TProvide a competitive positioning of the luxury industry back in 1990. How was Gucci positioned? 2. Which critical moves allowed De Sole to reposition Gucci? 3. What do you think about the acquisition of YSL and Sergio Rossi? 1. Market Worth and Composition: By 1999, the worldwide luxury goods market was worth $60 billion, with a sales growth rate of 6% per year.
Overall, the sector was mainly composed by 35 companies, which accounted for about 60% of the market, plus a “competitive fringe” of smaller companies. Among the top players, six of them had revenues over $1 billion, the majority (15 to 20) had revenues from $500 million to 1 billion and the rest lied within the $100 million to $500 million dollar range. Products: The typical portfolio of a luxury goods company comprised seven main product categories: leather goods, footwear, high-end apparel, silks, watches, jewelry, perfumes and cosmetics.
Most of these luxury companies were pursuing a differentiation strategy, by proposing different types of products that shared the same spirit of luxury and exclusivity with the brand, but tended to focused on just two or three of the categories mentioned above. Target clientele: The typical consumer of luxury goods ranges from wealthy and discerning women aged around 30-50 to younger (especially Asian and Japanese) girls, beginning around the age of 25. Ownership structure: Most of the luxury companies in the industry were Italian or French family-owned, single-brand firms (like Gucci, Armani, Prada, Chanel and Hermes).
Louis Vuitton, which in the 1990s was already owned by the LVMH Group, represented one big exception. LVMH was a multinational conglomerate with a wide product portfolio, which included, aside from leather goods and fashion, also champagne, spirits, perfumes and cosmetics. Production: Most luxury companies shared a mix of three production strategies: in-house manufacturing, outsourced production and licensing. Among those, Hermes heavily relied on in-house production, mainly because its success stemmed from its unique craftsmanship techniques.
On the other side, companies like Gucci, Prada and Louis Vuitton outsourced their production to small Italian/French firms in order to minimize their fixed costs. Pricing: Being the leather goods one of the most high-margin products among the companies’ portfolio, three pricing ranges could be identified: the high-end companies (top of the market) like Hermes, which were able to sell a leather bag starting from $4300, the middle segment companies (like Prada, Gucci and Louis Vuitton), with prices ranging between $600 and $1200 and the lower-end companies (like Ferragamo) which positioned themselves at the lower end of the luxury scale.
Brands: Every company had its own brand “personality”, which was consistent with its pricing positioning and with the firm’s values, history and vision about fashion and luxury. Hermes, for example, with its unique, hand crafted, leather goods placed most of the brand’s emphasis on its traditional, elegant and classic image. Hermes was the exclusive brand per excellence, worn by the most rich and influential people in the world.
One step behind there were Louis Vuitton and Gucci, with both firms heavily relying on their classic and stylish passed reputation: in the 1990s they were striving to maintain an exclusive relationship with an high-end, wealthy and mature clientele and, at the same time, to get attention from young and wealthy fashionistas asking for a “modern luxury”. Prada, on the other hand, decide to take a modern, anti-luxury take on luxury, by selling slightly cheaper and more aggressive/glamour products than its competitors.
Gucci: To fully understand Gucci’s positioning in 1990, it must be said that there was a clear distinction between its “ideal” positioning (the one that M. Gucci would have wanted) and its “real” positioning. M. Gucci’s vision was to create a $1 billion company with limited distribution, targeting an exclusive wealthy clientele, with a classic take on luxury: an image on which Gucci had built its past fortune. Unfortunately, Gucci’s exclusive image in 1990 was compromised by severe brand dilution and by an enormous amount of counterfeit products available n the market. At the time, Gucci’s extensive use of canvas to manufacture bags, belts and wallets fostered this trend: canvas was very inexpensive to produce and had very low price points. As a result, Gucci’s logo was everywhere and no truly discerning luxury goods client would have bought their products. Moreover, Gucci’s distribution network did not reflect the brand’s exclusive image: the company was overly relying on wholesale distribution, department stores and franchised stores, with a great loss of control over the brand’s diffusion and product’s quality.
