about how to run a business.' And Hackney too was a disappointingly drab: 'There was nothing happening about it then, I assure you.'

Nonetheless, it was a good move. Sixteen years later Cox is the 100% shareholder of Patrick Cox International, a fashion group with £19 million turnover and net profit of £400,000, all generated by a brand that has been stretched to encompass not just shoes, but clothes, jewellery, bags and ties. Next year will see the launch of Patrick Cox scent (provisionally called High: 'get High ... by Patrick Cox'), watches and possibly also men's underpants sold with a 'Cox in your box' strapline.

Along the way, he has played an important part in what he describes as the 'new aesthetic' which saw a wave of young designers turn tastes away from formal French elegance, epitomised by long-established fashion houses such as Chanel and Yves Saint Laurent, towards funkier sartorial status symbols.

At first, Cox produced footwear for other designers, including Vivienne Westwood and John Galliano. His high-profile work for these influential designers and their shows was central to the success of the company he set up in August 1985 to design, produce and wholesale footwear and also of the private label collection he launched in 1987.

Cox's depressing experience with curmudgeonly British shoe manufacturers, however, forced him to shift production to Italy. British factories were unwilling to accommodate small runs of idiosyncratic designs, with most preferring to concentrate on volume production for the mass market. Cox tells of using the same buckle for two years on his men's shoes, and of being restricted to two colours, brown and black, with white in summer if he was lucky. Cox went bust, but bounced back. With a more reliable Italian manufacturing operation now supporting him, he was able to become more ambitious in his marketing.

It was his loafer that made Cox hot. With its chunky square toe and brilliantly coloured leather, it fast became one of the most easily recognisable items of footwear on the British scene. Cox took a shoe that everyone was familiar, even bored with, and transformed it into a must-have item, available in adventurous materials such as mock-croc, red suede and green python skin.

By 1993, the style had become so well known, he gave it its own brand, the Wannabe, partly in deference to Madonna, but mainly to signify that the shoe was an aspirational product for customers not yet ready to pay the full whack for his main designs. It has now sold over a million pairs and, although its cachet is far from being what it was when queues formed outside the Symons Street shop, still accounts for around half of the 300,000 pairs of Patrick Cox shoes sold each year.

Yet to talk to Anthony Bottomley, the chief executive Cox hired in 1995 from Hermes to help him run the company, it rapidly becomes clear that the business is now at what management consultants might euphemistically describe as a 'major strategic inflexion point'.

Put more prosaically, without an injection of capital, its ability to grow in its markets and compete against the rapidly growing giants of the global luxury goods sector - among them Prada, Gucci/Pinault Printemps Redoute (PPR), Louis Vuitton Moet Hennessy and Richemont (LVMH) - will be severely constrained. Ultimately, the business could suffer enormously if it does not react now to the changes in the structure of the industry.

Standing still does not look like a viable option.

This is not to say that Patrick Cox is highly leveraged. In fact, the business has virtually no debt at all and finances its working capital needs with an overdraft from Barclays Bank. But the pace of consolidation in the luxury goods sector, largely driven by the previously mentioned four giants, has dramatically altered the competitive landscape for a small private group. The last three months alone have seen Prada snap up the companies founded by designers Jil Sander and Helmut Lang, as well as Church and Co, the manufacturer of the quintessentially English gentleman's brogue. Earlier this summer, LVMH and Pinault Printemps Redoute fought a bitter battle for control of Gucci.

And Gucci, now controlled by PPR, is negotiating to buy Sanofi Beaute, which includes Yves Saint Laurent and various fragrances. Cox has come to realise that maintaining complete ownership of his business is no longer an option. 'It's the old question: is it better to have a big share of something small or a smaller share of something big?'

At the heart of the problem is that Cox falls between two stools. On the one hand, the now slightly greying 36 year old is no longer so hot that he can automatically command a presence in the shoe drawers of fashion aficionados. That honour has passed to a new generation of designers, including Rodolphe Menudier, and still belongs to the true virtuosos of the profession such as Manolo Blahnik.

This must-have quality is relatively easy to measure: it is one of the ironies of the fashion industry that status accrues commensurately with the speed with which counterfeiters set about imitating new designs for mass sale on the high street. 'Copying is a form of self-validation,' Cox says. The bigger the legal bills the hotter the talent, perhaps. In Cox's case, the lawyers have been twiddling their thumbs a little too much lately.

And on the other hand, the big boys outgun Cox when it comes to competing for the pick of retail sites in key cities and in fighting their marketing budgets dollar for dollar.

