Case Study on

The House of Gucci

The expansion of the Gucci enterprise was not supported by Guccio Gucci, the founder. Against resistance from his father, Aldo's rst step in the company's growth was to open a shop in Rome in 1938, not a very propitious time to take such a step, but the rst step in moving beyond the Florentine base. After the major setbacks of the 1930s, such as restrictions on leather imports, and World War II which closed all the normal markets and when attention was turned temporarily to shoe production for the military, the company ourished in the period of postwar recovery when incomes rose and consumers were free to buy luxury goods if and when they were available. Working in the Gucci leatherworks became a much-desired job and many skilled craftsmen started at Gucci, only to create their own enterprises later, often still supplying the Gucci company. The Gucci enterprise became the centre of a network of such craftsmen. Gucci established the foundations of a whole industry.

Particular attention was paid to the location and decor of the sales outlets, which were always located in expensive areas and furnished luxuriously but stylishly. They were set up to attract what are called today celebrities. The rich and powerful were individually feted. Their presence attracted others and gave the stores an ambience which helped sell the products. By the early 1950s possession of a Gucci bag or suitcase established its owner as someone with refined style and taste. Royalty and celebrity displayed their ownership. The press photographed them with Gucci products. Thus public display helped build the name. Gucci products were the first status brands to appear in postwar Europe. At the same time Italian clothing designers began to promote their products at prt-porter fashion shows.

The rst step in internationalizing the company was expansion into the USA, an obvious move given that Americans in the early postwar world had far more money to spend on aspirational goods. Aldo inaugurated the rst New York store as early as 1953, much against the wishes of his father Guccio. The conict between the different generations became something of a family tradition, unfortunately often reaching the courts. Aldo took a particular interest in the US project, recognizing the importance of the US market at this early stage in recovery from war. Gucci Shops Inc., the rst US company, was given the right to use the Gucci trademark in the US market - the only time that the trademark was ever granted outside Italy. Elsewhere Gucci's foreign operating companies were franchise agreements. Gucci America became a agship for the Gucci group. The rst store in London was opened rather later in 1960, and in Paris in 1963. The three stages in the restructuring of this family company are discussed in turn.

Seeking a partner

A major role in the rise of the modern company of Gucci was played by the investment bank Investcorp, little known until it became involved with Gucci. It was created by its founder Nemir Kirdar in 1982 to act as a bridge for wealthy clients in the Middle East to invest their increasing wealth, based mostly on oil, in Europe and North America. There was a large pool of such money. Investcorp was set up as an Anglo-Arab counterpart to Goldman Sachs or J.P. Morgan, with a mission to buy up promising but struggling companies, restructure and improve them and then sell them off at a prot. Investcorp came of age and made a fortune by purchasing the American jeweller Tiffany & Company for US$135 million in 1984, rehabilitating the company and then selling the shares on the New York Stock Exchange. The company played an important role in sorting out the complicated share ownership and resurrecting the brand name. This deal put the company on the map. When approached by Gucci, Investcorp saw it as its means of entry into the closed business community of Europe. It proved to be a difcult and expensive, but nally triumphant entry.

Maurizio Gucci, son of Rodolfo, grandson of Guccio and the rising star of the family, was the next family member who was important. He managed to manoeuvre to take control of the company. In 1987 Maurizio Gucci and Investcorp reached what was called the 'Saddle Agreement'. They would collaborate to relaunch the brand, install professional management and establish a unied shareholder base for the company, in other words buy out the other family members, naturally against the wishes of these family members, including Aldo & his sons, one of whom he was in bitter conict with. After this was done, they would seek a stock market listing for the family company. Investcorp agreed to acquire up to 50% of the company.

The acquisition took 18 months to complete & was made possible by the already bitter divisions within the Gucci family. It was carried out by Morgan Stanley, with the role of Investcorp as purchaser remaining secret for the whole period of negotiation with the different members of the Gucci family. This was a real turning point for Gucci, since it was the rst time an outsider had owned a signicant block of shares in the family company.

