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How Long Can Kering’s Blockbuster Success Continue?

The French conglomerate has given rise to commercial juggernauts like Gucci and Saint Laurent, as well as Demna Gvasalia’s white-hot Balenciaga. How long can the momentum last?
Gucci's Autumn/Winter 2017 beauty campaign, shot by Petra Collins | Source: Gucci
By
  • Lauren Sherman
BoF PROFESSIONAL

PARIS, France — In the spring of 2015, Kering chief executive François-Henri Pinault visited Parsons The New School of Design in New York City to discuss the French luxury conglomerate's much-admired sustainability practices. But it was Pinault's comments on the wider fashion system that were most prescient. "The rhythm is crazy for the creatives and you have too many items in stores at one time," he said. "It's a matter of supply chain. It's risky, but I am pretty sure this will change in the next two or three years."

Change came even sooner — including at Kering's own multi-billion-dollar fashion juggernaut Gucci, which has since combined its women's and men's shows and shifted the cadence of its product drops. These operational tweaks, coupled with a hugely successful creative reboot put in place by Alessandro Michele, have helped to drive dynamite financial results for Pinault's empire, which has also benefited from blockbuster commercial success at Saint Laurent and given rise to Demna Gvasalia's still small but white-hot Balenciaga. While many major luxury firms — including fierce rival LVMH — have also reported strong results thus far this year, Kering's performance remains unrivalled.

The company's 2016 fiscal year was its strongest since 2012. In the first half of fiscal 2017, the trend continued. Consolidated revenue at the company reached €7.3 billion ($8.5 billion), up an impressive 27 percent year over year on a comparable basis, with sales in its luxury brands division up nearly 30 percent. Recurring operating income was €1.3 billion ($1.5 billion), up 57.1 percent year-over-year, with operating margin up 17.5 percent and net income up nearly 78 percent.

The company said the strong performance came from growth in almost every region, even in North America where the luxury market remains soft. And while sales at problem child Bottega Veneta began to stabilise, with comparable sales up 2 percent, sales at Saint Laurent were up 38.5 percent. At Gucci, sales were up a whopping 43.4 percent. The brand's operating profit — or earnings before interest and taxes — in the first half of 2017 were over €907 million, up 69 percent from about €537 million last year.

Kering has done a phenomenal job as an operator. Kering takes it seriously, which is an easy thing to say, but not as easily done.

At Gucci, chief executive Marco Bizzarri empowered Michele — a longtime deputy to former creative director Frida Giannini — to completely re-engineer the brand's aesthetic, with corresponding capital expenditure dedicated to refurbishing its stores. Together, Bizzarri and Michele also transformed how the brand was merchandised and tweaked the cycle of deliveries to up the newness quotient. Bizzarri also reset the company's corporate culture. "You have to make sure that the company is sustainable enough ... that the people share the same values of happiness, respect, joy and are quick to respond," Bizzarri said at BoF's VOICES gathering in 2016.

“We have benefited at Gucci from an improvement of the product mix and the launch of newness to help to grow the average selling price,” explained Kering group managing director Jean-François Palus last week. A refusal to discount product has also buoyed the average price of products sold. And the house has had great success with younger consumers. Sales in the 18 to 34 age bracket grew in the double digits in the first half of the 2017 fiscal year, and the company says retention of this cohort is high.

Saint Laurent also benefitted from a creative reboot put in place by the house's previous designer, Hedi Slimane, who managed to entirely revamp the brand from the bottom up. Anthony Vaccarello, who joined the house after Slimane's departure in 2016, has built on Slimane's vision instead of replacing it, which has thus far continued to generate strong results. In the first half of fiscal 2017, Saint Laurent's operating profit was €163.5 million, up 50 percent from €109 million during the same period last year.

Now, Kering is attempting to achieve something similar at Demna Gvasalia's Balenciaga, part of the group's smaller luxury brands division — which also includes Stella McCartney and Alexander McQueen — where sales were up 10 percent. "We are very well-aligned now and the brand is fully on a roll, enjoying spectacular trading momentum," said Palus, indicating that Kering's mid-term goal for Balenciaga was €1 billion in sales. (When Alexander Wang departed the house in 2015, annual sales were under $400 million.)

Kering is currently benefitting from the perfect storm of a flourishing Gucci, a steady Saint Laurent and a rising Balenciaga. Internally, this success is attributed to "freedom within a framework." brand leaders are given close-to carte blanche to do what they see fit in order to get results, while benefiting from the group’s pooled back-of-house resources. (Brands are supposed to consider themselves complementary, not competitive.) Creative directors are also given control over every aspect of brand imagery, from fragrance to advertising to store design to apparel and accessories. This stands in contrast to something like Louis Vuitton or Dior, which have multiple creative directors overseeing different aspects of the brand.

But can the momentum last? According to one outside partner, "Kering has done a phenomenal job as an operator. Richemont is struggling. LVMH is LVMH, but they get a lot of credit for so-called innovation that doesn't translate into actual business. Kering takes it seriously, which is an easy thing to say, but not as easily done."

It will take a lot for Kering to continue to grow at this phenomenal pace one year from now, against very strong comparables.

At Gucci, Michele and Bizzarri believe that they have broken the rules of what it means to successfully operate a fashion brand and that their rule breaking has resulted in a more sustainable model. The fact that the collections all blur together may not offer the sharp seasonal newness industry observers often expect from its greatest talents, but it’s that layered approached — layered apparel, layered storytelling, layered visual cues — that has allowed it to do away with discounting. (If the clothes or accessories are not pegged to a specific season, they don’t need to go on sale.) However, it is still unclear whether Gucci can maintain its insider appeal with core luxury customers while becoming more and more popular amongst the mainstream.

Another unknown: Will Michele’s aesthetic transcend the current moment, or is he backing himself into a stylistic corner? Will there always be a consumer who wants that maximalist magpie Gucci look? Is he a one-note designer, or when the time is right, can Michele evolve Gucci into something else? Opinions are mixed.

At Saint Laurent, Vaccarello’s collections have received mixed reviews — and the brand's retail success still relies heavily on the work of Slimane, who refurbished the stores and developed the core collection of boots, blazers, bags and duffle coats that continue to sell. But Vaccarello has also started to create some of his own must-have products, which seem to be resonating at retail.

The next test will be for Balenciaga, whose niche aesthetic must be merchandised for hanger appeal, while still maintaining its cool. Gvasalia's unconventional silhouettes and fits will make this challenging, though the real promise seems to be in his accessories — caps, bags and shoes — which carry the heat of the Balenciaga brand without the weight of its too-cool-for-schoolness.

Whatever roadblocks lie ahead, it will take a lot for Kering to continue this phenomenal rate of growth and post similar results one year from now against very strong comparables. “‎The real challenge when you manage a fashion brand is to keep its stylistic codes and perception as a fashion authority relevant for a long time,” says Mario Ortelli, head of the luxury goods sector at Sanford C. Bernstein. “This is becoming increasingly difficult as the fashion cycle is getting shorter and shorter.”

What's more, the outlook for the second half of the year is anything but certain for the luxury goods sector at large. LVMH, for one, delivered a note of caution along with its latest results. The company already faces tougher comparables for the second half of 2017, as the first half the previous year saw a steep decline in travel-related sales following terrorist attacks in Paris, while, in the second half of last year, Chinese consumers, who account for a large portion of the global luxury goods market, increased their spending both at home and abroad. Kering, too, cautioned that it would face tougher comparables in the second half, adding that a stronger euro could impact tourism, resulting in more moderate future growth.

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