What Luxury's Winners Are Getting Right | The BoF Podcast

— Good afternoon. Well, we have gone from AI to genomics to energy, but now we've arrived to the industry that Mr. Zegna and I immerse ourselves in every single day, which is the global fashion business. A business that's not often taken seriously in quarters like these, but hopefully with this conversation we'll to demonstrate to you just how important this two and a half trillion dollar industry is. Mr. Zegna, thank you for joining me here today. Uh we've been hearing, as I said, about the, you know, all of the change happening in the global economy. Uh we've got a tumultuous uh situation at the moment with the war in the Middle East and everything that's done to oil prices. Um we have the rise of artificial intelligence. We have a very uncertain economic outlook, and at a time like this, leaders like you who often want to hold on tighter to the reins. But you did the opposite. Um last year you stepped back from your day-to-day role as CEO, and you handed over the reins to the next generation, to your sons Angelo and Edoardo, and to a new CEO of the group. Why was it okay for you to make such a big change when it seems like everything in the world is changing? Good question. Thank you Emma, nice to be here. Ladies and gentlemen, I think it was an obvious decision. I turned 70 a few months ago, and I felt responsible that I had to move forward, not backward. And I was privileged that I had two brilliant sons that are there for meritocracy, not because they are they are children. And I had a very good CFO uh that I appointed as group chairman. And I think it came at the right time uh because I'm still healthy and I'm still very energetic. And I think I can contribute uh really for the future of my brand, family, and shareholder. I mean, we are a public company. We went IPO in New York in December '21. And I think that we made this step thinking forward to the family and to the brands, because we have three brands there. We have Zegna, Tom Ford, and Thom Browne. So, we feel we are half American, because actually about 40% of our portfolio are two luxury top brands that we enjoy very much so. So, I think that is right timing. Took me 2 years to figure it out. And finally, I picked the internal decision, which makes a lot of sense. And I must say, I'm at the fourth month of this experience, and we are doing jolly good. — only 4 months in. — 4 months, you know, there has been We started January 1st was the D-day, and I must say, so far so good. I know you, Gildo, and I know you are very, very hands-on with your business. So, when you're sitting back and you're, you know, observing everything that's happening, given everything that's going on in the world, we're talking about rethinking global business, how are you advising Angelo, Edoardo, the new CEO, them to navigate a period like this? First of all, be true to your value. Uh Second, uh stay the course. I think we have a very clear trajectory uh for our group and for our brand. And you know, just keep that vision going. Um Be patient. I think that uh listen, but once you decide to go, execute fast. I think that speed today uh with the help of technology, uh with the right team of people, uh is crucial to make it happen. So, uh think slow, but act fast. These to me are the most important uh criteria for being successful. In '21, right around the time that you IPO'd the business in New York, as you mentioned, the luxury industry was riding a wave of growth unlike anything we've seen in a very long time. Plus 20, plus 30% growth, right? Just this morning, uh LVMH announced that its fashion and leather goods business has contracted for yet another quarter, minus 2%. Meanwhile, one of your close competitors, Mr. Cucinelli, Brunello Cucinelli, reported sales plus 14%. What is separating, do you think, the companies that are continuing to perform in a luxury market that's contracting from those who are struggling to grow?

