Gucci Group: Background
Gucci Group is one of the leading groups in the fashion and luxury industry and consists of several highly attractive and prosperous brands. Gucci Group brands are Gucci, Bottega Veneta, Yves Saint Laurent, Balenciaga, Alexander McQueen, Boucheron, Sergio Rossi and Stella McCartney. Founded in 1921 by Guccio Gucci in Florence, Italy, the company has undertaken several serious steps in its corporate strategy and development, considerably moving towards multi-brand approach creating the value and competitive advantage through diversification of its business and acquisitions with independent related brands. The target was to reach customers in the close high-end segments (inc. shoes, watches, jewellery), but with distinguish stylistic identity and broaden the consumer’s pool by operation in related fields within the luxury category.
These brands existing under one umbrella create and sell high-quality luxury goods, namely ready-to-wear, luggage, handbags, leather goods, shoes, watches, jewellery, scarves and ties. Gucci Group also began to enter under license such markets as cosmetics, fragrances, eyewear and skincare products. Well diversified portfolio of various brands strengthened by the managerial expertise has formed to the present days the valuable assets for its shareholders and a basis for future growth and development.
In 1999, the company started to adopt a multi-brand strategy with the acquisition of, amongst others, Yves-Saint Laurent and Sergio Rossi. The following year, a number of additional acquisitions and franchising deals were made by the group, including the acquisitions of Stella McCartney and Di Modolo (Gucci Group: Company profile (2008), http://favormall.net/clientimages/38996/fashleadcomp-guccigroup.pdf). Since 2000 when Gucci only included four divisions (Gucci, Yves Saint Laurent Couture, YSL Beaute, Segio Rossi) under the management of Domenico De Sole and Tom Ford it underwent a chain of acquisitions that resulted nowadays in several separate departments that operate very distinctively and discreetly being managed in an autonomous manner. Broad product range provided through high-end multi brands balanced portfolio with a strong parent supervision and coordination together with geographical expansion and market share gain in developing countries and countries with changing economy helped the company to remain its profitability, flexibility and to strengthen its position at the global luxury market. Furthermore, growing through acquisitions is a successful strategy if only several factors are taken into consideration and act as supportive facets:
- A deep and comprehensive understanding and knowledge of fashion industry with all distribution, logistic, creative and administrative features and differences it includes;
- Each brand autonomy and distinctiveness, its protection and positioning according to its own distinguishing identity and ability of this brand within the group to generate benefits and profits.
Related Diversification strategy
The chosen strategy of related diversification since 2000 has taken place in Gucci Group corporate strategy proving its reliability and making the Group one of the strongest and recognized luxury market players. External environment and conditions are favorable for diversified companies in luxury industry, as long as highly diversified business groups are able to hold the biggest market stake and core resources and capabilities are efficiently used among different divisions within one group supporting trends for diversification in the luxury world. The key idea to add YSL Couture in 1999 was the possibility to create value through more efficient transfer of capabilities and managerial resources allocation from Gucci parent company. With the acquisition of YSL Beaute and Sergio Rossi the company didn’t perform with a considerable growth and gross profit increase was 20% (in 1999).
However, De Sole’s leadership position in the company was very important to contribute to organizational capabilities that were transferred within the company. His supervision position and readiness to solve problems, as well as his open-minded character to consider issues and perform centralized control throughout the whole organization was viewed by the personnel as management capabilities at corporate level.
Distinctive capability that was tried to be achieved in terms of general management of luxury brands created the competitive advantage in the businesses the company was operating in, thus Gucci Group was able to deploy the distribution, advertising and promotion, as well as retail management and quality guaranteed across all new brands it was acquisitioning with. YSL Beaute was considered a prospective product since its distribution could be held via Gucci’s already existing channels and gain benefits though Gucci’s experience in Asian market that was able to lead the sub-brand of cosmetics to success.
During 2000-2009 the strength of Gucci has been establishing and spreading to form a brand with strong international presence and economies of scope reached in tangible and intangible resources. Tangible resources were able to eliminate fixed costs for administrative and support services and sharing resources with other brands within Gucci Group can be referred as one of the company’s strengths. By this approach, the most success was reached in skills sharing, however HR and IT services are also shared as back-office functions.
Moreover, by 2004 when Dutchman Robert Polet was appointed as the new chairman of Gucci Group many brands were actually losing money: the former strategy applied to raise the turnover led to the decrease in profitability and total operating profit of Gucci Group grew from 18% to 19% (2000-2007) only. Later on, under Polet’s management all brands went under control of each other own label CEO and designer, much more freedom was given to each label within the Group hence increasing the sales and giving autonomy for expansion. The increase in sales since 2007 in Gucci Group was positive: +8,4% (2007), +5,5% (2008) and +0,3% (2009).
The gain from concentrating intangible resources is much greater because corporate reputation of the raising company achieved by De Sole and Ford’s efforts and then of the stable company guided by Polet nourished all sub-brands, giving them powerful background and tough status, but still at the present moment the company is mostly over-depended on its main brand, Gucci, accounted for merely 66,8% of the total revenue. The smart steps undertaken by Polet aimed to raise the other brands awareness and recognition but positioning of younger brands in a multi-brand company raises difficulties of bringing the whole group to the next level.
