Is Kering Putting All Its Eggs in a Gucci Basket?

Today Kering is the luxury-group king, racking up extraordinary corporate growth with an indisputable star brand: Gucci. And with a laser-focus on a key market: China. Despite the thorny €1.4-billion (1.578 billion) tax evasion probe into Kering in Italy, the exit of its sustainability flagship brand Stella McCartney, its lost opportunity with Yoox (Kering signed a joint venture with Yoox but missed out when competitor Richemont acquired it), Kering has shown tremendous ability in the creation of fashion “phenomenon.” The powerhouse Lyst Report last week acknowledged, yet again, Gucci as the world's hottest label — and it’s carrying the company as a whole. Gucci represented 57 percent of the Kering Group Luxury Activities in 2017, with Yves Saint Laurent coming in second place with 14 percent and Bottega Veneta following with 11 percent. But the marketing costs of keeping Gucci, well, Gucci are secret. What isn’t hidden is its strategy: Gucci is focused on China. To be fair, many rival luxury brands and groups pushing strenuous double-digit growth have focused obsessively on Chinese shoppers, outbound and otherwise. That mania remade the industry. Las Vegas boomed. Galeries Lafayette opened a Chinese restaurant in its Paris premises to lure the Chinese customers eager to savor their own mother country cuisine abroad. Other department stores went further in organizing impeccable logistics for personal shipments to China. It seemed like all the luxury stores outside China hired Mandarin-speaking sales assistants. Tour guides specialized in outlet trips from Florence to Tokyo to the Strip. But Gucci was the leading brand of this trend. Earlier than rivals, it developed a very effective strategy in China, a smart mix of WeChat mini-program activities, partnerships with Chinese influencers and viral advertising campaigns. The results have been celebrated by the press — and at the stock exchange. But the latter has started to cool down that excitement. Berenberg Equity Analysts told Reuters, of Kering’s results: “Despite its impressive H1 (2018) performance, with operating profit and free cash flow increasing by around 53 percent and around 65 percent year-on-year, respectively, the small organic miss at Gucci (40 percent versus previous quarter 49 percent) has attracted all the attention.” While Kering has clearly focused on Gucci's potential, many insiders have started questioning for how long this phenomenon will last and what will be the next chapter for the group. Initially, under the management of Marco Bizzarri another Kering player had boomed — Bottega — and then rapidly busted when the CEO appointed by Bizzarri didn't successfully manage further brand development. Meanwhile, Saint Laurent seems to have reached its tipping point and will have to face the competition of a Hedi Slimane comeback at Celine. Demna Gvasalia Balenciaga risks the same fate as the brand he founded before, Vetements. An haute-couture brand turned to big sneakers and fast trends will have trouble keeping high a level of interest among the youngest generations that are more invested in trends than in brands themselves. Clearly, some clouds are gathering on Kering's sky and they raise tough questions: Will Alessandro Michele's style at Gucci continue to be appealing to the new, young, generations of Chinese customers? Will he be able to evolve the brand instead of keeping it in his visionary loop? Or, will he rather be stuck in his own, monolithic vision of the world? Has Gucci reached a saturation point? How sustainable is such a stellar growth compared to competitors such as Vuitton and Chanel? Is it efficient to focus the revenue growth on China mostly? Apparently, Vuitton learned so well the lesson of the '90s when it risked bankruptcy because of the economic troubles of its key market, Japan. What about Gucci? What is the medium-term brand impact of pushing the revenues fast and furious? Will the fixed costs of such a gigantic fashion machine be sustainable even with slower growth? Has the growth of Gucci absorbed all the energies of the Group? Does Kering risk a burnout? And, is it possible to be successful forever?

Is Kering Putting All Its Eggs in a Gucci Basket?

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Published February 11, 2019

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Is Kering Putting All Its Eggs in a Gucci Basket?