Fashion Disaster

Donatella Versace, tiny, sculpted and forever blonde, was standing backstage after her menswear show at the Teatro Versace in Milan in June, receiving polite congratulations from a handful of editors and friends. The scene was positively dead compared with Versace shows a decade ago: no celebrities posing with Donatella for paparazzi, no bodyguards holding back the throngs, and no pals swilling champagne. Donatella's brother Santo, in his usual charcoal suit with black turtleneck, came back for a few minutes to shake some hands. Her husband, American-born Paul Beck, tall and tan, stood alone in the corner; no one even noticed him. It all felt feeble, pathetic—a sad, soulless charade to promote something that no longer exists.

The nonscene is a reflection of how far the Italian fashion house has fallen since its founder's death. When Gianni Versace was murdered on the front steps of his Miami mansion in 1997, the company immediately announced that his strong-minded sister, Donatella, would take over as creative director and his brother, Santo, would be CEO. The decision made sense at the time. The luxury fashion business was soaring, thanks to the new wealth of the Internet boom, and Gianni Versace was a favorite of the bling set, with his flashy designs, celebrity friends, and lavish lifestyle. The company was poised to become a luxury megabrand like Gucci, Giorgio Armani, and Louis Vuitton.

Instead, Donatella plunged into profound drug addiction and made erratic business and creative decisions. While competing fashion brands turned into global powers, Versace has watched its sales plummet from $1 billion in 1996 to less than half that today. Major retailers such as Neiman Marcus and Bergdorf Goodman have dropped the line. The company has lost both its prestige and design influence.

Starting in 2003, after what Santo described as "seven years of woes," the Versace siblings acknowledged they couldn't run the company by themselves and hired a string of outside managers to straighten out the mess. But the outsiders failed too—in large part, Versace sources say, due to Donatella's and Santo's resistance to change. "The industry had changed and they did not evolve," says a former Versace executive who would speak only on condition of anonymity.

In June, Giancarlo di Risio, Versace's CEO for five years, abruptly left. Sources say di Risio proposed more rigorous cost-cutting—with a particular focus on its owners' high-flying lifestyle—in response to the economic crisis and Donatella didn't agree. The House of Versace has denied this publicly and declined to comment for this story. Immediately following di Risio's departure, the company hired management consultants at Bain & Co. to come up with a three-year plan to get back on track; it also hired a new CEO, Gian Giacomo Ferraris, from Jil Sander. To some extent, it's remained business as usual at Versace: last month Donatella jetted off to New York to host the Whitney Museum's annual black-tie gala, which Versace sponsored, and then to Brazil for the Rio Rocks Fashion extravaganza, where she co-hosted a grand charity dinner at the Copacabana Palace and hung out with Diddy and photographer Mario Testino. Days later, however, Ferraris announced the layoff of 350 employees—roughly a quarter of the company—as part of a "comprehensive corporate reorganization" to put Versace back in the black by 2011.

With the fashion industry reeling from the lingering recession, many in the business wonder whether Bain's prescriptions will be enough to save Versace. "The old family way is not the new modern way," says Tom Julian, president of the Tom Julian Group, a brand consultancy in New York City. "Whether it's McKinsey or Bain or Boston Consulting Group, these reputable firms have very strong recommendations, but it may not take hold or help the brand, given the hemorrhaging."

For better or worse, the Versace siblings have always been devotees of the "old family way." In their hometown of Reggio di Calabria in southern Italy, their father, Antonio, was a methane-gas and coal merchant; their mother, Francesca, was a dressmaker who had a shop called Elle. The family lived in an apartment above the store. As a youth, Gianni helped his mother in the shop. "I shuttled back and forth between Reggio and Messina, I took the ferry and each time tried to choose more beautiful and extraordinary materials," he wrote in his book, Designs. Before his mother would cut expensive fabrics, he recalled, she would say a prayer.