It was extremely difficult for a family-owned firm such as Gucci to attract and control the new capital and the professional management resources it desperately needed to stay viable. Having a creative idea was not enough. Most other fashion houses have been built on a strong relationship between the creative figure and an efficient business manager. Maurizio had great creative flair. His vision for the company turned out to be correct. It was Maurizio who appointed Tom Ford as the company's chief designer. However, the strategy was very expensive in the resources needed to give it back its name for quality. By 1993 Maurizio faced personal bankruptcy and so did the company. Investcorp was losing patience in financing the company. Between 1987 and 1994 Investcorp had poured hundreds of millions of dollars into Gucci with no return. The house of Gucci was in total disarray, each part having a serious debt problem. Sales had been static for three years and losses were mounting. Morale was low. The only solution was for it to cease to be under the control or ownership of the Gucci family. By the end of 1993, Investcorp had acquired 100% ownership, buying out Maurizio Gucci for US$120 million.

The company returned its headquarters to Florence from where Maurizio had moved it to Rome. It rationalized its activities and labour force. One key turning point was when Tom Ford was given sole charge of design in May, 1994. He single-handedly turned Gucci into a fashion house. Another turning point came with the appointment of Domenico De Sole, for ten years CEO of Gucci America, as chief operating officer in the autumn of 1994 and in July 1995 as CEO. De Sole knew Gucci very well and, more to the point, knew how to motivate the staff and restore morale. At last Gucci had the partnership of creativity and management expertise it required. Maurizio had given it the right strategy. In 1994 profits became positive and sales began to turn upwards.

Investcorp had grown tired of the effort to revive the company. In 1994 it tried to sell Gucci for US$500 million, offering it to either LVMH or the Vendome Luxury Group, owners of Cartier, Alfred Dunhill, Piaget and Baume and Mercier. The offers received were between US$300 and 400 million, an unacceptably low level. However, the company was ready for listing.

The public oat

Investcorp used two top merchant banks to lead the listing, Morgan Stanley and Credit Suisse First Boston. Fortunately sales were already on the rise. They were far exceeding the expectations at the time of the offer from LVMH and Vendome, one year before. In August 1995, Vendome, realizing its mistake, came back with a raised offer of US$850 million, twice the previous level. However, Investcorp's advisers valued the company at more than $1 billion so they continued with the initial public offering planned for the autumn of that year. The initial plan was to offer 30% of the company on international stock markets, Investcorp retaining the other 70%. The road show promoting the issue went so well that Investcorp increased the offer share to 48%. The share price was to be $22, at the high end of the previously estimated range. In the event the offer was 14 times oversubscribed. In April 1996 the secondary offering was completed. Between them they raised a grand total of US$2.1 billion, which, after intermediary costs, left Gucci with US$1.7 billion.

This was an amazing turnaround for a company which had seemed to be headed for bankruptcy just two years before. Investcorp was completely vindicated in its commitment. Maurizio's creative strategy was also vindicated. Gucci, as a publicly traded company owned by large and small investors across the US and Europe, was an anomaly in Italy where even such companies were usually controlled by a shareholder syndicate. Most fashion companies remained privately owned.

Gucci created a new sector on the stock market. It was a true pioneer and was imitated by other luxury goods companies. Gucci encouraged the emergence of analysts in the international investment banks who specialized in 'fashion risk', meaning what a poor collection might mean to a company. They began to analyse the business cycles of fashion companies, including sourcing, delivery and sell-through as well as the importance of show reviews, glossy fashion spreads and the style arbiters of Hollywood. They also appreciated the impact of recession on the market and how companies might insulate themselves from its effects.

Meanwhile Tom Ford was integrating the total image of Gucci - the apparel and accessory collections, the new store concept, advertising, ofce layout and decor, staff dress and even the ower arrangements at Gucci events.

