GUCCI(Paper 7)

A Case Analysis:

EXECUTIVE SUMMARY The year is 2000, Gucci Group is at a cross road and its strategic decision at this juncture will define the future of the world’s fourth largest US$1.2 billion luxury group. Gucci is a 77 years old group, established in 1923 in Florence selling luggage imported from Germany. It has transformed itself over the last 77 years and moved from a family owned entity to a public listed company. After 77 years of its existence, it now sells a wide range of luxury goods starting from leather goods, fragrance, cosmetics, shoes, watches, apparel, jewelry, silk ties & scarves etc. More importantly, what started as a single product, single brand company that was focused on small leather goods has now transformed itself into a multi-brand, multi-product group with worldwide presence. The case Fashion Faux Pas: Gucci & LVMH deals about the hostile takeover and the legal battle between the aforementioned companies in the controlling ownership of Gucci shortly after its initial public offering. Thus, J4 examined the actions pursued by Gucci as it has practiced the “poison pill” mechanism. With such a study, the proponent aims to recommend actions that will enhance the competitiveness of the company. Further, the group identified area of opportunity in which the internal organization of Gucci can focus on to deliberately align its strategies with its mission and vision. To achieve these goals, the proponent used several tools in congruence with the identified problems hindering the company’s endeavor to achieve its goals. The proponent initially looked into the internal structure of Gucci through its company profile. Acknowledging the significant impact of external environment and the fashion industry in the performance of the company, the proponent used the PESTL Analysis and Porter’s Five Forces of Competition Analysis. With the PESTL, it was found out that the economic and social aspects of environment have the utmost impact to the company. Porter’s result on the other hand posted a moderate to high level of competitiveness within the fashion industry. Furthermore, the proponents included other analysis of general environment to completely realize what action(s) to undertake to satisfy the goals of Gucci.

TOWS Matrix evaluates the company’s historical transactions and strategies to gain a better picture of the company’s current status and lead the proponent to a realistic action plan for the future. This tool is an aid to identify strengths and opportunities that can serve as armours in battling the weaknesses and threats in the organization. With the integration and matching of the results of the tools used, the strategic action chosen as the grand strategy was determined to be the pursuance of market expansion. This can help the company proceed to development and growth. This action is appropriate since the company’s status in the industry has been at par with the superior brands like LVMH, Prada, Hermes, and the like.

A Case Analysis:

Objectives: The proponents aim to examine the actions pursued by Gucci in the case when LVMH attempted a hostile takeover. Other intents of the groups are the following:

(1) To identify strategies that will help maintain and strengthen the company’s competitiveness in the luxury goods industry. (2) To identify opportunities that will satisfy the company’s mission of rapid growth development in the next five years. (3) To propose tactics and/or courses of actions that Gucci can undertake to increase its market share by 10% next year.

Problem Statement: The battle between LVMH & GUCCI brought the latter to spill a “poison pill” (ESOP) into competition with the former’s attempt of hostile takeover. Gucci then faced a dilemma on how it will reposition itself in the fashion industry and how it will find opportunities to enjoy organic growth to proactively prevent takeover of a competitor like LVMH.

A Case Analysis:

