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Can Kering Turn Things Around?

As the French luxury group attempts to get back on track, investors, former insiders and industry observers say the group needs a far more drastic overhaul than it has planned, reports Bloomberg.
As Kering dives into a critical attempt to turn things around, about 10 long-term investors, former insiders and industry observers say the group needs a far more drastic overhaul than it has planned.
As Kering dives into a critical attempt to turn things around, about 10 long-term investors, former insiders and industry observers say the group needs a far more drastic overhaul than it has planned. (Getty Images)

On a recent Friday afternoon, shoppers at a Gucci boutique waded through heaps of heavily discounted, past-season merchandise: Yellow pumps, furry slippers, flamboyant jackets and bright green clutches. A sale of that sort at an outlet in a nondescript suburb of Paris, near Disneyland, would be unthinkable for rival purveyors of luxury like Louis Vuitton, Chanel and Hermès.

But for Gucci, it’s the result of a muddled vision of its place in high fashion and a dysfunctional management strategy that have left its parent Kering SA struggling to stem a sharp decline in revenue while other groups in the €362 billion ($385 billion) global personal luxury goods industry remain more resilient as the sector cools down.

The more than doubling of shares at competitors LVMH Moët Hennessy Louis Vuitton SE and Hermès International SCA since March 2020 has made the former’s founder, Bernard Arnault, the world’s richest person and the family behind the latter into Europe’s wealthiest. In contrast, Kering, which gets more than two-thirds of its profit from Gucci, has lost about a third of its value, leaving the group facing one of its biggest challenges since its own controlling billionaire family — the Pinaults — got into luxury at the turn of the century.

As Kering dives into a critical attempt to turn things around, about 10 long-term investors, former insiders and industry observers say the group needs a far more drastic overhaul than it has planned. Some who asked not to be named discussing private views even question if chief executive officer François-Henri Pinault, the 61-year-old son of the founder widely known as FHP, is the right man for the job after nearly two decades at the helm. It may be time for him to hand over the reins to someone like co-deputy CEO Francesca Bellettini to reinvigorate the group, they say.


“Gucci is a story of turnarounds and re-branding, but the one it’s in the midst of now could be one of its toughest because they have to fix the corporate side as well as the brand,” says Stefania Saviolo, a lecturer in fashion and luxury management at Bocconi University.

Representatives for FHP and Kering declined to comment.

The wild swings in Gucci’s — and hence Kering’s — fortunes over the years can be traced to its effort to find a sweet spot straddling fashion and luxury, two segments with business models that can be at odds with each other. One relies on trends that are ephemeral and need to change constantly while the other is more timeless and enduring.

The group has historically stuck more to the former, allowing Gucci to sell fad-driven products like the ones that were on sale at the outlet, but also making it vulnerable to the vagaries of the economically sensitive shopper. Competitors at the more exclusive end of the market such as Hermès and Chanel offer timeless classics, often engineering shortages to keep them desirable.

“Kering’s portfolio is mainly composed of luxury fashion brands rather than luxury heritage brands,” said Mario Ortelli, founding partner of industry consultancy Ortelli & Co. in London. “When you’re exposed to fashion, it’s intrinsically more volatile because fashion waves come and go. You can ride the wave for a while but it won’t last forever.”

There’s broad acknowledgement at the group that it needs to reel back outlet sales that are eroding brand value, and address the cyclicality of Gucci that creates volatility for Kering shareholders, a person close to the company said. But a very competitive luxury market that’s also slowing down means measures being put in place to address those issues will take longer to bear fruit, the person said, declining to be identified because they’re not authorized to speak publicly.

The depth of Kering’s woes became evident when it took a rare step last month to warn that Gucci’s revenue in the first quarter would fall by nearly 20 percent on weak demand in China — which not too long ago was a key growth engine. Sales for the quarter are slated to be published on Tuesday. The company had already said in February that ongoing investments at Gucci would lower group profitability this year. Its other labels including Yves Saint Laurent — the second biggest — Balenciaga, Bottega Veneta, Alexander McQueen and a stake in Valentino are too small to offset that decline, and some have problems of their own.

Kering has also been hit harder than its peers by the slowdown in demand for luxury goods, especially from so-called aspirational buyers who spent money with gusto post-pandemic but cut back massively once inflationary pressures took hold. LVMH has felt the effects of that, too, but with a broader range of brands the impact has been less severe, bringing the difference in the strategies of the two groups into sharp focus.


While both Kering’s founder François Pinault and LVMH’s Arnault started their careers with similar grit and drive, their empires have diverged dramatically since the two faced off more than two decades ago to acquire Gucci. Pinault, 87, who left school at the age of 16 and later joined his family’s sawmill operations, came out a winner against Arnault in the tussle for the Italian brand. A few years later, he handed the reins to his son FHP, who sold off assets to focus on luxury and largely stuck to a handful of core brands. Arnault, meanwhile, inexorably rolled up about 75 labels that gave LVMH access to a wide range of market segments, from fine wines and hotels to cosmetics. The 75-year-old is still firmly in command of a juggernaut valued by markets at about €400 billion — nine times more than Kering.