Expansion

The team of the designer Tom Ford and the manager Domenico De Sole completed Maurizio's strategy successfully by rescuing Gucci's tarnished brand and turning the company round. The success of the public oat and the ensuing rise in the share value was made possible by this turnaround. What was to be the strategy for further expansion?

The public oat made Gucci a possible target for takeover. In June 1998 Prada announced that it had bought a 9.5% stake in Gucci, but Prada was not large enough to constitute a threat to Gucci, at that time a $3 billion company with sales in that year of more than $1 billion. Prada took no further action. In the autumn of 1998the corporate ofces of Gucci were moved to London, reinforcing its international status. This move was taken deliberately to help Gucci to recruit top-level international managers.

In January 1999, LVMH acquired more than 5% of Gucci. LVMH already included in its stable Christian Dior, Givenchy, Louis Vuitton and Christian Lacroix as well as the vintners Veuve Clicquot, Hennessy and Chateau d'Yquem, the perfume house Guerlain and the cosmetics emporium Sephoria - this was a real threat. LVMH was dominant in France, and was likely to look to Italy which was a rising player in the world of fashion and aspirational goods. LVMH even had separate discussions with Georgio Armani which came to nothing. Arnault, the CEO of LVMH, has a style of continuing to build his stake in a 'creeping takeover' until he controlled the company. LVMH bought out Prada's 10% share, and by the end of January 1999 held 34.4% of Gucci. Prada in its turn continued to expand, buying control of Jil Sander and Helmut Lang, and joining with LVMH to buy Fendi, winning out in a bidding war with Gucci.

Threatened in this way, Gucci sought a white knight to help it fend off LVMH. To buy time it initiated an employee stock ownership plan, in so doing diluting LVMH's ownership share. This was combined with the putting in place of a golden parachute for both De Sole and Ford in the event that the company was taken over, a threat of removal of Gucci's main assets. The white knight eventually emerged in the form of Franois Pinault, controller of the largest non-food retailer in Europe, Pinault-Printemps Redoute (PPR).

Pinault not only offered to buy enough of Gucci to block the purchase by LVMH, he also offered to buy Yves Saint Laurent, which he later did for $1 billion, and turn it over to Gucci. Pinault invested $3 billion for a 40% share in Gucci, later raised to 42%. This had the effect of reducing Arnault's share to 21%. In reaction Arnault made a bid which valued Gucci at $8 billion which was rejected, even when the price was further raised. However, the agreement in place today is that PPR is obliged to buy out the rest of Gucci if the share price of the company is below US$101.50 in March 2004. PPR is now Europe's biggest distribution company, with annual sales of US$27 billion, but a debt of $6 billion. It is currently at a debt rating just a notch above junk bond status and in no position to buy out the rest of the Gucci company.

In 1999 the Gucci Group bought the Yves Saint Laurent brand for US$1 billion from Pinault, at least its ready-to-wear and beauty businesses. It did not acquire the haute couture part of the company, which was acquired by Pinault himself. Gucci then made YSL the cornerstone of its global multibrand strategy. Gucci had become a prot machine on the basis of $5,000 dresses and $700 purses. It now intended to do the same with YSL: it was a test of its ability to extend and develop the model.

The Yves Saint Laurent story parallels in some respects the story of Gucci, although it is a much more recent one. Yves Saint Laurent began as the chief designer of Christian Dior. He made his name at the early age of 26 when he began his series of collections which changed the nature of modern fashion. He initiated his own label in the same year. He opened his rst ready-to-wear Rive Gauche boutique. In all of this he acted as one of the pioneers.

In 1972 Squibb bought the YSL company and started the process of licensing. Quite quickly this ran out of control. There were a myriad of licences sold, without coordination and no desire to prevent the valuable brand name being sullied, for everything from YSL cigarettes to plastic YSL shoes, which could be bought on the Tokyo subway for as little as $125. There were as many as nine different store designs around the world. By the early 1990s, a time when Gucci also reached a similar stage, most upmarket shops had ceased to stock YSL products. YSL was overtaken by Giorgio Armani and Chanel, and later the revived Gucci.