COMPANY PROFILE The House of Gucci or famously known as Gucci, was founded by Guccio Gucci in 1921. As one of the world’s leading luxury fashion brands, Gucci is known for its renowned reputation for quality and Italian craftsmanship, designs, manufactures and distributes highly desirable products such as leather goods, shoes, ready-to-wear, silks, timepieces and fine jewelry. After Guccio’s death in 1953, his son Aldo helped the company lead the company to a position of International prominence, opening the company’s first boutique in New York. Gucci targeted the Far East for further expansion in the late 1960s wherein they opened stores in Hong Kong and Tokyo. They also developed on that time their famous logo, GG, the Flora silk scarf and the Jackie O shoulder bag which was created by U.S. President John F. Kennedy’s wife, Jackie Kennedy. During the late 1970s, the establishment remained one of the premier luxury goods establishments. Family quarrels and disastrous business decisions had brought to the downfall of Gucci. His two sons, Rodolfo and Aldo acquired equal 50% shares of the company. Rodolfo’s contribution was much less than what Aldo and his sons did. Aldo created the Gucci Accessories Collection (GAC) wherein the main intention was to boost the Gucci Parfumes Branch and it was operated by his sons. GAC consisted of small accessories, such as cosmetic bags, lighters, and pens, which were priced at considerably lower points than the other items in the company’s accessories catalog. GAC proved to be profitable but it had resulted to the lost of Gucci’s reputation as the one of the world’s most stylish brands. Soon, cheap counterfeit Gucci products began appearing, with the knockoffs looking exactly the same as the originals. This became a big stain to the company’s name. Rodolfo’s death paved way for the eventual control of his son Maurizio of the Gucci Company and further mismanagement caused him to introduce déclassé products which further cheapened the then-weakening Gucci brand name. The company suffered heavy losses in October 1993. The business was set up for liquidation and Maurizio was forced to sell his shares in the company to Investcorp in August 1993. This was the start of Gucci’s turnaround and redemption with Investcorp’s bold move of hiring Domenico de Sole as Gucci’s CEO and Tom Ford as Creative Director.

A Case Analysis:

In 1999, Pinault-Printempts-Redoute (PPR) made a strategic investment worth $2.9 billion and eventually became the current owner of the Gucci Group. At present, Gucci is one of the leading luxury brands in the world with several luxury brands under its portfolio like Balenciaga, Yves Saint Laurent and Alexander McQueen to name a few.

Mission: To become a group leader in the luxury market at world-wide level through: putting into effect and maintaining. The company’s objective was to enhance its rapid development and growth plans, as well as to bring about great flexibility to its production and business processes.

Vision: To become the global multi-brand, well-diversified luxury goods company leader.

MAJOR PRODUCTS and SERVICES Gucci Group produces a range of fashion products and related items. The company offers the following products and brands:

Luxury goods Women’s ready to wear Luggage Handbags Leather goods

Time pieces Shoes Jewellery Ties Scarves

Eyewear Perfumes Cosmetics Skincare products

A Case Analysis:

BRANDS:

Alexander McQueen Balenciaga BEDAT & Co Bottega Veneta

Boucheron Gucci Sergio Rossi Stella McCartney

Yves Saint Laurent YSL Beaute

Segment information The Group has five operating segments: Gucci Division (excluding Gucci Timepieces) Gucci Division (excluding Gucci Timepieces) includes all revenues from the sale and licensing of Gucci branded products other than those from the wholesale distribution activities of the Gucci brand watches. Gucci Group Watches Gucci Group Watches includes the production and distribution of Gucci and other Gucci Group brand watches. Yves Saint Laurent Yves Saint Laurent includes all revenues from the sale and licensing of Yves Saint Laurent branded products other than those from the wholesale distribution of Yves Saint Laurent perfumes, cosmetics and watches. YSL Beauté: YSL Beauté includes revenues from the sale of perfume, make-up and skincare products other than Gucci and Boucheron brand perfume.

A Case Analysis:

Gucci vs. LVMH: The Battle for Control The battle for the takeover of Gucci by LVMH, and efforts by Gucci management to defend against the intended takeover at all costs, is a classic example in the fashion goods industry. The case can be seen as mainly a battle between the two majority stakeholders in Gucci, namely the management of Gucci itself versus the other majority stakeholder LVMH. It can also be seen as the battle between two personalities, De Sole of Gucci and Bernard Arnault of LVMH, each determined to get their own way, regardless of the other minority shareholders. The following are claims of LVMH against Gucci’s poison bill creation:

Nature of ESOP

An ESOP is a type of employee benefit plan designed to invest primarily in employer stock. To establish an ESOP, a firm sets up a trust and makes tax-deductible contributions to it. In the case of Gucci, it has created ESOP as a strategy to protect the ownership of the management and its long-time employees. With the growing percentage of shares of LVMH, extending up to 34.4%, Gucci has been alarmed of the possible hostile takeover. De Sole, CEO of Gucci, instituted ESOP in the form of Trust. This is viewed as a company-centred move because as was mentioned, ESOP was merely a Trust, meaning, employees can not expect for premium and dividends. The company also, did not actually issued stocks to accumulate additional capital, rather only shares that converted into its power to retain its majority voting rights.

