Can Kering Fix Gucci?

0:07Hello and welcome to The Debrief from The Business of Fashion, where each week we delve into our most popular BLF professional stories with the correspondents who created them. I'm executive editor Brian Baskin. And I'm senior correspondent Sheena Butler-Young. 2024 was, to quote Bernstein analyst Luca Solca and Anis Horribilis, for Caring. Gucci's sales plunged 24 % in the fourth quarter, with Caring's overall sales falling 12%. The company's stock actually rose slightly after the results came out, but only because investors were already bracing for the worst after three consecutive quarters of double-digit declines.

0:46But of course, numbers don't always tell the full story. On their latest earnings call, Caring Chairman and CEO Francois-Henri Peneau sounded optimistic. The strategy we are implementing consistently since we became Caring, a pure player in luxury, is unchanged. We have demonstrated in the past that we know how to grow brands, and we will do it again. Gucci will come back. I have absolutely no doubts about this. If and when Gucci does come back, it will be without creative director Sabato De Sarno, who was fired after less than two years on the job. Pinot is confident about the future of caring, but should he be?

1:24To break it all down, we're joined by BOF's luxury editor, Robert Williams. Hi, Robert. Welcome back to the Debrief podcast. Hi, Sheena. Hi, Brian. Thanks so much for having me. Thanks so much for joining us, Robert. Most of our audience knows what Caring is and why Gucci is so important to the fate of that company. But I also know my mom is listening and she does not know what Caring is. And I'm sure there are more listeners like her. So just to start things off, can you give us a really quick summary of that company and its place in the luxury world and why Gucci is so important to them? Caring has emerged over the past 15 or so years as a really important competitor to LVMH and Richemont.

2:05Caring was formed from Gucci Group, which was the company that was run by Tom Ford with Domenico del Sole throughout the 90s and really saw the renaissance of Gucci. And then started to form a group when it acquired and merged with Bottega Veneta and Saint Laurent. when Gucci was under quite a bit of financial pressure, they were looking for a white knight investor to make sure they didn't get absorbed by the same big machine that had, you know, absorbed Givenchy and Louis Vuitton and Dior. And François Pinault Sr., who is not involved in the company anymore, but is still the chairman of its holding, which also owns Christie's and operates as a charitable foundation, a couple of really important contemporary art museums, he emerged as this white knight investor who helped to kind of save, quote unquote, Gucci from being a part of LVMH.

3:02Over the years, that became a really important and historic development for the fashion industry because people who want to work in luxury in France and want to have that support of maybe a big corporation, but don't want to do it at LVMH, you know, they have another option because of the success that we've seen over the years at Gucci, which is still, you know, based in Italy, and Bottega Veneta, which is also based in Italy, but also Saint Laurent, which mainly produces in Italy, but is based in Paris, and Balenciaga, which are the main brands at Kering. Kering's run by François-Henri Pinault, which is Pinault's son, who you guys know as the French guy who's married to Salma Hayek.

3:40If you're not familiar with fashion, you would see him with her. And recently he acquired through his family's holding company, CAA, because he is also very interested in the entertainment industry, as well as art, culture, kind of other things in addition to fashion. But Caring, the group, is just operating the jewelry and fashion brands. But really, the underpinnings of the whole operation here is still Gucci, right? I mean, there's something like half of revenue, two-thirds of profits. It's really, everything depends on the success of that brand. Absolutely. Gucci has always been the core of this group and kind of its big profit center.

4:18Financial analysts would say like this kind of group is only going to be as strong as its most profitable kind of biggest anchor brand. You know, in the case of LVMH, they over the years have built this empire by being able to kind of reinvest a lot of the profits from Louis Vuitton into doing so many other things at Richemont that happens with Cartier. And at Caring, often we see a performance and the trajectory of this group that maybe yo-yos a bit more that isn't quite as much of a straight line, because Gucci has this strong identity as a fashion brand. It's had a few really big booms, but then also some pretty big busts afterward.