First of all, I can only speak highly of the LVMH group. Because if there is luxury, it's mainly thanks to them. — I know, but you're being diplomatic, Mr. Zegna. — I just want to be fair, because — [clears throat] — they are very strong and very capable. So, — But they're shrinking. But you know, they have — They have like 72 brands. So, uh and so I think it's I isolated — It's pretty challenging, I mean, to manage the portfolio. — just to the fashion leather goods division, which contracted by 2%. There's a big difference between shrinking by 2% and growing by 14%. What's the difference? — Yeah. Anyhow, I think that they're going to come back. So, but let's not do not focus on that. Um let's focus on the differences. I think that uh in order to be resilient, uh you have to be very focused. Uh and you have to have a clear brand strategy. And you don't have to be as logo-driven as used to be. And you have to be more attentive on your uh the perception of the pricing. Mhm. Uh and [clears throat] I think all these uh it's brings a new formula together, and so you have to be able to manage. I must say that for Zegna's sake, we are fortunate because we are in the side luxury. And I think that we have developed a couple of iconic product, one I'm wearing today, that is jolly good not only for the loyal customer, but also for the young customer. — And so, I mean, getting to a new customer is satisfying and being able to provide experiences. I think that the good game changer for Zegna is that we went from product to experiencing. — Yeah. And to me, this is very, very important. And I think that coming out with a product that are highly innovative, uh they are different from most of the other brands, and they are produced at home. I mean, one peculiarity of our company, our group, is that we are a supply chain fully integrated. Yeah. I like to go we from sheep to shop. Yeah. We are the only luxury company that fully integrated. As a matter of fact, more than 60% of the goods that we produce is produced at home, most of them in Italy. Okay, well, back to the results. — important — to go So, um this morning, when LVMH reported the results, one of the things they pointed to that was a headwind that they faced was the war in the Middle East. You told me once that the store in Dubai Mall, the Zegna is was your number one store in the world. How are you responding to How is your business performing in light of what's happening in that part of the world? — surely, with most of you, I think that we are for peace, and we hope that the conflict will end quickly. After having said that, Middle East has been one of the most growing areas Yeah. uh for the group. Before COVID, Middle East was 3%. Today, for Zegna brand, is close to 9%. Yeah. So, it's a big change. So, we hope — sales? — Of total sales. So, I think that it's important, and I think that it will come back. In the meantime, you have to figure out what to do. So, what are you doing? Well, I think that we have other important countries. Surely, United States is one, and we are doing a good job, and we are spending there. We have China that I think China is slowing has slowed down in the past couple of years, but I think that it reached a plateau, and I think it's the new normal. So, I think that we can do better in China. And then there are areas that we still have to improve. Japan, Korea, Southeast Asia, and Latin America. Zegna has been a pioneer not only in China, but also in Latin America in the '70s. And so, it's a small area, but I think that we are we're doing well. So, the other thing is that we are doing is being innovative with the product you create. And so, we created this personalization effect. Uh we have been really quite pioneering in made-to-order uh product. And now we created this concept of Villa Zegna that we offer an experience to our world customer, what we call the Zegna friend, with product that they cannot find in the stores. Mhm. Uh all personalized. We go from bespoke, I mean, to to more um affordable product. And I think this is like a club. So, I think that all that, you know, helps the What do you consider affordable? I would say affordable is product that are around $1,000. Yeah. But you know, I just want mind you, Zegna is costly, but it's not expensive. Because — And now, let me just add one that. You come and visit our industries. Zegna

is a luxury brand but in the industry of fashion. You come and visit our factory in the mountain. Our wool mill. 116 years old. You understand why we are costly. I'm just I'm leaving you with this. And the other thing, sustainability. Once a competitor said, "Listen, what are you talking about? You are the most sustainable brand in the world because you last forever. " Yeah. No, but not cheap to shop. They last forever. — Yeah. You still I still have coats of my grandpa, 600 g. They are modern and fresh as ever. So, I think this is So, all of these things are elements that customers, maybe some of your customers in the room, take into account when they purchase a product, whether it be, you know, a product um at Zegna or elsewhere. But there is a lot of conversation about pricing in the luxury industry and how, you know, in some places the inflation in prices in our industry is up 60, 70, 80, 