Luxury Goods Market – Key success Factors Comparatively, Gucci maintains high profitability from the certain product lines . They maintain the company’s profitability, market position, and brand superiority over time. It is highlighted that the gross margin is higher in the case of watches and leather goods @ 75% to 80%, followed

A Case Analysis:

by Silks @ 65% to 70% and apparel @ 50%. Secondly, the primary consumer of luxury goods is women in the age group from 25 to 50 and a major portion of such sales for many brands are from Asia (especially Japan).

Spread of Luxury Products – Source: HBS Case 9-701-037

Luxury goods industry The Luxury Goods industry is defined by the personal consumer goods positioned in the high end of the market. Luxury products transcend product functionality. Traditionally, the Luxury Goods industry has been associated with French families and designers and is becoming a global industry. The main characteristics of luxury goods are: - A strong branding that relates to an exclusive and wealthy lifestyle. - High quality, especially in terms of design - Premium pricing The luxury brand is perceived as being exclusive (82% of consumers), high quality (80%), stylish (75%) and extravagant (65%). Only 55% perceive it as lasting and only 51% perceive

it as expensive.

A Case Analysis:

Market segmentation Total sales in 1999/2000 amounted to USD 60 to 80 billion. The market growth has been 6.3% between 1996 and 1999, and is supposed to be 7-10% between 1999 and 2003. The market can be divided into different business segments and geographical areas. The market is divided among: · Fragrance and cosmetics (24 to 37% of the luxury goods, depending on estimates) · Ready-to-wear and fashion (14-30%) · Leather and shoes (13-16%) · Watches and jewellery (8-32%) · Wines and spirits (15-22%) · Table wear (4-5%) · Accessories (5-9%) Geographical segments The market is divided into 3 geographical areas: in 1999, USA accounted for 30%, Europe for34%, and Asia for 36% (increasing to 60% if we include purchases abroad by Asian tourists).

PESTL ANALYSIS

A Case Analysis:

A Case Analysis:

Porter’s Five Forces Model Analysis Industry rivalry The competitiveness in the industry can be qualified as relatively high, but given the high margins and the customers' perception about the price, the competition is not on price, but rather on quality and image perception, as well as on the ability to attract the right designers. Competitors The barriers to entry are very high. They are the intangible image and the perception built around the brand. The barriers to stay are also very high: there is a continuous need to "feed" the image, to maintain the perception but still to respond to customers' needs and changing expectations. The trade off between exclusivity, stylishness, extravagance and lasting image makes it difficult to be for a long time in the business. There are hardly any barriers to exit given the high barriers to entry and to stay and the low barriers to exit, the dynamics of the industry are: few big players and only the best, as the others either cannot get in, or are easily out. Suppliers The bargaining power of the suppliers depends on the segment. As some tended to have increased bargaining power, this leads to the concentration and vertical integration trend in the industry, one of the reasons for which is to lessen the bargaining power of the suppliers. Until now, there is not observed concentration among the suppliers of the luxury goods industry among themselves. There is however a trend for larger houses to buy smaller suppliers and to deprive the market form access to those suppliers.

A Case Analysis: Customers There are two types of customers: •

The super-rich

•

The middle-market customers, who selectively trade-up to higher levels of quality, taste and aspiration

The super-rich customers (or High Net Worth Individuals) seem not subject to the world economic cycles. In addition, they are a growing number. Estimates predict that their number will increase from ~ 26 millions in 2000 to ~ 40 millions in 2005 (an increase of ~ 9% p.a.) The middle-market customers are those that are willing to buy luxury goods, but "they want the hottest, trendiest design, which increasingly have to be marketed in creative and expensive ways". They can potentially expand the market quite dramatically, as they are part of the upper-middle class. They are considered to be both a great opportunity (show no price sensitivity when buying the "hottest" product) but they are also a threat. "They are more demanding, more selective and show less brand loyalty than the super-rich class". This implies for the luxury goods industry a difficult equilibrium between the two kinds of customers, because both are not necessarily compatible. This can lead to a difficult trade off between satisfying a smaller number of loyal customers and a larger number of more volatile customers. New entrants The new entrants are mainly new designers who start their own brand on their own. Usually, these new entrants, if successful, are quickly acquired by the big names of the industry, by providing them the needed infrastructure for growth. However, new entrants, if remaining independent, can represent a threat by capturing the volatile middle market customers. These customers go after the established name and the perception build around it, after the quality and design. All these elements take time to be built, which makes the threat of new entrants less significant.

