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Gucci Group (Italy)

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Gucci had earned a reputation as one of the world's most fought-over fashion brands before finally achieving stability within the portfolio of what is now French group Kering. During the 1980s, it was the centrepiece in an astonishing family saga of money and power, intrigue and even murder. After 1993, there were no Guccis at Gucci. Instead the partnership between designer Tom Ford and businessman Domenico de Sole restored glamour and prestige to the business after years of neglect. However, the mercurial success of the business led to a bitterly hostile takeover bid by luxury goods giant LVMH. Gucci survived, only to end up as the subsidiary of LVMH's arch-rival PPR. Ford and de Sole left in 2004, prompting forecasts of impending disaster. Yet the soothsayers were proved wrong, and the post-Ford Gucci actually delivered even greater success than ever before.

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Brands & Activities

Gucci may not now get the swooning coverage it enjoyed under Tom Ford, but stripped of its superstar management team, the business began generating significantly increased profits. The recent boom in the whole luxury sector - apart from the temporary lull in 2008/09 - has a lot to do with this but there seems little question that the core Gucci-brand business has benefited significantly from a more structured and less personality-driven management culture. The future is less clear for its smaller lines, notably vanity labels McQueen and McCartney, which earn far more in critical acclaim than they do in profit.

Gucci Group is the world's third largest luxury goods business behind LVMH and Richemont. It now operates as the core division within French group Kering (known as PPR until summer 2013). The main business of Gucci Group is of course Gucci itself, Italy's single most valuable brand for more than a decade. Despite fears that the brand would suffer significantly from the departure of Tom Ford, collections by the brand's subsequent designers have been well received and sales and profits have risen sharply. Although best-known perhaps for its ready-to-wear fashion for men and women, Gucci's most lucrative line is actually leather goods, including handbags and luggage. Shoes are the next biggest line, followed by ready-to-wear. The company manufactures and sources all its main products (except watches) in Italy, and it regularly collaborates with other Italian companies on joint projects. In 2011, these included a Fiat 500 by Gucci limited edition car and Aquariva by Gucci yacht. Gucci previously licensed the production and distribution of eyewear to Safilo, but took back control of that business in 2016.

Gucci-branded fragrances were originally licensed to Cosmopolitan Cosmetics, a division of Wella. That contract technically expired in October 2003 as a result of Wella's acquisition by P&G. P&G issued legal action to prolong the license, and the arrangement continued under the umbrella of P&G Prestige. In 2016, the contract will transfer - along with the rest of P&G's prestige fragrance business - to Coty.

In 2009, Gucci issued a lawsuit against rival Guess alleging that a range of shoes by the latter's footwear licensee Marc Fisher were "studied imitations" of Gucci products. It demanded damages of more than $220m. After three years of dispute, a US court eventually ruled in favour of Gucci, but allowed damages of less than $5m.

The recovery within the wider luxury market has helped Gucci Group to achieve record performance since 2015. For 2017, the Gucci brand alone registered a 42% jump in revenues, topping €6bn for the first time at €6.21bn, while operating income soared by 69% to €2.12bn. In 2015, leather goods accounted for 57% of sales, shoes for 14%, and ready to wear for 11%.

The group's other fashion brands are now collected as Kering Couture & Leather Goods. Bottega Veneta has become the second largest accessories brand in the group, with sales rising fivefold since 2005. They topped €1bn for the first time in 2013, but growth has slowed since then. The figure for 2017 was €1.18bn. Yves St Laurent operates as a separate unit. Like Gucci, the once-legendary YSL business suffered during the 1980s from over-zealous licensing arrangements which hugely devalued the brand, and its increasingly frail founder had little to do with the business by 1999, when it came under Gucci's wing. Having succeeded in resurrecting the reputation of the Gucci label, Tom Ford turned his attention to restoring the glory of the Yves St Laurent brand as well, though arguably with less success, financially at least. The range includes Yves St Laurent women's ready-to-wear, men's ready-to-wear and accessories such as handbags, small leather goods and shoes, as well as diffusion fashion line Rive Gauche. Divisional sales have risen sharply since 2010, jumping by 27% in 2014, and another 38% in 2015. Another 23% increase in 2017 took the figure to over Leather goods accounted for 57% of sales, shoes for 14%, and ready to wear for 11%.1.50bn for the first time in 2017. Like Gucci, the largest proportion of revenues (49% in 2015) comes from leather goods. Until 2008, the group also housed YSL Beauté, the fragrance and cosmetics business which contained a sizeable collection of prestige perfumes, toiletries and skincare products. PPR agreed to sell that business for €1.15bn to L'Oreal, which continues to produce them under license.

