Gucci Case Study

Harvard Business School9-701-037 Rev. May 10, 2001 Gucci Group N. V. (A) Historically, fashion was viewed like movies. We made it a business.

-Domenico De Sole, CEO, Gucci Group Domenico De Sole seated himself at the wenge-and-steel conference table in his London office, a few steps from Bond Street, home to the most glittering names in the luxury world. It was a springlike morning in February 2000, and several blocks away, eager shoppers were already streaming into Gucci’s newly renovated store. But De Sole had more than handbag sales on his mind.

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Over the past five years, De Sole, whose geniality cloaked a steely will, had led the effort to transform a moribund brand into a billion-dollar company whose goods were coveted by affluent, style- conscious customers around the world. (See Exhibit 1. ) Now he sensed that Gucci might be pushing up against limits to further growth. ”If you really are an exclusive brand, you can’t grow beyond a certain point,” he explained.

“Nobody knows where that point is, but there is a limit to the number of handbags you can sell for $1,000. That’s the bottom line. De Sole planned to burst these bounds by turning Gucci into a multi-brand group. In November 1999, Gucci took its first important steps toward that goal by acquiring Yves Saint Laurent (YSL), one of fashion’s leading names, and Sergio Rossi, an Italian maker of exquisitely expensive shoes. De Sole was confident that Gucci’s creative team, led by Tom Ford, a talented designer who had attained rock star celebrity status in the fashion world, would be able to recreate its magic at YSL.

But a number of nagging questions remained.Would the synergies arising from the acquisitions justify the $1 billion that Gucci had paid for YSL? Did the future really lie with multibrand groups or with focused, single-brand companies—the highly successful model that Gucci was leaving behind? A Brief History of Gucci Guccio Gucci opened a small shop selling leather goods on the via del Parione in Florence in 1923. Initially, Gucci sold luggage imported from Germany and offered repair services on the side. As the business prospered, he opened a workshop to produce his own designs.Gucci flourished in the 1920s, as post-war prosperity brought new waves of tourists to Italy’s shores, and surmounted the challenges of the 1930s, when the sanctions imposed on Mussolini began to pinch.

Facing a shortage of imported leather, Gucci innovated by turning to new materials, such as canvas, and by producing small leather goods, including wallets and belts. Research Associate Mary Kwak prepared this case under the supervision of Professor David B. Yoffie as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.This is a rewrite of HBS case 700-068. Copyright © 2000 by the President and Fellows of Harvard College.

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1 Do Not Copy or Post 701-037Gucci Group N. V. (A) But it was after World War II that Gucci came into its own as an internationally known luxury name. In 1953, Gucci opened a shop in New York, its first outside Italy.

Over the next two decades, as the U. S. economy boomed, Gucci stores sprouted up in Chicago, Philadelphia, San Francisco, Beverly Hills, and Palm Beach. The company also expanded in Europe and starting in the early 1970s, moved into Japan and Hong Kong. These were golden years for Gucci.

The trademark red-and-green striped webbing and GG logo became known worldwide, and glamorous clients, including Jacqueline Kennedy and Grace Kelly, sported Gucci’s horsebit loafers and carried bamboo- handled Gucci bags. Gucci’s troubles began in the 1970s as internal feuding wracked the firm. Much of the turmoil centered on conflict between Aldo and Rodolfo Gucci, the founder’s surviving sons, and the younger generation over strategy and control. In 1980, after twice being fired by his relatives, Aldo’s son Paolo tried to launch a series of products under his own name.

The company moved to block his venture, and lawsuits flew back and forth. The most dramatic consequence was the 1986 sentencing of family patriarch Aldo Gucci to a year in prison for tax evasion in the United States. The charges stemmed from evidence Paolo had revealed in his efforts to force the rest of the family to back down. The Last Gucci: Act 1 Rodolfo Gucci died in 1983, leaving his 50% stake in the company to his son Maurizio. One year later, Maurizio Gucci seized control of Gucci, with the support of his cousin Paolo, who like each of his two brothers, held 11%.

Aldo Gucci owned the remaining 17%. ) Maurizio Gucci was determined to transform Gucci into a modern retail organization. One of his first moves was to name Domenico De Sole, a trusted legal adviser, as president and managing director of Gucci America.

De Sole personified two trends that would shape Gucci’s growth in the years to come. A Harvard Law School graduate and partner at Washington, DC law firm Patton Boggs & Blow, De Sole was one of the first professional managers to play a senior role at the family-run firm. In addition, as a native of Rome who became a U.S. citizen in 1986, he moved easily between Gucci’s Italian culture and the international corporate world.

De Sole fired 150 of the company’s 900 employees and hired new managers with deep retail experience to rationalize key functions, such as buying, that had previously been handled by individual stores. 1He consolidated operations like warehousing and stopped family plans to license new products (e. g. , cigarettes). At the same time, he expanded Gucci’s control over distribution, moving wholesale distribution in-house, drastically reducing the number of doors, and cquiring all of Gucci’s North American franchises in three years. While De Sole was rebuilding Gucci’s North American organization, Maurizio Gucci confronted renewed legal troubles at home. In August 1985, relatives charged that the signature transferring Rodolfo Gucci’s shares to his son was forged.