A Case Analysis:

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Luxury Goods Market – Competitive Position Mapping From a position mapping point of view, Hermes and Vendome form the high priced luxury goods range. Gucci, LVMH and Prada take the mid-tier followed by Ferragamo, Emporio Armani etc in the low end tier. As for products, many of these are moving from traditional classic prints to new fashion. Several of these have global reach with some brands limiting their presence and others expanding aggressively. For example, LVMH has 1005 direct stores where as Gucci has only 126 stores but uses different sources like 6700 point of sales for watches, 301 departmental stores and 54 duty free shops for variety of its products.

LUXURY M

Luxury Company Positioning Matrix

The competitive position mapping table below was done based on five key areas that are recommended by Macmillan (2000) for assessing competitive advantage.

Cost-based Advantage

GUCCI

Rest of Competition

Its recent remaking effort and its outsourced manufacturing model has helped to reduce cost and thereby price by 30%. It also minimizes fixed investment and helps to maintain its return on invested capital at 36%

The in-house manufacturing model adopted by Hermes, LVMH and many others have shown to increase the fixed investment and thereby resulting in lower return on invested capital and thereby reducing cost advantage and increasing the price

GUCCI

A Case Analysis: Rest of Competition

Differentiated Product or Service

It focuses heavily on the unique customer service experience to maintain its brand image. It also has different range of products including jewelry, watches, leather, apparels etc.

Many competitors focus heavily on customer services experience as part of maintaining their luxury branding efforts. However, LVMH focused more on leathers in the luxury products and others like liquor. As shown in figure above, not many brands have a spread of luxury products and they mainly focus only on high margin leather products or watches only

First mover Advantage

In a 150 years old industry, Gucci has been around for 77 years. Though it had ups and downs, the recent strategy has put it back on growth track. If this track record continues it will overtake the leaders

LVMH, Hermes and several other brands have been in the industry longer than Gucci and are well known to the consumer and are considered the pioneers with first mover advantage

Time based advantage

The revamp effort has reduced manufacturing time considerably in many product lines. A 35% reduction noticed in the leather bag manufacturing cycle – 104 days to 68 days. It also built 2030% additional capacity to cater for growth in the current outsourced production line, which will position them to address any growth quickly

Products like Kelly bag from Hermes had a long waiting list and became a fashion statement that worked to Hermes advantage given the product’s market image and success. However, the same may not apply to fast moving ‘ready-towear’ product lines and that calls for focus on demand management and reducing manufacturing cycle time for fast moving products

Technology Based advantage

Heavy focus on technology by senior management is visible as part of Gucci’s revamping effort. This includes online sales, EDI network connecting Guccisuppliers-partners, and data mining on customer preference and market demand management etc.

While some brands have realized the internet potential and established website and online shopping, there is a hesitation to adopt the technology aspects fully by many luxury companies. This is because of a common belief that an exclusive clientele would prefer a traditional luxury shopping experience and luxury is not synonymous with e-commerce.

Luxury Company Competitive Assessment

The TOWS MATRIX

A Case Analysis:

INTERNA L

EXTERNAL

OPPORTUNITIES

1. Promising 2.

3. 4.

5. 6.

wide market potential of luxury markets is growing in Asia Consolidation of other brands that can serve as competitive advantage Expansion of product portfolio The latest developments in multimedia technology for advertisements and marketing E-marketing Prominence of ecommerce leading to online presence

THREATS 1. Stiffening competition 2. Presence of substitutes such as medium brand products 3. Possible takeover of holding company PinaultPrintemps-Redoute 4. Fake Gucci Products 5. Exposure to political and economic turmoil of local operations.