4:55And so with it, kind of that does create additional complications for the group and how much they're able to invest in acquiring new brands, in developing the brands they have, and honestly, just, you know, continuing to exist because, you know, it's very profitable. I shouldn't say continuing to exist because I don't think it's gone loss making. Like, it's not that bad yet. Well, I want to talk about how bad it is. Speaking of personal references, I tie the recent boom of Gucci to the purchase of my glasses three years ago when it felt like they were really doing well and I was proud to wear this particular pair of glasses.

5:30How bad is the bust that we're seeing now? Because you said it already that these brands do boom and bust. Is this a really detrimental one or is this just a run-of-the-mill downturn moment for Gucci? You know, it is pretty dramatic to have seen sales falling by about 20 % this past year and now carrying, therefore, down about 12%. You know, this is their most profitable brand. and with it being under so much pressure, it's really unclear then how you can invest in a turnaround. I think maintaining market share has always been a challenge for them, even though it is a big brand that gained a lot of market share in the first few years under Alessandro Michele.

6:09The brand grew really rapidly. But then ever since then, you know, figuring out how much to invest and where in order to keep growing or to even just solidify its business hasn't been super clear. How serious this downturn is, is not always completely obvious because, you know, there have been some really weak points in Gucci's business that people have pointed out over the years. They have a pretty strong exposure to outlets, to parallel market resellers, you know, maybe people who buy at a discount somewhere at like a big department store at a wholesaler and then will resell that back in another country after getting a tax rebate.

6:45There is certainly kind of maybe a lower quality, less controlled dimension to Gucci's business that they've talked about kind of weeding out for years and years. And so now it's unclear maybe and it's not always evident to what extent the current downturn is about weakness in that core luxury business in the stores and about the broader company and how much they're kind of trying to cut out the parts of the business that they're not sure are sustainable in the long run. But I mean, it's certainly in any case a dramatic difference between the Gucci we saw a few years ago. I mean, stores were chock-a-block with so many people.

7:21That was, you know, maybe the first luxury brand, in my experience, where they would consistently have lines. You know, before that became quite a common occurrence. After the pandemic, you would really see a lot of people line up at a Gucci store. And then, you know, that really has run out over the past few years. It stagnated during the last two or three years of Alessandra B. Kelly's tenure there. And then as they changed CEO and designer the past year and a half, about 18 months, sales declined quite dramatically. We're talking about Sabato De Sarno, the creative director that came in and was let go within two years, correct?

7:57Sabato came about a little bit less than two years ago. He had his debut show in September 2023. and you know that show I think really you know set a kind of a fresh reset for the brand it gave a really like a youthful stylish kind of sexy tone had a great some great styling signatures there was this sense of like this mix of very sartorial details like long overcoat with more skimpy things like lingerie dresses mini shorts there was the classics of Gucci like a horse bit loafer but like in a platform style, there were a lot of little twists on the heritage that felt quite fresh, but it was not, you know, like.

8:42But it flopped. To quote Brian, I think it flopped. Well, I didn't, I wouldn't know it say it flopped out of the gate. You know, I think there were people that felt like there was a refreshing angle there, but it definitely did not have that sort of like dimension that was setting the fashion agenda. It had something to say about the way girls want to dress right now that felt quite timely felt fresh but it wasn't giving people a lot to respond to and so you know to create urgency about why do i have to go into the store this season not next season why is it this brand that's so exciting and not another it gave you know maybe a really wealthy client because prices were going up dramatically there in these collections which were had a higher level of construction in some ways but also just saw the price inflate quite a bit for a variety of reasons.

9:28It was quite expensive and there was a high-end client that bought into these ready-to-wear collections, but it was just so much more of a niche audience than who this brand used to speak to with, you know, a really strong story and much more accessible merchandising that felt also much more urgent during the Alessandro Michele era. But then we've seen so many luxury brands make this pivot to kind of muted minimalism. I mean, That's not really what Gucci's doing, but definitely more subdued in the previous era of Gucci and a little more commercial, a little more something you'd wear every day.

