Strategic Management And Brand Management On The

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Strategic Management and Brand Management on the Luxury BrandGUCCIShin’ ya NagasawaProfessor, Graduate School of Commerce, Waseda University1-6-1 Nishi-Waseda Shinjuku-ku, 169-8050 Tokyo JapanTel: 81-3-5286-3971Mail: [email protected] FukunagaMBA, Graduate School of Commerce, Waseda University1-6-1 Nishi-Waseda Shinjuku-ku, 169-8050 Tokyo JapanTel: 81-3-5286-3971Mail: [email protected]

Strategic Management and Brand Management on the Luxury BrandGUCCIAbstractIn recent years, on the one hand, Japanese apparel companies are sufferingbadly from decreases in profits under the variable markets, but on the other hand,many luxury brand companies are advancing into Japan or overseas markets andachieving market share with high profit ratios.This paper reveals which strategy and brand management is effective forluxury branding through the case of the luxury brand GUCCI. It shows that theluxury brand companies have to manage and control the quality of products,prices, distribution channels and promotions to establish and maintain theirposition as a luxury brand. That is to say, they take “Luxury strategy”. It alsoshows that sustaining innovation and disruptive innovation are necessary toestablish and maintain their position not only in the HDD industry, but also inluxury brand industry.Keywords: Luxury Brand, GUCCI, Strategic Management, Brand Management, BrandInnovation2

Introduction and ObjectivesThis paper will examine the luxury brand Gucci. It aims to confirm how luxury brands thathave been wielding strong power in the global market in recent years or the companies thatown them have established their positions, and, during the course, to identify what makescorporate management and brand operation either superior or inferior. Certain brandmanagement techniques, it is called “luxury strategy”, and sorts of innovation are consideredto be involved there.Nowadays, commoditization is rapidly developing in the Japanese fashion & consumergoods market. Japanese apparel companies, with the exception of a few, are falling behindoverseas fast fashion companies or luxury brand companies in terms of both size andprofitability. Moreover, it seems that the market is about to be split into the fast fashionmarket at one end and the high-end consumer goods market centering on luxury brands at theother end. The luxury brand market is setting the trend, and the market players are creatingabsolute value that is not comparable in terms of product quality as well. In short, it is adifferentiated market, and thus it is quite unlikely for luxury brands to converge with fastfashion brands even in the future. Therefore, by identifying management strategies and brandmanagement techniques of luxury brands, we may be able to offer a suggestion in such amarket where commoditization is so significant.The reasons why Gucci is to be examined are as follows. At one time, Gucci’s brand valuewas undermined by the harmful effects of its family management, and the company waspushed to the brink of bankruptcy, with its position as a luxury brand about to be lost.However, Gucci achieved a dramatic revitalization owing to changes in both management anddesigners, and not only regained its position as a luxury brand but also achieved furtherdevelopment. This event has overturned the general idea that a change in designers alone canregenerate a brand. For this reason, identifying brand management techniques andmanagement strategies during the start-up period when Gucci had penetrated the market and3

during the brand regeneration period means deriving techniques to managerially control brandvalue. In addition, we can see a kind of innovation happening in the process where Gucci hasestablished its brand. Therefore, it is considered to be a good example to clarify thatinnovation plays a role in building a luxury brand. Moreover, such innovation is considered tobe commonly seen during both the start-up period and the regeneration period. Based on theabove, this paper examines Gucci.Previous StudiesThere are a number of published works on Gucci. They describe scandalous quarrels in theGucci family or Gucci acquisition stories by LVMH Moët Hennessy Louis Vuitton SA(LVMH) and Pinault-Printemps-Redoute SA (PPR) in a non-fiction novel style. In addition, asa paper that describes a collaboration system between Gucci and small- and medium-sizedenterprises in Italy, we can cite “Large and Small Firms in the Italian Fashion Industries”(Sandrine Labory, 2003). Meanwhile, one of Harvard Business School’s case study materials“Gucci Group N.V.” mainly describes Gucci’s genealogy as an enterprise until 2000 and itsturnaround by Domenico De Sole. Among other papers, “The Nature of Parenting Advantagein Luxury Fashion Retailing - the Case of Gucci Group NV” (C.M. Moore and G. Birtwistle,2005) discusses Gucci Group’s superiority as a conglomerate. As the research about luxurybrand management, there are “The Luxury Strategy-Break the Rules of Marketing to BuildLuxury Brands-“(Kapferer, Jean-Noël, and Vincent Bastian 2009), “The principle of LOUISVUITON”(Shinya Nagasawa 2007), “CHANEL STRATEGY-Management of the Ultimateluxury brand-(Shinya Nagasawa and Kana Sugimoto 2010). Among these researches, theyshow how luxury brands control and manage their brands to maintain or enhance their brandposition and they advocate ‘Luxury Strategy’. About innovation domain, there are manyresearches such as “Innovator’s Dilemma:When New Technologies Cause Great Firms toFail”(Christensen, Clayton M. 1997) and so on. These are the main previous literature and4