Facing charges of fraud and violation of foreign currency laws, Maurizio Gucci fled to Switzerland in 1987, and a court-appointed administrator took his place. Returning to Italy in 1988, he was acquitted of the foreign exchange charges and convicted of fraud—a conviction that was overturned the following year.It was only in May 1989 that he regained his post as chairman of Gucci. The Last Gucci: Act 2 Once back in the saddle, Maurizio Gucci focused on rescuing Gucci’s brand. His vision was to create a $1 billion company, firmly lodged in the upper reaches of the market, with limited distribution targeting an exclusive clientele. But Gucci had fallen on hard times.

By the late 1980s, some 22,000 products, including tennis shoes, playing cards, and cigarette holders, bore the Gucci name. 2Fake Gucci bags, featuring the GG logo on plastic-covered canvas, crowded the sidewalks of Rome and New York.The ubiquity of the double Gs and canvas webbing prompted future trends guru Faith Popcorn to comment, “When you see that [red and green] stripe, you want to throw up. ”3 This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected]

harvard. edu or 617. 783. 7860. 2 Do Not Copy or Post Gucci Group N.

V. (A)701-037 Brian Blake, who became president of the Gucci division in January 2000, joined the company in 1987 to run the New York store. At the time, he recalled:Gucci would not truly be considered a luxury company by luxury goods players like Chanel and Hermes. It was pretty much trading on its past reputation. A very large proportion of business at that time was driven by the “interlocking G” canvas material, which was very inexpensive to produce and had very low price points.

No truly discerning luxury goods client would shop at Gucci. Maurizio Gucci brought in Dawn Mello, president of luxury retailer Bergdorf Goodman, to oversee product development and image creation for Gucci worldwide.Mello threw out two-thirds of the products, including most of the canvas, and built a new design team to reinvent Gucci as a classic brand.

4“Gucci should be designing products that you don’t discard after a season,” she explained. “It should not be trendy. It’s a matter of style, not fashion. ”5Mello revived designs from Gucci’s archives and updated them with a twist. The bamboo-handle bag, which had not been produced since the 1960s, was scaled up to meet the needs of working women. 6The horsebit loafer blossomed in a range of pastels and reappeared as a stiletto and a clog.In addition, Mello abandoned striped webbing and confined Gucci’s logo to the lining of its bags. 7The resulting products were subtle, elegant, and expensive, in line with the tastes of an older, well-heeled clientele.

At the same time, De Sole attacked Gucci’s sprawling North American distribution network, which had grown out of control. From more than 600 points of sale in the late 1980s, Gucci dropped to 194 in 1993. 8The company stopped distributing through department stores and closed stores in secondary markets like Cleveland and Columbus.Between 1990 and 1994, Gucci America’s store tally fell by almost half, from 42 to 26. In cities where Gucci remained, the company renegotiated rents, reduced square footage, and cut staff in order to lower the break-even point of its stores.

Maurizio Gucci initially had the backing of Investcorp, the Bahrain-based investment group that bought out the rest of the family between 1987 and 1989. But tension grew as Gucci slipped into the red. Gucci’s repositioning program cut deeply into sales, as Brian Blake recalled: They knocked out all of the product overnight, the product that as essentially selling, whether it was moderate-driven or not, and they didn’t have replacements in the pipeline to offset the volume drop.

They didn’t do it in a phased manner; they did it all at once and essentially wiped out the business. And Maurizio Gucci wasn’t willing to adjust. He wasn’t willing to take a more measured approach to rebuilding the business, which was what Investcorp wanted to do. They had been listening to Maurizio’s predictions for three years, and none of them were coming true. We were just producing more and more losses.

Despite his vision, Maurizio Gucci lacked business and analytical skills.Prices were too high, production was disorganized, and delivery was a nightmare, even for Gucci’s own stores. There was no clarity to the direction of the company and no cost controls, an equation that added up to “financial disaster,” in De Sole’s words. As Gucci’s cash flow dried up, Maurizio Gucci continued to spend freely. In addition to lavishly refurbishing Gucci’s Milan headquarters, he splashed out on an 18th-century palazzo outside Florence and co-sponsored one of Italy’s entries in the America’s Cup. But Gucci’s difficulties could not be placed entirely at Maurizio Gucci’s door.In the early 1990s, the entire industry was suffering from a downturn. The Gulf War, the U.

S. recession, and a turn against conspicuous consumption combined to reduce luxury goods sales by 3% a year between 1990 and 1993. 9Thanks to its unique customer base, the luxury market was less vulnerable to economic slumps than many other categories.

However, as this period showed, it was by no means immune. This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617.

783. 860. 3 Do Not Copy or Post 701-037 Gucci Group N. V. (A) The Luxury Goods Industry The roots of the modern luxury trade reach back more than 150 years. Thierry Hermes, founder of the legendary leather-goods house, started a small business manufacturing harnesses in 1837. Ten years later, Louis-Francois Cartier set up shop as a jeweler, and in 1854, Louis Vuitton launched a company to furnish canvas-covered trunks to the Second Empire elite, including Napoleon III and Empress Eugenie.

All three began as small family firms catering to an exclusive, largely local clientele.However, over the years, they expanded their reach around the world and diversified into a wide range of products, targeting the upwardly mobile, as well as the traditional elite. (See Exhibit 2 and Exhibit 3. ) By 1999, luxury goods were a $60 billion industry, with sales growing 6% per year. 10The industry encompassed seven main product categories: leather goods, footwear, high-end apparel, silks (scarves and neckties), watches, jewelry, and perfume and cosmetics. Ready-to-wear apparel and watches were growth sectors in the 1990s, while sales of silks stalled.While luxury was a highly profitable business as a whole, gross margins tended to be highest for watches and leather goods (75% to 80%), with silks in the middle (65% to 70%), and apparel (roughly 50%) at the lower end. The Market The primary consumers of luxury goods were women in the upper income brackets between the ages of 30 and 50.

