Ermenegildo Zegna Advances Peers with Australian Wool Farm Purchase

If anyone has heard a doleful "baa" emanating from the Italian luxury industry lately, it might be because textiles-to-mens couture powerhouse Ermenegildo Zegna advanced its position on the fashion playing field by clinching a majority stake in Australia's Achill superfine wool farm.

The move makes Ermenegildo Zegna, reportedly the sixth largest luxury firm by sales in Italy, one of the first upscale fashion companies to streamline its business -- from raw materials to finished product.  

 

 

"Zegna has now taken direct responsibility for the production phase of one of its primary raw materials thereby consolidating its complete verticalization strategy and reconfirming its longstanding support of the wool industry," the company said in a statement.

International industry observers see the acquisition as a strategic move in averting the raw material price fluctuations long-bemoaned by the small and medium sized textile and yarn companies that constitute the backbone of Italy's € 51 billion euro shrinking fashion industry.

"Brands are trying to stand out in terms of exclusivity credentials - securing direct control of scarce raw materials and high, value-added manufacturing activities is one way to do that," Luca Solca, the head of luxury goods at Exane BNP Paribas, told NOWFASHION. "In this case there is a logic of insulating the business from high market price volatility of cost components," Solca added.

By comparison, Zegna's Italian peer, cashmere and wool kingpin Loro Piana, which was acquired by LVMH Moet Hennessy Louis Vuitton SA last year, does not own any sheep farms in Australia or New Zealand, the world's primary and most reputable apparel wool region. However Loro Piana remains, along with Zegna, an active player in setting the high bar for the finest Australian and New Zealand wool with its annual Record Bale Award -- a competition that encourages wool growers to obtain an increasingly higher quality product. Loro Piana has been buying the Record Bale merino wool since 1997.

Similarly, the Ermenegildo Zegna Extrafine Wool Trophy, which was established back in 1963, awards Australian breeders for the best in Merino wool.

Zegna is not, however, the first foreign company to stake its claim in the sheep-grazing lands "Down Under". Woolmark said that Biella, Italy-based luxury textile firm Reda Group owns merino wool farms in New Zealand,  while other larger Chinese processors have wool farming enterprises in Australia. Germany's Sudwolle Group, the largest wool spinner in the world, also owns wool growing property in the south-eastern territory of Victoria.

Elsewhere, Italy's Benetton family has been a pioneer in terms of verticalizing its business from raw material production to apparel.

In 1991, the Benetton family's Edizione Holding SpA reportedly bought 2.2 million acres of sheep-grazing lands in Patagonia, which at the time made it the biggest landowner in Argentina.

Benetton reportedly invested $80 million in the property, which was the home to about 260,000 sheep and produced about 1.3 million kilograms of wool a year.

Today, the retail and luxury sector's slice of the fine wool pie in Australia is much smaller - in terms of weight - and they are not likely to impact price fluctuations of wool on a global level... at least not yet. 

"Australia produces 340 million kilograms of apparel wool each year. I estimate that all the aforementioned farms [European, Chinese owned farms in Australia] combined would produce under one million kilograms -- so they have a way to go before they impact price," said Woolmark and Australian Wool Innovation chief executive officer Stuart McCullough in an interview with NOWFASHION.

McCullough said that overall the total value of the Australian Wool clip is 2.5 billion Australian dollars (€ 1.72 billion at current exchange).

"We expect that to stay at the same level for the 2014 year," McCullough said. 

In other facets of the fashion industry, prices of exotic hides affected the leather goods market and smaller luxury accessories makers in recent years.

In order to satisfy growing demand for opulent exotic hides, high-end leather goods and accessories makers like LVMH and Hermes invested in their own saltwater crocodile farms. The phenomenon later sparked laments from smaller European leather goods players, who cited increases in the prices of exotic hides.

Zegna, which booked 1.3 billion euro in sales last year and boasts deep roots in the wool and fashion industry since its inception in 1910, is certainly no fool to the skulduggery and the raw material manipulation that takes place in the global apparel market.  

Last year for example, Italian yarn makers blamed cotton, cashmere and wool price hikes on stockpiling tactics employed by large fast-fashion companies and industrial countries like China, which they claimed buy in massive quantities on purpose - hundreds of thousands of tons at a time - in order to drive demand.

For now, Zegna's raw material venture in Australia, remains relatively small. The Achill farm, which is located in the wool heartland of New South Wales, currently herds about 12,500 sheep.

"I think it is not so much a trend but a genuine interest in completely participating in this industry," McCullough said.

But Zegna insists that the move is part of its long-term vision.

"The decision to strengthen its bond with Australian wool growers by becoming one of their peers is strategically important for the company and reflects Zegna's pledge to the survival and long-term viability of fine wool growing," Zegna said in a statement.