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Study In Contrasts: Kering And Gucci Go Down And LVMH Is Up, Up, Up

The French luxury conglomerate Kering, number two in the global luxury market, just issued a rare warning that first-quarter revenues are expected to decline 10% from last year’s $5.5 billion (€5.1 billion) and projects its flagship brand Gucci to be off nearly 20%, down from $2.8 billion (€2.6 billion).

Kering cites particular weakness in the Asia-Pacific region as the cause of Gucci’s expected shortfall, but North America was a pain point for many luxury brands in 2023, with Bain reporting that performance in the personal luxury sector declined each successive quarter.

Kering had a bad showing in North America last year, with revenues off 18% there. North America accounted for about one-fourth of revenues. On the other hand, Asia Pacific did quite well in 2023 with revenues up 10%. Asia-Pacific made up 35% of company revenues.

Kering owns some 13 brands, but Gucci accounted for roughly one-half of Kering’s $21.2 billion (€19.6 billion) in revenues last year, as overall sales dropped 4% from 2022 and Gucci was down 6%. Kering also underwent a management shakeup and Gucci appointed of a new creative director in 2023.

Kering’s other fashion brands include Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen and Brioni, plus Boucheron and Pomellato in jewelry, Kering Eyewear, Kering Beauté and a few others.

Set against the bad news from Kering is good, even great news from LVMH, the luxury industry’s leader. It ended fiscal 2023 up 9% on a reported basis, equating to 13% organic growth, reaching $93 billion (€86.2 billion). Its Fashion and Leather Goods reporting sector, most closely comparable to Kering, was up 9% reported (14% organic) to reach $45.6 billion (€42.1 billion).

Both companies are facing the same global macroeconomic headwinds, but only one is entering 2024 with a positive outlook, as stated by LVMH, “While the geopolitical and macroeconomic environment remains uncertain, LVMH is confident in its ability to continue to grow in 2024.”

These two companies, number one LVMH and number two Kering in the luxury industry, provide a compelling study in contrasts. Why is the one doing so well and the other so poorly? And how much worse can it get for Kering? Neither company answered a request for comment.

Same Market, Different Results

Having reported on Kering’s mounting troubles before, I did a deep dive into its results since 2019 compared with LVMH, LVMH’s Fashion and Leather Goods sector and the personal luxury market overall. This chart tells the story in numbers:

oN9i1-luxury-leaders-revenues-and-personal-luxury-goods-market-2019-2023 (1)

While the personal luxury market grew at a compound annual growth rate (CAGR) of 5.2% from 2019 to 2023, Kering’s results fell below the market at 4.2% CAGR and Gucci had a miniscule advance over the five years.

On a positive note, Kering became less reliant on Gucci during that time, dropping from 60% of revenues in 2019 to 50% in 2023, but its other reporting brands and sectors didn’t pick up the slack.

By comparison, LVMH nearly doubled the market’s CAGR, up 9.9%, and its Fashion and Leather group achieved 13.6% CAGR from 2019 to 2023, nearly reaching storied Hermès’ 14.2% CAGR over that period to reach $14.5 billion (€13.4 billion).  

LVMH’s Fashion and Leather Goods sector is led by Louis Vuitton and also includes 14 other brands or maisons, specifically Berluti, Celine, Christian Dior, Fendi, Givenchy, Kenzo, Loro Piana, Loewe, Marc Jacobs, Moynat, Patou, Pucci, Rimowa and Vuarnet.

Trouble At Gucci

Kering’s Gucci finds itself in a mess of trouble. TD Cowen’s Oliver Chen wrote in a research note that while Gucci has a strong history, its turnaround may take quite some time.

“We do not believe this will occur quickly,” he wrote, noting that new creative director Sabato De Sarno is still unproved, since his designs will contribute only about one-third of the brand’s assortment by June.

And it might be said that De Sarno’s first showing was a fail, particularly in Asia-Pacific. “The product launched in stores in Winter did not resonate with customers, particularly during the crucial Chinese New Year Holiday,” Chen wrote.

“We believe the issues are particularly isolated to the Gucci brand given a new designer and fashion change from anniversarying multiple years of growth,” from 2017 to 2022 under previous creative director Alessandro Michele.

Business Model Flaws

Kering’s weakness seems to be a function of two business model flaws: over-reliance on Gucci’s and other brands’ star power, or lack thereof, and a short-term focus.

  • Rising And Falling Stars

“Kering has developed a fragmented management style where every brand is pushed to its limit to grow revenues, to go maximum speed with most of its energies and expectations devoted mainly on Gucci,” luxury industry advisor Susanna Nicoletti shared.