In Asia, which was reported to account for as much as 70% of some companies’ sales (including purchases made by Asian tourists in Europe and the United States), the customer base was somewhat younger, beginning around the age of 25.In Japan, for example, many young working women continued to live rent-free with their parents. Consequently, even women with moderate incomes could afford to indulge in designer purchases. Younger customers tended to be heavy consumers of accessories, such as handbags, and of diffusion lines—less expensive product ranges, such as Emporio Armani, that companies used to extend their brands. While luxury customers often had favorite designers, they usually spread their purchases among numerous brands. As Tom Ford, Gucci’s creative director, observed:We’re all going after the same consumer, and our consumer has different needs. A woman who shops at Gucci will also probably shop at Prada and she’ll also probably shop at Hermes, but when she shops at these different places, she’s shopping for a different part of her life, a different side of her personality. Fashion magazines played an important role in educating consumers about luxury products and determining which designers or products would become that season’s stars.

Many companies invested heavily in advertising, with average spending rising from around 9. 4% of sales in 1995 to 10. % in 1999. 11In addition, it was common for luxury goods firms to enlist A-list celebrities, like Madonna, to sport their brands. Dressing a nominated actress on Oscar night was more than a boost for a designer’s ego; it was a cheap way of ensuring media attention around the world. The importance of such coverage grew as the industry moved away from its classic image toward a more fashion-oriented approach. In the past, many companies had focused on “timeless” designs that varied little from year to year.

One benefit of this strategy was a reduction in inventory risk.Any over-production could almost always be sold the following year. By the 1990s, however, consumers expected new styles and new models every season. As a result, luxury goods producers were stepping up their investments in design and production, in addition to learning to forecast demand. This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright.

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783. 7860. 4 Do Not Copy or Post Gucci Group N.

V. (A)701-037 ManufacturingMost luxury companies used a mix of three production strategies: in-house manufacturing, outsourced production, and licensing. The first, vertically integrated approach was exemplified by Hermes. In the mid-1990s, the company employed almost 600 artisans handcrafting leather goods in workshops outside Paris.

12Each leather worker trained for a minimum of three years, mastering techniques, such as the company’s saddle stitching method, that were unique to Hermes. Typically, a single craftsman was responsible for all the steps involved in assembling a handbag, which might take 17 hours or more.Altogether, Hermes produced about 80% of its products, which also included silks, apparel, watches, and perfumes, at 21 company-owned sites. 13 Companies like Gucci and Prada took a different approach. Both companies outsourced most of their production through a carefully controlled network of small Italian firms. (See Gucci’s Turnaround—Manufacturing and Logistics. ) This system minimized fixed asset investment, allowing Gucci, for example, to attain a return on invested capital of 36% in 1998, compared to 19% for Hermes.

In addition, most firms relied on licensing to some extent.Licensees manufactured part or all of a product line; in some cases, they would also acquire the rights to design and distribute products under a luxury house’s name. Licensing was the easiest way to extend a brand, especially in areas such as eyewear that required technical expertise.

It also generated a reliable revenue stream at no marginal cost. Led by Pierre Cardin in the 1970s, designers lent their names to everything from sunglasses to sheets and towels. In the 1990s, the pendulum swung back, with most companies cutting back on aggressive licensing.

DistributionIn distribution, the trend in the latter part of the 1990s was toward greater reliance on directly operated stores (DOS). Many companies bought out or closed franchised operations and pulled back from wholesale distribution through department stores or independent boutiques. Running dedicated stores was a costly proposition, but it allowed luxury houses to maintain complete control over presentation, service, pricing, and the range of products that were sold. In addition, controlling distribution reduced vulnerability to the “gray market,” or parallel trade.At the same time, many companies rethought their approach to duty-free sales. Duty-free retail was big business, running at more than $20 billion a year by 1995.

14But most duty-free stores carried a small range of products, housed cheek-by-jowl with similar items from competing brands. The emphasis in these boutiques was on discounts, and any disheveled backpacker could browse in the stores. In addition, the Asian crisis that began in 1997 raised a number of questions about the wisdom of relying on duty-free sales.With the number of Japanese tourists falling by 8% and substantial yen depreciation between 1997 and 1998, DFS sales slumped 16% in 1997 and 35% in 1998. 15In response, many companies put increased effort into developing local markets, which were less sensitive to short-term macroeconomic moves. E-commerce was also emerging as an alternative in the late 1990s, but many companies were reluctant to embrace this channel.

While luxury fragrances were readily available on Internet sites, few brands were ready to sell higher priced goods online.The pioneers in this area were Tiffany, which started offering a limited selection of items over its Web site in late 1999, and LVMH, which launched eLuxury. com, a multi-brand portal, in the spring of 2000.

This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected]

harvard. edu or 617. 783. 7860. 5 Do Not Copy or Post 701-037Gucci Group N. V.