Gucci, Bottega Veneta and YSL are supported by a clutch of smaller labels with combined sales of €1.91bn in 2017. The fashion labels Alexander McQueen and Stella McCartney both operate as joint ventures with Gucci. The latter's founder and figurehead Lee McQueen took his own life in 2010, but the business continues as before with Sarah Burton taking over as creative director. It enjoyed huge international acclaim in 2011 when creative director Sarah Burton created the bridal dresses for the wedding of the Duke and Duchess of Cambridge. Stella McCartney is perhaps best-known now for her collaborations with Adidas, publicity for which has a knock-on effect on the reputation of her own label. In 2018, she announced plans to buy back Kering's 50% stake, though that process will not complete until 2020. Balenciaga, also previously a joint venture, is now wholly controlled by the group. In 2011, the group acquired Italian menswear label Brioni for an undisclosed sum. Other group subsidiaries include British designer Christopher Kane and US fashion brand Altuzarra. Luxury shoe designer Sergio Rossi was sold in 2015 to European investment house Investindustrial.

Two other distinct business units were created in 2013 to house the growing collection of other brands. Kering Watches & Jewellery assembles and distributes watches under the Gucci, YSL and other brands, and also houses Bedat & Co and jeweller Boucheron. The group acquired a majority stake in Swiss group Sowind, parent to the JeanRichard and Girard-Perregaux brands, in 2011, followed a year later by Chinese fine jeweller Qeelin and then Italian jeweller Pomellato. Ulysse Nardin was added to the collection in 2014.

Financials

Despite all the predictions that Gucci would never be the same without Tom Ford and Domenico de Sole, the business has been thriving under its new owners and management. Like other luxury marketers, it has seen a steady increase in revenues, which have doubled since 2007. For 2017 alone, combined revenues for the luxury division surged by almost 28% to a record €10.8bn, while operating income jumped by 50% to €2.91bn.

Around half of the group's revenues are generated by its own retail network. This spans some 1,264 directly controlled retail outlets, and an additional quantity of franchisees. Around half the outlets operate under the Gucci brand. The group's biggest territory is Asia, with China as its fastest growing market. The Asia Pacific region including Japan contributed 40% of Gucci Group sales in 2015. China alone accounted for around 23% of brand sales and Japan for 10%.

Management

Robert Polet was appointed as chairman, president & CEO of Gucci Group in 2004, and oversaw the transition to a more streamlined and disciplined business. In a surprise development, he was removed in early 2011. Alexis Babeau, previously COO of Gucci Group, was later named as CEO, PPR Luxury but he too departed the group in 2013. Instead a three-man executive team was established, reporting to Kering CEO Francois-Henri Pinault, with Patrizio di Marco as CEO of brand Gucci.

In another shake-up of the Gucci business, Patrizio di Marco and his partner, Gucci creative director Frida Gianinni left the group abruptly at the end of 2014 and early 2015 respectively. Marco Bizzarri, previously CEO of the other accessories and couture labels, took over leadership of the Gucci brand business, and accessories designer Alessandro Michele was promoted to become overall creative director. Gianinni's designs for the Autumn/Winter Menswear collection were abandoned at short notice and a completely new collection created just days before the show took place. Michele was named as International Designer of the Year by the British Fashion Council in 2015 after only ten months in his role.

Background

Gucci first opened its doors in 1921, when craftsman Guccio Gucci began selling finely crafted leather goods from a shop in Florence, Italy. Previously he had worked as a lift attendant at London's Savoy Hotel, where he saw at first hand how luggage could symbolize wealth and taste. The business prospered, and Guccio's four sons soon entered the business, opening their own shops in different Italian cities to sell their father's designs. In 1953, two of the sons broke from the family by opening a shop in New York, selling their own designs. Gucci himself died that year, but Aldo and Rodolfo's business did fantastically well. Although they arguably borrowed several design elements from established companies such as Hermes and Chanel, their designs were snapped up by New York's social elite and quickly became classics, eclipsing their father's business.

New shops opened around the world, and Gucci rapidly became a global status symbol, especially when the brand became a favourite of Elizabeth Taylor and Princess Grace of Monaco. But despite their success, the Gucci brothers - later joined in the business by their own sons - rarely saw eye-to-eye, and frequently resolved business differences with their fists. Board meetings often ended in a punch-up, and not only between the two brothers. In 1983, one meeting ended with the resignation of Aldo's son Paolo after he received a beating at the hands of his father. As the business became wealthier, the two clans began to fight each other for control of the company through the Italian law courts. In the mean time they allowed the label to become devalued by sloppy manufacturing and excessive licensing of the brand to other companies.

