Gucci Group in 2009

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R E V : FE B R U A R Y 2 3 , 20 10
DA VI D B . YOF F IE
R E N E E KI M
Gucci Group in 2009

Gucci celebrated the beginning of 2008 with the opening of its largest store to date on Fifth
Avenue in New York. The striking three-story glass building was a statement of luxury, from its
46,000 square feet of open space that glowed in natural light to the bronze glass accents on the walls
to the rich polished Gucci logos that filled the flagship store. In many ways, the store was a testimony
to the milestone accomplishments that Gucci had achieved over the last decade. It has risen to
become the world’s third-largest luxury retailer, with 548 directly operated stores and more than 3.8
billion euros in sales. The Gucci Group consisted of nine brands, including Bottega Veneta, Yves Saint
Laurent (YSL), and shoemaker Sergio Rossi.
Yet perhaps the biggest change at the fashion house was that star designer Tom Ford and CEO
Domenico De Sole were no longer running the show, following their dispute over managerial control
in 2004 with Gucci’s new parent company, French retailer PPR. Robert Polet, a former executive at
Unilever Co. with no prior experience in the fashion industry, took over the reins as the new CEO of
the Gucci Group. Dispelling initial doubts, Polet guided Gucci through three years of sales and profit
growth. Yet as Gucci entered 2009, the challenging economic times across the globe raised the
obvious question: Was it time, again, to re-adjust the portfolio?
YSL and Gucci’s Expansion

When Gucci purchased YSL back in 1999, De Sole and Ford believed they could recreate the
sensational success of Gucci at the iconic fashion house. 1 The goal was to turn around YSL, which
had become a moribund brand over the prior decade. Management forecasted rapid profit growth
starting in 2003, with revenues from directly operated stores and wholesale expected to more than
triple by 2004. To achieve these targets, Gucci spent aggressively to grow YSL stores from 25 in 2000
to nearly 60 by 2003. To revitalize YSL’s brand image, virtually all licensing deals were terminated,
even though licenses had provided more than half of YSL’s revenues and a significant share of its
margins. De Sole also aimed to reduce YSL’s dependence on ready-to-wear and the European market.
Ford’s first collection for YSL received mixed reviews in October 2000, although Ford seized
attention the following year with a $2,500 purple peasant blouse that became the must-have item of
the season. Another buzz was created with the Mombasa bag, a soft oyster-shaped leather shoulder
bag spotted on Gwyneth Paltrow at the Paris couture shows. However, the new interest in YSL failed
to translate into profits: YSL’s operating losses widened to 109 million euros in 2003.
Professor David B. Yoffie and Research Associate Renee Kim prepared this case. This case was developed from published sources. HBS cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
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709-459 Gucci Group in 2009
Meanwhile, Gucci went on a shopping spree to add new brands to its portfolio. Driven by a vision
to create a multi-label company, De Sole acquired Alexander McQueen (a hip British designer) in
December 2000, in a deal that ended McQueen’s association with LVMH. Also notable was the
addition of Balenciaga in July 2001, a rising fashion brand under Nicolas Ghesquière, whose women’s
ready-to-wear and accessories enjoyed a cult-like status among fashion insiders. Other acquisitions
were made to increase Gucci’s control over production and distribution, such as a Swiss watch design
studio and franchised store operators in Asia and Spain (see Exhibit 1).
Management Shake-Up
On September 10, 2001, the long and protracted battle between LVMH and PPR over Gucci finally
came to an end. PPR bought LVMH’s 20% stake in Gucci and all pending legal claims were dropped.
PPR also agreed to a put option to pay a set price in March 2004 for the remaining Gucci shares that it
did not own.2 But within hours of the legal settlement, the world started to unravel. First came the
September 11 terrorist attacks, followed by the war in Iraq, and the outbreak of SARS in Asia. As a
result, the global economy stalled and choked off luxury sales. Gucci could not escape: its brand sales
fell 10% in 2002. The slump forced Gucci’s new parent company to take a closer look at Gucci’s
corporate strategy. In addition, PPR had different ideas about how to run Gucci, especially regarding
brand management. For instance, PPR no longer wanted Ford to retain his creative power at both
Gucci and YSL, while Ford insisted, “I really think that a fashion brand has to have a single, focused
point of view.”3
Following months of intense negotiations, Ford and De Sole announced their decision to leave in
2004, failing to secure their autonomy over Gucci. The departure of the dynamic “dream team” that
had transformed Gucci from the brink of insolvency into the cutting-edge global luxury brand rocked
the fashion world. Their departure was called the most upsetting event in the fashion world since the
murder of Gianni Versace in 1997. Several insiders predicted that Ford’s departure spelled the end of
Gucci, which had become synonymous with sexiness and glamour. Donatella Versace, a fellow
designer, lamented, “Gucci is Tom,”4 while the American Vogue editor-in-chief said, “Take him out of
the equation and you’re left with a big hole.”5
New CEO—Brand over Designer

