A Bronx Cowboy In Europe?

By Lauren Goldstein/London

"It's like trying to sell ice to the Eskimos," says a London fashion writer. "It's like trying to sell sand to the Arabs," sniffs an executive at a competing British fashion house. The news that Ralph Lauren, the icon of American style, is pushing hard to expand in Europe is being greeted with a certain degree of skepticism. And bitchiness. Who needs a mass American brand like Lauren's when you have the class of Armani, Zegna, Dior and Savile Row? Sure, Europeans are happy to wear a polo player by Lauren instead of an alligator by Lacoste when summering in Cannes. But will they want to don Lauren's $3,000 men's suits or $10,000 beaded dresses when they get back to Paris?

Lauren, 62, is no longer interested in selling simply the odd logo shirt or golf jacket. He wants nothing less than to meet the European designers head on. What's more, he feels he has to. Although Lauren is the world's biggest-selling fashion designer (retail customers spend more than $10 billion a year on products bearing the Ralph Lauren name), Wall Street dismisses Polo Ralph Lauren as just another apparel company. If financial analysts would consider it a purveyor of luxury goods, the stock price--and Lauren, who owns 89% of the company--would be all the richer.

But it isn't the thought of another home (he already has six), another vintage car (he has 60) or even the desire for a private plane (he has one of those too) that is pushing Lauren to expand. It's pride. Lauren doesn't talk about his stock price in monetary terms. He calls it "a report card, which gets issued every day." And right now--with the stock of Polo Ralph Lauren hovering around $20, some $10 less than its IPO price--the company is getting poor marks. "When I went public, I had a great business," Lauren says. "I don't think the company has gone backward." Global expansion, he hopes, will prove to Wall Street that he's not just a designer but a businessman too.

To that end, Lauren's license partner in Japan has pledged to spend $70 million in the next three years to renovate and revamp Polo stores there. But the company's biggest efforts are focused on Europe--outside of America, it's the part of the world where Lauren feels most comfortable. He was the first American designer to open a freestanding store in Europe, on London's New Bond Street in 1981. "I think I had something to say that wasn't being said before," he claims. His clothes not only brought idealized versions of preppy America or western America or sporty America to Europe but also reintroduced idealized versions of European classics to the very people who invented them. "When I first came to London, they didn't have what I thought they'd have," he recalls. "There were more Italian clothes than English ones." So Lauren presented the Brits with what he thought they should be buying: tweed jackets, jodhpurs, polo shirts. The New Bond Street store proved so successful that Polo added a second big store nearby, which has enjoyed double-digit growth since it opened in 1999.

But Lauren's main focus was still the U.S. business, which was booming. In just 14 years, Lauren had gone from selling the wide neckties he designed in 1967 to having the first in-store boutique for men in Manhattan's Bloomingdale's to being the first American designer with his own store, on Rodeo Drive in Beverly Hills, to having complete collections for men, women and boys, as well as his own accessories and fragrances. More firsts followed. In 1983 he introduced a collection of designer sheets and other home furnishings. In 1986 he opened the $14 million New York City flagship in the Rhinelander mansion on Madison Avenue and filled it with antiques. To critics who bemoaned the extravagance, Lauren effectively said, "It's the marketing, stupid." Now much of the real estate on upper Madison Avenue is devoted to similar showplaces in which designer after designer presents the lifestyle he or she is trying to promote.

Meanwhile, in Europe Lauren's business was growing too, but differently. Though stores were opening in Germany, Greece, France and the Netherlands, they were owned not by Lauren but by European licensees. And the clothes in them were made not by Lauren but by sublicensees. With so much going on in the U.S., it made sense for Lauren to leave Europe largely to the Europeans.

But now his strategy is shifting. To understand why, it helps to go back to his road show in the spring of 1997 to promote investment in his about-to-go-public company, Polo Ralph Lauren. An analyst asked Lauren a question that haunts him still: "You've been in business for 30 years; what do you have left?" Lauren brushed aside the question, and he got away with it--at first. With his initial public offering of stock, Lauren added $230 million to the company's capital and $440 million to his own fortune. The shares closed that day at $31.50. But in November 1998, the company missed its expected year-end earnings by 15[cents] a share. It blamed warm weather and a weak economy. Analysts blamed what they saw as Lauren's inability to control spending. It's all those antique cricket bats in the stores, they cried. By the end of the month the stock fell to around $18.50. In May 2000 it reached an all-time low of $13.25.