90%. Do you What do you think about the value that is really being, you know, offered to customers now with prices that have gone up so much? I think I can't talk for our own brand. I think that uh since we became public company, we had three brands. We united three brands. We consolidated we came out with only one brand, Zegna. And we decided to work by investing more in quality. Mhm. More in personalization. — What By what percentage did your prices go up roughly? Well, it's hard to compare because we don't have similar product. — Yeah. Uh and I just say that uh the perception of Zegna uh in terms of pricing is fair. We are prudent uh but in moments in which you have tariff, you have forex, you have inflation. Yeah. I mean, you have to convert part of that. However, I think that, you know, you have to look at the productivity side. I think artificial intelligence could help in improving uh long-term the productivity. And so, you have to be uh open-minded and don't think that artificial intelligence will cut jobs. I think will add new jobs and will improve productivity. So, I think that you have to be uh smart in finding new ways to go about knowing that price is an important part of the equation. So, be uh responsible in how you can increase pricing uh on your product. All right. We only have about 45 seconds left. Your grandfather founded this company in 1910. You know, if he were still around, what do you think he would make of the company that you've handed over to your son? — be very proud that we are now the fourth generation. — Fourth generation. And we have about 20 kids. Thank you. kids that hopefully they're going to make the fifth generation. So, keep going and be true to your values. This is what we he would be very fond of. Right. Thank you very much. — Thank you, Imran. Patrice Louvet runs Ralph Lauren, which has been one of the great outperformance stories in our industry, the global fashion industry. Revenue up 12% last quarter, earnings up 29% growth in every region, including China. Uh at a time when most luxury and fashion companies are struggling to grow. Some of them are even going backwards. But Ralph Lauren has raised its guidance three times this year. For his part, Noah Horowitz runs Art Basel, which has gone from three to five art fairs, adding Art Basel Paris, and debuting Art Basel Qatar just a couple of months ago. In a market where over 400 art fairs exist and are fighting for the same collectors and fair fatigue is a real phenomenon, Art Basel keeps expanding. So, the main question for all of us this morning is quite simple. What did these two business leaders see in the global consumer that others are missing? And Patrice, I wanted to start with you. Your consumer, as I just said, is spending more. They're trading up. What are you seeing and taking away from the kind of state of the global consumer right now? And what are perhaps others missing? Good morning. Nice to see all of you here. Um well, I had the opportunity to just come back from China and the West Coast in a span of a couple weeks. And I think those were good illustrations of what we are experiencing. Now, our consumer base has proven to be pretty resilient and has been for some time now. We tend to have a more elevated consumer base, right? Average income is above $100,000. Uh and what we are hearing from them is one, they're really leaning into quality and trusted quality.

Two, they're looking for brands that are clear on who they are. And you know this industry even better than I do. Uh and there are many brands who are searching for their identity or going back to their original identity. And then three is the notion of value, which, you know, I come from the FMCG world where we talk a lot about value. We don't talk as much about value in the luxury space, but it's as important. Right? So, I think the value equation that our teams have developed around the world on the range of products that we have, whether that's Ralph's coffee or a tuxedo, uh is compelling. And I think the combination of these three elements, quality, clear on what we stand for, with values that resonate, and value perception that is strong, is what's fueling our growth. Okay. Noah, let's turn to your customer, which probably has some interesting overlap with Patrice's customer. Uh you've been, you know, we were just talking backstage, you've been expanding in the art fair world while, as I just said, there's like a preponderance of art fairs. Why is Art Basel standing out in the market at the moment? And what are you seeing in your customer base um today? Yeah, well, I think much the same, right? There's a focus on an unequivocal quality and top of the funnel um experience. And Art Basel delivers that. We've um been doing this for over 50 years. Um we've grown quickly recently but steadily, assiduously, and actually quite slowly if you track back. Um and it very much follows the arc of of our industry, which has gone from being very insider industry with a very small um uh group, mainly of European and American consumers, to a more global, increasingly diversified, much more female-forward um audience base. And Art Basel, with the addition of Paris uh 4 years ago we launched as you referred to um in Qatar just beginning of February this