“Kering brands have been pushed over their structural limits by the temptation of immediate results, never given the proper time to push, rest and recover. It’s been like a Ferrari taken to the maximum speed without any pit stop,” she continued.

Because of the inherently volatile nature of the fashion business model versus the evergreen luxury business model, Kering’s Gucci and its other brands are caught in a vicious cycle of ups and downs as fashion’s winds blow hot or cold.

“There’s obvious emotional excess in the Gucci and Balenciaga shows, for example, and a competition of egos across the brands,” she continued. “The group could not keep a grip on the strategic orchestration of all its brands and resist the temptation of individual growth that could too easily result in a quick fall from grace.”

  • Short-Term Gain, No Sustained Focus

At the corporate level, Professor Alessandro Balossini Volpe sees past strategic decisions coming back to haunt the company. For example, in 2018, Kering spun off 70% of its holdings in Puma after investing nearly $6 billion in the brand in 2007. At the time, Kering justified its decision to focus exclusively on its higher-margin luxury business.

“Had they not decided to spin-it off its sportswear division, it could at least partially compensate for the declining sales in its luxury houses. Now Puma is a strong performer in its own market,” Balossini Volpe said. Puma revenues advanced 6.6% in 2023, reaching $9.3 billion last year.

Another misstep was the sale of YSL Beauté to L’Oreal in 2008 in a deal valued at about $1.2 billion. “Although being lucrative at the time, it was a mistake, depriving the group of full control of a key brand and eventually seriously limiting their possibilities to expand in the cosmetics business with all its benefits as a cash cow. Cosmetics are a growing and stable market, as well as a tool to expand brand awareness and recruit new customers,” he observed.

Kering is trying to recover from that mistake by its recent acquisition of Creed and the establishment of a Kering Beauté division. The company did not announce terms of the deal, but the Financial Times reported it amounted to $3.8 billion. “How much stronger would they be in this sector if they still managed still managed such a leading cosmetic brand?” he asked.

Balossini Volpe also points to the mismanagement of Brioni, which had been a revolving door for CEOs and creative directors. “Now Brioni has apparently found some stability, but what could it have been without the dispersal of precious cultural capital and competencies during this protracted turmoil?” he asked.

Brioni’s loss seems to be competitor Brunello Cucinelli’s gain. It is opening a menswear plant in Penne, Italy, where Brioni also has its manufacturing facilities. The move will help Cucinelli recruit high-value menswear tailoring talent cast off or dissatisfied with Kering management. Brunello Cucinelli’s revenues advanced 24% last year to $1.2 billion.   

Managing for Long-Term Sustainable Growth

LVMH manages its business and maisons in a different way, and one could argue the right way in the luxury market.

“Steady growth at all brand levels is carefully engineered by LVMH, orchestrated by the group that manages every single brand within the group by a group logic to which each brand and CEO are subordinated,” Nicoletti said.

“LVMH luxury brands are like an orchestra all playing in harmony together and focused on the group results, not just a single brand success,” she observed.

Fellow contributor Steven Dennis and Michael LeBlanc hosted a podcast with Anish Melwani, LVMH chairman and CEO North America, where he succinctly described the management philosophy of the company:

“We share a common set of values. We are all committed to excellence, quality, creativity, innovation and entrepreneurial spirit. The idea is that you never rest on your laurels of what you’ve accomplished, but you’re constantly striving to drive desirability in new and creative ways. And we added a new value more recently, to be a positive force for the planet.”

Those long-term strategies are working. “I’m not arguing that LVMH always makes the right move,” said Balossini Volpe. “They’ve had their failures and mistakes, like Fenty clothing, Pucci never really took off and canceling Marc by Marc Jacobs in 2015 only to relaunch it in 2018. However, LVMH is more diversified, has long-term, more luxury-friendly strategies and a stronger control of the identities of their own brands.”

Kering’s Challenge, Luxury Industry’s Opportunity

In closing, Balossini Volpe sees a paradigm shift emerging in the luxury-fashion market from the old model that Kering seems to follow to a new one evidenced by LVMH.

“We are on the verge of seeing a shift from the era of the omnipotent creative director to a broader, collective leadership model that puts a careful definition and management of the brand identity at the center of the process,” he said.

It would mean that product design and creativity become subordinated to the broader process, not the driver of it and he points not just to LVMH, but also to Hermès as demonstrating the new business model.

“For example, Martin Margiela and Jean-Paul Gaultier have been the creative directors at Hermès, but while there, they played ‘Hermès’ and not their own song. They worked as part of an orchestra, and not as soloists,” he concluded.