Shoemaker shares in Saks

SANT’ELPIDIO A MARE, Italy – Something wasn’t right about the black sport shoes that Diego Della Valle wore on a recent stroll around the sleek campus and factory that form the heart of the Tod’s luxury shoe empire here.

“I don’t like the way they feel,” declares Della Valle, the chairman of Tod’s, stopping mid-stride to study his feet more closely. “It’s the part around the toes,” he says. “It needs to be rounder.”

Della Valle does things the old-fashioned way: by instinct. To find out if a new style of shoes will work in the marketplace, he doesn’t need focus groups or poll testing – he wears them. After a few days, if they’re not to his liking, he renders his verdict: “These won’t go into production.”

Despite running Tod’s like a traditional, Old World family business, Della Valle has turned it into a successful multinational, multibillion-dollar company, whose buttery leather moccasins adorn the feet of Princess Stephanie of Monaco, Gwyneth Paltrow and thousands of other loyalists around the world.

Around his sweeping white office, there are no computers and no iPhones; Della Valle, 56, feels more comfortable clinging to an outdated Motorola cell phone. Above him looms the painted silhouette of President John F. Kennedy, one of his idols.

His father, Dorino, 85, whose business in hand-cobbled shoes was transformed by Della Valle into a family empire, still shuffles in each day with a silver-knobbed cane to inspect things. Across the hall, Della Valle’s younger brother, Andrea, manages operations; he is also co-owner of the Fiorentina soccer team that Tod’s bought in 2002.

But if relying on tradition is a fading style in the modern luxury market, that is what has kept this company growing. “We don’t take risks,” says Della Valle, who has kept the business concentrated on shoes and handbags. “We want to guarantee our customers we’re giving them the best.”

While he never gambles with Tod’s itself, he occasionally does go out on a limb. Since 2009, he has amassed a 9 percent holding in Saks Inc., making him the second-largest shareholder, behind the Mexican billionaire Carlos Slim Helu.

Della Valle says he became interested in the retailer on his first visit to the United States as a youth, when he stopped in at a Saks Fifth Avenue store – to which his father used to sell high-quality shoes – and was “overwhelmed by the size of the store and by the amount of people shopping.” He says he views Saks as having “enormous potential for growth with an excellent management in place.”

All the investment comes from Della Valle’s own private purse and is not linked to Tod’s. Though he refuses to say if he is pursuing a takeover, he bought the shares when they were a bargain and has said he has no plans to sell.

Something else he hasn’t done is follow the trend of other Italian-based multinational companies that are moving production to cheaper points like China, even as the luxury industry stakes much of its future on the growing ranks of wealthy people there. Tod’s has 24 stores in China, and Della Valle is making Beijing his first stop on an Asian tour in October.

A men’s crocodile loafer, which retails for 3,500 euros, or about $4,850, costs 1,590 euros for Tod’s to produce in Italy. Making it in China would reduce the cost by half. But while “Made in Italy” may cost more, Della Valle says he still thinks it is worth the price. He sniffs at companies like Geox, which has sent most manufacturing of its Italian-designed shoes abroad.

Thanks to cheaper labour, Geox had strong margins until the financial crisis hit, but now its performance has stumbled. Tod’s, by contrast, must defend its margins by passing the costs of hand-stitching, expensive leathers and continued innovation on to consumers, which it can do only by promoting exclusivity.

“For true luxury brands, lowering prices by outsourcing is not something they could really ever consider as a strategy for growth,” said Davide Vimercati, the chief analyst for luxury goods at UniCredit in Milan. On the other hand, he said, Tod’s is “certainly giving up some profitability because they don’t spend less on manufacturing.”

Even if outsourcing shoes and handbags could plump the bottom line, the strategy of Tod’s has paid off – and seems likely to keep doing so as long as it stays a premium brand with universal appeal. It was one of the few luxury companies worldwide to increase sales and profits through the financial crisis: Profit grew from 77 million euros in 2007 to 83 million in 2008 and 86 million last year.

Today, shares of Tod’s have recovered to around 70 euros after falling to around 30 euros in 2008 and 2009, when frightened consumers – and a worldwide flight from stocks – sent the luxury industry reeling. And while the wisdom of Della Valle’s holding in Saks remains a question, the investment will not ricochet back to the steady business that is Tod’s.

“Tod’s is proof that if you manage your brand consistently and you build brand equity over the years, you reach a stage where demand remains strong, even in tough times,” Vimercati says.

Coming off a decade when Jimmy Choos and Manolo Blahniks flew from the shelves, Tod’s marched quietly ahead by fabricating subtle variations of its signature gommini, or driving moccasin, into which tired feet could slip chicly when the stilettos came off.

The secret is pure Italian style, which Della Valle says is identifiable anywhere in the world. “When I am walking in Central Park, I recognize the Italians,” he says. “Because an Italian, even when he jogs, he’s dressed perfect.”

Della Valle says he makes sure this is reflected in Tod’s shoes and handbags. “There is a time to be chic and sportive, there is a time to be sexy and feminine, but it’s hard to find the balance, and Tod’s has done that,” he says.

A perfectionist himself, he has the final word on new styles, new markets and new stores. Running the business, he says, has been like an obsession ever since he dropped out of law school in Bologna.

Yet his acute focus could also prove his biggest future nemesis, analysts say.

The key for close-knit companies like Tod’s is a patriarch like Della Valle, who projects the family’s values into the product as “part of a promise from the company that’s incorporated into one person,” says Stefania Saviolo, director of the master’s program in fashion at the Bocconi University Business School in Milan.

But Della Valle “cannot be on top of everything,” argues Vimercati. “He needs to prepare the company for a transition from an entrepreneurial-style company to a managerial-run company.”

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