In 1983, the now elderly Rodolfo died, and his son Maurizio inherited 50% of the company. Although he had previously avoided involvement in the family war, he quickly became embroiled in a renewed legal battle against his uncle and his cousins. Three years later, estranged son Paolo took his revenge on his father Aldo by blowing the whistle regarding the latter's tax affairs. Aldo was jailed for a year for tax evasion, prompting his other sons to cut their losses. They agreed to sell their 50% stake in the business to Bahraini banking group Investcorp, who also then owned Tiffany and Saks Fifth Avenue. Investcorp agreed to back Maurizio's vision for rebuilding the much-debased business. He quickly cut the product range of more than 22,000 items by two-thirds, dropping all lower-priced goods, and also stopped supplying department stores in favour of the group's own retail chain. Dawn Mello, former creative director of upmarket US store Bergdorf Goodman, was brought in to oversee the designs. She set about recreating the label, and hired young designer Tom Ford, previously an assistant to Perry Ellis, to design womenswear for the group. Ford quickly made a big impact, eventually replacing Mello as creative director in 1994.

Although Gucci's status began to build once again, the company's finances were still in a bad way and getting worse. By 1993, the business was close to bankruptcy. Maurizio jumped ship, selling his remaining share in the business to Investcorp for around $150m. But while Investcorp set about pulling the group back in to shape, the Gucci family saga took another even more dramatic turn for the worse. Several years earlier, at the height of the legal battle with his cousins, Maurizio had walked out on his first wife Patrizia. The divorce settlement was reported to be just under $1m a year in alimony, which Patrizia described publicly as "little more than a plate of lentils". Her resentment grew steadily stronger. By the time Maurizio sold out to Investcorp for $150m, Patrizia had begun to tell just about anyone that she wanted her husband dead. In March 1995, Maurizio was shot four times in the back of the head while walking to his Milan office. After a two-year investigation, Patrizia was arrested and charged with employing a hitman to execute her estranged husband. She was eventually jailed for 29 years.

Meanwhile, Investcorp did its best to restore the company to health. In 1994, it hired Harvard-trained lawyer Domenico de Sole to take day-to-day control of the business. De Sole was already familiar with the company - he was first introduced to the business in the early 1980s as one of the many mediators between Aldo and Rodolfo. Business picked up and the following year, Investcorp took its profits, floating the entire share capital of the company in Amsterdam and New York.

The turnaround that followed was nothing short of miraculous. Ford's keen eye for streetwise fashion gradually turned Gucci into one of the most sought-after labels of the late 1990s, endorsed by just about every A-list female celebrity. Meanwhile the group set about regaining control of its licenses, so widely distributed during the 1980s. In 1997, Gucci won back ownership rights to Gucci Fragrances from haircare group Wella, but issued a license to the German company for production and distribution. It also bought out various Far East franchisees, and acquired watchmaker Severin Montres, rebranded as Gucci Timepieces.

Even so, progress was rarely smooth. The 1998 economic crisis in Asia, a huge market for the brand, caused Gucci's share price to tumble. Rival fashion house Prada seized the opportunity to speculate, picking up a 9.5% stake. With all of its shares in public issue, the fashion group was vulnerable to a hostile takeover. As a result, de Sole redrafted his own and Ford's employment contracts in 1998 to introduce a "poison pill" clause. This allowed them not only to exercise lucrative share options in the event of a takeover bid, but also gave them the ability to terminate their employment contracts and walk away from the business.

As the label struggled to maintain its stock valuation, no one paid closer attention than Bernard Arnault, the chairman of French luxury goods group LVMH. By 1998, Arnault was looking for another brand to add to his already extensive wardrobe, and was sitting on a sizeable acquisition war-chest. In early 1999, LVMH announced that it had bought 5% of Gucci's shares on the open market. Days later, Arnault bought out Prada's 9.5% holding in the Italian company, and quickly accumulated a 34% holding. At this point Arnault began trying to leverage one of his supporters onto the fashion company's board. The apparently friendly relationship between the two companies quickly grew increasingly hostile. Gucci accused Arnault of attempting a takeover without paying the proper premium and began defensive measures. To counterbalance Arnault's equity stake, Gucci created an equivalent number of new shares within an employees' trust, which had the effect of diluting LVMH's 34% stake down to just 19%. Arnault responded with a lawsuit.