Lauren is not shy about voicing his frustrations with Wall Street. Despite a few quarterly snags, the company has almost doubled earnings per share since going public. Yet the stock price won't budge. Securities analysts are worried that Lauren relies too heavily on sales in U.S. department stores, which are losing market share. The analysts see Ralph Lauren and Polo as mature brands, incapable of the growth Wall Street had got used to in the late 1990s. They complain that Lauren, the CEO, won't communicate directly with them, leaving that to the company's financial officers. Roger Farah, Polo Ralph Lauren's president, responds that Lauren's time is better spent working in the design studio.

To be sure, Lauren can talk eloquently about how he built his company slowly, to last. He can talk convincingly about what Ralph Lauren, the brand, has meant to America. But still, in the back of his brain is the question he tried to brush aside: "What do you have left?"

What Lauren has left is Europe. In fiscal 2002, which ended March 31, only 9.8% of Polo Ralph Lauren's wholesale revenues came from Europe. He also has Japan, which contributed just 10.5%. Come to think of it, his women's business is still smaller than his menswear, even though women spend twice as much on clothes. So he has that left. And Polo gets only 9.4% of its sales from accessories (Gucci earns 60%), so that's left to improve too.

But first, Europe. In 1998 the company spent $200 million buying back its key licensee, Poloco SAS of Paris, which had been managing to increase sales in only the single digits, compared with double-digit growth in the U.S. And last summer Polo Ralph Lauren spent another $22 million buying out its Italian partner, PRL Fashions of Europe. A key Polo lieutenant, Lance Isham, moved from the company's New York City headquarters to London to oversee the company's international development, and an Italian, Gian Luigi Longinotti-Buitoni, who had most recently been CEO of Ferrari North America, was hired to manage day-to-day operations in Europe.

Two years ago, Lauren signed Spanish actress Penelope Cruz to be the worldwide face of the all-American brand, and in March he took the dramatic step of moving his men's fashion show from New York City to Milan. That show, for fall clothing, and the one for spring 2003 that followed last month, were well received by the local press. WITH RALPH LAUREN MAN IS ELEGANT AGAIN, gushed a headline in the Milan daily Corriere della Sera. The international press played up the competition between Lauren and the European king of menswear, Giorgio Armani. Again a compliment: no such comparison was made when Calvin Klein staged his first men's shows in Italy. Lauren's moves have begun to pay off. European sales in fiscal 2002 grew more than 30% compared with 2001, a trend that has continued, according to Isham, though from a very small base.

Wowing the fashion press, with its natural affinity for anything new, may be the easy part. Convincing Continental shoppers--particularly the conservative European male, weaned on a diet of Italian cashmere and French tailoring--may be more difficult. "Some Europeans know me very well," Lauren says. "But they know me for sport. Having the classy clothes is new to them." Lauren is encouraged by the reviews and by what he sees as the nature of the European shopper. "It's a culture that understands quality and taste," he says. "They understand my clothes more than Americans. They're hungry for it. Armani and Zegna? They don't look like me." For fall, Armani looked east with kimono shirts and Mao jackets; for spring, Lauren went Gatsby with pleated trousers and waistcoats.

"Sometimes Europeans are bored with European brands," says Jacques-Franck Dossin, a Goldman Sachs luxury-goods analyst based in London. "Ralph Lauren is cooler. It's different. It's from the U.S." Carol Pope Murray, an analyst at Salomon Smith Barney in New York City, more or less agrees. "Yes, I think there is a consumer in Europe who will buy the product," she says. "But the issue is and has always been, Can they do it and make a profit?"