The brand is always more important than the designer because the brand will stay with us, and with your
children and our children’s children, out into infinity.
—Robert Polet, Gucci Group Chairman6
PPR raised more eyebrows in the fashion world by appointing Dutchman Robert Polet as the new
chairman of the Gucci Group. Polet—born in Malaysia and educated in the Netherlands and the
United States—was known as the “ice-cream man” for successfully turning around Unilever’s ice
cream and frozen-foods business during his 26-year tenure at the Anglo-Dutch consumer product
giant. PPR emphasized Polet’s strong global brand-management experience and achievement of
increasing his business unit’s profit margins by 70% through new ad campaigns, innovative products,
and better distribution.
It wasn’t the first time a luxury goods company had hired an executive from outside the fashion
world; LVMH and Chanel had both done it as fashion houses increasingly shifted from family-owned
businesses into conglomerates with multiple labels. However, Polet was still a risky bet. Most of the
Gucci brands were losing money. Tom Ford was replaced by three relatively unknown in-house
designers rather than another top-notch designer with a clear distinct style and celebrity-like status
Gucci Group in 2009 709-459
such as Marc Jacobs or John Galliano. Nearly three dozen managers, especially those loyal to De Sole
and Ford, had left by August 2005, generating greater uncertainty over Gucci’s future.
One of the first changes Polet made was to give each brand direct control over its own label,
contrary to his predecessors’ “one size fits all” approach. Each label was run by a creative director
and CEO, and design decisions were left to the autonomy of the designers. One former executive
noted that Polet’s “freedom within a framework” management style meant that “[with Domenico, if
you had a problem, you would go to him, and he would fix it in half a nanosecond with a phone call.
With Robert, you pick up a bag and go to Italy and work it out yourself.” 7 The brand CEOs were
required to submit a three-year business plan every year. Polet was committed to managing a
portfolio of brands. At the same time, he tried to refocus on the Gucci brand, laying out a plan to
double its sales over the next seven years to three billion euros.8
Gucci In 2005 the Gucci label came under the control of Frida Giannini, an Italian designer
who had first joined the company as a handbag designer. Under Giannini, Gucci’s sultry sexy look
was replaced with a more feminine, softer appeal. Handbags with traditional Gucci symbols were
reintroduced as part of Polet’s overall plan to place more Gucci logos on its products. Ads refocused
on the products themselves. Accessories did well, such as Giannini’s early Flora collection, a colorful
pattern first used for a scarf designed for Princess Grace of Monaco. Giannini tried to push ready-to-
wear collections, although leather goods continued to represent the majority of Gucci’s sales (see
Exhibit 2). However, overall reviews had been mixed amid complaints that Gucci lacked the
character and brand personality seen under Ford.
YSL Sales at YSL increased at double-digit rates under Polet, led by leather goods and shoes.
While it was reported that YSL needed 350 million euros to break even, YSL remained the only brand
within the Gucci Group that was unprofitable (see Exhibit 3). Europe still represented more than half
of YSL’s revenues in 2007. In the meantime, YSL Beaute, whose growth was lagging behind that of
Gucci’s other brands, was sold to another French company, L’Oreal, for 1.2 billion euros in 2008.
Other brands The Bottega Veneta brand was the rising star of the Gucci Group, positioning
itself in the high-end luxury niche market, similar to Hermes. Bottega rose to prominence under
creative director Tomas Maier. Known for its hand-woven leather patterned bags—which would
easily cost a few thousand dollars—and unusual approach of adding its brand label inside its
products, Bottega swung to a profit within two years from an operating loss of around seven million
euros in 2004. Revenue surged 49% in 2007 from the previous year and operating income soared 69%.
Meanwhile, Alexander McQueen and Stella McCartney, the younger, more trendy brands, both
posted a positive operating income for the first time in 2007 (see Exhibit 4).
Competitors
While Gucci refrained from making new acquisitions under its new CEO, competitor LVMH
expanded its sprawling empire to include over 60 brands, ranging from spirits to leather goods to
watches. The world’s largest luxury retailer also dropped several less productive labels, including
Christian Lacroix, Bliss spas, and Urban Decay (a teen cosmetic brand). LVMH’s sheer size and scale
allowed its CEO, Bernand Arnault, to revive fashion brands Givenchy, Celine, and Kenzo. In
addition, smaller brands also started to license their products to increase brand awareness. As a
result, LVMH’s sales grew 38% in 2007 from 2003, while operating profit margin steadily grew to 22%
from 16% during the same period. While fashion and leather goods led by Louis Vuitton represented
the greatest source of sales and profits for the company, LVMH had a more diversified portfolio
compared to Gucci, thanks to LVMH’s wines & spirits and selective retailing businesses (see Exhibit
5). Other divisions also continued to perform well, such as Sephora, the cosmetic retail chain, which
expanded its presence to 756 stores in 22 countries. Indeed, LVMH’s multi-brand strategy had
outperformed the entire Gucci Group in recent years (see Exhibit 6).
Meanwhile, Prada, known for its black nylon bags and minimalist style designs, posted a 66%
increase in net profit to $187 million, accompanied by a 17% increase in sales to $2.5 billion in 2007,
driven by strong performance from the Prada and Miu Miu brands. 9 Prada also made headlines with
the “Prada phone,” a slick black mobile handset developed in collaboration with LG Electronics. It
sold more than one million units since its release in March 2007, luring customers to view a handset
more like a fashionable accessory, a trend that was followed by Giorgio Armani and Ferrari. At the
same time, Prada found itself struggling with over $950 million in debt, accumulated through its
poorly executed expansion plan as the acquired brands failed to deliver solid financial returns.
Prada’s stake in Fendi was quickly sold to joint venture partner LVMH in 2001. In addition, not only
were underperforming businesses such as Jil Sanders sold, but plans to go public were also scrapped
for the fourth time in 2008, with Prada citing poor market conditions.
Gucci in 2009
The overall luxury market had enjoyed strong growth from 2005 through 2007 as China, India,
Russia, and Brazil emerged as the fastest-growing markets for luxury brands. Gucci had rushed to
open 16 directly operated stores in China and also entered India for the first time in 2007. Additional
store openings were planned mainly in emerging markets, while mature markets, such as Japan and
the United States, were expected to slow down as luxury consumers tightened their spending.
The big question for Gucci as well as its competitors was how to handle the global economic
slowdown. After the industry grew a mere 3% in 2008, the prediction for 2009 was that the 175 billion
euro global luxury market could fall into a recession for the first time since 9/11. 10 In the meantime,
after years of steady growth, Gucci saw its first-quarter sales slip 3.3% in 2008. Despite the recent
success of the Group’s smaller brands, the company remained overly dependent on the Gucci brand,
which represented 89% of the Group’s recurring operating income. 11 For Polet, the big question
remained: Was it time to further strengthen Gucci, or push the multi-brand strategy to the next level?
Exhibit 1 Gucci’s Acquisitions, 2000–2001
Gucci Est. Price Est. Sales

