1) EXECUTIVE SUMMARY
With a long history, US$ 4.31 billion in revenue, 6506 employees, and 233 direct-operated stores in 2007, Gucci is one of the leading luxury brands in the world. This case study assesses the competitiveness of Gucci in the global up-scale market, and examines how the industry environment impacts the brands performance. We will also recommend competitive strategies and looks at the reasoning. What could be in the future for Gucci?
2) INDUSTRY HIGHLIGHT
In economics, a luxury goods is a product for which demand increases more than proportionally as income rises, in contrast to a normal goods and inferior goods for which demand increases less than proportionally as income rises. According to an April 2007 article from the Economist, the global annual sales of luxury goods are €100 to €150 billion. The Japanese market is responsible for some one third of demand, while the Europeans and Americans about a quarter each. The blooming China is hailed as the Promised Land as it threatening to take over the # 1 spot in the coming decades.
COMPANY BACKGROUND
In 1906, Guccio Gucci opened the house of Gucci as a saddlery shop in Florence started with his craftsmanship in leather. It was back in 1899 at the Savoy hotel working as a dishwasher that he saw the vision of luxury goods and what they meant to the riches – class, rank, success and wealth. The “double Gs” label was created in 1923 and his leather travel bags business took off.
Feuds within the family eventually undo the ownership and by 1989, nearly 50% of the business had fell to Investcorp. The murderous ex-wife of Maurizio Gucci (a grandson of Guccio) hired a hit man killing him, ending the family ownership.
Starting in 1994, under De Sole’s business savvy and Tom Ford’s commercial creative genius, Gucci achieved unprecedented success and grow 1000 folds to a 3-billion dollars company. In 2004, they brought in Pinault-Printemps-Redoute to fend off a hostile takeover from LVMH. However, both departed merely 2 years later when PPR sought to control its near autonomy. Patrizio Di Marco is the current CEO with Frida Giannini as the creative director. Losing 2 proven talents like de Sole and Ford, this is a critical time to evaluate the competitiveness of Gucci.
3) ENVIRONMENT ANALYSIS
Being in a highly concentrated industry, Gucci’s main competitors are Louis Vuitton, and Hermes. With only a handful of large firms, a high barrier of entry due to high set-up cost combining with time to establish a historical brand, and differentiated products (ready-to-wear, leather goods, etc.), Gucci is in an Oligopoly industry.
Using Porter’s Five Forces, we will analyze how the industry environment affects Gucci’s performance,
Internal Rivalry
In the high-end luxury market, price competition has no bearing on profitability since people are buying prestige, not functioning products. On the contrary, it would hurt the company.
Since the mid-90’s, LV have chased aggressive growth strategies. That in turn forced Gucci to create, innovate and well positioned itself for the future. Gucci strengths lay on the non-price competitions – attributes like design, workmanship, projection of high quality image through ads and events, timely innovation creating desires, etc. Tom Ford picked and established a “sexy” image, which is more desirable with a broader reach then its competitors. All these efforts aim to create demand resulting in both increases in the price and the quantity.
Entry Conditions
Luxury brands build on intensive capital, a long history and a modern phenomenon – “being cool”. History requires time, which is priceless. The element of “cool” depends on both human talents and luck. The latter 2 of the 3 are hard to come by. Thus, the threat of new entry is extremely low. With the high rate of failure of brand revivals, we can conclude that the entry barrier is high.
Noted that new comers usually look for a “niche”, meaning a different set of customer altogether. Coach is a good example for that it imitates Gucci closely but with a different segment of customers with an entry-level price point.
Substitutes and Complements
Fashion is personal and close to the body that there are very few close substitutes that can replace the feeling of prestige and class emulated by that jacket or that leather bag. Extravagance fashion shows are at the heart of the marketing of these luxury brands to stay hot. The threat of substitutes is low; On the contrary, Gucci excel at being the substitutes and complements of other luxury goods such as watches, jewelry, etc. rather than the other way around.