(A) Competitors Analysts estimated that 35 companies shared 60% of the luxury goods market, with a large number of smaller companies accounting for the rest.Of the top competitors, six firms were believed to have revenues in excess of $1 billion; 15 to 20 were thought to lie in the $500 million to $1 billion range; and ten were pegged at between $100 million and $500 million in sales. 16(See Exhibit 4. ) French conglomerate LVMH Moet Hennessey-Louis Vuitton topped the list (see LVMH), followed by Vendome, a Swiss-based group that was particularly strong in “hard” luxury goods (jewelry, watches, and writing instruments), with names like Cartier, Vacheron Constantin, and Mont Blanc. Beyond size and product focus, positioning set different firms apart.Within leather goods, for example, Hermes represented the top of the market, with its classic Kelly bag—named for a pregnant Princess Grace, who used one to hide her swelling stomach—starting at $4,300. (Price was clearly no object for the women who crowded Hermes waiting lists around the world. ) Chanel, where a bargain-hunter could snag a quilted leather bag for $1,500, was one step down the ladder.

Gucci, Louis Vuitton, and Prada occupied a middle range, with basic leather models typically ranging from $600 to $1,100, while firms like Ferragamo stood at the lower end of the luxury scale.Many of the most successful luxury companies were family-owned or -controlled, including Armani, Versace, Ferragamo, Prada, Bulgari, Hermes, and Chanel. 17(See Exhibit 5. ) In a number of cases, ownership was concentrated in the hands of the founding designer who had given the house his or her name. This arrangement had both pluses and minuses. Founder-led companies could give full rein to their creativity; moreover, they could often move more quickly than public firms. But they were vulnerable to the founder’s whims and frequently lacked capital and management depth.

In many cases, for example, managers were unable to analyze profit margins across the range of products associated with the brand. ) Moreover, founder-led firms faced a unique challenge: keeping the brand going once the original designer had left the scene. Due to the prevalence of the founding family model, historically most luxury goods companies had been single-brand firms. By the late 1990s, however, industry consolidation was gathering steam.

Between 1998 and 1999, the number of mergers and acquisitions more than doubled, while deal volume increased more than 350%. Two of the most active acquirers were LVMH and Prada.LVMHLVMH Moet Hennessy-Louis Vuitton was the dominant force in luxury goods marketing and retailing worldwide, with revenues of $8.

2 billion in 1999. Four major product groups each accounted for around a quarter of sales. Leather goods and fashion contributed 27% of revenues, followed by champagnes, wines, cognac, and spirits at 26%; selective retailing brought in 25%; and perfumes and cosmetics accounted for 20%. When it came to operating income, the shares were 53% for leather goods and fashion, 42% for drinks, and 9% for fragrance and cosmetics, with other activities resulting in a loss.The LVMH stable contained some of the most venerable names in the trade—Louis Vuitton, Givenchy, Guerlain, Dior, Moet & Chandon, Veuve Clicquot, and Dom Perignon—along with a handful of edgy newcomers, such as U. S. cosmetics firms Hard Candy and Urban Decay.

Despite its size, LVMH’s portfolio continued to grow at a rapid clip. In 1999 alone, the company spent at least $2. 9 billion on acquisitions, including Krug, Tag Heuer, Chaumet, Ebel, Fendi (together with Prada), and a significant stake in Gucci. The driving force behind LVMH was a shy yet ruthless Frenchman named Bernard Arnault.Beginning in the late 1990s, Arnault sought to create synergies among LVMH brands. For example, Vuitton produced handbags for Dior, drawing on the expertise of Madrid-based Loewe. 18All of the brands negotiated with suppliers as a group, and according to Arnault, group buying resulted in discounts on advertising of as much as 20%.

19In addition, in running LVMH, Arnault emphasized the importance of control. In 1997, he told Forbes, “If you control your factories, you control your quality; if you control your distribution, you control your image. 20Arnault moved virtually all of Vuitton’s production, of which 70% was previously outsourced, back in-house. On the distribution end, he spent $2. 6 billion in 1996 to acquire 61% of duty-free giant DFS. 21Several months later, This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected]

harvard. edu or 617. 783. 7860. 6 Do Not Copy or Post Gucci Group N. V. (A)701-037 Arnault bought Sephora, France’s largest retailer of cosmetics and perfume, and took it overseas.

By the end of the decade, LVMH controlled almost 80% of its brands’ retail sales through 1,005 stores, including 261 for Louis Vuitton. 22 Louis Vuitton was LVMH’s leading brand, accounting for an estimated 18% of revenues and 47% of operating income in 1999. 23Traditionally, the company relied heavily on a focused range of handbags and luggage, executed in monogram canvas and leather and produced in factories in France.

After hiring American designer Marc Jacobs in 1996, Vuitton branched out into shoes and ready-to-wear, in addition to introducing new leather goods designs.In addition to boosting LVMH’s bottom line, with gross margins in the neighborhood of 77%, Vuitton’s strength was an asset for other members of the group. 24It was widely believed, for example, that LVMH leveraged Vuitton’s popularity to win department store distribution for Loewe and other lesser names.

PradaFounded in 1913, Prada was a relatively obscure maker of luxury luggage based in Milan until Miuccia Prada, a granddaughter of the founder, and her future husband, Patrizio Bertelli, took charge. Miuccia Prada was a college radical with a doctorate in politics, who reluctantly entered the family business after training as a mime.In 1985, she designed a quilted black nylon tote with a triangular Prada label, which paid ironic homage to Chanel’s gold chain-strap bags. Priced between $200 and $500, the simple bag became a must-have item for fashion editors, who were tiring of 1980s ostentation. By the early 1990s, Prada’s modern, anti-luxury take on luxury was known worldwide. Sales, which grew at 25% per year in the second half of the decade, were expected to reach close to $1 billion in 1999, with Prada reporting $77 million in net income in 1998.

