Subject: Shrinkage of Stores and Customers in U. S. Causes Italy's Benetton to Alter Its Tactics Date: Published: 6/24/92 (192 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. Retailing: Shrinkage of Stores and Customers in U. S. Causes Italy's Benetton to Alter Its Tactics ---- By Teri Agins Staff Reporter of The Wall Street Journal Mention the "United Colors of Benetton" advertising campaign and former Benetton licensee Susan Oustalet sees red. Benetton's controversial ads -- with themes like AIDS and condoms -- were the final blow in the Biloxi, Miss., retailer's tumultuous seven-year relationship with the Italian apparel maker. When the rainbow-colored condom ads first appeared last year, she recalls, "I was getting 10 calls a day from people who told me that the company I worked for was sick.... and that they'd never shop here." Last February, Mrs. Oustalet closed her store and filed a lawsuit against Southern Star Inc., a company representing Benetton in her area. In her suit, she alleged, among other things, that the ads helped drive her out of business. Benetton has been losing both stores and customers in the U. S., which only five years ago was its biggest market outside Europe. During the 1980s, some 700 Benetton boutiques sprang up at malls and shopping strips across America. The company's colorful clothes were the rage among teens. In recent years, however, stores like Gap Inc. and Limited Inc. 's Express lured away trendy young Benetton shoppers by offering a snappier array of affordable merchandise. Benetton parried by targeting an older, better-heeled clientele. In the past few years, Benetton has gradually shifted away from $25 logo T-shirts and $50 sweaters to emphasize dressier, tailored sportswear, priced from $50 to $300. But Alan Millstein, a New York apparel industry consultant, contends that Benetton's current array of dressier clothes has been largely ignored by the working women the company is targeting. "The career woman associates Benetton with one classification -- sweater tops," he says. Meanwhile, Benetton's brash advertising has often seemed at odds with the new customer it hopes to attract. "Our market is now the 25-to-49-year-old woman, and she isn't impressed to see the teeny-bopper ads," says Ival Goldstein, a store owner in Chattanooga, Tenn. Since 1989 Mr. Goldstein has closed two of his five Benetton shops and is considering closing two more by the end of this year. Adds Debra Romano, a Tampa, Fla., store owner who has closed 12 of the 27 Benetton shops once owned by her retired father: "It is not our function as retailers to raise the consciousness of people. I've had long, hard fights with Italy over the advertising." To placate store owners, Benetton two years ago began providing them with ads featuring clothes rather than causes, plus a $5,000-a-year stipend for cooperative local advertising. In the national media, however, Benetton advertising continues to court controversy: One spread depicts a nun kissing a priest. The campaign positions Benetton as a "concerned, socially active company in a modern global village," a company spokesman says. Others, however, suggest that the studied audacity fails to mask a fundamental problem. Says Kurt Barnard, of Barnard's Retail Marketing Report in New York: "Benetton ceased being hip a long time ago." Officials of Benetton S. p.A., the parent company in Treviso, Italy, declined to be interviewed by telephone for this article. But they authorized Carlo Tunioli, who runs Benetton operations in the U. S. and the Caribbean, to submit their written answers to questions. Benetton insists it can regroup. Mr. Tunioli plays down the importance of the U. S. market, saying that the company's smaller base of U. S. stores and an emphasis on larger stores, which have replaced some of the studio-sized boutiques, "will result in a much improved bottom line." Indeed, the company casts the licensee exodus in a favorable light, heralding an end to "indiscriminate growth" in the U. S. But a number of retailing observers are less sanguine about Benetton's effort to regain its former luster in this country. The task is formidable. In 1986, the company's North American division accounted for about a fifth of Benetton's total sales. Since then, Benetton's U. S. presence -- which includes a $23 million investment in an apparel factory in North Carolina -- has decreased by more than half. Benetton officials disagree about the precise number of stores in the U. S. Benetton officials in Italy say there were 480 U. S. stores in operation in 1991. But Mr. Tunioli says there were about 400 stores. He also says that the number of U. S. outlets is "expected to fall further, to about 300" in 1992. Suppliers who ship equipment to Benetton's U. S. stores estimate the number of stores to be even less, perhaps as few as 250 stores. Benetton's North American division hasn't been profitable for the past three years-though