NO-PROFIT ZONE

Parisians and Milanese handpick their silk scarves and cashmere sweaters with the care hedge funds lavish on stock portfolios. New Yorkers, with their professional blow-drys and sleek power uniforms, are always the most pulled-together fashionistas. London is, by contrast, the adolescent of the design world--home to the hot fashion schools, a restless incubator for global trends, but earning the industry equivalent of part-time wages at McDonald's.

Britain's designers took in 700 million pounds wholesale last year--10 times what they did in the early 1990s, but a relative pittance compared with the three leading players, the United States, France and Italy. While it is difficult to find comparable figures across nations in the fashion industry, Britain's total designer wholesale revenues are a fraction of America's; New York's fashion industry (which makes up the bulk of U. S. sales) made $12 billion (6.5 billion pounds) wholesale on apparel in 2004.

Talent is certainly plentiful in Britain: the ideas generated by its designers reverberate throughout the fashion world. Homegrown stars often have their own small labels, but many are also poached to work for bigger fish abroad--John Galliano for Dior, Alexander McQueen for a time at Givenchy, Stella McCartney for Chloe. Many of Britain's biggest homegrown brands, like Vivienne Westwood, Paul Smith and Burberry, don't even hold their most important shows at London Fashion Week; it is an afterthought to shows in New York, Paris and Milan, with an increasing number of buyers and editors skipping the city altogether. No British brand, with the exception of Burberry, has reached the billion-dollar scale of an Armani or a Ralph Lauren.

This only fuels the maxim that the British tend to innovate, then leave others to make money off their designs. Fashion is a tough business these days for everyone--goods of all kinds are becoming commoditized, and retailers are having to work harder and harder to come up with innovative ways to drive traffic into stores. But despite having some of the richest and best high-fashion customers in the world at their doorstep, British designers have a harder time than most for a variety of reasons. Unlike the French and Italians, they don't have a critical mass of large luxury businesses built up over several decades. Their design schools focus more on art than commerce, turning out edgy innovators rather than savvy retailers. Manufacturing is practically nonexistent, there's no massive home market and, unlike New York, London has been unable to create a sense of hype and entertainment around the industry.

London's deficits as a fashion profit center are most stark in comparison to New York, which has even less history in the luxury trade. American designers came into their own during World War II, when fashionable women were cut off from Paris couture. New York specialized in sportswear, still the biggest seller in the market; today's big names like Donna Karan (now owned by Parisian conglomerate LVMH) make their money dressing the working woman. "American designers have always been about practicality--one in the 1950s actually created an outfit especially for getting in and out of a cab easily," says Sonnet Stanfill, a fashion curator at London's Victoria and Albert Museum. Even at the high end, that means selling mass luxury, as opposed to edgier chic. "London fashion is very intellectual, all about ideas, or about being an outsider," says Stanfill. It is perhaps no accident that an American, Rose Marie Bravo, transformed the dowdy raincoat maker Burberry into the United Kingdom's biggest and best-known fashion brand by slapping its trademark check pattern on a variety of mass-market luxury goods, from umbrellas to bags.

Some of the U.S. advantage is structural: American design houses have an enormous home market working in their favor. Nationwide retail chains like Neiman Marcus and Saks Fifth Avenue that sell luxury to the masses have no equivalent in the U. K. Luxury is more or less a London business, with sales made in boutiques or department stores like Harvey Nichols and Selfridges. Since London's own designers remain relatively small, it's tough for them to crack the highly competitive American market; Paul Smith, who sells about 220 million pounds worth of goods a year, is one of the few who have.

At the same time, overt commercialization is still frowned upon in British design circles. While British institutions like Central Saint Martins and the Royal College of Art are regarded as among the best design schools in the world, they are less well known for their financial training. By contrast, New York's main teaching center, the Fashion Institute of Technology, was founded in the 1940s by textile industrialists because the state wouldn't support a school for what was then known as the "rag trade." FIT remains as much a business school as an art school.