The Pinault family holds a 42 percent stake in Kering and 59 percent of its voting rights. The holding accounts for most of the family’s wealth, with François Pinault’s net worth standing at about $30 billion, according to the Bloomberg Billionaires Index.

Investors, analysts and former Kering insiders lay the blame for much of the company’s recent turmoil on what they see as dysfunction within the group. Unlike Arnault at LVMH, who’s known to be hands on and keeps tabs on how his labels are faring by impromptu visits to stores like Le Bon Marché in Paris or Harrods in London, FHP is seen as too laissez-faire, leaving brands to their own devices. One former executive remembers a cacophony of views from middle managers on the strategy of a small brand, with FHP not weighing in.

But company executives defend FHP’s management style, saying he empowers his managers and designers, but is not afraid to take tough decisions if they fail.

Adding to investor questions about FHP’s involvement and commitment to the daily running of Kering is the multibillion-dollar acquisition last year by the Pinault family holding company Artémis of a majority stake in the Los Angeles-based talent-management giant Creative Artists Agency. The firm represents FHP’s wife, the actress and producer Salma Hayek, who regularly feeds her 28 million followers on Instagram with updates on their family, often from the US West Coast. Last month she posted photos from the Vanity Fair Oscar Party wearing a silver sequined Gucci gown, accompanied by her tuxedo-clad husband.

The acquisition of CAA hasn’t distracted FHP, the person close to the company said, noting that the CEO doesn’t spend any more time today on Artémis than he’s done in the past.

Still, as he hobnobs with Hollywood A-listers, investors and industry observers taking a closer look at FHP’s nearly 20 years at the top of Kering say his record has been mixed.

On his watch, the group was recast as a pure luxury play from a holding company that also included a hodge-podge of retail assets. Kering’s biggest labels, including Gucci, have posted eye-popping levels of sales at times.


“If you look at what they have done in the last 10 years, 15 years, it’s an exceptional performance,” Rachid Mohamed Rachid, Chairman of Valentino — in which Kering has a 30 percent stake — said in a Bloomberg TV interview on Monday, pointing to Gucci’s strong growth before its recent troubles. He said he was confident the group’s management “will be able to put all these brands on the right track.”

Still, over FHP’s time in the top job, he hasn’t been able to make transformational acquisitions that could have weaned the group of its over-reliance on Gucci and given it more stability.

People close to the company point to the recent purchase of the Valentino stake and investments in the group’s eye-wear unit as deals with potential in the longer term. Kering is now No. 2 in luxury eyewear after EssilorLuxottica SA, and an eventual full purchase of Valentino will give the group another high-end brand alongside Gucci, they say. But to Bocconi University’s Saviolo, the game plan is not clear.

“There’s a bit of a lack of focus,” she said. “If you want to compete, you need to be a leader in your category, not a darling of everyone with a little bit here, a little bit there.”

FHP has also talked from as early as in 2006, a year after he took over as CEO, about luring the high-end luxury customer. He repeated that in 2014, when Gucci sales slowed, saying in a Bloomberg News interview that focusing on quantity rather than quality “would be the greatest danger to the brand.”

And yet Gucci continued on as before — maximising sales growth at the expense of a longer-term strategy that could have propelled some of its products into Hermès and Chanel territory, a former executive said, citing two bags in particular — the Marmont and the Dionysus — that had the potential to become as coveted as the iconic Birkin. Additionally, when former star designer Alessandro Michele’s pieces were a hit, the company could have orchestrated scarcities and created waiting lists. Instead, outlet distribution in Europe and in places like China remained part of the strategy and cheapened the brand.

Now, as Gucci’s sales slide again, the company is once again saying it wants to reduce discounted outlet sales, and FHP is rolling out the pledge to “elevate” the group’s brands, telling reporters in February that “if this elevation is well executed, it enables us to develop this more sophisticated, high-end segment of luxury with a clientele that has a higher purchasing power.”

But Gucci is now fighting to regain its so-called “desirability,” the holy grail sought by all luxury brands. Its ranking on the Lyst index that tracks brands and products according to searches and references on social media tumbled to as low as No. 12 in the third quarter of 2023 — trailing even smaller rivals such as Prada and Miu Miu — from the top spot the previous year.

The brand hasn’t been helped by changes in designers and managers. Since the legendary Tom Ford exited in 2004, Gucci has had three creative directors, two of whom lasted for under a decade each, with the third taking over last year. While other fashion houses have also seen designers come and go, they have managed to hang on to some creative talent for a long time. Karl Lagerfeld reigned at Chanel, designing its classics for more than 35 years, from 1983 until his death in 2019. At Hermès, Véronique Nichanian has been designing menswear since 1988, while Marc Jacobs ruled at Louis Vuitton for about 16 years.

The drop in Gucci’s desirability on Lyst came amid a creative vaccum following the exit of Michele at the end of 2022 after weak sales and disagreement over where the brand needed to be taken. FHP appointed Sabato De Sarno in early 2023 as the brand’s new creative director, with his first collection presented in Milan in September.