25 In the late 1990s, Prada began to acquire stakes in competing luxury goods firms.In the summer of 1998, Prada amassed a 9. 5% holding in Gucci, which it sold to LVMH for a gain of $140 million in January 1999. 26Two months later, Prada bought 51% of Helmut Lang, an avant garde fashion house with roughly $100 million in sales. In August 1999, Prada acquired 75% of Jil Sander, a German beacon of elegant minimalist design. (Designer Jil Sander, who was reportedly unhappy with Bertelli’s meddling, resigned from her namesake company in January 2000. ) Prada also took a controlling interest in Church & Co. , an English shoemaker, in October 1999.

However, Prada’s most theatrical coup that fall was its joint victory in the war over Fendi, creator of the “baguette,” the hottest handbag of the year. In an unusual arrangement, Prada and LVMH formed a joint venture that beat out Gucci to acquire 51% of Fendi for close to $600 million. The Rome-based house, known primarily for its furs, was estimated to have around $120 million in sales in 1998. According to Bernard Arnault, Fendi’s lack of production capacity and stores was the principal barrier to growth. “With our friends at Prada we will give them production in Italy, and with Vuitton we will give them shops,” he explained.

This business should explode in the next five years. ”27 Gucci’s Turnaround Few would have said the same of Gucci by the early 1990s. From 1991 through 1993, Gucci’s losses amounted to $102 million. 28Strapped for cash, by the fall of 1993 Gucci was unable to finance new collections and advertising or even to pay suppliers and employees. Investcorp stood willing to rescue Gucci, but only if Maurizio Gucci stepped down. Finally, in September, the last remaining Gucci sold out, reportedly receiving $170 million for his 50% stake. 9 (Eighteen months later, Maurizio Gucci was gunned down in Milan, the victim of a hit ordered by his former wife.

) Reorganization William Flanz, a member of Investcorp’s management committee, replaced Maurizio Gucci as CEO, while Domenico De Sole moved to Gucci’s Florence headquarters (the Milan office was This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected]

harvard. edu or 617. 783. 7860. 7 Do Not Copy or Post 701-037Gucci Group N. V. (A) huttered) to reorganize and reposition the firm. In addition to instituting professional management and financial controls, cost-cutting was an early priority for the new team.

Fifty people were fired at the corporate level, and after negotiation with the unions, the manufacturing workforce was cut by 100. De Sole then focused on upgrading Gucci’s production and delivery systems, while Tom Ford, who replaced Dawn Mello as creative director in 1994, took charge of design. De Sole, who was named COO in October 1994, threw himself heart and soul into the effort to turn Gucci around:The key to our initial success was the personal drive to save this company. When I inherited control of the company in 1994, everything was in disarray.

People were demoralized and paralyzed; all the organization could do was just write memos. Everyone was in a panic. We were able to turn the company around because we were driven by an incredible sense of urgency. Tom and I share the same management philosophy: making immediate decisions and doing everything three days ago. I worked weekends and made calls at three o’clock in the morning. We were relentless.

Just as an example, in 1994, I went to Japan for the first time and thought our stores looked terrible. I then went to Japan ten times over the following 12 months, and we changed or upgraded every location. Sales went from $40 million to $120 million in one year. We made quick decisions, but with discipline and focus. It felt as though we were operating at the speed of light. After a rocky start, Ford and De Sole forged a close partnership, which both men identified as a critical factor in Gucci’s success. Initially, Ford, who started with a staff of one, sketched and designed nearly all of the products.As Gucci grew, his role shifted to setting the tone and direction for design throughout the firm.

In addition, he was responsible for advertising, public relations, store design—even the look of Gucci’s annual report. As Ford put it, “Anything visual, anything that tells you about the company, is my area. In a sense, every single person in the company reports to me. Everyone reports operationally to Domenico. Everyone reports creatively to me. ” However, Ford’s role was not limited to design.

He also worked closely with De Sole to shape strategy for the group. In part, this was due o Ford’s unusually business-like approach to his job. As he explained, “I don’t profess to be an artist. I’m a commercial designer, and I’m very proud of that. ” But Ford also saw personal chemistry as a critical factor in his partnership with De Sole: Domenico and I are very, very similar people, and we’re very, very different people. We’re both very goal-driven. Just go around the wall if we hit a wall or go over the wall or go under the wall or blow the wall up. We both make decisions very quickly; we both always have an opinion about something; we both want everything to have been done the day before.

We both are workaholics; both of us don’t sleep very much at night…. We both have the same goal, and yet we’re also very different. Domenico is not a visual person.

He doesn’t pretend to be a visual person, and that’s one of the reasons that we’ve been able to work so well together. He has always allowed me to make the design decisions I have needed to make. Our mutual respect for each other and total trust in each other’s abilities have been key to our success.

… One of the first challenges the two men confronted was welding Gucci’s many parts into a coherent whole.In a 1997 interview, De Sole described the situation they had faced: “The company was never run as a united company, as one global brand. At one time, several members of the family would do separate products. One person would take care of the handbags.

Somebody else would be involved with shoes. ”30The same problems existed in distribution. According to Brian Blake, under the Guccis, “The company within itself never spoke.

I did not know what was happening in Japan or Europe, nor did Domenico. Each company was operating on its own, operating to whoever was in corporate within Europe, and no information was shared. This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783.