The business of selling clothes in Europe, from manufacturing to marketing to distribution, is at odds with what Lauren has done in the U.S. While European designers love centralization, Lauren is more willing to give important roles to others. Take manufacturing. In the past 12 months, Gucci Group has announced it will open a state-of-the-art factory for shoemaker Sergio Rossi by the end of the year. Armani has announced a joint venture with four shoemakers. And Marzotto, the new owner of Valentino, has promised that Val will get his own accessories plant too. All this activity in the name of corporate control, and MADE IN ITALY on the label. Polo doesn't own a factory, doesn't make a single shirt or dress itself. "Owning a factory is a two-edged sword," says CEO Farah. "It works great on the way up. No one yet understands how it works on the way down." In other words, although Farah says Polo Ralph Lauren plans to move some of its production from Asia to independent European factories, why take the risk of hiring lots of workers, who are more expensive in Europe and hard to lay off? Says Farah: "It's not at the core of how we want to operate."

Then there is distribution. In the U.S. 47% of Polo Ralph Lauren's revenues comes from selling to third-party retailers, mostly big American department stores in which Lauren controls a vast amount of floor space. In Europe there are simply not enough department stores to support such a strategy. If Lauren wants to sell in Europe, he will have to build, staff and run his own stores. That's an expensive proposition, in part because the stores his European customers frequent are on expensive streets in the city centers, not in suburban shopping malls.

Undaunted, Polo Ralph Lauren says it plans to spend more than $1 billion on its European expansion over the next five years. "When Ralph invests, it's for the long term," says Ron Baron, CEO of Baron Funds, which has $137 million invested in Polo Ralph Lauren. First up: new stores in Manchester, Glasgow and Antwerp, as well as in London and Paris. To start, the company will focus on just half of Lauren's many offerings, including the top-of-the-line collections for men and women, children's wear, men's sportswear and Ralph Lauren Blue Label, a new women's casual line that will make its debut this September. What won't be coming are the lowest of the Lauren lines--Chaps and Lauren--those produced by licensees in the U.S.

"Thirty-five years of business in the States taught us what we want to do and what we don't want to do," says Farah, who will oversee the retail operations in Europe. "What we want to do is establish the high end of our business first." Lauren too thinks his experience in the U.S. can help him in Europe. "I started out in America piece by piece. Now I'm coming with all the equipment," he says. But not always waving the American flag. "All the stores are international now. Someone who is 12 years old doesn't know if Armani is Italian. These stores are a part of life; you respond to them based on if you like them or not."

It would be easy to say that Lauren's view is a simplistic one, that he doesn't know Europe very well, that he speaks only English, that he doesn't shop the stores in Milan. He is not, he says, a "kiss-kiss kind of fashion guy." So how could he possibly understand the European psyche? You might answer that question with a question: How can a working-class boy from the Bronx, who changed his name from Ralph Lifshitz, understand the psyche of the American upper class, which is what his clothes embody? Lauren has been railing against this sort of criticism since he started his business. "The idea that there is a correlation between where you come from and what you make is ridiculous," he says. "I have a taste level people respond to."

His father was a struggling artist who painted houses to pay the bills--a heritage Lauren points to with pride. "At 12 years old, I was wearing tennis sweaters and Bermuda shorts, but I was wearing them to play basketball," he says. The designer Calvin Klein grew up not far from Lauren at about the same time. He told Women's Wear Daily, "When I was a child in the Bronx, I would see him and think, 'Who is this person? Who dresses like that?'"

Lauren now lives something close to the life depicted in the ads for his clothes. He has a 14,000-acre ranch in Colorado, a Fifth Avenue duplex and homes in Bedford, N.Y., on New York's Long Island, and in Jamaica. He collects antique cars and watches and owns a garage full of motorbikes.

Last year Polo Ralph Lauren reported about $2.4 billion in revenue. The second most popular designer, Giorgio Armani, reported about half that. Those numbers help prove Lauren's point: he doesn't have to understand the psyche of his customers; he just has to have a sense of style they understand and want. In the U.S. he has made that connection. In the rest of the world? Well, Giorgio Armani and Ermenegildo Zegna will certainly be watching. And so will Wall Street.