The public knows little about the pedigree of De Sarno, who was brought over from Valentino, and has toned down Gucci’s reputation for audacious bling and homed in instead on its heritage, building on the brand’s century-old roots in luggage-making in Florence. Since then, he has presented a menswear and a womenswear collection, neither of which have set the world on fire — although the company notes that it’s early days. It’s a gradual ramp-up to get the offerings into stores, and they will make up all of the new collections by the fourth quarter, the person close to the company said.

“De Sarno’s shift to classic makes the collection potentially more commercial, but it also pitches Gucci against more credible incumbents,” Luca Solca, an analyst at Sanford C. Bernstein, wrote in a note after the designer’s maiden show, alluding to rivals such Prada and Armani.

The changes on the creative front have coincided with a deep management overhaul at Kering and Gucci, which has failed to assuage analyst concerns about the outlook for the group. Over the years, cyclical waves of success at Gucci have come with strong partnerships between the designer and the top executive. During the Tom Ford era, known for “sexy power” dressing styles and provocative ad campaigns, the designer worked closely with then CEO Domenico De Sole — resulting in the “Tom and Dom” team bringing Gucci back from the brink in the 1990s. The duo quit in 2004 amid a power struggle with the Pinault family after Gucci was folded into the French conglomerate.

An underwhelming creative period followed under Frida Giannini, who ended up marrying then Gucci CEO Patrizio di Marco after the couple left the group. The exit of Giannini, who didn’t leave much of a mark on the brand, paved the way for the flamboyant Michele to take over the top creative role in 2015. Known for his bohemian chic aesthetic, the designer who had worked for Giannini, was a bit of a gamble for Kering. But under him and brand head Marco Bizzarri, Gucci sales almost tripled between 2015 and 2019. To some Gucci observers, that’s a sign of the brand’s resilience and a reason not to count Kering or FHP out just yet.

“People are looking at Kering now and saying that there are maybe some governance issues, maybe some brand power issues and so on; I think they tend to forget that between 2017 and 2019, Gucci was the best turnaround story in luxury,” said Aurelie Husson-Dumoutier, an analyst at HSBC.

But that may be a tough act to follow. FHP’s latest management overhaul hasn’t reassured markets. Unlike LVMH where CEO Arnault unambiguously calls the shots on all important moves, at Kering, the new structure’s confusing reporting lines make it hard to know who’s in charge, analysts say.

In the July shake-up, Bellettini, the CEO of Yves Saint Laurent, was named Kering’s co-deputy CEO, tasked with developing all group brands and reporting to FHP. The group’s former No. 2, Jean-François Palus, who attended business school HEC Paris with FHP and has worked with him for decades, moved to Milan to head up Gucci and technically reports to Bellettini — who until then had reported to him. Former insiders and industry observers say Palus is more of a number cruncher than a brand builder.

Despite Kering’s insistence that Palus, with his deep knowledge of the group and his organisational skills, is the right man for Gucci, “the market does not agree,” analysts led by Piral Dadhania at RBC Europe Ltd. wrote in a note on March 22. Bringing in someone with a track record may have enabled a “faster pace of change,” they said. This month, Gucci named a new deputy CEO — Stefano Cantino, previously in charge of image and communication at Louis Vuitton, LVMH’s biggest label — hoping to give Palus some creative bulk.

Investors were happier with the elevation of Bellettini, a highly-regarded former Goldman Sachs banker. A luxury industry rival had high praise for Bellettini, calling her one of the best in the business. Some shareholders suggest she replace FHP as CEO, with the scion staying on as chairman of the board, which he is also overhauling.

Not much is known about FHP’s plans, although in a protracted tax dispute with French authorities originating in 2014, he outlined a desire to eventually step back — without specifying when, according to a court ruling from the case that was made public a year ago.

Although FHP’s oldest child, François Louis Nicolas Pinault, 26, is too young to take charge anytime soon, there are signs he’s being prepared for bigger things. Last month, he replaced his avid art-collecting grandfather on the board of Christie’s, the auction house owned by the family through Artémis. FHP has three other kids: Mathilde, who like François Louis, is a product of his first marriage; Augustin James, from a relationship with model Linda Evangelista; and Valentina Paloma, with Hayek.

“The father organised the next generation, and François-Henri Pinault’s next act will have to be to do the same; it’s now up to him to think about his succession,” said Philippe Pelé Clamour, an adjunct professor at business school HEC Paris specializing in family firms. “In the coming years we could see a family member emerge and be mentored by someone, either at the holding or at Kering. Right now there is uncertainty.”

By Tara Patel and Angelina Rascouet

Learn more:

Kering Braces for Aspirational Luxury’s Long Winter

Sales at luxury fashion’s second-biggest group fell 4 percent in the holiday quarter, putting it significantly behind key rivals. The Gucci and Saint Laurent owner is expecting another year of lacklustre growth amid a long-term plan to push its brands upmarket.

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