7860. 8 Do Not Copy or Post Gucci Group N. V. (A)701-037 Under Investcorp’s guidance, the seven Gucci operating companies—Guccio Gucci (the original firm), Gucci France, Gucci Ltd. (UK), Gucci S. A. (Switzerland), Gucci America, Gucci Japan, and Gucci Co.

Ltd. (Hong Kong)—were combined for the first time, and Domenico De Sole was named CEO of the entire group in July 1995.Gucci also began to offer stock options to employees, a practice that differentiated the company from most of its peers. In October 1995, Investcorp floated 49% of the company in Amsterdam and New York. Six months later, it sold its remaining stake at $48 a share—more than twice the price Gucci had brought the previous fall.

Remaking the Brand FashionDe Sole and Ford felt that focusing on fashion was the right strategy for Gucci. In addition to raising the company’s profile, it would serve as a vehicle for relaunching leather goods and shoes.Gucci’s successful flotation was, in large part, a tribute to Tom Ford’s brilliant vision for the brand. In March 1995, while more pressing matters distracted the management, Ford launched a ready-to-wear collection that broke radically with Gucci’s past. Gone were the ladylike loafers and scarves.

The new Gucci woman stalked the runway in hiphugging trousers and a tight peacock- colored shirt with half the buttons left undone. In one 45-minute show, Ford catapulted Gucci onto center stage, stripped of its classic image and recast with an aggressively glamorous edge.In the early 1990s, Gucci’s core customer was a wealthy, somewhat conservative, older woman.

Ford redefined her as a modern, urban consumer, with a youthful spirit, no matter what her age. This had both pluses and minuses, as he explained: Our customer is a fashion-conscious customer. They have a short attention span. They have maybe less brand loyalty than other customers. They replace everything they have every season—which is also what makes them an incredibly good customer to have. A classic customer will buy the blue blazer, the cashmere twinset and replace it when it’s worn out.A fashion customer consumes, shops, buys, and disposes of, and then buys again.

With single purchases averaging $350 to $450 in the United States—higher in Hong Kong and Japan—fashion customers pushed Gucci’s sales from $264 million in 1994 to $500 million in 1995 and above $880 million in 1996. In 1999, ready-to-wear represented less than 15% of revenues, while leather goods remained the leading category at more than 41%. (See Exhibit 6. ) According to Ford, instinct drove much of what he did. However, Gucci also created a merchandising function to collect customer data and channel market demands.While merchandisers often had great power in American apparel firms, they were absent or ignored in many European firms, where designers wielded nearly absolute control. PricingIn addition to revamping Gucci’s image, the new management reviewed its price structure.

In 1994, De Sole and the leather goods merchandiser Pat Malone personally repriced every item in the collection, lowering prices on average by 30%. This strategy positioned Gucci below Hermes and Chanel and on a par with Prada and Vuitton. Gucci’s goal was to offer a superior product that represented good value for the customer.To this end, De Sole had the company’s production staff benchmark all of Gucci’s handbags against its best competitors’ products, a process that Brian Blake illustrated with a comparison to Hermes: We took the classic Kelly bag and had our production people tear it apart and compare it to our classic bamboo-handle style. We were able to show that product to product, they were equal, in terms of material, in terms of workmanship. The Kelly bag is $2,000 plus; our bamboo is $950.

The client’s no dummy, you know. After a while, they’re going to get the message. This document is authorized for use only by Usha Narasimhan until September 2012.Copying or posting is an infringement of copyright. [email protected]

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9 Do Not Copy or Post 701-037Gucci Group N. V. (A) Gucci also made it possible for a wide range of people to enter its world, by offering articles ranging from scarves to fur coats. At the same time, however, De Sole and his team were determined to preserve Gucci’s luxury status.

Consequently, they resisted the temptation to extend the brand by launching diffusion lines. MarketingA third element of the new strategy was to get the word out about how Gucci had changed.Tom Ford explained why marketing was critical as Gucci became a fashion-driven brand: A black pair of pants from Gucci, to be honest, is not that much different from a black pair of pants from Prada or a black pair of pants from any of our other competitors—other than that, of course, ours fit well and make you look really sexy. But in the customer’s mind, this basic pair of pants can be endowed with a quality that makes her feel she’s wearing the right basic pair of pants, the cool pair of pants, the pair of pants that’s going to make her whole life come together, and that’s in a sense also what you’re selling.Gucci’s new management nearly doubled advertising expenditure, from $5. 9 million (2.

9% of revenues) in 1993 to $11. 6 million (4. 6% of revenues) in 1994. By 1999, advertising and communication had grown to 7% of revenues, and was expected to reach $250 million, or 13% of sales, for the entire group in 2000. Initially, Gucci’s advertising was created in-house and focused on redrawing the image of the company as a whole. The goal, in Ford’s words, was to “create an arresting image of a world you wanted to be a part of.

” Later, once the brand was established, more product-focused ads joined the mix.In the early days, however, Tom Ford was probably more important to Gucci’s communications strategy than any of the products he designed. Bob Singer, the company’s Brooklyn-born CFO, recounted the thinking behind this approach: Domenico and Tom sat down and said, “How are we going to turn Gucci around? ” And they said, “We’ll make Tom a star. ” And his being a star is part of the success of Gucci. Because it created a lot of excitement around Gucci in the press..

.. Tom has got a great physical presence; he’s a very handsome man. He developed this ethos of the Gucci lifestyle which is sort of on the cutting edge; he gave it this sexy edge.And he made clothing that exactly cohered with that. So that became the platform for selling incredible quantities of handbags. Manufacturing and Logistics Of course, image was not all.