10:02And that has worked at so many places. Why then didn't it work here? Why didn't that more mainstream commercial approach take hold? Well, that's the subject of debate. There are some people out there who are going to say that Gucci stands for maximalism, for fashion authority, for something quite bold. even if you know there was something very slick about the tom ford era that you could find again in this sabato era even if there had been some fatigue with the strain of maximalism that alessandro michele was doing with so much nostalgia so much personality such a layered on styling in any case there's a common thread of doing something really quite striking and maybe quite conversational you know you could see a straight line in some ways at the best moments of gucci from those G logo thongs on the runway where the letter G was holding together the thong.

10:59You could just see a straight line from that to something like a ruffled, sequined, tiered gown with kind of a babushka scarf that you would see with Alessandra and Kelly. They look very different aesthetically. They speak to a different taste and desire in the market. But there is something about this brand being a place for bold fashion propositions, which Which also is maybe one structural reason the brand wasn't quite set up for success in this past fashion cycle, which has been all about classics and investment pieces. Gucci has those with certain bag styles, with the loafers, but it's a small chunk of its business, at least as the business has existed in its previous incarnations.

11:41Previously, they had the classics and then this big component of fashion on top of that. You know, it's hard to manage that and not have some big ups and downs. When did you first have an inkling that maybe this whole change of direction wasn't working? I mean, for me, BOF's office in New York is right around the corner from that big Gucci store in Soho that opened a great fanfare in 2018. And it used to be quite crowded. You know, you always saw people in there. And I just do like a weekly spot check every time I'm headed to the office. And in the last, you know, year or two, it was kind of a ghost town.

12:17Like, I remember walking by yesterday, you know, just thinking about recording this podcast and literally not a soul in that enormous space. Yeah. I mean, I don't think it was immediately obvious that it wouldn't work. There wasn't like a super enthusiastic response from fashion insiders because it was not, you know, they were not the most forward looking runway shows. They were not the most transgressive. But, you know, that doesn't mean that something's not going to work. The Virginie VR era at Chanel was commercially extremely potent, the way she re-tailored a lot of Chanel's offer in a way that made it relevant for a lot more young people.

12:54You see girls wearing Chanel ready-to-wear that you wouldn't have seen a few years wearing it, even if a lot of fashion people never really got on board with what she was doing there. And, you know, the same was true for years with Maria Grazia Chiuri. A lot of people took a long time to come around with what she was doing at Dior. So I wouldn't say it was immediately obvious that it was not going to work. I think it was obvious from the beginning that it was going to be a very big challenge. Sabato joined while the former CEO Marco Bizzari was still in place. And then Mr. Bizzari left just before the debut show, like three weeks before.

13:31So there was a lot of turnover. You know, then they sent the managing director of Caring, Jean-Francois Palus, who was kind of like, you know, seen as a real financial whiz who had helped him manage the building of Caring's portfolio over a long time. But it never really had a hands-on branding and fashion role in managing the brand in the day-to-day before. They sent him as the CEO of Gucci for about a year before finding someone else. So there's been just a lot of turnover, a lot of turmoil. and all of that is quite hard to create any kind of financial turnaround also in the wake of such a booming success as they had during the Alessandro Michele era which was compelling from a fashion standpoint it was commercially very successful but it was also critiqued as like very financially unsustainable it was quite over distributed the stores were full of people but they were also really full of inventory and there was a sense that if like interest in this proposition ran out what was going to happen with this brand because they were really kind of firing on all cylinders from the outlets to the mainline stores, to the wholesale, to the travel retail.

14:38There wasn't a lot of like what like financial analysts would call dry Tinder to burn. My favorite moment from that era was that presentation they did on expanding in the U.S. and they said they were going to open five stores in Ohio. I've heard this before. And I was just like, I don't care how hot this brand is. I don't know if Cleveland can support Gucci stores. What happened with those Ohio stores? Where did they land? Did they open? I don't know if those all opened. They're definitely closing some now. Those have to be on the list, right? They're closing something like 50 stores worldwide, right?