The presiding judge on the case eventually told the two sides to go away and sort out their differences. Arnault attempted to make peace by offering not to buy any more shares provided he received a seat on the board. But the truce didn't last for long. Soon afterwards, LVMH released results for 1998 showing a sizeable fall in profits, largely as a result of the downturn in Asia. The following day, Gucci rushed out its own results, showing a healthy increase in net income. Gucci president Domenico de Sole crowed, "I invite investors to compare our excellent results with the 1998 results LVMH published." The real insult, as Arnault saw it, came when Gucci announced it had sold 40% of the company to Pinault-Printemps Redoute, the giant French fashion retailer controlled by Arnault's arch rival Francois Pinault. Worse still for Arnault, PPR offered to hand over to Gucci (as a "wedding present") control of the Yves St Laurent fragrance business it had acquired for $1bn only a few days earlier from Sanofi-Synthelabo. Enraged, Arnault offered to buy the entire Gucci group at a significantly higher price than PPR was offering, provided his French rival was frozen out.

After that, the two sides continued to play a game of cat-and-mouse with each other. Arnault made a series of conditional offers at ever higher prices; Gucci rejected each one because of the various restrictions and conditions accompanying them. By the end of May, LVMH's suit had begun to look increasingly futile, especially after Gucci designer Tom Ford stated he would not work for Arnault at any price. And why would he ever need to work again? The various bids from LVMH and PPR had served to trigger those "poison pill" share option clauses. Tom Ford and other senior executives (excluding de Sole) shared a profit of around $26m by cashing in options in January and March 1999. It was a superb victory for Gucci, and especially for de Sole, who had masterminded the entire defensive campaign. By mid-year, Gucci was sitting on a war-chest of almost $3bn and an open offer to buy PPR's YSL fragrance business. This deal was finally done in November 1999, with Gucci taking control of the Yves St Laurent fashion label YSL, and a clutch of upmarket perfume brands. In January 2000 Tom Ford was appointed as the creative director of the YSL label, as well as Gucci.

What to buy next? One possible acquisition was the Italian fashion group Fendi. Gucci approached the company, run by the five daughters of its original founder, but quickly alienated chief designer Karl Lagerfeld, who refused to hand over creative control to Tom Ford. LVMH nipped in with a better offer, teaming up with Prada to acquire a controlling stake. Instead Gucci spent $96m to buy Italian shoe company Sergio Rossi, then jeweller Boucheron for nearly SFr250m ($144.8m). In late 2000, bad feeling between Gucci and LVMH spilled out once again when LVMH discovered that PPR had endorsed a gift of Gucci share options worth over $400m (or 5% of Gucci's share capital) to de Sole and Ford. Bernard Arnault initiated a new series of lawsuits; Gucci retaliated alleging criminal libel. In a deal which could have been designed to pique LVMH further, Gucci also agreed to take a 51% stake in an own-brand fashion label run by Alexander McQueen, the designer then under contract to run LVMH's Givenchy. In early 2001 the group bought a 67% stake in luxury leather goods company Bottega Veneta for around $60.6m, as well as a stake in watchmaker Bedat & Co, and formed a joint venture with designer Stella McCartney. Another prestigious design house, Balenciaga, joined the portfolio in July.

Eventually, LVMH and PPR agreed to settle their dispute after more than two years of bickering. PPR, which had until then owned just under 44% of Gucci, agreed to buy LVMH's shareholding in two installments at a significant premium, thereby gaining majority control. The deal probably came just in time, ensuring the security of Gucci Group just as a new economic downturn caused further erosion of sales and profitability right across the luxury sector. However the financial control now demanded by PPR was at odds with the kind of independence De Sole and Ford had created for themselves. The fashion industry was left reeling in November 2003 when it was announced that the duo would leave Gucci at the end of their contracts. For months, fashion experts speculated about which superstar designer would be parachuted in to replace Ford. In the end, the company said it would appoint three different, comparatively unknown designers to split his job between them. The announcement of Robert Polet, the former head of Unilever's frozen foods and ice cream business, to replace de Sole was also greeted with concern and even derision by senior staff. Over the next few months, many of the brand's senior executives announced their resignations. Yet all such concerns were shown to be premature.

Polet brought much-needed stability and proven management experience to the business, dismantling the powerbase established by de Sole and Ford, and pushing management decisions down to individual brand heads. PPR has reported a steady increase in both revenues and profits for Gucci since 2004.

Last full revision 1st July 2016

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