Low supplier bargaining power
Merging in a multi-brand group PPR mitigate the risk of big investments and save money through economy of scales in advertising, I.T., distributions, raw materials, etc. Managers of individual brands are able to share know-how and best practices.
Being the “taste-maker”, Gucci solely control what to produce or to replace, implying the demand of production from Gucci is very elastic. Having many factories competing for Gucci’s order (the prestige of being Gucci’s supplier means more downstream industry orders), the supply of production is inelastic. Gucci will enjoy this advantage as long as the name stays desirable.
Buyer bargaining power
Luxury product is by definition about excess, meaning the demand is elastic. However, Gucci is able to set retail prices because consumers of luxury goods rarely demand lower prices. They do not want to “down grade” the image of class and wealth that they are buying into.
4) SUSTAINABLE COMPETITIVE ADVANTAGE
Benefit position
Being the trendsetter, Gucci aims to be the first to use resources from designers to fabrics and even retail locations. This enables Gucci to charge a premium over the copycat competitors. Brand recognition leads to diversified product categories that in turn are being cross-marketing leading back to the brand name. This creates a snowball effect adding perceived value and benefit advantage.
Gucci marketing strength includes a wide reach of customers through magazines, websites, and advertising. Designer and PR personal relationships with fashion magazine editors and celebrity stylists ensure the right product placements.
However, the hotter the brand, the more counterfeit products are out there. Counterfeit cheapens the label. This benefit disadvantage will hurt the most in the new emerging market such as China. In addition, according to a research from AC Nielsen, consumers in the world’s fashion capitals remain loyal first and foremost to their domestic designers. That creates a benefit disadvantage for Gucci in places like France (Hermes).
Cost position
Again, being the trendsetter, vendors and designers are willing to charge less to affiliate with Gucci. The reasoning is that they can make that back and more with others and in the future with Gucci as a partner and on their resumes. Also, lots of the premium vendors and factories are located right in Italy, and this proximity gives Gucci a great cost advantage.
The long history in Italy with an Italian last name means it is hard for Gucci to move the main productions to lower cost country such as China. “Made in Italy” is actually a cost disadvantage in the longer run for reducing cost. In addition, being a public trading company, Gucci’s ability to take risks is lower then that of Hermes’, a private-own company. Since fashion is always about the future, Hermes can maintain a long-term vision while Gucci have to balance that with the short-term gains.
Sustainability
Economic profits will need to be reinvested back into resources and capabilities for cost and especially benefit position. Since intellectual capabilities are scarce and imperfectly mobile, the advantage should be sustainable as long as the brand image stays hot and desirable to add perceived value relative to LV and Hermes.
5) RECOMMENDED GROWTH STRATEGY
With a great history comes the baggage of age. 10 years of hard work and luck can be reversed with just a few seasons of wrong decision-making regarding the image of the brand. Maintaining while updating the image is critical in this industry. Detecting this “invisible hand of cool” (what’s trendy) is labor intensive with a great focus in human resource. Top-notch designers and fashion management talents are rare, pushing up the salary.
On the other hand, a brand tends to be over dependent on one face. As in the case of Apple with Steve Jobs, Gucci had the same problem with Tom Ford. Gucci’s heritage provides the content of the brand, but it is the designer who makes it relevance for today.
All that history and old world techniques mean the industry is slow to adopting the new technology and new ideas in business.
It is critical for Gucci to “stay hot” globally and maintain its hi-end image. I suggest that Gucci needs to decentralize both the design department and the market department to maximize the benefit advantage regionally. Set up small design offices in all markets that report back to the design “headquarter” in Milan.
Like all international business, developing the China market is important. Based on China’s past GDP and purchasing power growth rate, China is likely to be the world’s largest economic power by almost all measure. To capture this dramatic growth, Gucci needs to invest in relationships with the press in China with culture specific marketing plans that go beyond the same standard international campaign.
Shifting non-core productions to China would gain a cost advantage. Gucci could buy into some factories in the developing countries and partner with their management while Gucci would then bring their production know-how.
“Italian does it better.” But, they can only maintain this by understanding their advantage and devise a plan to maintain it in the decades ahead.
Leave a Reply