Britain's other two main competitors, Italy and France, share some of its European disdain for crass commercialism. But they have other ingrained advantages. In both Paris and Milan, a long tradition of strong government support has created clusters of fashion houses. The Italians have the added advantage of maintaining a relatively robust textile-manufacturing industry in the face of emerging market competition from China and elsewhere. "Italy's manufacturing base is historically one of the reasons it's been easier to grow big brands there," says Carlo D'Amario, the Italian managing director of Vivienne Westwood, who grew the British business from almost nothing to 60 million pounds a year, in part by switching manufacturing to Italy in the mid-1990s.

He also relocated Vivienne Westwood shows from London to Paris to capitalize on the Continent's other advantage: the critical mass of buyers and press who come to the shows. The clothing shown there isn't necessarily more innovative than what gets made in London. Nor is it more genuine: some European labels already outsource to Asia, and companies like Prada may follow. But in the luxury business, history and perception really do translate into cash. "The heritage of the brands adds intangible value," says Merrill Lynch analyst Rodolphe Ozun. "Because there aren't as many old, iconic brands in the U.K., London is less associated with luxury than Paris or Milan," and consequently captures less of the luxury trade.

While tradition cannot be built in a day, London's cause is not hopeless. New York's fashion shows were once as haphazard as London's, but have since been transformed into a slick enterprise. The big change came in the early 1990s, after throbbing music at a Michael Kors show sent plaster and bits of the ceiling crumbling onto the laps of Manhattan's most important fashion editors. "we live for fashion, but we don't want to die for it, ran the headlines the next day," remembers Fern Mallis, then president of the Council of Fashion Designers of America (CFDA), who moved the shows to plush tents in New York's Bryant Park. The project was so successful, it's been spun off into a separate business and acquired by the international talent-management company IMG.

The good news is that the British powers that be are finally starting to focus on how the domestic fashion industry can make more money from its cutting-edge designs. The British Fashion Council, London's equivalent of the CFDA, has far less entrepreneurial chutzpah than its American counterpart. But the London city government has become an official advocate for the industry, launching projects like a high-fashion incubator called the Centre for Fashion Enterprise in conjunction with the London College of Fashion. The center was founded by a high-tech entrepreneur named Suran Goonatilake. The idea is to hook up talented designers with capital, PR and marketing support, and smart managers to run the business side of things. "London has great schools, capital markets, media and buyers," says Goonatilake. "There's no reason it couldn't be the Silicon Valley of fashion."

Indeed, certain changes taking place in the industry actually favor London over its counterparts. For starters, the city is the capital of fast fashion (the rapid adaptation--or outright copying--of luxury ideas for the mass market). High Street stores like Topshop invented the concept--and many more are starting to hire British designers to do special, less expensive lines for them. This support helps the designers expand their high-end businesses as well. Jasper Conran, who has long designed for groups like Debenhams department store, Waterford and Wedgwood, recently opened a large flagship store in London's tony Mayfair, selling 1, 800 pound sequined pants and candy-colored cashmere sweaters alongside fine bed linen and crystal champagne flutes.

Conran is one of the few internationally known designers who still present their collections in London. But fashion-week organizers hope to change that by including other creative industries--film, music, graphic arts--to pull in more press, buyers and, ultimately, designers. "It's ridiculous that we don't have a more meaningful fashion week," says British Vogue editor Alexandra Shulman, who is also encouraging organizers to shorten the event and time it closer to the Milan and Paris shows so that attendees don't have to fly overseas several times.

Will all this turn Britain into a home for luxury megabrands? Probably not. Designers here want to grow, but it's tough to find someone who aspires to be the next Armani. "I'd have to work too hard," says Conran with a laugh. Still, the students who come from all over the world to study in London will undoubt-edly continue to be snapped up by the industry's top brands. And ironically, the city's also-ran status may put it closer to the true meaning of luxury: originality, and exclusivity.