STRENGTHS

A Case Analysis:

1. Well-known brand 2. Wide-ranging presence worldwide 3. Aggressive strategy through diversification and communication 4. Expansive product lines 5. Novel product lines matching up trends in customer tastes and preferences Controlled and integrated distribution network 6. Leather goods, watches and other accessories are Gucci’s first-line products SO STRATEGIC/TACTICAL ACTION 1. Market Expansion (S1, S2, O1,O5, O6) 2. Related Diversification (S1, S2, S4, S5, S6, O1, O2, O3, O4, O5, O6) 3. Innovation and Improvement of Current Technology (S3, S4, S5, S6, O1, O2, O3, O4, O5, O6)

4.

WEAKNESSES 1. Company size is small 2. Price of products are relatively high 3. Limited target customer – the professionals

WO STRATEGIC/TACTICAL ACTION

1. Product Development (W1, W2, W3, O1, O2, O3, 04, O5, O6)

2. Skills and Technology Advancement Trainings (O3, O4, O5, O6)

Strategic Alliance with acquired companies (S1, S3, O1, O2, O3, O4)

ST STRATEGIC/TACTICAL ACTION

1. Market Penetration (S1, S2, S4, S5, S6, T1,T3, T4)

WT STRATEGIC/TACTICAL ACTION

1. Backward

Integration (W1, W2, T1, T2, T3, T4)

2. Product Line Extension ( T1, T2, T3, T4)

A Case Analysis:

Alternative Courses of Strategic/Tactical Actions The TOWS matrix aided the proponents to identify the strengths and opportunities of Gucci which can battle its own weaknesses and threats. Through this matrix, the group was able to come up with several alternative courses of actions which eventually will lead the company to strategically position itself as a fast-growing luxury goods brand.

1. Market Expansion Its well known brand and high consumer recall worldwide of its brand, it is given that the company finds a favourable pick of action in market expansion as it can venture into expanding in the growing economies in the Asian continent and other potential markets.

Advantages

Disadvantages

1. Growth in terms of market share

1. High investment is required to support the action

2. Improved market position

2. The company needs to undertake legal proceedings needed to enter new markets

3. Above average returns through widened market 4. Strengthening and adding more value to the company and its brand name

5. Nearer to its market as more distribution network will be added

1. Related Diversification

A Case Analysis: Related Diversification is possible through the company’s aggressive strategizing and expansive product lines.

Advantages

Disadvantages

1. Increase in market share

1. The company may need to resolve operational efficiency issues and improve its supply and value chain management

2. Widened product choices for consumers

2. The company’s distribution network may be disturbed

3. More established brand name and more value to the brand

3. Innovation and Improvement of Current Technology The multimedia way of marketing the products can pave way to innovative operations for Gucci since its controlled and integrated network provided the company the tool to possibly seek this course of action for further

Advantages 1.Enhancement of marketing and broadening the scope of distribution

Disadvantages 1. Investment to Research & development is high

2. Increase in product portfolio

2. Costly operating expenses

3. Strengthening and adding more value to the company and its brand name

3. Additional cost for training & development for human resources

4. It can serve customers faster and more conveniently. improvements.

4. Product Development Fashion fades too fast and for Gucci’s brand to remain fresh and new, it should create, new products that would create value for the company and would stabilize its financial position in the luxury good industry.

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Advantages

Disadvantages

1. Improvement of financial base

1. The company needs to incur greater research and development expense

2. Increase in product portfolio and product mixes

2. Uncertainty in product acceptance

3. Strengthening and adding more value to the company and its brand name

5. Strategic Alliance with acquired companies The company can improve its cash base and expand its revenue base thereby increasing its market share if the company ventures into alliances with its acquired companies in order to promote and market its products.

Advantages 1. Improve cash and revenue base 2. Increase in market share

Disadvantages 1. High Investment costs 2. Result of high debt for Gucci

3. Strengthening and adding more value to the company and its brand name

6. Backward Integration Gucci could cost in its production/ manufacturing of goods without compromising quality by means of backward integration, with this strategy, Gucci could distribute and sell its products at a lower price making them more competitive and could threaten substitutes.