15:08I don't remember them ever saying five stores in Ohio. I will pull up that slide and show you later. This burned in my brain. I mean, Caring opened a lot of stores in the U.S. over the past few years. and the future of those locations is probably up in the air to some extent because even though the u.s is emerging as the main bright spot for the luxury market this year and you saw some really strong growth in the numbers at hermes this year those have been the most resilient for a lot of brands has been their u.s business the kind of products and maybe the kind of shoppers that were being catered to at some of these new mall locations and secondary cities and smaller cities, whether those are going to turn out to be a long-term bet is not completely clear.

15:54I mean, wealth is extremely diffuse in the US. It's much less centralized than a lot of places, whether the US is a big country and it could sustain probably more stores than it had before, but whether it needs quite as many Alexander McQueen and Balenciaga stores as were planned, or certainly Gucci stores by caring. Yeah, I think that's not totally clear. We'll be back with more of the debrief right after this.

16:27So we have this creative director seat that's open. I assume there's a lot of potential on what someone that can come in and do for the brand. Any inkling of who should take this role, who Gucci's considering, what the promise would be of a new creative director in this moment? You know, they are saying that they've built a really strong base through this period with Sabato and with their current direction that this kind of aesthetic reset and this back to basics, you know, this renewed focus on heritage and higher end products that were a little more complicated could back up the prices a bit better.

17:02You know, they're saying that this has created a base where now if someone comes in with a strong fashion vision, it's going to be able to take off really quickly. But do you believe that? They're building a really strong base, but he's out in two years. I think that there's a potential that with the right messaging, they could build quite quickly on what they've done and not have a long transition period again. That's at least the story they're telling markets is that there's not going to be a long transition, that they're going to be able to start bouncing back right away. And having gone down so quickly, hopefully as they annualize those declines, there is going to be room to really start bouncing back.

17:41They have a lot of stores. They've worked really hard on investing and having like a more responsive supply chain so that hopefully the next designer that comes in, it won't take quite so long to get good products into the store, which was one issue with the rollout of kind of Sabato's collections. so who will be the right person for that role now i think it's a two-part question it's who's the right person and what is the right thing to expect from them gucci is a company that was managed maybe historically in a really directional way the creative director has had a lot of power a lot of control over the image the collections over kind of everything they're doing in a visual creative way to an extent that is not typical for such a large company where maybe you would see brands that kind of mix a more edgy fashion vision on the runway with some other more aspects that are more commercial and they have maybe more people in the room, a multiplicity of voices.

18:38Maybe Dior can seem a bit disjointed because of this sometimes because the men, the perfume, the jewelry, the women's all have different creative directors, but at the same time, they're not pinning their fortunes to one person. So I think there's kind of a structural question that needs to be asked. And then in terms of the people that would be right for it, there's a few names that have come up. So Caring over the past 10 years kind of diverged in their strategy from LVMH, which had historically been really focused on attracting star designers and keeping them. And, you know, finding, really working with these A-list talents that had a big name recognition.

19:16And that's still the case at a lot of their brands with people like Pharrell and Niko at Kenzo, So kind of like who's the biggest name we can get to this brand is often the way they're going to work. Caring was more about finding these young talents that were hidden behind the scenes in the studios of various brands and could maybe like would know the archive really well and have a strong vision to propose about the brand and elevating them. So that's been the strategy. I think this time to reassure the market and to stabilize what they're doing at Gucci, they're probably looking quite seriously at investing and bringing on a very A-list talent that people already know about.

19:54Those could be people like Eddie Slimane, who left Saline some months ago. And he has a rocky relationship with Kering because they had a pretty messy split when he left Saint-Laurent. And they had a couple years that they spent in court trying to figure out some things about the royalties, the intellectual property he'd left behind there, and about his non-compete, which Kering tried to release him from. But he wanted to focus on his photography practice for a few years. And he took them to town to really pay up quite a lot of money so that he could have a few years out of the fashion game. I love that.