studies. However, as far as this author can tell, no study has ever focused on Gucci’sbrand-building and the success factors of brand management during the start-up period andthe regeneration period as well as its innovation, and thus these themes have never becomemain subjects for analysis and verification. Accordingly, this paper will analyze andsystematize this untested area with references including overseas literature.Outline of GucciIn the following sections, we will cover Gucci. More specifically, we will analyze andexamine in detail how the highly profitable luxury brand Gucci has been built and what kindsof brand management techniques have been applied. First, let us review Gucci’s start-up andregeneration periods, respectively, in order to analyze success factors of Gucci’s brandmanagement. Now that Gucci is a brand under the control of a conglomerate company calledPPR, we will also touch on the outline of this PPR, and then will analyze Gucci.Start-up periodGucci’s origin dates back to 1921 when Guccio Gucci opened a sales store for leathergoods in Florence. The founder imported luggage from Germany and sold them, and alsoprovided repair services. After that, Guccio started to design products on his own. Heconstructed a self-owned factory, and brand production started. Gucci enjoyed prosperity intandem with the increase in tourists to Italy during the 1920s after the war. When importedleather was in short supply, he adopted new materials such as canvas, and produced leatherfancy goods such as wallets and belts. But it was after the World War II that Gucci developedinto a world-famous brand. In 1953, Guccio opened the first overseas store in New York.5

Regeneration periodGucci’s loss amounted to 102 million dollars between 1991 and 1993, owing to adverseeffects mainly from the Gucci family’s longstanding infighting and poor cost management byMaurizio, the last president from the family. In response, Investcorp, a Bahrain-basedinvestment company that was involved with Gucci at that time, had Maurizio step down, andappointed Domenico De Sole, who doesn’t come from the founding family, as theheadquarters’ COO in 1994. In the same year, Tom Ford assumed the position of creativedirector, with a larger occupational field than a position of ordinary designer. In 1995,Investcorp consolidated Gucci’s seven operation companies, appointed Domenico De Sole asthe Group’s CEO, and thereby embarked on corporate revitalization. In this way, the new tugof Domenico De Sole as CEO and Tom Ford as a designer, was formed. De Sole and Fordcarried out reforms in each field of products, distribution and promotion. As a result of theseefforts, Gucci won over fashion-minded customers with a high motivation to spend, and itsbusiness results significantly improved from sales of 203 million dollars and an operatingprofit of 2% in 1993 to sales of 1,042 million dollars and an operating profit of 23% in 1998as the chart1 blow.(This section was prepared by this author with reference to Harvard Business School’s casestudy materials “Gucci Group N.V. (A) (B) (C)” (2001, 2002). Some parts are quoted).6