Still, it has to be mentioned that, in 1990, M. Gucci was aware of these problems. On one side, he decided to bring in D. Mello, to take care of product development and to reinvent Gucci as a classic brand and, on the other side, De Sole attacked Gucci’s North American distribution network, which had grown out of control. Since this repositioning wasn’t made in a phased manner and was mainly based on M. Gucci’s predictions (who lacked of business and analytical skills), many difficulties arose. D.
Mello, by raising prices and throwing out two-thirds of the products (most of which were canvas), left the company with a disorganized production and a deep cut into sales. Moreover, in a few years, De Sole decided to close more than 400 points of sales in North America, to stop distributing in department stores and to close the ones in secondary markets. Gucci’s repositioning program resulted in more elegant/expansive products and a selected distribution, in line with the tastes of an older, well-heeled clientele.
At the same time, prices were too high, production was disorganized and delivery was a nightmare: essentially, they wiped out the business. 2. Under De Sole’s leadership as Gucci’s COO, Tom Ford as Creative Director along with the financial support of InvestCorp, Gucci was able to take the lead in order to start a complete company restructuring. Starting from its internal organization, De Sole strove to reunite all the international branches (which were operating as independent business entities) under a sole management.
His main goal was to run the company as one global brand that could exploit synergies and leverage a best-practice approach, with information shared across the entire organization. At a corporate level, Gucci decided to set up an incentive program, with stock options being offered to employees (a practice that differentiated the company from most of its competitors) in order to get people to contribute to the company’s goals. In an effort to reposition Gucci in the marketplace, De Sole decided to redefine all the 4Ps of the marketing mix.
Starting from the Product, the company launched, under Ford’s creative direction, a new high-end ready-to wear collection with a youthful spirit, targeting a new generation of urban/modern customers expecting new collections for every season. As the luxury industry became more fashion-oriented, Gucci moved from its traditional classic image to a more aggressive and glamorous one, presenting all its collections under a renewed brand.
De Sole and his new management reviewed the company’s Price structure as well, by re-pricing every item offered (lowering prices on average by 30%) in order to position the company below Hermes and Chanel, as a mid-tier brand at par with Prada and Louis Vuitton. The re-pricing strategy was consistent with the new image of the brand, which offered superior products with a good value for money. Moreover, the company decided not to opt for any brand extension, so as to keep the integrity of its luxury status. Promotion. Mr. De Sole completed the company restructuring by deciding to re-advertise the Gucci brand.
He knew that one of the main difficulties was to convey the right message to target customers and to better match the company’s offerings with people’s wants. With the aim of doing so, his management decided to set up a big advertising and communication campaign, in order to improve the attractiveness of the brand and to boost sales. Placement. Being aware of the primary importance of the client experience while purchasing Gucci’s products, De Sole decided to revamp and strengthen the network of directly operated stores, by expanding them numerically and by size.
He also chose to redesign them, in order to better match Gucci’s interior decoration with the younger and hipper profile of its clientele. As a matter of fact, every store was accounted for its personal contribution in improving the overall reputation of the company, avoiding any move that could potentially be image-detrimental. Despite selling its products through different distribution channels, Gucci resisted from the temptation of taking into account only financial results when deciding whether a distributor would be allowed to sell its exclusive items.
In the years to come, Gucci focused on the composition of the product mix sold in its DOS, mainly favoring local customer tastes, since they accounted for the majority of the ready-to-wear sales and represented a more stable and reliable customers base. De Sole also chose to take full responsibility for improving Gucci’s manufacturing and logistics, with the aim to sort out a disorganized, inefficient production process and an unreliable delivery system, which were seen as bottlenecks that needed to be eliminated.
At first he started a new program for partners, selecting only those who were able to provide impeccable service, meet very high quality standards and abide to delivery deadlines. In turn, Gucci committed itself to providing financial and technical support as well as training to its key suppliers. Gucci was able to guarantee to its suppliers minimum production levels of at least 50% of the previous year. In addition, since the company chose to subcontract the manufacturing of 95% of its leather goods to a selected group of small Italian firms, it was very important to establish a long-term relationship with them, based on mutual trust.