20:32That's the one time the non-compete worked in favor of the employee and the talent and not the actual company. At least that's what he was trying to get it to do. Certainly it's rare. Yeah. He said that it was not unilaterally revocable, that they couldn't just get out of that. But, you know, they had a pretty messy split. But, you know, there's a lot of money at stake for both parties if he were to come on for this job. I think it's a real possibility that they've certainly explored. There's also been reports that Maria Grazia Curi is leaving Dior. This is something that industry sources have been saying for months is more or less decided.

21:09And whether or not she'll go on to another job within LVMH, which is something that the group reportedly wanted, or whether she'll leave for a competitor is also not clear. There's also maybe some oddballs out there. I mean, John Galliano has left Martiala. I do not think that he is a serious contender for this job because I don't think that's something he wants to do. But, you know, that's the kind of the kind of A-list talent that is really like floating around out there because there's been a lot of movement. You know, it's interesting. Gucci is bringing in the lion's shares of revenue for caring, but it's not the only brand.

21:43There are some other brands in the stable, some performing better than others. How does Gucci's performance compare with like a Saint Laurent or Balenciaga or Bottega Veneta in this Annus Horribilis of a year? Gucci is definitely where the bulk of the declines are focused. The others are down, but maybe down, maybe more in line with the rest of the luxury sector and the way a lot of fashion brands are struggling right now. In this past quarter, we saw the segment that contains Balenciaga and McQueen declining by like 4%, which is a little bit more than LVMH, but not that much, certainly far less than the previous quarter.

22:23And the same goes for Saint Laurent. I think it was a single digit decline this past quarter, whereas it had been down double digits a lot of the year. those brands grew really fast over the past few years notably in the wake of the pandemic so i think that there's been a bit of a course correction for them it seems less worrying to a lot of people because not only are they less important as profit centers for the group they are coming down after flying really high without having had already like several years of stagnation which was the case of Gucci, you know, which kind of really was flat for several years before Alessandro McKellie left.

23:03But isn't that the whole problem with caring? And the whole point of having a conglomerate is that if one brand is down, some other brand's going to be up. And they don't seem to have that. There's no diversification here. It's a bunch of on-trend brands that all head in the same direction. They were all up a couple years ago. Now they're all down. They all seem to be going through designer transitions at the same time. What's the plan here? I guess maybe it's the question. Well, I mean, that could be true to an extent that is worrying that they're not having like some major bright spots. They have one in the form of Bottega Veneta, which has had a really strong performance this year.

23:37And just lost its creative director. And just lost its creative director. They do kind of have some challenges at every turn. And they're aware of that. I mean, it's not a great mood over there. They've been preemptively, you know, kind of making some pretty big disposals in terms of like they spun out some really valuable real estate. in these joint ventures with a new investor. Tell us more about that. I'm not sure the names of those properties will, some might, some might not mean a lot to our audience, but those are pretty, it's a pretty big deal that they sold those, right? Yeah, well, I mean, one of the recent ones was, you know, something not very strategic.

24:13It was this, like a couple luxury malls in Italy, I mean, luxury outlet malls. They're trying to have less exposure to this. They're not a mall operator. So that kind of disposal maybe is the kind of, is a normal thing to do. protectively if you're under some cash pressure. One of the properties though was the headquarters and original flagship store of the high jewelry brand Boucheron, which is like this palazzo on the Place Vendôme that they just renovated, I think five years ago, and did a sweeping renovation to make this beautiful store. That's like the nerve center of this brand. It's so important to its history that choosing to like, you know, cash in on the fact that this building is worth a lot of money, it's a bit worrying that they feel the need to get that treasury right now.

25:00Mr. Pino commented on this, saying it was a very normal thing to do, that that was an investment, that they're not a real estate company, that it was an investment that it matured. But I think most people would say, you could make some disposals at a good price now before people might think you're under duress to do it, and you wouldn't be getting a very good deal if like things do get worse. So is it maybe a bit protective? It's interesting also, they're making these real estate sales at the same time that they're maintaining their dividend. And, you know, I talked to some people, why would they be doing this, selling something as important as the Boucheron store, but then still paying out a dividend.