year, just ahead of um you know, it's become a really challenging geopolitical crisis for all of us. Um and our global audience is is very, very focused on uh extraordinary experiences, um extraordinary art. So, our selection processes and the things we put in place to get the best and most ambitious work from the great artists of the world um out is is rung true time and time again. Um but what's changed in our industry is the overall experience experientialization of the fair-going experience, the role of community, uh the importance of what people are wearing, where they're going, where they're dining, where they're staying. It's all come together in a much different way than it used to be. And we're seeing a huge um attraction to that around the Art Basel platform globally. Um wrapped up a few weeks ago in Hong Kong um where we had record attendance. We had over 91,000 visitors at our Hong Kong show. It's become the most important uh cultural event of its kind in the Asian hemisphere. And it's extraordinary. And you know, you toggle back to Miami Beach, which many in this audience in the American context are familiar with, which is, you know, fills very much the same role in the US market at the end of December. So, I definitely want to get into the experiential elements in a minute. But I do want to double click on this kind of shift we've seen in consumer behavior from the pandemic. You know, both the art industry and the luxury and fashion industry went through kind of an unprecedented growth spurt. Um almost gluttony of consumption of art and fashion. But when the lockdowns lifted and people had the opportunity to go and experience real things, that that, you know, the shift or the stated idea is that there's been a shift towards experiences, which we'll get to. But when you talked about value, Patrice, like can we go deeper into that with you? Now, people are being much more discerning — discerning discriminating about what value is. So, like when you're thinking about how you offer value, how the customer defines value, you know, how do you do that? And then, Noah, we'll get to you as well. So, we have a simple formula. Bear with me. All right, value the way we talk about it is quality of storytelling, quality of the product. That's both craftsmanship and style. And quality of the shopping experience, whether that's online or in store, divided by price. All right, often people just simplify this whole value equation to well, what's the price for the item? And in this industry, it's so much more than that because we sell the dream first and foremost. We're selling We're storytellers. All right? I'm often asked what business are is Ralph Lauren in. And not in the apparel business. We're in the dreams business. Like Disney? Exactly like Disney. Yeah. Much I like to think that, you know, when I I

I spend a lot of time with Ralph and I see how he operates with his teams. He is closer to a movie director like Martin Scorsese or Steven Spielberg than he is a traditional designer like Christian Dior or Yves Saint Laurent. So, the combination of the storytelling my our ability to make you dream obviously then translating that into great product and a unique experience and I agree you know with your point and Noah's point on the fact that expectations from the experience template have gone up dramatically for consumers, whether that's online or in store is really how to build the top of the numerator and then the denominator is what price that consumers will have And is that a global thing, Patrice, or do you see variations on that or like more of a weight on one of those three factors in different parts of the world? — So, Imran, it's fascinating because uh I guess we were in Hong Kong at the same time that we didn't bump into each other. You you're being punished now cuz apparently you went [clears throat] there very quickly and may or may not have made it to It's yes, next time I'll make sure I stop by Art Basel. Um it's consistent everywhere we go, right? I mean, I saw that in Chengdu where we just opened a beautiful uh store in Chengdu IFS. I saw that in San Diego last week. Uh the consumer sees it consistently. I would say across cultures and across generations. All right. Uh and certainly we are we're having some really nice momentum with the younger generation for which the fickle things don't really resonate much with them anymore, right? They want things that are much more grounded, values-driven. So, we talk a lot about value and values. And I think as long as we provide a unique value perception that is uh superior relative to our peer set and stand for clear values with authenticity and consistency then this company will be in good shape. Okay. Noah. When you know, obviously art collectors come in all shapes and sizes, all levels of taste and familiarity with the market. I mean, how do you see the definition of value in the art world shifting post-COVID and how does it differ by region, if at all? Yeah. Well, first of all, thing on value. I mean, let's be pretty clear. Art is fundamentally valueless, right? It is all a mythology. Uh and that's something that's as true today as it has been in history, right? Um selling a Cézanne landscape, selling a great Picasso, you're selling a mythology