Advantages 1. Improved Quality Products 2. Improved customer Services 3. Updated products and services 1. Lower operating cost

Disadvantages 1. This entails additional costs to the company

A Case Analysis: 7. Strategic Alliance with Local Distributors and Retailers The company can easily penetrate the market if it can close an alliance with local distributors and retailers thereby increasing cash and revenue base.

Advantages 1. Improve cash and revenue base

Disadvantages 1. High Investment costs

2. Increase in market share 3. Strengthening and adding more value to the company and its brand name

8. Product line extension Gucci could also extend its product line and innovative products that are related to its core business.

Advantages 1. Increase revenue/sales 2. Increase in market share 3. Wide variety of products2.

Disadvantages 1. High Investment costs 2. Research and development entails efforts and costs

A Case Analysis:

Activity

Responsible Person

Who Needs To Cooperate

Resources Needed

Timeframe

KPIs/KRAs

Market Expansion ➢ Conduct Market Study in Asia(first target market for further Expansion)

Marketing Department; Research & Development

R&D; Marketing

Financial Resources; Human Resources;

Last Quarter of 2001 onwards

Identification of demand in Asia

➢ Assessment of Marketing Market Study Department; Result Financing department

Finance.; Marketing

Human Resources;

First Quarter of 2002 onwards

Result indicating potential market in Asia based from rigid studies

➢ Launch of Gucci Human expanding in Asia Resource Department; Operations Department; Marketing Department,

All employees of Gucci

Financial Resources; Fixed Capital; Human Resources; Technological Resources

Last Quarter of 2001 onwards Project Engineering

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SUMMARY OF ANALYSIS

Assessments

Findings and Recommended Actions

How can it contribute to enhance its competitiveness?

PEST DG Analysis

Economic, Political and Legal segment has utmost impact to Gucci. The company has to expand market and integrate the competitive advantage of acquired companies with strategic alliances

Porter’s Five Forces

There is a very high competition in the industry because of few but competitive players and of the high capital investment required in entering in the industry. The company has to penetrate new markets and achieve dominant leadership in the industry The company has more strengths than weaknesses which can be matched with its many opportunities to combat threats. The company should take advantage on the promising wide market potential of luxury markets. Since the company possessed a large potential in market growth, it should invest in market expansion

It helps the company gain sustainability despite the economic crisis. Further, it helps the company gain increased customer loyalty and gain market share thereby providing a strong revenue and cash base It helps the company achieve strong staying power in the industry by having majority influence in the fashion industry trending backed up by partnerships aiding the company in lowering its cost and offsetting the threats of substitutes

TOWS Analysis

It helps the company

A Case Analysis:

MATCHING AND DECISION STAGE PEST DG ANALYSIS

Porter’s Five Forces of Competition

Market Expansion

Market Expansion Market Penetration

Strategic Alliances

TOWS Analysis

Decision

Market Expansion

A Case Analysis:

Recommendation: The Market Expansion step is that period when a company assesses current markets, identifies untapped markets, and seeks opportunities for revenue growth through new market opportunities. The market expansion step will result in estimates for delivering new capabilities to current markets, and potential new markets for existing products. Gucci has a strong brand image worldwide but it has not expanded yet into other markets mainly because for a couple of years of operations, it has focused in major markets in Europe and North America. The step that the company can undertake is to capitalize on favourable opportunity- Asian market. Asia, according to studies, is a fast growing economy worldwide. High net worth individuals are increasing in number in the region- quite an opportunity for luxury good company like of Gucci. Gucci can also treat Asia as country-by-country region to identify and categorize more potential markets from the less ones. In that case, it will reduce cost in investments. Japan, China, Hong Kong, Korea, Singapore are top five most countries that are seen by most researchers that can be tapped by Gucci. Thus, market expansion is the best pick for the company to strategically maintain and enhance its position in the industry as one of the superior branded product worldwide. Market Expansion satisfies the mission of the company to rapidly develop and grow. With this strategy, Gucci will also be able to hold its position to be one of the top brands in the luxury good industry. Market share will substantially increase competing head to head with its competitors like LVMH. With the opening of new distribution networks in the selected areas in Asia, Gucci will now be closer to its clients serving them with convenience and offering a wide array of products that are fresh and new. This would further lead to stronger brand equity and increase sales and profit and a higher dividends/income for stakeholders.