All is not bene among the united colours

Andrew Gumbel reports from Rome on unaccustomed pain for the clean, bri ght success story called Benetton

Benetton is not used to bad news. In the 30 years since it first introduced its clean, bright, affordable clothes to the world, it has only really gone in one direction, and that is up.

The family business started by Luciano Benetton with his two brothers and sister in an obscure corner of north-eastern Italy in March 1965 has become a multinational success story, spawning 7,000 shops around the world, diversifying into sport, agriculture and food retailing, and generating a turnover approaching 9,000bn lire (£3.8bn) a year.

And yet not all appears to be well at Benetton. Call it the price of success, or a patch of recessionary blues, but the company is generating an awful lot of negative publicity. First, of course, are the advertisements, those deliberately shocking imagescrafted by Oliviero Toscani that have caused such a rumpus that a handful of Benetton store owners in Germany have rebelled against the parent company by refusing to pay for goods received from the factory.

But there are less glamorous causes for concern, too. The company's share price has lost 35 per cent of its value on the Milan Stock Exchange since last May. Growth in profits has virtually ground to a halt, hit by an aggressive pricing policy aimed at combating the recession, with figures for the first six months of 1994 showing an increase of 2 per cent - nothing by Benetton's high standards.

Most recently, the company's general manager, Aldo Palmeri, stepped down after more than a decade at the helm, to be replaced by Carlo Gilardi, a career banker, sparking gossip about rivalries at the top and disagreements about Benetton's future direction.

The company is proving remarkably touchy about the aspersions cast on its good name. One official, Marina Gallanti, admitted being in a "very bad mood" after seeing the relentless press coverage of the German shop-owners' revolt. "The story is being toldas though an Islamic crusade was being waged by a big bad multinational against some poor helpless small businessmen. The whole thing is completely ridiculous," she said.

According to her, the store-owners were using the provocative advertising as an excuse. It is certainly true that Toscani's images - even the most tasteless ones showing AIDS victims and the clothes of a dead Croatian soldier - appear to have done no harm to Benetton's sales, which even in recessionary 1994 grew 12 per cent to record highs, and of course increased the company's profile thanks to the gossip they have generated.

"What we're talking about is a lawyer's trick to use a cause celebre as a peg on which to hang every kind of grievance. It's not even true that the adverts are unpopular in Germany. These store-owners may not like them, but the Frankfurt Museum of ModernArt has them on permanent exhibition," Ms Gallanti said. "Legally they don't have a leg to stand on. We are suing for non-payment of goods received and in many cases already sold to customers."

Behind the spat lie some deeper questions about the way Benetton operates. The company built its success on a special kind of licence for its stores, quite distinct from the more usual franchise system. Instead of demanding royalties in exchange for guaranteeing the security of the stores, Benetton has developed a looser relationship under which the stores are almost autonomous and stand or fall on their own profitability.

In good times, this means Benetton stores can make far more money than their high street counterparts. But in bad times, they may suffer or even go under. In the United States, for example, the number of Benetton outlets fell from 750 in the mid-1980s to120.

It is almost certainly the recession that sparked the revolt in Germany, Benetton's biggest export market for clothes - with 616 stores, second only to Italy itself. Sources inside the company have suggested that the licensing system may be due for a review.

Another potential problem, that may help to explain Mr Palmeri's second departure from the Benetton helm in less than five years, is the continuing close involvement of the quartet of Benetton siblings in the running of the business as the company diversifies and grows ever more powerful.

Although Mr Palmeri has always insisted that his relationship with them is good, there have been reports, for example, that he did not agree with the decision by Benetton's parent company, Edizione Holding, to invest in the Euromercato supermarket chain and a number of motorway restaurants - fearing that Benetton was getting too deep in an area in which it had no solid experience.

Mr Gilardi comes to the general manager's job with previous experience in financial administration and a solid background at both the Bank of Italy and the Banca di Roma - suggesting that the company feels it needs to inject some financial structures after the rapid growth of the past few years. The company blames the general atmosphere of recession and political uncertainty in Italy for the drop in its share price. It will be up to Mr Gilardi to prove that the problems go no deeper.