On the other hand, human resources – designers – also influence the intangible resources of the company in a positive manner enabling the company to transfer these resources from one division to another with the possibility to support internal entrepreneurship so that talented fashioners can start their own brands.
Along with seeking external resources and capabilities to expand and capitalize its distinctive position and gain market share Gucci Group was able to create internal market of capital: Gucci Group allocated its financial resources between different brands which is more efficient and less expensive than carrying high indebtedness. The company also continued to reinforce its financial structure. PPR’s capital employed together with reduced by 20,7% net financial debt in 2009 creates an advantage of avoiding high borrowing rates to support new businesses and availability of prospective investments in fashion trends benefits from allocation of capital and, therefore, increases financial leverage and balances the capital structure.
The related industries Gucci Group was entering were attractive to existing business and while the cost of entry was considerably low, investments in brand expansion and acquisitions were the right choice. If we look at Porter’s ‘better-off’ test we can see that combination of brands under one umbrella created competitive advantages to the original business, as well to the developing one. Generally, related diversification offered greater potential and value in forms of:
- Unique product features of each brand and strategic relatedness between businesses. Throughout its history Gucci has been developing a unique vision of luxury, a ‘dream’, a sustainable reputation successfully building the Group’s market share in the luxury industry. Positioning fashionable, innovative and high-quality products gained a remarkable market share for the main brand – Gucci, and has been striving for expansion of other brands. However, Gucci woman and, for instance, YSL woman are very different proving that each brand has its own ‘lowers’ and followers, serves different needs and, hence, widens the pool of clients and provides substantial brand recognition. Source that can be used as competitive advantage in the Group is the quality of goods because quality is one of valuable and significant characteristics of all brands in the Gucci Group.
- Management team. Here special mention should be made to Dominco De Sole, head of Milan office, and Tom Ford who replaced Dawn Mello as the creative director in 1994. This strong and appreciated team was capable to turn the company from bankruptcy, to start the internal trend towards diversification and create the strategic commonalities among the businesses included in one diversified group. The essence of the value brought by managerial skills of top-managers is the ability to apply operational control in corporation and to build linkages between business strategy and financial capabilities. Nevertheless, Polet adapted the company to changing market opportunities re-shaping the Gucci Group, so that the Group’s longevity is based on capabilities of core management.
- Manufacturing and logistics capabilities. Gucci Group’s outstanding and innovative manufacturing and logistics network served the company for many years being its benefit in the world of competition primarily for its relativity and quality. Several programs with suppliers, as well as technical and financial support led to the increase of bargaining power with suppliers. Most production is concentrated in the hands of partner suppliers that is quite different to the competitor’s tactics. Integrated design and mostly subcontracted manufacturing for brands in Gucci Group because of manufacturing and operational similarities contributed to economies of scale. With the latest environmental issues and certification of its production Gucci Group is optimizing the usage of its raw materials for shoes, ready-to-wear, silks, leather goods and fine jewellery showing the ability of the group to generate these processes faster through its integrated supply chain and allocate resources and premises to better meet demands of each brand. The Gucci Group Watches manufactures its products in Switzerland and markets Gucci, BEDAT & CO and Boucheron timepieces worldwide. Lastly, YSL Beauté creates, manufactures and distributes fragrances and cosmetics for Yves Saint Laurent, as well as fragrances for Boucheron, Alexander McQueen and Stella McCartney (Goods activity: Gucci Group (2005), http://www.ppr.com/fr/DataUploadFiles/publications/7086/2_1_Luxe.pdf).
- Parenting value added. This comes from the unique managerial skills and resources that can be possessed by the parent company to the business it’s diversifying in. In Gucci Group they include the brand name which is the fundamental pillar for most shareholders and which is hardly traded and top-managers’ performance; many companies are run now under the license of Gucci. These factors add value and attractiveness for the diversification to happen. We can see that from the beginning mainly parenting value added made the diversification a success representing now the greater benefit with lower internal transaction costs.
- Exceptional Asian-Pacific distribution network is the single for all brands within the Group, making it comfortable to negotiate with wholesalers, advertizing companies and gain better deals.
Summarizing, strength of corporate government, consolidated financial planning and minimized upstream and downstream coordination costs together with the strong main leading brand (Gucci) made it possible for Gucci Group to compete with such big market player as LVMH and Richemont. With regard to Gucci Group as a whole we can see that together with the key diversification strategy applied in the company for its brands and multi-brand approach that has reached the new level for Gucci Group, the company was also aiming at some other diverse performance goals among all. Global learning, innovation, supply and distribution processes performed the potential for the growth, and combined with the other benefits enabled the company to reach more complex sources of competitive advantage. All this helped to support quite stable performance during the last years after crisis. Seven-year strategy of Polet is bringing fruit as long as sales performance increase since 2007 was 5,8%, yet the growth is sluggish but Gucci Group managed to overcome the financial crisis. This position is proved also by the stock market: year 2010 can be characterized as stable (see Exhibit 1).
After all, Gucci Group has the potential to grow even following the diversification strategy; however consideration should be made about unprofitable brands within the Group and future active expansion to Asian markets, especially Chinese.
Exhibit 1. Source: Bloomberg (3 year period).