Date Company Activity Stake (in $ mln) (in $ mln)
May 2000 FJ Benjamin Asia-Pacific distributor 65%a na 41
May 2000 Boucheron Jewelry, perfumes 100% 300 99
Oct. 2000 Zamasport Ready-to-wear factory na na na
Dec. 2000 Alexander McQueen Fashion 51% na 10
Dec. 2000 Bédat & Co. Watches 85% 80 12
Feb. 2001 Bottega Veneta Leather goods 66.7% 159 48
Mar. 2001 Di Modolo Watch design, components 100% na na
Apr. 2001 Stella McCartney Fashion 50% na -
Jul. 2001 Balenciaga Fashion, perfumes 91% na 17
Jul. 2001 Caravel Pelli Precious skins tannery 51% na na
Aug. 2001 Regain Men’s footwear 70% na na
Source: Adapted from Dorothy S. Lakner et al., “Gucci Group NV,” CIBC World Markets, March 22, 2002 and
various public sources.
a
Gucci acquired the remaining 35% in July 2001.
Exhibit 2 Gucci Division’s Sales by Product and Region (% of Total Sales)a
Source: Compiled by casewriter using data from the Gucci Group and PPR.
a
North America’s sales for 2003 were for the United States only.
Exhibit 3 Operating Margins of the Gucci Group, by Division (%)
2000 2001 2002 2003 2004 2005 2006 2007

