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Solving Kering’s Gucci Problem

It’s a problem many competitors would kill to have. But as once-staggering growth begins to stall, the Italian megabrand would benefit from new aesthetic ideas, writes Luca Solca.
Guests at the Gucci show during Milan Fashion Week Spring/Summer 2020. Getty Images.
Guests at the Gucci show during Milan Fashion Week Spring/Summer 2020. Getty Images.

In recent years, Gucci has delivered the most spectacular turnaround in the history of the modern luxury goods industry, multiplying many times over its financial contribution to parent company Kering: between 2014 and 2019, Gucci sales increased by 2.75x, while EBIT (earnings before interest and taxes) grew by 3.84x, hitting about €4 billion in 2019.

This phenomenal result was achieved first and foremost by boosting the percentage of goods Gucci sold at full price and increasing like-for-like sales across a relatively unchanged physical retail network, while growing online. The combination of creative genius (Alessandro Michele’s reinvention of the Gucci’s aesthetics), commercial acumen (chief of merchandising Jacopo Venturini’s articulation of these ideas through a very effective collection architecture and pricing structure), and entrepreneurial courage (chief executive Marco Bizzarri “going all in” on the new aesthetic — and summoning all regions, all functions and all of the company’s financial muscle to support it) have produced this outcome.

But Gucci now faces a problem: how to maintain, consolidate and enhance its recent success. After such a wild ride, the brand seems to be showing some signs of fatigue.

Social media traction, while still high, appears to be declining. Google data shows Gucci is less sought after than it once was. In the critical China market, WeChat reads show the brand is a touch weaker. Indeed, consumer relevance analyses show a gap with rival Louis Vuitton.

At the same time, Gucci seems to be facing declining full price sell-through. We pick up a significant increase in Gucci products listed on off-price website Yoox. Interviews with daigou reveal low resale prices (for unworn inventory) on the back of material “friends and family” special sales. And the recently announced partnership with resale site The RealReal may be, among other things, a way to exit excess unworn inventory.

Gucci seems to be facing declining full price sell-through.

Gucci’s loss of altitude was confirmed by recently reported organic growth trends. Gucci has trailed LVMH’s fashion and leather goods division for a few quarters. Compared to mega-brand peers, Gucci has been less able to repatriate sales to Chinese consumers stuck on the Mainland due to the pandemic. And, while Gucci has delivered astounding growth in the United States, here, the brand has benefitted from a low year-on-year comparison point, resulting from a drop in US sales after the brand’s “blackface” scandal, which erupted in early 2019. Industry sources also point to government subsidies supporting discretionary demand in America, including sales of personal luxury goods. If so, this lift could prove transient.

The opportunity for Gucci long-term may be Western consumers: Kering senior management reports that Gucci is less exposed to European and American locals than its peers. But where Gucci seems to have really fallen short relative to competitors is in recapturing consumer spend in Mainland China during a year when Chinese nationals haven’t travelled abroad.

Gucci’s repatriation challenge came at a difficult time. First, Chinese consumers had already bought a huge amount of Gucci products in the previous five years: growth at some point had to normalise. Second, Gucci has been in a “more of the same” aesthetic mode for the past six years. Consumers who had bought a lot already didn’t necessarily see any compelling reasons to buy more. Third, Gucci, like most brands, maintains higher prices in China. That means relatively satiated Chinese would have needed to buy more of the same at a higher price.

It is reasonable to think that Chinese consumers, who had to pay more for their luxury purchases in 2020, cut their shopping lists and concentrated their spend on “must have” products and brands, favouring brands that would give them the most bang for their bucks. It is also possible that slightly older Chinese consumers were the brightest spot in China in 2020, buoyed by rising real estate prices and a fast-paced stock market, more than the younger cohort that Gucci has been able to recruit.

It’s time for Kering to take bold action. Reinventing brands like Gucci while they are still strong prevents bigger problems down the line. If we restrict our analysis to successful luxury brands, we find that among these, those that have managed to stay successful over time have done three things. First, they have applied some form of restraint, selling less than market demand. Second, they have worked to update their product offer, sometimes killing off products that were selling too much. Third, they have evolved — and sometimes veered — their marketing approach to fit broader shifts in consumer demand and the competitive landscape.

Reinventing brands like Gucci while they are still strong prevents bigger problems down the line.

Gucci could benefit from introducing new aesthetic ideas. The brand has shown mastery of marketing, while limiting distribution clearly hasn’t been a priority. Perhaps the most important lever Gucci has is updating its product offering. More of the same can exhaust consumer support for a brand — even a highly desirable one, especially when its aesthetic proposition is highly recognisable.

The pains of Bottega Veneta under Tomas Maier (with old intrecciato), before the arrival of Daniel Lee (who invented new intrecciato) are a case in point. So are the last years of Gucci under Frida Giannini, Michele’s predecessor. Watering down ideas and going more mainstream — which looks like what Gucci has done in recent collections — may fall short of reigniting interest and traffic to stores. To this end, some brands ensure a continuing pipeline of creative ideas through a team effort, rather than by relying on a single star designer. Hermès, Louis Vuitton and Moncler, for example, work this way. Karl Lagerfeld was famous for drawing many of his ideas from his younger team members. Another stratagem is to recruit outsiders to produce capsule collections or even single items, as seen at Vuitton and Moncler.

2021 should bring newness at Gucci. We don’t expect major changes in the Gucci creative department this year. Yet, the brand’s 100th anniversary should provide the ideal platform for new creative initiatives, possibly including capsule collections designed by third parties, much as Louis Vuitton did in 2014 with Karl Lagerfeld and others. This could work well towards recapturing traffic to the Gucci stores. The Chinese New Year Doraemon collection seems a good step in the same direction. The big question is whether all of this will be enough to re-energise consumer interest, first and foremost with the Chinese.

Luca Solca is head of luxury goods research at Bernstein.

Related Articles:

The State of Gucci

Is There a New Gucci Brewing?

Why Gucci’s Alessandro Michele Is Shaking Up the Fashion Calendar

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