Economic crisis tests Italy’s luxury market

“It’s been a disaster, a disaster,” bellows Ubaldo Grazia.

The owner of his family’s 500-year-old ceramics business isn’t talking about the financial meltdown in his country or the Eurozone debt crisis, but the weak U.S. economy that he said had cost him one customer after another. Saks, Tiffany, Nieman Marcus, Williams-Sonoma — his list goes on.

Grazia’s company, now in its 25th generation, is one of dozens of ceramics makers struggling in this picturesque medieval town known for its handcrafted pottery. Business has fallen so low — down to just five painters from 75 a few years ago — that he’s worried about whether it will make it to the 26th generation.

A half-hour’s drive away in central Italy’s Umbria, in the hilltop village of Solomeo, Brunello Cucinelli seems a picture of contentment inside his 14th century castle, headquarters for his thriving cashmere clothing company named after himself.


Cucinelli is expecting another double-digit growth in sales this year, in part thanks to emerging markets like China. The self-styled philosopher-entrepreneur has made enough money to help restore the village church, repave streets and build a 240-seat theater that looks like Rome’s Pantheon.

“I want to make profits with dignity,” said Cucinelli, 58.

The contrast between the two Umbrian businesses shows both the resilience and vulnerability of one of Italy’s staple industries — luxury. Whether cashmere sweaters, designer handbags or sports cars, Italy’s luxury goods are famous the world over, but the Great Recession and the region’s widening debt crisis have severely tested old formulas and markets.

Many of them are hoping for an eventual lift from Italy’s new government and the promise of economic reforms, even as the country braces for pain from austerity measures to come. On Sunday, Italy’s new prime minister, Mario Monti, announced approval of spending cuts, higher taxes and other proposals to “reawaken” the economy and help avert a collapse of the euro.

Italy’s luxury sales have bounced back after they were hammered by the 2008-09 recession, but its future — like that of many other industries — will depend also on how well they adapt to the new realities of globalization.

Grazia and others in Deruta have been putting out the same products their forbears did centuries ago, catering to people with the depth of knowledge and appreciation for an old tradition of majolica pottery-making. But those folks are not the hot customers in today’s global economy.

When high-end stores and restaurants in California, New York and elsewhere cut back orders, it exposed the town’s over-reliance on rich American customers and its dominant platform of Raffaellesco (dragon-patterned) designs.

Cucinelli, meanwhile, has made a faster drive to diversify his products and adjust to the tastes of people who have money today. He made his mark with sporty sweaters in light earthy tones, but more recently has added a more contemporary line of close-fitting jackets and dark party dresses that cost as much as $3,500.

Cucinelli also is moving more aggressively into developing countries. Americans still dominate purchases of global luxury goods — $65 billion last year — but the large government debts and the prospect of slow economic growth and higher taxes in the U.S., Western Europe and Japan mean these long-dominant markets are likely to see few gains for years to come.

Yet luxury sales are booming in emerging economies. They rose 35% in each of the last two years in China, for example.

“With these growth rates, their strong economy and populations, the future belongs to those countries,” said Santo Versace, chairman of fashion company Gianni Versace.

Like other business leaders in Italy, Versace blamed part of the industry’s troubles on former Prime Minister Silvio Berlusconi’s failure to reduce government spending, collect taxes, make investments and cut red tape choking the economy.

“We have entrepreneurial creativity, culture and such an incredible beauty of art, landscape and history,” he said.

Grazia too celebrated on that Saturday night when Berlusconi stepped down, popping open a bottle of champagne. But back at work on Monday morning, he had little to cheer about as he showed a visitor vacant seats in his workshop and displays of his company’s past glory.

He recounted how his grandfather began exporting to the U.S. in the 1920s, shipping plates and pitchers to New York in wine barrels stuffed with straw. In the decades that followed, as overseas demand grew and tourists arrived by the busloads, riches flowed into Deruta.

Beautiful parks went up. A splendid castle museum opened on a hilltop overlooking the town. Tiles of Deruta’s signature Raffaellesco patterns were embedded on cobbled sidewalks in front of cafes and pretty storefronts.

But the soft U.S. and European economies of recent years have taken their toll. Some of the 200 ceramic factories and workshops disappeared. Deruta’s big kiln-making plant shut down and is now for sale.

Some business owners in town said they had only themselves to blame.

“Today young people want contemporary styles,” said Roberto Domiziani, a maker of tableware and furnishings in Deruta. “Would you eat on a plate with a dragon that looks out at you?”

For his part, Domiziani said, he’s moving much of his operations to Brazil.

Grazia is experimenting with new materials, adding porcelain to the traditional majolica clay and glaze to produce tableware that’s less fragile for restaurant and hotel use. He’s developing a broader line of contemporary designs. And his company is teaching ceramic painting to students to promote the craft.

“Now we just need to find new markets,” he said, noting that he’s trying to break into Russia.

Cucinelli, who came from humble farming roots in a village near Solomeo, started in 1978 with about 45 pounds of cashmere bought with an IOU. He turned it into bright-colored sweaters, a la Benetton, but later shifted to producing a wider array of clothes in hues largely of beige and ash.

His sales jumped 29% last year and are expected to grow 18% in 2011, to about $320 million. The company is planning to go public early next year in Milan, the country’s financial and fashion capital.

Analysts attributed Cucinelli’s success to its classic yet sports-chic look, combined with high-quality materials and workmanship.

“I could dress like that to go to the stock market,” Cucinelli said, wearing a navy blue blazer over a light cashmere sweater and his trademark cream-colored pants.

Cucinelli also thinks his buyers like his humanistic — others might say paternalistic — approach to business.

There are no time sheets to sign or clocks to punch in. Workers take a 90-minute lunch and don’t work past 6 p.m. His tailors work on the ground floor of the castle, making on average about $2,700 a month — well above the industry norm.

Cucinelli himself occupies the tower, sitting behind a long 500-year-old walnut table that has little on it but a stack of blank white paper and a case of perfectly sharpened pencils, which he uses to illustrate his points.

“This enterprise has a culture that’s from St. Benedict,” Cucinelli said, referring to the Umbrian ascetic monk of the early Middle Ages who developed rules for communal living under a loving father.

Until 10 years ago, he said, his market was almost entirely the billion people of the U.S., Europe and Japan. Now he counts the nearly 3-billion population in China, India, Brazil and Russia as his customers of tomorrow.

“That world is fascinated by Apple ... French champagne and Italian suits,” he says. “I want to sell them extra-high-quality, hand-made and exclusive products.... I’m not worried whom I will sell to.”