Gucci Position

9 September 2016

Map the competitive positions of the different players in the luxury goods business. Who are the best-positioned players? Why? It is difficult to find a precise definition of “luxury”, but it’s generally identified with high quality and price products in the fields of fashion, luggage, jewelry, cosmetics, fragrances, watches, and drinks. In the luxury goods business there are 35 companies that share 60% of the market, but only 6 of them have revenues in excess of $1 billion.

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Considering the definition explained before, the most important companies which belong to the market are: Louis Vuitton, Cartier, Gucci, Prada, Hermes, Bulgari, Tod’s, Celine, Jil Sander, Kenzo, Valentino, Lacroix, Donna Karan, TAG Heuer, Armani, Tiffany, Chanel, Ralph Lauren and Tommy Hilfiger. It is an interesting market because it is completely focused on the quality of the product from every point of view: the beauty and the design of the product, the refinement and affectation of raw materials, the meaning of the product (the style and the social status of the person to whom it belongs) and the values and emotions that it transfers.

As a result, the company focus is mainly on differentiation rather than on cost, therefore these companies follow a differentiation strategy in order to obtain a differentiation advantage. This feature of the market is reflected on the companies’ results, for example looking at the return on sales ratios of Gucci (27% in 1999) in relation to ther company markets like Coca-Cola Company (10,6% in 2000), Amazon (6,8% in 2000) and Dell (8% in 1998). Considering the market in general, LVMH holds the first position followed by Vendome that represents the leaders of the market.

While Vendome’s products portfolio regards watches, jewelry and writing instruments (with brands like Cartier, Vacheron Constantin and Mont Blanc), LVMH is especially concentrated on lather goods and fashion, drinks and perfumes and cosmetics (with brands like Louis Vuitton, Moet & Chandon, Bulgari, Dior and Sephora). The competitive LVMH advantage (that brings the company to a revenues level of $8. 2 billion) is based on two main capabilities (understood as the firm’s capacity to deploy resources for a desired end result).

The first one is the possibility to exploit the synergies between the different brands both in the development and the manufacturing of the product (sharing the expertise and the skills) and the relationship with the suppliers (thanks to the greater bargaining power due to the fact that they act as a single group). The second one is the high level of vertical integration that allows a strict control on the quality, the distribution and the image; this politics is carried out thanks to the high number of acquisitions (as the Sephora, Dior and Bulgari cases testify).

Leather goods and fashion represent 27% of LVMH revenues in 1999 ($2. 2 billion) and it is probably considered the most important field of luxury goods market. However LVMH (with Louis Vuitton especially) is not the leader in this branch of the market where Hermes holds the first position. Hermes is at the top of the leather goods market both for the quality (with the famous crocodile leather handbags embellished with diamonds for which consumers can wait also one year) and the price (which start from $4300 and can arrive to $60000 or more).

Chanel is one step lower, with its famous international prestige and with its unique and inimitable products that have made history in fashion (like the handbag 2. 55). Chanel is differently positioned from Hermes both for materials refinement and for prices that start from $1500. Finally, Gucci, Louis Vuitton and Prada are in the third positions. Their products are more approachable than Hermes’ and Chanel’s, so they have a broader target. Luis Vuitton is one of the flagships of LVMH and it is completely inserted in the general strategy of the company.

The products are made of monogram canvas and leather and produced in factories in France. The weight of Louis Vuitton in LVMH company is high: 18% of revenues and 47% of operating income in 1999. Prada is an Italian luxury firm that becomes famous thanks to its quilted black nylon tote priced between $200 and $500 in 1985. So, considering the quality and the price of the product, it is clear that Prada positioned itself as a more accessible brand (in relation with Hermes or Chanel) even if it remained a luxury brand. 2. Where was Gucci positioned in 1990? 1994? 2000? What were the critical moves made by De Sole to reposition the company?

Gucci position in 1990: At the end of 1980s there were a lot of fake Gucci products as the Brian Blake (who became the president of Gucci division in 2000) words testify: “Gucci would not be considered a luxury company by luxury goods players like Chanel and Hermes. It was pretty much trading on its past reputation”. Therefore the company decided to reinvent Gucci as classic brand that doesn’t follow the changes in fashion market, but which is a “matter of style”. In this period Gucci is focused on selling (with high prices and a disorganized production) even if the inventory system is not able to react to this selling policy.

Consequently, in this period Gucci has bad brand image and an unstable financial situation (from 1991 to 1993 Gucci had losses of $102 million). Gucci position in 1994: De Sole is nominated COO and builds a great partnership with Tom Ford that represents the soul of the company. The first change they make is to unify the Gucci parts into a coherent whole both for the brand image and for the distribution policy. The company focuses on fashion (especially on leather goods, shoes and ready to wear) breaking with the past and deeply changing the style addressing to a “modern, urban consumer, with a youthful spirit, no matter what her age”.

Moreover Gucci lowered price on average by 30%, doubled advertising expenditure, and changed its distribution channel in order to “create an arresting image in a world you want to be a part of” even in the company remains anchored to one of its core competence: the great quality of Italian craftsmanship. Not only did management restore Gucci’s image, maintaining it as a luxury brand, but also refreshed it so that Gucci would become a valid alternative to Hermes or Gucci. The financial reflects the results of this change: from $264 million of sales in 1994 to $880 million in 1996.

Gucci became one of the strongest players in the luxury goods market bringing it to the attention of its larger competitor, LVMH. LVMH unsuccessfully tried to buy the majority stake of the company. Meanwhile Gucci acquired in 1997 Gucci Timepieces, in 1999 YSL and Sergio Rossi becoming an international, multibrand company with new markets and products. The level of sales changed from $1. 236 billion in 1999 to $2. 528 billion in 2002 increasing considerably the market share of the company. 3.

Evaluate De Sole’s latest strategic move to buy Yves Saint Laurent (YSL) and Sergio Rossi. “When I inherited control of the company in 1994, everything was in disarray,” is the description De Sole used to explain his position upon becoming COO of Gucci in 1994. At this point in time, much of Gucci’s difficulties can be attributed to the fact that the company was very disorganized and out of unison. Gucci’s many parts were slapped together rather than fitting together like pieces of a puzzle. De Sole described bringing the Gucci brand into a united company as his first major task as COO.

His belief was to consolidate everything that enhanced the image of the Gucci brand, and discard anything that detracted from it, regardless if it made money. From this point of view, De Sole’s latest strategic move to buy YSL and Sergio Rossi is difficult to understand. Gucci’s incredible recovery from a disbanded brand to one with a core image is not in sync with De Sole’s strategy to expand to a multibrand company. While the company does—for the time being—have a unified team at the top of organizational structure, there are already hints of separation amongst the lead management.

The structure is described as “far-flung”, with leaders, who should be working together in day-to-day operations, scattered in London, Florence, Milan, and Switzerland just to name a few places. While communication technologies have advanced, being able to share information and pass ideas in person is essential amongst executives, especially when the goal of the company is to be unified. How the executives interact is symbolic of the company. It’s easy to see how the separation of the company’s leaders can trickle down the company structure and be reflected in the image and quality of the company’s various brands.

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