company officials say 1991 was a "near break-even" year for the division. Because of rapid growth elsewhere -- especially in new markets such as Japan, Egypt and Eastern Europe -- the parent company last year reported a 24% surge in net income to $132 million, on sales of more than $2 billion. But it's hard to dismiss the U. S. market -- which even Benetton acknowledges sets the standard for youth around the world. Interviews with retail observers, as well as 15 current and former Benetton store owners, indicate that the current troubles are merely the culmination of years of haphazard management in the U. S. Kenneth Costello, a Los Angeles attorney specializing in franchising, believes Benetton stumbled by failing to design a consistent marketing strategy from the outset. "Now everything is coming home to roost," he says. To Ciro Tomagnini, a Merrill Lynch analyst in London who follows Benetton, the company is stuck. "Benetton will remain in the U. S. A. because it has to," he says but adds that he expects continued U. S. losses. In the 1980s, Benetton signed up hundreds of entrepreneurs -- many of them inexperienced in retailing -- to invest more than $100,000 each to open a Benetton store. The owners agreed to buy merchandise from Benetton representatives (who work on commission) but otherwise were left alone to run their businesses without financial support from Benetton. Many of these stores made money. But as district representatives enlisted throngs of recruits to open new stores -- often in overlapping territories -- the stores began to cannibalize one another. The company concedes that its aggressive U. S. expansion, coupled with the inexperience of many store owners, took a heavy toll. Beginning around 1986, losses and store closings began to accelerate, and many owners filed for bankruptcy. A number of them sued Benetton, charging it with misrepresentation, fraud and violation of franchise laws. In denying these accusations, Benetton has steadfastly maintained that it isn't a franchise operation and thus isn't subject to franchise requirements. It calls store owners licensees because they own their stores and don't pay royalties to Benetton, as franchisees typically do. To date, none of the lawsuits has resulted in a judgment against the company. Mr. Tunioli says Benetton incurred "considerable financial losses" when failing store owners bailed out without paying Benetton for unsold goods. To resolve such situations, some store owners say Benetton has quietly forgiven part of their debt and severed ties -- providing the owners signed a document pledging not to sue Benetton or its representatives. Charles Buffon, a Washington attorney representing Benetton, characterizes the documents as "standard mutual release agreements." He says: "In a number of cases, settlements are negotiated and Benetton agrees not to sue them and they agree not to sue Benetton." But Mrs. Oustalet of Biloxi is one who didn't go quietly. In February, she obtained a temporary restraining order in chancery court of Harrison County, Mississippi, to stop Southern Star, the Benetton representative, from collecting on a $40,000 letter of credit. The dispute between Mrs. Oustalet and Southern Star -- which has since been transferred to a Mississippi federal court -- centers on outstanding merchandise invoices that Benetton says Mrs. Oustalet owes. (Benetton S. p.A. isn't named as a defendant in the suit.) In court papers, Mrs. Oustalet alleged that her business had been hurt by what she termed the company's "repugnant and immoral" advertising. She alleged that Southern Star shipped defective or unneeded goods and then refused her attempts to return them for credit. When she asked Benetton for a written reconciliation of her account, she alleged, the company failed to provide it. Denis Dotto, president of Southern Star, denies that he shipped Mrs. Oustalet unordered or defective merchandise. "We only ship merchandise that we have a signed order for, so we can easily compare these documents," he says. He says further that he responded promptly to her requests to replace defective merchandise when she complained on "about two occasions." In a departure from previous policy, Benetton's U. S. representatives have begun to take over some failing stores in strategic locations. Iraklis Karabasis of Washington, D. C., says Benetton gave him "subsidies" to keep certain stores open. He says he now owns or controls 15 of the 50 stores in his region. Mr. Tunioli says Benetton is now more sophisticated in selecting retailers to run its U. S. stores and has stopped shipping merchandise to those failing to meet their financial obligations to Benetton. He denies that the U. S. is critical to Benetton's expansion into other markets but doesn't dismiss the American market altogether. The company's goal in the U. S., he says, is to "achieve a profitable presence." [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]