Gucci 27% 30% 29% 28% 28% 27% 29% 30%
YSL 16% -75% -44% -50% -42% -41% -25% -14%
YSL Beaute 8% 7% 7% 3% 4% 3% 5% 10%
Bottega Veneta na na na na -8% 9% 21% 25%
Other Brands 10% -16% -13% -10% -33% -20% 16% na
Total Operating Profit 18% 15% 12% 11% 11% 13% 16% 19%
Source: Adapted by casewriter based on Gucci Group and PPR’s financial results for the selected years.
Exhibit 4 Gucci Group’s Selected Financial Performance, 2002–2008a
(in euro millions) 2002 2003 2004b 2005 2006 2007 1H 2008
Revenue 2,544.3 2,587.4 2,712.0 3,030.4 3,564.4 3,867.0 1,576.9
Gucci 1,536.8 1,522.4 1,590.0 1,806.3 2,100.5 2,175.4 1,017.7
Bottega Veneta 146.4 154.2 100.0 159.7 266.9 366.1 197.4
YSL 549.7 614.7 169.0 162.0 193.6 221.3 120.2
YSL Beaute 350.8 348.3 621.0 608.2 624.3 649.2 na
Other brands -39.4 -52.2 232.0 294.2 379.1 455.0 241.6
Operating Income 179.4 119.8 288.0 392.0 565.2 730.9 299.6
Gucci 431.1 406.0 423.0 485.4 611.8 646.9 284.5
Bottega Veneta na na -7.3 13.7 54.6 92.2 51.4
YSL -87.9 -109.1 -70.8 -65.8 -49.4 -31.9 -12.0
YSL Beaute -3.0 -23.0 23.0 17.9 32.2 64.7 na
Other brands -126.5 -122.4 na -13.7 10.3 33.1 7.1
EBITDA 241.0 145.4 428.1 519.7 696.9 878.7 359.7
Gucci na na na 549.6 676.8 722.2 322.0
Bottega Veneta na na na 22.2 65.8 102.0 56.6
YSL na na na -50.7 -35.7 -19.4 -6.6
YSL Beaute na na na 34.5 51.5 92.6 na
Other brands na na na 2.8 26.4 48.7 15.5
Source: Compiled by casewriter using data from the Gucci Group and PPR.
a
Total revenue and operating income for the Gucci Group may not add up precisely due to other items
that were not disclosed by the parent company.
b
Adjusted for Gucci Group’s reporting period.
Exhibit 5 LVMH’s Sales by Product in 2007a
Source: Compiled by casewriter using data from LVMH 2007 annual financial results.
a
Selective retailing category included cosmetic chain Sephora and home department store Le Bon Marché.
Exhibit 6 Operating Margin of Gucci Group vs. LVMH (%)
Source: Compiled by casewriter using data from PPR and LVMH annual financial results.
Endnotes
1
This section is primarily based on David B. Yoffie and Mary Kwak, “Gucci Group N.V. (B),” HBS No.
701-089, and David B. Yoffie and Mary Kwak, “Gucci Group N.V. (C),” HBS No. 702-479.
2
Specifically, PPR was committed to buy the remaining 32% stake in Gucci that it did not own if Gucci’s
price fell below $85.52 a share. Starting from the first investment made in 1999, PPR ended up spending a total of
nearly $8 billion for Gucci.
3
“Control not money made me leave Gucci, says Ford,” Agence France-Presse, March 5, 2004, via Factiva,
accessed December 5, 2008.
4
Jess Cartner Morley, “Ford fiesta: Designer bids farewell to Gucci,” The Guardian, February 26, 2004.
5
Colin McDowell, “Tom’s last bow, interview, Tom Ford,” The Sunday Times, March 7, 2004.
Christina Passariello and Stacy Meichtry, “Boss Talk: Gucci chief peddles ‘power of dream’—how Polet
6
went from popsicles to purses,” The Wall Street Journal, September 24, 2007, B1.
7
Peter Gumbel, “Galvanizing Gucci,” Fortune, vol. 157, 1, January 21, 2008.
8
Suzy Menkes, “Polet sets out strategy for a Gucci recovery, no labels will be dropped for 3 years,”
International Herald Tribune, December 15, 2004.
9
Suzanne Kapner, “Prada goes shopping—for money,” Fortune, vol. 158, 4, September 1, 2008.
10
“Worldwide luxury goods market growth projected to slow substantially by end of year and head into
recession in 2009,” Bain & Company press release, October 28, 2008.
11
PPR, 2007 Financial Document, p. 41, www.ppr.com, accessed December 16, 2008.

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9 - 709- 459

Gucci Group in 2009

YSL and Gucci’s Expansion

New CEO—Brand over Designer

Exhibit 1 Gucci’s Acquisitions, 2000–2001

Gucci Est. Price Est. Sales

Exhibit 2 Gucci Division’s Sales by Product and Region (% of Total Sales)a

Exhibit 3 Operating Margins of the Gucci Group, by Division (%)

2000 2001 2002 2003 2004 2005 2006 2007

Exhibit 4 Gucci Group’s Selected Financial Performance, 2002–2008a

Exhibit 5 LVMH’s Sales by Product in 2007a

Exhibit 6 Operating Margin of Gucci Group vs. LVMH (%)

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