After acquisition, Gucci was faced with the task of restoring the YSL name, a task in which they already had valuable experience. The number of licences was reduced to just 15. Royalties from these licences declined from 65% of revenue in 1999 to 25% in 2001. Most of the manufacturing of shoes, bags and clothes was brought in-house. The number of directly-owned stores with the YSL name was tripled to 43, with a promise of 60 within 18 months

YSL once more became the fashion trendsetter. Ford put on three critically acclaimed shows, the first at the Rodin Museum in Paris in October 2000. Ford regularly placed his designs on the front pages of fashion magazines. The first outstanding success for the revived YSL came with a $2,500 purple silk peasant blouse in March 2001. There was a heavy commitment of financial resources to advertising. Quite the best advertising came when A-list celebrities began to wear YSL - Nicole Kidman at the Cannes Film Festival in 2001 wore a black silk strapless YSL dress and Gwyneth Paltrow carried a Mombasa bag at a fashion show in January 2002.

The Mombasa bag is typical of the world of luxury and the worlds of Gucci and YSL. It was a soft, oystershaped leather shoulder bag with a curved deer-horn handle, which was priced at $700. Such accessories carried a prot margin of over 40%. It sold out as fast as shops could stock it.

YSL was still making a loss but a return to prot was planned for 2003. Sales were growing so fast that an earlier return seemed likely. In 2001 YSL sold only $90 million worth of ready-to-wear items and accessories compared to $462 million of beauty products, and compared with Gucci label sales of $1.5 billion.

The strategy and its implementation

The Gucci history shares many events and circumstances with other similar companies - the identication of appropriate partners, the movement to a public company, the loss of family control, the problem of the professional management of creative people, the development and misuse of a brand name. All these issues pose strategic problems which must be resolved. The twin achievements which make success possible are a positive balancing of creativity against managerial efciency and the managing of the brand name so as to preserve the aura surrounding the brand but at the same time taking advantage of that aura to make a signicant prot. These are problems which have confronted many similar companies.

Gucci always had the creative air; it did not always have the administrative expertise. It grew alongside the aspirational market which emerged in the postwar world, once recovery was complete. It understood well that aspirational market. The family members, notably Aldo & Maurizio, understood very well the nature of and potential for development of the market which had appeared for the kind of product which the company sold. They did not fully understand the commitment of resources and the level of management needed to translate this vision into a reality.

Gucci set the model which has been imitated by many other companies. Some have remained private companies, other have been oated and taken over. Some have become parts of much larger organizations. To some extent all purveyors of luxury or aspirational goods are competitors with each other. Each chooses to highlight one particular attribute of its goods. As Goldstein (1999: 95-8) has written of another company: 'Prada is not beautiful like Dior, classic like Armani, sexy like Gucci, or tacky like Versace. But at various times it is each of those things. ... Prada is fashion's future.' All have tried to draw out the attributes which the customer prizes.

One particular problem with the sellers of luxury or aspirational goods is how to ride recession. In the second quarter of 2002 Gucci's profits were down 55% and sales down 7%. The problems of the white knight PPR are more of a problem. Riding a boom is easy when rising income and wealth levels fuel demand. In a recession the reverse effect becomes prominent. Luxury or aspirational good are easily struck off the list of purchases when it is necessary for consumers to retrench. This makes it essential to take a number of strategic decisions to ensure survival. Polishing the brand names to give them advantage over others helps, as does the expenditure of US$200 million to open and refurbish 70 stores. Positioning the company is a key strategy.

Case Study Questions

1.How should an enterprise be structured where the core competency of that enterprise involves "creative" activity?

2.Is it inevitable that a family company goes through a difcult transition in order to come of age?

3.What does the history of Gucci tell us about the successful management of a brand name?

4.Does the history of Gucci show that a company selling luxury or aspirational goods is different from the norm in both structure and strategy?

5.What strategy should be adopted by such a company in a recession?