Moreover, as demand and production volumes grew exponentially over the years, De Sole encouraged his staff to invest in technological innovation such as computerized equipment, in order to reduce both cycle time and inventory turnover, resulting in a more flexible production system. 3. What apparently seemed to be just a defensive strategy against a hostile takeover turned out to be a starting point towards a path of growth for Gucci. Both acquisitions are part of a context of industry consolidation, a trend that began to characterize the luxury industry since the late 1990s.
The acquisition of YSL and Sergio Rossi enabled Gucci to become a multi-brand luxury group with an enormous financial power, capable of exploiting strategic synergies and exerting more market power, despite an increasingly complex organizational structure. Fist of all, the acquisition of YSL represented a great opportunity for Gucci to minimize fixed asset investments, while expanding its product offerings: using the same facilities for its back operations, Gucci was able to realize big cost savings.
Moreover, the core competences of both companies could be pooled together synergically, in order to fill the gap in the multi-brand group’s supply: on one side, the French company’s market clout in perfumes and cosmetics and its modern and revolutionary take on fashion and, on the other side, Gucci’s expertise in ready-to-wear and leather goods. Moreover, by following LVMH’s approach (which exploited synergies among brands and gained relevant discounts on advertising of as much as 20%), Gucci could try to leverage its contractual power with suppliers and other third parties as a group, to achieve cost savings.
In my opinion, one of the most positive things about the YSL acquisition was that Gucci had the expertise to be able to redefine YSL’s identity, product and distribution; mainly because the Italian-born company faced the same issues back in the early 1990s. At the time of the acquisition, YSL faced several problems: its ready-to-wear collection was out of creative power, they had a severe problem of brand dilution and they had lost control over the brand, due to an unorganized distribution structure and more than 167 licensing contracts.
Gucci appointed Ford as creative director, fixed the distribution side by re-acquiring YSL’s historical supplier and distributor of the ready-to-wear collection, Mendes, and re-organized the company’s stores. Regarding the YSL brand, T. Ford fully understood both its potential and the need to keep the companies’ identities distinct: reaching customers in the same high-end segment with two different styles. YSL represented the “other” side of luxury and fashion: it was a totally compatible brand targeting a different side of the same market.
In my opinion, the downturn of this acquisition will show its true face in the future: without any doubts, Gucci had the expertise to reorganize YSL, but, when it comes to new collections and products, it will become increasingly difficult to “do the same things in different ways”. Exploiting back-office synergies, by using the same production facilities and distribution channels, is always a good move but, in this case, front-office synergies could result in blurring perceptions for clients: a risk that Gucci shouldn’t be willing to take.
My advice in the long run would be to hire another designer in order to grow the brands separately and effectively. The Sergio Rossi acquisition was another way to reinforce Gucci’s presence in the luxury world, but in a different way. Sergio Rossi was targeting a lower segment of the luxury scale (his shoes were priced around $400) but shared the same values with the Italian-born company.
The selected distribution, the high quality hand-crafted products and the founder’s insightful creative mind were highly consistent with the group’s image and gave Gucci the opportunity to take a more active role in the shoe market. Sergio Rossi’s company was an organized small firm providing high-quality products under a brand that had potential to reach a better worldwide echo. Of course, this brand will need a higher-scale reorganization, and a wide promotion campaign to spring out of the darkness.
The obtainable synergies are similar to the ones listed before, although it should be underlined that there are little synergies, in terms of economies of scale, to be found in design. However, the acquisition will surely give Gucci the opportunity to exploit economies of scope, to be developed both in terms of learning curve and in terms of product range. ——————————————– [ 1 ]. Tiffany, Chanel, Ralph Lauren, Tommy Hilfiger, Cartier, Luis Vuitton. [ 2 ]. By the late 1980s some 22,000 product bore Gucci’s name including tennis shoes, cigarettes holders and playing cards