In terms of retailing presence in the streets that count, Cox has done well for such a cash-starved group, which has always financed its expansion through internally generated resources.

It has two stores in Paris, and one in each of London, Manchester, New York and Lyons. Yet it sorely needs more wholly owned shops in the right locations; one of the Paris shops needs replacing; and the Madison Avenue store is too small. Above all, it needs a presence in Milan, where only three streets really count: Via Monte Napoleone, Via Della Spiga and Via Sant' Andrea.

However, the premiums for entry are huge and rising as the Italian economy recovers.

Bottomley estimates the company needs to find between £5 million and £10 million from external sources to expand its overseas retail network.

But there will not be a mad rush for locations. Cox will proceed carefully after learning the lessons of 1997 when he expanded too fast in New York and had to close his SoHo showroom because of insufficient sales.

As important, Bottomley says, is to change the balance of power between Patrick Cox and the Italian factories that produce and then wholesale his orders to non-wholly owned stores in return for paying Cox a commission. Clawing back the wholesale margin from the manufacturers, as well as more of the retail margin from department stores, is the crucial step towards lifting gross operating margins from the current 15% to the 40% to 60% range enjoyed by the big luxury goods groups.

Moving away from the business' current low-margin commission structure should generate more cash for the group to plough back into its own retail expansion and into the group's marketing and promotional budget.

The discrepancy between the advertising and promotional budgets of the likes of Gucci, which this year will spend around $80 million-$85 million, and the sparse resources available to Cox is a large problem. The $1.8 million Cox will spend on advertising this year represents around 9% of sales. 'We should be trying to spend between 15%-18% of sales on marketing the brand,' says Bottomley, 'which requires minimum gross operating margins of 40%-45%.' Being small has other disadvantages. Cox could never even contemplate matching Prada's sponsorship of Luna Rossa in this year's Americas Cup, the cost of which has already swelled to $50 million. Fashion magazines are notoriously nepotistic and reward big advertisers with editorial space. Bigger groups are also able to advertise throughout the economic cycle. Bottomley admits that Patrick Cox reduced its media presence in Asia last year and will now have lost market share.

The big question hanging over Cox now is how to gain access to capital to finance expansion. The easiest way would be for Cox to invite in a strategic partner, either a venture capital group that would then seek within two or three years to float the company, or a rival luxury goods firm. However, that would leave Cox himself in a difficult position, as he would almost certainly lose control of the company that bears his name: 'I am 36 years old and my name is Patrick Cox: what do I do next? It's my name.'

The recent precedents for designers being unceremoniously dumped by the companies that have just taken control are not reassuring. Ines de la Fressange and Herve Leger are just the latest French haute couturiers to be kicked out of their own fashion houses by hard-nosed new owners. 'I'm not sure I really want to be in the chief creative designer role for the rest of my life anyway.'

Bottomley also believes the company is still best served by independence: 'Now is the right time for a strategic investment to capitalise on our brand strength. But to dispose of too big an equity stake would be premature: whether we were to sell a big stake to PPR/Gucci, Prada or LVMH, any independence would be short-lived.' But he also recognises that the big groups would probably not be interested in taking minority positions that did not confer control and allow synergies to be exploited.

The way forward for Patrick Cox as a business depends on its ability to reconcile its stated wish to remain independent with the need for funding to grow overseas and assume greater control of its own distribution. Venture capitalist money could provide one short-term answer. The likeliest outcome, however, is that the Patrick Cox brand's long-term home will end up within one of the luxury goods conglomerates that are currently revolutionising the fashion industry.

DOS AND DON'TS OF TAKING YOUR BUSINESS OVERSEAS

DO

- Keep control of your brand image - it's your most valuable asset. No one will understand it like you do or share your vision of it.

- Think local. Don't presume all consumers are the same. You may need to tailor your approach to meet the demands of the local market.

- Assess the competition first. Find out who is doing what. Are they offering a similar product to you but at a cheaper rate? If so, find out how and look at ways of streamlining your costs.

- Be prepared to adapt your business model. Flexibility is vital when you are exploring new territory.

DON'T

- Overextend yourself. Revenue streams may be slow to develop while unexpected costs could spring up at any time.

- Bring cultural baggage. Research your market and remove factors which could alienate potential customers.

- Refuse to adapt your business model. Accept that you are in a new market and new thinking may be required.

- Lose sight of why you are there: be prepared to exit. However ambitious your dreams of global domination, there may be some markets that you will just never crack.

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