Chart1. Gucci’s sales and operation profit (1992-1998)12001000800600mil. 5%-20%-29-30%1992199319941995199619971998Gucci's Sales /Operation profit ratio from 1992 to 1998SalesOperation profit1042Operation profit ratioSources: authors made chart by “Gucci Group N.V. (A)1”Outline of PPR (Kering)Here in this section, we also describe the outline of PPR, the conglomerate company thatcontrols the Gucci brand. The following Chart 2 is an organizational chart by PPR’s businesscompany as of 2011. As seen in this chart, Gucci is a brand within the Gucci Group, which ispositioned as PPR’s luxury business division. PPR’s sales for 2010 amounted to about 14.6billion euros (equivalent to about 1.72 trillion yen at the exchange rate of 1 117.89 yen as of2010). This figure reveals that PPR is the second largest company in the luxury industry afterLVMH, the French conglomerate company that owns Louis Vuitton among other brands, withLVMH’s sales for 2010 totaling about 20.3 billion euros (equivalent to about 2.4 trillion yenat the exchange rate of 1 117.89 yen as of 2010). And yet, after tracing the history of PPR,we find it was inaugurated as a lumber business company in 1963. After that, PPRaggressively carried out M&A deals and developed into a conglomerate company with itsmain pillar of retailing business including furniture, department stores and mail-order retailing.Even now, this retailing division accounts for more than 50% of total sales. Accordingly, in1Yoffie, David B., and Mary Kwak, Gucci Group N.V. (A) , Harvard Business School, 20017

terms of consolidated sales that include these business companies, PPR is boasting the secondlargest position among luxury companies.Chart2. The organization chart of 2011’ PPRPPR(Kering)Gucci group(Luxury division)Sport&LifestyleDivision(e.g. Puma, Volcom)Retail Division(e.g. Fnac)GUCCI, BOTTEGA VENETA, YVES SAINT LAURENT, ALEXANDER McQUEEN, BALENCIAGA,BRIONI, STELLA McCARTNEY, SERGIO ROSSI, BOUCHERON, GIRARD-PERREGAUX, JEANSource:PPR’s Reference Document 2011PPR’s business portfolioSince PPR brought the Gucci Group, the luxury group with Gucci at the core, under itscontrol, the company has been selling off parts of its retailing division in a proactive manner,while acquiring luxury brands and fashion & consumer goods companies in a gradual andsteady manner. According to some sources, such as an interview with the current CEO of PPR,this series of movements is expected to accelerate and most of its retaining division isintended to be sold off between 2012 and 2013. The following two charts respectively showthe profitability and growth rate of each business within PPR. Chart 3 reveals PPR’s earningstrend by business type during the period from 2007 to 2010. As of 2010, the luxury businessGucci Group accounts for less than 30% of PPR’s total sales, but the same group accounts forabout 60% in terms of PPR’s earnings (in other words, profit). The profit share was about40% in 2007. Meanwhile, Chart 4 plots the combination of growth rate and profit margin,8

with its horizontal axis indicating sales growth rates for the four years from 2007 to 2012 andits vertical axis indicating operating margin as of 2010. The size of each bubble representingeach business type is proportionate to sales for 2010. As seen in Chart 3, Fnac and Redcats,both of which belong to the retailing division, are characterized by their low profitability andlow growth potential. Conversely, the Gucci Group, in the luxury division, indicates highprofitability, and Puma in the sports lifestyle division indicates high growth potential. Basedon this observation, we can assume that PPR has been changing its portfolio structure with afocus on the luxury division because of its high profitability. Moreover, Gucci accounts forabout 60% of Gucci Group’s total sales, and it is a core brand of the luxury division that hasan 80% share in PPR’s operating profit. As indicated above, the ownership of a brand that hasestablished such a solid brand position as Gucci leads to ensuring high profitability. Thissuggests that utilizing the brand management techniques of a luxury brand and establishingone’s own brand may contribute to increased profits. This suggestion possibly serves as auseful reference for domestic apparel companies with low profitability.Chart3.Breakdown of recurring operating income by activitySource:PPR’s Reference Document 2007-20109

Chart4.PPR sector recent growth & profit ratio(2007-2010)PPR Sector recent growth & profit ratio30%Profit/Revenue(%)Gucci group25%4011mil. 20%Puma15%Redcats10%Fnac3436mil. 5%4473mil. 2706mil. 0%-20%0%20%40%60%Revenuel growth (2007 to 2010)(%)80%Source:PPR’s Reference Document 2007-20104P Analysis of Gucci’s Brand Management during the Start-up Period and theRegeneration Period and Luxury strategyIn this section, we will analyze the luxury brand Gucci by means of the Marketing Mix(4P) Analysis in order to identify success factors of Gucci’s brand management techniques.However, before this analysis, we will introduce ‘Luxury strategy by Shinya Nagasawa’ of 4Panalysis and we will verify that Gucci’s these 4