25:39But they have quite a bit of like rotating debt as well that they're trying to refinance. The terms at which you borrow are going to be based often on the valuation of your company. You could lose a lot of institutional investors, you could lose the value of your shares even more than they've dropped over the past couple of years if they were to start touching the dividend. So I think that's why they're maintaining that and then going on this other course in terms of disposals. But some people said they're selling the family silver, which it kind of does feel like when you sell the Place Vendôme store for Boucheron, makes you worry a little bit.

26:15I think that's maybe the most worrying move they've made in terms of where this could actually head for this company and all the people that work there. Why don't we end on a positive note, though? I mean, everything does have plenty going for it. There's still one of the biggest luxury conglomerates. Gucci's still one of the, I mean, even was looking it up just now, you know, their sales last year, as far much as they fell, still 7.7 billion euros. There's only a handful of brands, probably can count them on two hands that are at that level in that market. There's plenty of room for a comeback here, right?

26:49Absolutely. And I think that's important to underscore. I mean, it can seem like people are beating up on caring just because, you know, it could seem like we're beating up on caring because they've just had a few quarters where they've had a lot of different problems at the same time, maybe starting around when there was this crisis at Balenciaga a few years ago. And And it's just, you know, there's kind of been always something lately. But this is a company that owns some really strong brands. I mean, Saint Laurent is a brand that's like extremely stable, extremely appealing to a lot of people.

27:23People understand how this stands for French style and Parisian style in this really clear way. They understand that Balenciaga stands for like, you know, a forward-looking, architectural kind of shocking fashion authority in a really clear way. I mean, then Gucci, you know, really can stand for a lot of things. I think that's where they got a bit confused. It's the biggest Italian luxury brand. And maybe they started to see, think that it was more of a heritage house than it should be. So I think the rebound and the real potential for the rebound there is if they can get the right person in place to tell a very convincing fashion story, it can go very high, very fast again.

28:03They have a lot of real estate. They have a lot of stores in great locations and they have a whole supply chain behind them that's really like rooting for their comeback because it's the biggest client for so many suppliers in the Italian fashion system. I think it's a group that's made some really smart decisions in the way they empowered creative directors to make really strong fashion driven repositionings that got really good results for a while. Now I think they have to start looking at things in some different ways. This is the luxury group that isn't known for its long-term planning or it being able to stick with long-term plans as well.

28:48But they'll take some bigger risks and sometimes those lead to having to really reposition. At one point, they said that they should really diversify away from luxury and be a sportswear company as well. it's not like they were completely ignorant to what to what they were doing when they were opening so many stores for gucci and when they were pushing so hard on the outlets and the wholesale and the entire you know pushing on every cylinder they wanted to catch up with lvmh and louis vuitton very quickly because they felt like it was primordial for them to have a bigger market share to be a serious player in this fast growing market that they needed to make up for lost time they had had a previous era where gucci was quite stagnant under its previous designer before Alessandra Michele Frida, who also is very respected in a lot of circles, also did a lot to stabilize the brand.

29:36She has a story that's a bit like Sabato's in a lot of ways, except that she ended up staying quite a long time. And so once it really was bouncing back, they pushed very hard. They had big ambitions. At that point, they were exploring whether or not they would be able to take over Richemont and be the owners of this Swiss group that owns Cartier. And then they would really be diversified. As Brian says, they would not have all their eggs in one basket the same way. And so, you know, they pushed quite hard. And then, you know, when that didn't pan out and things landed, you know, not as softly as they were hoping, it's been complicated for them ever since.

30:15But I think there's a huge potential for this group. There's a huge potential for this group. I think that ends us on a positive note. Robert, thank you so much for joining us today. Thank you guys for having me. It's been a lot of fun. Please be sure to check out Robert's article, Can Caring Bounce Back from its Annas Heribolis at businessoffashion.com. This and other stories are available to BOF professional subscribers only, and you can find the links in the episode notes. You've been listening to The Debrief, produced by Olivia Davies, mixed and mastered by Eric Ria. I'm Sheena Butler-Young.

30:47We'll be back next week with a new episode. Thanks so much for joining us and be sure to follow us wherever you get your podcasts.

30:57Thank you.