of what that artist stood for in that moment in time. So, it's a relationship to a relationship, but there's also something material and real to that. Um now, that's an abstract um way of framing it, but it's very tangible in a way. In terms of what's driving value in our industry today, we're seeing a lot of shifts. There was a moment um you know, the last great boom bust in our industry is late '80s when it was a lot of Japanese speculation on Impressionist paintings. Um the '90s sort of leveled out. The contemporary art world as we know it today really manifested at that stage. And in the early 2000s, artists of the post-war era overtook Impressionists and early modern masters as the the names driving the market dialogue. Um we're seeing an increasing sort of diversification of that today where um you know, we opened our our flagship fair now in Qatar where artists from um you know, the Manasa region are increasingly in vogue. Hong Kong has been a story of mainland China, but increasingly Southeast Asia and a more diversified set of artists there. In the US context, we've seen over the last years artists of color, female artists, an extraordinary array of different names come into the mix. And I think for a new generation um of younger, more self-made entrepreneurs, more female-forward consumers, there is a huge attraction to discovery um and to name that outside of the Western canon. Um as there also is from within the Western canon a huge sort of uh flight to safety um I'd say in the last 18 months or so uh after a huge post-COVID frenzy of speculation of really hot contemporary trending artists, which has eased off somewhat. Um but as prices have reset, there's a big flight right now to extraordinary, well-priced masterworks as well as discovery increasingly of artists um of a global nature. And that for a global platform like Art Basel is fascinating um and it's something that we've leaned into wholly as we've also tried to resuscitate and reposition galleries working with and artists working across a whole different array of media. Does that go beyond the mythology though then? Because if there is this flight to safety are people increasingly considering art as an investment class? Well, absolutely. And if you go back in time, uh and it's quite relevant to the moment we're living through now with the oil crisis of the '70s and the stagflationary moment of that time, the beginning of art investing as a practice as an institutionalized practice actually took hold then. Um and there

have been various efforts really since the early 20th century in which various consortiums and professionals have invested in art on a one-to-one basis, but that practice really um solidified then and I think we'll see it again to some degree now. Um you know, there's a lot of um value buying in the market right now as prices have eased and there's a lot of extraordinary material with the great wealth transfer that's going to come into the market. We saw this in New York in the fall at the extraordinary Lauder sale at Sotheby's and others that value is is going to be driven through that. The last point on this is that the art market is a human market and it's extremely confidence-driven. So, when people of means feel confident what's happening, they lean in and others follow. Okay. Let's talk about experiences. We don't have that much time left. The time goes by very quickly here, but you know, you were talking both of you were talking about the extraordinary importance of experiences. I'm interested in understanding how experiences actually convert into you know, dollars and pounds and yuan. So, you know, for Ralph Lauren, you mentioned Ralph's coffee. How does that fit into the overall kind of customer journey from like experiencing a coffee, which has kind of become a thing, the Ralph's coffee thing. How does that translate into your core business? Cuz the margins on coffee sadly aren't the same as the margins on clothes. You mean it doesn't make a lot of sense for designer who started with a tie to be in the coffee business? I'm curious to understand like how what's the link there? — a very legitimate question. Yeah. So, if you zoom out a little bit and you look at what's happening in the lives of consumers shopping has gotten a lot easier online. Right? So, uh this for us uh digital shopping now e-commerce is about 25% of the business. AI will accelerate that because AI through our respective agents will make that kind of frictionless shopping even more accessible. Humans are going to be looking for even more experiences. Uh and even deeper in experiences, even richer experiences. And so, what's interesting with the concepts that Ralph and the teams have developed over time is when you come into our stores the concept does not welcome to our store, although of course you're welcome to our store. The concept is welcome to our home. All right? And actually, if you come in and you visit it like an art gallery and you leave with nothing that's first time, that's fine. Because we want you to experience the interaction with a sales associate. We want you to admire we don't have the same type of art as the one Noah deals with, but we do have some art. We want you to experience the art. — though. You could have more. We