Marzotto SpA, a leader in high quality wools and linens, is to put fashion in the driving seat as it seeks to expand its business and increase profitability the Wall Street Journal Europe reported today.

With other mills being driven out of business by competition from lower cost countries, Marzotto underwent a five-year makeover in the hope of avoiding a similar fate. The result is that its traditionally core textiles business is sinking into the background while the high-margin fashion sector and the company#;s ready-to-wear labels take centre stage.

"We have a goal of improving the margins for the textiles business, while beefing up the ready-to-wear activities, which should post strong growth," says Innocenzo Cipolletta, who became Marzotto's chairman in September.

Marzotto fabrics have long been used by designers such as Giorgio Armani, Paul Smith, and Donna Karan. Marzotto was founded in 1836 by the great-great-grandfather of current owner Pietro Marzotto and its status as a leading manufacturing power in Italy was sealed in 1939, when the Italian king granted the family the title of count.

In the 1950s, the family began to diversify into apparel, making Marzotto one of the world's few fully integrated yarn-to-apparel groups. This trend picked up pace in the 1980s, when Marzotto snapped up a number of small Italian makers of ready-to-wear apparel. Its most important acquisition came in 1991, with the purchase of Hugo Boss. The Marzottos shelled out relatively little for the tiny menswear concern, which at the time was foundering under the management of a Japanese group.

More-recent years, however, have proved tougher. In 1997, the group abruptly called off a merger with HdP SpA, the holding company that controls labels such as Valentino. Around the same time, the global textile industry headed into a structural crisis, with low-cost Asian suppliers emerging as fierce rivals to established manufacturers. To make matters worse, raw-material prices for wool and linen started rising more than 20 per cent a year.

In the late 1990s, Marzotto began shifting production of lower-end products into the Czech Republic and Lithuania - where labour costs are about a seventh of those in Italy - while also coming up with new wool and linen products to respond to the surge in casual dressing. By next year, about a third of Marzotto's fabrics will be produced outside of Italy, a major shift considering that all its textiles were manufactured at home five years ago.

"The trend towards shifting more standardised textiles into low-cost areas is now an irreversible trend," says Mr. Cipolletta. "We'll start seeing margins recover starting with the current half" and strengthen next year.

While the textile business stabilises, Marzotto sees its main growth coming from licenses and, more importantly, the fashion labels it owns. And the big driver is undoubtedly Hugo Boss, whose spectacular growth in recent years has kept Marzotto's bottom line afloat amid the textile troubles. The German group accounts for more than half of Marzotto's sales and nearly 80 per cent of its operating margin.

And now Hugo Boss is wading into womenswear, having launched a new line at a lavish presentation during the runway shows in Milan last month, complete with a caviar-laden theme party recalling 1920s Berlin. The strategy is certainly an ambitious one. The launch alone cost 75m marks ($33m), while the company plans an extensive global retail rollout over the next six months.

The new line, aimed at well-heeled working women and featuring an extensive array of suits and formal wear, will be going up against the likes of Donna Karan and Armani. And while the casualwear trend has largely topped out and polished dressing is making a comeback, the competition in this segment is nonetheless fierce, say analysts.

Marzotto is also counting on a boom in the sales of Marlboro Classics, the clothing line owned by Philip Morris, for which the Italian group holds the European license. By rendering more youthful the Marlboro cowboy image and opening many new stores, Marzotto is expecting to push Marlboro Classics annual sales above 800bn lire ($359m) within five years, compared with this year's 200bn lire.

Marzotto's other labels present greater difficulties. Lines such as Borgofiori and Lebole have very little visibility and low margins, and will be tougher to turn around amid the glut of apparel in department stores, say analysts. Instead, the group is looking around for acquisitions, particularly a women's group with a strong US business.

Indeed, it is under some pressure to make an acquisition, given that it might lose its license to produce clothing for Gianfranco Ferre SpA in 2003. Marzotto for some time has been courting Ferre, which has been unprofitable and is looking for a partner. According to recent reports, Marzotto appears to be losing this battle to IT Holding, another Italian group that also manufactures Ferre designs.

While Marzotto has the financial muscle to make acquisitions, some say the group has been slow to move, with Hugo Boss remaining its biggest achievement so far. Others, however, say Marzotto has been prudent in not jumping too fast into an acquisitions race that has seen prices for fashion brands leap to record levels.

"There are still some brands out there that could be within Marzotto's reach," says Andrea Paladini, analyst with Centrosim in Milan. "I think they can buy something without paying a huge amount."