Women's Wear Daily February 28, 2006 BALENCIAGA IN THE BLACK, NOW GOES FOR GROWTH.Gucci Group Byline: Miles Socha PARIS - Balenciaga as a megabrand? It's not such a far-fetched concept. WWD has learned the fashion house owned by Gucci Group has reached its profitability target two years ahead of schedule - triple-digit sales growth across all product categories is propelling it rapidly toward fashion's big leagues. "We went from being a niche brand to now a future big brand," said Balenciaga designer Nicolas Ghesquire, whose fashion show here today will be rich in references to the house's archives. "I'm very happy and proud of thatThe whole perception of the brand is changing. Balenciaga is starting to define a new kind of luxury house." What's more, Ghesquire - who in recent years had battled over strategy with the powers that be at the luxury conglomerate - said he now feels "confident, supported and understood." Gucci Group has committed to investing more in Balenciaga's development, allowing Ghesquire to hire additional creative and product development staff, advertise more and build a company-owned retail network beyond its flagships in New York and Paris. In separate interviews, Ghesquire and Balenciaga chief executive officer James McArthur described the future of the company in bullish terms, especially now that it has reached the profitability goal set by Gucci Group president and ceo Robert Polet in December 2004, when he unveiled his strategic plan for the world's third- largest luxury group. "This is a business that has the potential to do above 200 million euros ($240 million)," said McArthur who as executive vice president and director of strategy and acquisition for Gucci Group, also oversees Alexander McQueen and Stella McCartney. McArthur declined to give Balenciaga's current sales figures or pinpoint percentage increases, as Gucci Group parent PPR is slated to report its 2005 earnings on March 9. However, he stressed the triple-digit increases at Balenciaga apply to all sales channels and to the ready-to-wear category. Market sources estimate Balenciaga's sales volume already exceeds 60 million euros, or about $72 million at current exchange. That's more than triple the revenue figure in 2001, when Gucci Group snapped up Balenciaga as part of an acquisitions spree, offering a 9 percent stake to Ghesquire, the architect of the brand's rejuvenation and one of the most influential designers of his generation. And make no mistake: Despite his reputation for experimental fashions and a strict invitation list for his semi-annual fashion shows (today's show will feature sky-high heels, kimono-style jackets and micro miniskirts), Ghesquire is not at all opposed to the large sales volumes sought by today's luxury groups. "I share this ambition," he said, flashing a bright smile. "Balenciaga used to be a very big couture brand, so why not? I think there's room on the market for a brand like Balenciaga. It's ambitious, but I was ambitious nine years ago when nobody cared about the brand. "I like the idea of popularity, having people carrying the bags in the street; the trousers collection or the knit collection being worn by customers and bought from Balenciaga instead of a copy from somewhere else." The rapid growth is explained partly by Balenciaga's relatively small base. But Ghesquire also credits a marked increase in his product offering, from the introduction of archival styles and more affordable "greatest hits" collections of pants, knitwear, silks and leather, to the expansion of accessories. For example, the number of styles in the shoe collection now is triple what it was only a few seasons ago. And while the "lariat" with braided handles and dangling zipper pulls remains the engine of the brand's handbag business, new styles like the "Ring" bag, introduced for pre-fall selling, are also showing good promise. "Now we can feed the market with much more product, a larger assortment and at a wider range of prices," Ghesquire explained in an interview, wearing a tweed topcoat to ward off the chill at Balenciaga's sparsely furnished headquarters. "We are thinking really in terms of product." Retail prices for Balenciaga designs now start at about 220 euros, or $264, for a knitwear item and reach 30,000 euros, or $36,000, for exceptional made-to-order pieces, like the spectacularly detailed lace jackets the designer showed last October for the current spring season. In lieu of a couture collection, Ghesquire has been adding exceptional pieces made with couture ateliers like embroiderer Lesage and feather and flower house Lemarie. Product expansions are still done in an organic way, not because of some commercial edict from on high. For example, for the fall 2005 season, Ghesquire decided to recreate some jewelry styles from the Balenciaga archive: a belt, brooch and shoe buckle, all with a bow motif. "We really believe in it. It's a natural complement to our look," he said of the category. "For the future, I would love to design new things in jewelry and design a more important line." McArthur credited the house's rich heritage and the "clear and incredible" talent of Ghesquire and his teams for Balenciaga's current momentum. "Everything seems to be coming together," he said. "It's firing on all cylinders and on all fronts." McArthur said profitability came quickly, thanks to rapid top-line growth rather than aggressive cost-cutting, although he noted, "We have been very much behind spending intelligently to support the brand." He said that approach would continue, and increased investments would not compromise the profitability of Balenciaga going forward. "We also have to keep our budget," Ghesquire noted. "That's part of the game." Underlining future growth potential is the fact that only the U.S. and Europe have been priority markets to date. "There are a lot of parts of the world we really haven't touched," McArthur said, listing Japan as an example. Balenciaga has made some important moves in Asia recently, opening shops-in-shops in Singapore, Taiwan and South Korea - a mix of franchise and distribution agreements. Last October, the brand also opened a 1,700-square-foot franchise boutique in Hong Kong, operated by Joyce and lined - like some intergalactic swimming pool - in pastel tiles. "We've got a strategic plan in place that is geared to intelligent growth," McArthur said. He declined to say how much Gucci Group is investing to develop the business, but said money would be funneled into communications, shops-in-shops and directly operated stores. The U.S., Asia, Europe and Japan are considered priorities for retail stores, but "wholesale will always remain a significant part of our business," McArthur said. London, Milan, Tokyo and Los Angeles have been frequently cited as the most likely targets for new Balenciaga boutiques. Ghesquire is very hands-on with boutiques, in collaboration with artist Dominique Gonzales-Foerster, and he travels regularly to scout locations. But given his workload - preparing for a retrospective exhibition of Balenciaga bowing in July at the Louvre's Museum of Fashion and Textiles - the designer said it is unlikely there will be any new stores in 2006. Reaching profitability should put Ghesquire in a strong negotiating position as he renews his employment contract with Gucci Group, which expires in July. He declined to comment on the discussions, offering only, "I feel very attached to Balenciaga." To be sure, Ghesquire is hardly one to rest on his laurels. With business success comes heightened expectations, and he acknowledged the fear factor of meeting expectations. "I'm scared every season. It's super high pressure," he said. But Ghesquire also stressed business pressures would not undermine his reputation for pushing the boundaries of fashion with new silhouettes and techniques. In fact, he said, "I feel much more free, now that it's solid." In recent years, Ghesquire has talked about building Balenciaga into a brand with iconic elements, just as Chanel has its tweeds and camellias. While precision cuts, couture fabrics and sharp futurism are consistent themes at Balenciaga, Ghesquire said it's a work in progress to define the brand's icons and hallmarks. "The (lariat bag) is the most recognizable bag with no logos, so I follow this direction for Balenciaga," he said. After his show today, Ghesquire said he would devote all his time to the Louvre exhibition, which coincides with a high moment for the house on the business front. "This brand, which is more than 70 years old, is finally getting there, and again I feel at a starting point," Ghesquire said. "It's such great timing to have this exhibition. It's an incredible moment." It's so cool that Balenciaga has reached its target ahead of schedule! I wonder how much of a role the leather switch played in helping them save money?