You're right. We should talk about that. Uh give me a deal. Maybe we'll think about that. Um we want you to experience these different rooms that have been set up like Ralph's homes, right? Ralph has homes in Bedford and he's got homes in Telluride and in Jamaica and our store concepts replicate that. Coffee fits really nicely into that. It was started as part of a retail concept to energize our stores, but what's very interesting, Imran, is Ralph's coffee has become a brand. Yeah. People want to walk around with the hat and the apron and uh and anything related to it. And I think because consumers are yearning for these immersive, authentic, distinctive experiences that they've lost in, you know, many different uh areas of their lives and they're also seeing this whole digital world kind of taking that over as well. And uh so, I'm actually quite hopeful that companies that lean into experiences, you know, we have five restaurants opening one in London very soon. Take note of that. Um same thing. They're doing particularly well. Who would have thought a designer could have a successful restaurant with the parallel. Well, the parallel is back to what I said earlier. We're in the storytelling business. We're in the dreams experience business. I think as Noah is as well. Uh and we happen to sell apparel, but that's not really the business that we're in. So, how many people have gone to a luxury store and been asked to wait outside in a line? There's you know, the you know, just the other day a new store opened in London. They invited me over to have a look and there was like this big burly security guard who basically barked at me saying, "You stand there. " You know? And I was kind of shocked. You know, I was in LA over in the holidays and there's this big barrier in front of the store and like, you know, again, like this like burly security person kind of telling me you can't come in. The idea of thinking about a store as a home seems to be in like direct contrast with a lot of your peers who tell me, you know, Imran, the reason that happened is because like we want to allocate one store associate to every customer and we want to make sure they have the best experience. Meanwhile, they're making people wait outside on the street.

How do you reconcile this like more welcoming home approach with the coffee and everything to the more like we want to keep you outside experience? — Yes, so it is their differentiator and our philosophy is welcoming. Um I think one of the things that differentiates Ralph Lauren from many of the other luxury players and is contributing to our performance is we believe in inclusive luxury. All right, if you look at the types of categories that we offer I mean we just saw the $320,000 watch. But you can also buy a 12,000 $12 pack of tennis socks, right? And we cover the whole range of products. Uh we cover all generations, right? We sell items for newborns and 80-year-olds. Uh Ralph's philosophy has always been we want to be accessible to all of you and luxury has often been defined uh as a $4,000 handbag. That's not luxury. That's a very I think um lazy definition of luxury. If I'm a consumer and I'm buying a $120 polo shirt for me that may actually be a luxury based on my income level. And so we approach luxury through that lens, which is put ourselves in the shoes of the consumers that we want to engage with and we want to recruit very broadly and then make sure that whatever we offer feels like a luxurious experience. — Mhm. Uh you will not see us blocking access to our stores. It's interesting what we see with some of the players in the industry because often there's a big line outside and the store is empty. — It's empty. And it's cold and it's not engaging. And back to your point on experience I don't know that's what the majority There may be some consumers who appreciate that, but I don't think the majority of consumers are looking Yeah, queuing is not a luxury experience. Let me tell you. Um No, I mean we're almost out of time, but I I'm keen to kind of close off the conversation by talking a bit about like culture as it pertains to this notion of the luxury customer, the luxury art collector. You know Ralph Lauren also sits in this kind of cultural context with everything that you do in the world of sports, etc. Like how you make sense to us of the like link to cultural context in terms of you know, the way your customers are choosing the artists they want to collect, etc. Well, I I think the the broad grip around all of this is um community and place in the world. And again, whether it's a polo or a coffee or wearing a hat to signify inclusion in a club or some validation, I think we're all looking, especially as we spend more time on our phones and detached from one another, for community and for connectiveness. Um and Ralph Lauren provides that. Art Basel provides that. Going to galleries, I went to the Hirshhorn yesterday, it provides that. There's a sense of place, community, and connectivity and I think that that's, you know, more and more important as more technological things will speed up the way we consume and understand process information. All right. Well, we are out of time and I promised we would stay on time. Thank you, Patrice. Thank you, Imran. Thank you.