The closure of a branch of Italian shoe brand Vergelio in one of Milan’s best-known shopping streets generated mixed feelings among locals. More than that it exemplified the conundrum Italy’s economy faces today.
Established in 1927 by the Vergelio family, the company made a name for itself over the years. But when the downturn struck following the 2008 global financial crisis, the family decided to give up control. In 2015 it sold up to Italian tycoon Antonio Percassi, paving the way for the eventual closure of the shop that for decades had sold handcrafted shoes in Corso Vercelli.
Nostalgic shoppers considered it yet another demise of that base of historic family brands and SMEs that contributed to the development of the prestigious Made in Italy brand. Their sentiment was countered, however, by the feelings of those who were excited by the news that the replacement tenant was global coffee powerhouse Starbucks.
“On the one hand, it is perceived as a symbol of a city that is becoming part of the global market. On the other hand, as the symbol of a stifling globalisation that replaces Vergelio with Starbucks,” says Andrea Colli, professor of economics at Bocconi University.
SMEs at risk?
SMEs, particularly family SMEs, have traditionally been the driving force behind Italy's economy and the ever powerful Made in Italy brand. Companies with annual revenues of below €50m make up 82% of the employed population, and account for 92% of the active companies in the national economy, according to data from research firm Promoteia.
Such firms’ relatively limited size and family governance can be both a blessing and a curse in today’s global market. While it ensures they are nimble enough to excel in their niche and move quickly in an ever-changing market environment, it can limit their financial firepower – and often their horizons too.
“This base of SMEs with great innovation potential constitutes a major appeal of Italy's economy. But they risk missing out on the opportunities they may find in emerging markets to become the prey of investment funds or bigger companies,” says Giovanni Da Pozzo, president of Promos Italia, an association of chambers of commerce promoting the internationalisation of Italian companies.
Vergelio embodied the struggle of a system of family-owned SMEs that have been unable to withstand the perfect storm brewed up by the financial crisis and the e-commerce revolution. One-fifth of Italian SMEs went bankrupt between 2008 and 2014, according to figures from data provider Cerved. But while SMEs such as Vergelio have gone under, of have been forced to sell or scale down, new entrepreneurs have managed to embrace the crisis as an opportunity to adapt the Made in Italy brand to the needs and challenges of the global market.
The new pretenders
Just a few blocks away from Vergelio’s shop, start-up Velasca combined tradition and shoemaking excellence with a modern, e-commerce-driven business model to raise two initial rounds of funding in 2014. This triggered the development of a brand that today, following seven rounds of funding in the past five years, is selling across the globe through its online platforms and a few flagship physical shops.
The current dynamism of Italian start-ups is confirmed by the growth of a domestic venture capital (VC) market. Italian start-ups attracted VC investment of a total €480m in 2018: a drop in the ocean in a global market that moved $250bn in the year, but a big jump on 2017’s €144m, according to report by VC firm P101.
The changing nature of Italian capitalism, often dubbed as ‘family capitalism’, is embedded in the evolving nature of the governance models of the country’s most successful family groups. These groups have increasingly opened their boardrooms and executive roles to external professionals – thus decoupling the fortunes of the company from the fortunes of the family – and have embraced international competition at home and abroad, illustrated by a 2019 report by Bocconi University and the Italian Association of Family Businesses.
“Italian companies have evolved much [in the past few years],” says Licia Mattioli, vice-president for internationalisation at the General Confederation of Italian Industry. “Things are changing quickly, and those firms that are being successful are those that have gone global, and those that don’t perceive foreign companies competing in the domestic market as a threat. Their mindset is different; their goal is growth.”
This new mindset is pushing Italian companies to go global while also slowly opening up the country’s high streets to a mounting wave of foreign brands. If the country’s manufacturing has traditionally been a recipient of foreign investment, retail and other sectors typically dominated by Italian brands have been slower to open to foreign competition.
Starbucks hesitated for years before making a splash by launching its Italian campaign with the opening of a 2300-square-metre flagship store in the heart of Milan. The company now plans to open 10 to 15 new stores a year across the country.
Following recent reforms, foreign names are also increasing their networks and footprints in the sector of pharmacy retail, which used to be the exclusive realm of family-owned shops in Italy. US-based Walgreens Boots Alliance is planning to open 1000 to 2000 stores in Italy, chief executive Stefano Pessina told Italian business daily Il Sole 24 Ore in February 2018. Meanwhile, Amazon announced plans to invest €800m in 2018 on the development of the Italian business, and global property developer Westfield is working on a €1.4bn project to build a 185,000-square-metre mall in Milan.
Too much competition
These investments mirror the appeal of a consumer market that remains the eighth largest in the world by household consumption expenditure, according to UN data. They inject fresh capital into Italy's economy, but may represent too much of a competition for domestic, smaller peers.
“It is important to avoid concentrations of powers that lead to oligopolies that don’t fit the nature of the Italian economy, which features small [businesses] often with rooted territorial characteristics. We have to combine the global market model with an economy that has to strengthen and gain competitiveness [while] trying to avoid circumstances where a single major player wipes out a whole segment of SMEs without generating much advantage in terms of jobs and taxes for the country,” says Promos Italia’s Mr Da Pozzo.
Global companies are breathing new life into an Italian economy that has dealt with stagnation and political uncertainties for decades – yet there is lingering ambiguity over their role in the national economy. In certain sectors, they can be too much of a threat for domestic SMEs. However, Italy’s family capitalism has shown it has the capacity to evolve, adjust to and, eventually, embrace such challenges, rather than run away from them.