The new team recognized that quality craftsmanship had also played a central role in Gucci’s earlier success. However, by 1993, the company’s supplier relations were at an all-time low. Many relationships had been severed as a result of Gucci’s inability to pay.

Consequently, one of Domenico De Sole’s first priorities was to hit the roads of Tuscany, woo the best of Gucci’s manufacturers, and cut off the rest. I personally visited every supplier,” De Sole recalled. “They hated me at first because I was pushing them so hard, and they feared that I would move production to low-cost countries. But through personal persuasion, they came around.

” De Sole started a new program for partners, which provided selected suppliers with technical and financial support. He pressed for faster and more predictable delivery of classic products, which sold reliably from year to year, and he encouraged Gucci’s production staff to invest in technological innovations, such as computerized equipment for cutting leather, which Gucci helped design. 1The result was a highly flexible production system built on three pillars: skilled artisans, advanced technology, and efficient logistics. Leather goodsLeather goods reflected Gucci’s best practices in production. Gucci subcontracted the manufacturing of 95% of its leather goods, producing only items made from exotic skins, such as ostrich and crocodile, in-house. The company worked with 80 to 100 assembling suppliers, This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright.

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783. 7860. 10 Do Not Copy or PostGucci Group N. V. (A)701-037 concentrated in the region around Florence. Twenty-five were partner-suppliers, who worked exclusively for Gucci and accounted for roughly 70% of total production.

Gucci provided this group with financing for materials and investments in plant, as well as technical expertise. In addition, the company guaranteed minimum production levels for partner-suppliers at 50% of the previous year’s level. The rest of the assemblers, known as integrated suppliers, received production guarantees but not financing. (Advance production commitments for 1999 were $41 million at the start of the year. The partner-suppliers and integrated suppliers managed 300 sub-suppliers on their own. Altogether, the three groups employed some 3,000 workers, who worked largely by hand, with individual firms ranging from 10 to more than 100 employees. By and large, the suppliers were believed to be very loyal. Some of them had started as Gucci employees and received funding from the company to strike out on their own.

In other cases, as Giancarlo Lilli, the director of production and logistics explained, “The supplier is the main factory in his little village, and the workers see De Sole as their president. Gucci used a variety of methods to maintain quality throughout its network. The company bought all of the leather used in its products and did 50% of the cutting, while suppliers specialized in cutting did the rest.

Gucci provided training for its suppliers’ workers, in the suppliers’ workplaces and at its own. Gucci inspectors checked quality control during manufacturing and once products were complete. And an EDI network connected Gucci and its partner-suppliers, ensuring the smooth flow of information through all stages of the production process.As Gucci grew, the demands on its production system increased in complexity and scale. Between 1994 and 1998, production volume in leather goods grew from 640,000 pieces to 2. 4 million, an increase of 277%.

In addition, as Gucci became more fashion-oriented, the company began to produce a growing number of new items every year. From 1994 to 1999, the proportion of new styles to “carry overs” doubled from 27% to 54%, while the number of new material combinations grew 35% to 1,574. Whereas classics made up 60% of Gucci’s volume in 1997, fashion products, which were usually only produced for one season, accounted for 80% to 90% in 1999.In the same period, as Lilli’s team addressed bottlenecks in planning and production, the average time required to manufacture a handbag and get it into Gucci’s warehouse fell from 104 to 68 days. Gucci maintained four days of finished goods inventory, on average, in its warehouse outside Florence. From Florence, the company shipped 12,000 to 15,000 pieces a day, with most goods passing through Switzerland, where they were consolidated with ready-to-wear and silks produced in northern Italy, before reaching their final destination.

Lilli believed that Gucci could probably expand production by around 20% to 30% a year, relying on its existing suppliers. Further growth would require the company to bring new suppliers on board. Already Gucci was beginning to move production into Marche in the east and further south in Tuscany, but as the company moved beyond its base, it began to encroach on territory occupied by competitors such as Prada. Other productsGucci had a similar system for producing shoes, although its relationships with shoe suppliers were more arm’s length.

Shoes were produced for the most part not in Florence but in the Veneto and Marche, regions which were known for their expertise in this field. Similarly, four suppliers around Como produced Gucci’s silks. Men’s ready-to-wear was produced under license by Zegna and women’s by Zamasport, although Gucci had plans to move women’s ready-to-wear in- house. Eyeglasses were manufactured under license by Safilo, and production of watches was handled by Gucci Timepieces, a former licensee acquired by Gucci in 1997. Distribution Gucci’s management put primary emphasis on strengthening the etwork of directly operated stores. This trend accelerated in the wake of the Asian crisis, as Gucci took advantage of This document is authorized for use only by Usha Narasimhan until September 2012.

Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 11 Do Not Copy or Post 701-037Gucci Group N.

V. (A) depressed asset prices to take over franchises in Taiwan (ten) and Korea (nine). After expanding from 65 stores in 1995 to 83 in 1997, Gucci’s store network grew more than 50%, reaching 126 stores at the end of 1998.Ranging in size from 500 square feet to 10,000 square feet, the DOS category included both flagship stores and shops-in-shops in prominent department stores. (The latter arrangement, which was distinct from wholesale department store distribution, was most common in Japan. ) Four regions each accounted for around one quarter of the stores: Europe, Asia outside Japan, Japan, and the United States.

