Gucci Turnaround

The Gucci case explores one of the most dramatic international turnarounds of the 1990s. In 1991- 1992, Gucci was on the verge of bankruptcy. With $200 million in revenues, very little cash, and almost $50 million in losses, Gucci was a classic example of a family-owned firm that had not made a successful transition to professional management. After new management is appointed in 1994-95, the company repositions itself, and by 2000 has almost $2 billion in revenue, $3 billion in cash, and over $300 million in profits. The challenge in 2000 is that the structure of the luxury goods industry appears to be changing, and Gucci must reposition itself again.

Source of problems
Fear of imitation and pursuit of volumes
Licensing and widespread distribution

Volumes v. value
Demand-side scale diseconomies

Why dont volumes make up for loss of value?

Nature of competition changes Now competing with large-volume rivals Gucci will have a cost disadvantage due to overhead Rivals who maintain pricing will lose less market share and make more profits
They may corner talent, distribution, etc.

At the same time, WTP will be lower; fewer brand-loyal and more one-time customers Price cut leads to modest market share advantage

Positioning

Inter-linkages in the value chain

Product design
Gucci shed its classic image and became a fashion-driven company. Why fashion rather than classics? What is Gucci really selling? The emphasis on fashionable accessories and ready-to-wear gave the brand a higher profile, increased traffic to the stores, attracted a higher-spending customer who made repeat purchases, and supported sales of core products (leather goods). Reduce impact of knockoffs

Classics

Lifestyle/fashion

Pricing
Gucci cut its prices by 30% on average, with the goal of broadening its audience and providing superior value. Improvements in manufacturing quality and efficiency were critical in supporting this strategy. Why did Gucci cut prices?

Marketing Gucci doubled spending on advertising and used Tom Ford's celebrity status to promote the brand. Why does it make sense to raise advertising and cut prices? Don't you usually raise advertising to raise prices and raise WTP? Manufacturing Gucci strengthened its network of suppliers around Florence by cutting off marginal assemblers and increasing investment in core partners. This network significantly reduces Gucci's fixed costs and gives the company flexibility to scale production up and down. In addition, it supports Gucci's fashion-oriented strategy by making it possible to produce short runs of new items in a compressed time frame and by reducing the penalties associated with guessing wrong on demand. Why subcontract? What are the benefits of subcontracting vs. keeping the manufacturing in-house?

Gucci
Gucci has raised advertising, cut prices, and at the same time, cut the number of points of sale The resultant drop in revenues and profits have to be offset by lowered manufacturing costs

Logic of greater subcontracting

Distribution
Gucci cut out many distribution outlets, even those that were generating significant revenue, in order to make the brand more exclusive. In addition, the company began to rely much more heavily on directly operated stores (DOS) and upgraded many of its stores to match the image that Tom Ford was creating through his fashion designs. Does it make sense to raise advertising, cut prices, and at the same time, cut the number of points of sale?

Logic of forward integration

More exclusivity required due to brand dilution from licensing and third-party distribution Reduces imitation (knockoffs) more likely when you license Shift from classics to fashion increases product churn and obsolescence, so control over distribution becomes imperative Higher cost of forward integration is potentially offset by increased WTP

Advantages of Italy
Repositioning towards Herms would have been very difficult given the damage to the brand under prior management. In addition, it was clear from the experience of the early 1990s that Gucci would not sell well at high prices. Going back to the low end was a possibility, but not with the existing manufacturing strategy. Gucci's Italian subcontractors were a great asset, but not sufficiently low cost to compete in the more mass-market end of luxury goods. If Gucci wanted to leverage to the fullest its existing capabilities or assets, it had to take advantage of highly skilled, highly flexible, but relatively high cost artisan workforce. This meant repositioning towards Prada and Vuitton was probably the optimal decision.

 The company was centralized; professional management was brought in; De Sole's personal style emphasized fast decision-making and put priority on brand management.

Human Resources
Part of the strategy was to make Tom Ford into a star Does it make sense to turn your creative designer into a star? What are the costs and benefits?

Organization

Diversification
Where are the economies of scale and scope? Some economies do exist: Advertising (purchasing) Manufacturing (YSL operations in France are inefficient) Distribution (Gucci has clout with department stores, which it could choose to expand distribution for both YSL and Sergio Rossi.) International operations and back-office (Gucci can open DOS for YSL in international locations, where the former management of YSL had little experience or existing assets. Information systems and other back-office functions can be shared.)

Diversification
But some diseconomies also exist: Creative design:
Can Tom Ford succeed as creative director for both Gucci and YSL?

Directly operated stores (DOS):

YSL and Sergio Rossi cannot be sold with Gucci DOS.

Brand:
Are there any synergies between the Gucci brand and YSL or Sergio Rossi? While there may be economies in purchasing and advertising, the brands are competing, not complementary. YSL does not enhance Gucci, and vice versa.

Diversification via brand acquisitions

Why would a multi-brand strategy work? Negative network effects
Limit to volume based growth necessitates selling multiple brands

Differentiation is based on prestige and age

Prestige and firm age are huge entry barriers. Ergo, acquisitions make sense as vehicles for diversification

Can Gucci afford high acquisition multiples?

Con: Lack of synergies- may fail better-off test Pro: Attractiveness test- high margins may offset acquisition price as long as rents are not fully captured in the acquisition price, quite likely due to illiquidity (closely-held targets, likelihood of only friendly acquisitions)

Takeaways
Differentiators face negative network effects
Demand-side diseconomies of scale Higher the volume, lower the value

If your product loses its market, you have to reposition

Successful repositioning Top-down management decision which requires changing almost everything, from distribution to product development, manufacturing, financial structure, pricing, etc. Explains firm inertia to poor performance, the difficulties of switching generic strategies Understand the value chain and its relationship to generic strategies The key in making strategic repositioning work is that all of the various activities have to have a tight "fit." De Sole and Ford restructured the entire corporation, and integrated the strategy tightly together. In addition, one should pay careful attention to the trade-offs while strategically repositioning. In Gucci's case, for example, it had to manage the reduction of distribution while expanding sales; lowering prices while aggressively strengthening its brand, etc.

Takeaways
Repositioning requires realignment of WTP with price Avenues for growth
Think multi-brand Inorganic growth