32 Beginning in 1996, Gucci embarked on an aggressive program to renovate its directly operated stores.As Pat Malone, who became president of Gucci America in 1997, recalled, “We realized that we were designing all this fabulous new fashion product for a younger, hipper customer, and they were walking into very dated-looking stores. ” To address this problem, Tom Ford collaborated with architect Bill Sofield to replace the old, clubby interiors with a clean, modern look. As Gucci rolled out the new design and opened additional stores, capital expenditures (which also included information systems improvements and expansion of the company’s Florence office and warehouse) grew from $20 million in 1995 to $92 million in 1998.By the end of 2000, the company expected to have renovated all of its directly operated stores. In addition, as the Asian crisis unfolded, Gucci immediately shifted the product mix in its DOS, in order to strengthen its local customer base. In Manhattan, for example, Pat Malone estimated that the share of local customers climbed from 40% to 75% between 1998 and early 2000.

Local clients, who accounted for the bulk of ready-to-wear sales, tended to be wealthier and represented a more stable market than tourists, who were primarily drawn to handbags and scarves.However, apparel required more space and sold more slowly than small leather goods. Consequently, sales per square foot in Gucci stores fell from $3,248 in 1997 to $2,548 in 1998. While DOS accounted for 66% of 1999 sales, Gucci also sold through 60 franchised stores (mostly in smaller markets), 54 duty-free outlets, and 301 department stores. (In addition, Gucci watches, which were distributed separately, were available at 6,700 points of sale.

) The company’s management took a tough line on third-party distribution. During one of his early, aptly named “Terminator” tours, De Sole closed the DFS door in Hong Kong’s airport overnight.De Sole applied a simple test in deciding whether a distributor would be allowed to carry Gucci’s wares: “Is this store helping the brand or not? Is it enhancing the image of Gucci or detracting from the image of Gucci? If it’s detracting, I don’t care if it makes money. ” Gucci launched a Web site in early 2000, but the company had no definite e-commerce plans. While De Sole had not ruled out the possibility of using the Internet as a distribution channel, he emphasized that the same rules that guided Gucci’s approach to bricks-and-mortar distribution would determine its position on the Web:I can triple sell tomorrow [without the Internet]; this is not an issue. Let’s talk about ties. Why do I need the Internet? DFS would love to have my ties in every single location around the world. I could sell ten times the ties I do now. Why don’t I do it? Selling to DFS is great because I have a profit—not a gross margin—a profit of 40%. No hassle. Just give it to them; they’ll sell it; no taking it back. It’s an unbelievable business proposition. Why don’t I do it? Because I want to maintain the exclusivity of the brand. If you put your ties in every single corner, you lose what’s special about the product.This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 12 Do Not Copy or Post Gucci Group N. V. (A) 701-037 Gucci in 2000 The Battle with LVMH In 1994, Bernard Arnault considered adding Gucci to his stable of brands but balked at the asking price of $350 million. 33Five years later, with Gucci emerging as a real competitor, he was ready to pay much more. LVMH started accumulating shares in Gucci in November 1998.By the end of January 1999, the company had spent an estimated $1. 4 billion to become Gucci’s largest shareholder, with 34. 4%. De Sole’s reaction to this development was characteristically firm. If Arnault wanted to acquire Gucci outright, he explained, he and Tom Ford were willing to stay. But if Arnault’s goal was a creeping takeover, De Sole was prepared to fight him every inch of the way. “I said to him, ‘You want the company, you have to pay for it,’” he recalled. De Sole gave proof of his determination in February 1999, after Arnault demanded the right to appoint a director to Gucci’s board.De Sole riposted by announcing that the company had issued 20 million shares—equivalent to LVMH’s stake—to a newly created employee stock ownership plan. LVMH sued to block the move, which would have reduced its holding in Gucci to 25. 6%. But LVMH was caught off-guard one month later, when De Sole dealt Arnault’s ambitions a fatal blow. On March 19, Gucci announced that it had found a white knight in Francois Pinault, the chairman of Pinault-Printemps-Redoute (PPR), the largest non-food retail group in Europe. PPR bought 40% of Gucci for $2. 9 billion, diluting LVMH’s holding to 19. 6%.At the same time, Pinault announced that his holding company, Artemis, was paying close to $1 billion for the beauty business of French pharmaceuticals firm Sanofi, which owned Yves Saint Laurent and licenses for several other brands. Arnault immediately countered with a conditional offer to acquire Gucci, contending that he could realize more than $50 million in synergies by bringing Gucci together with Vuitton. 34But Gucci rejected this and subsequent bids. While LVMH continued to attack Gucci through the courts, Gucci shareholders approved the alliance with Pinault at a meeting in July 1999. 5In November, Gucci acquired Sanofi Beaute, which it split into two companies: Yves Saint Laurent Couture, which produced YSL ready-to-wear and accessories, and YSL Beaute, which managed the fragrance and cosmetics brands. The Pinault infusion and the Sanofi Beaute transactions transformed Gucci into a multi-brand luxury group with nearly $3 billion in cash. The New Gucci Group As of early 2000, Gucci Group included four divisions: Gucci, Yves Saint Laurent Couture, YSL Beaute, and Sergio Rossi, an Italian shoemaker that Gucci bought in November 1999.Each of the divisions had its own management structure, headed by a president or CEO, who reported to Domenico De Sole. At the top of the organization, a small circle around De Sole and Ford, including CFO Bob Singer, human resources head Renato Ricci, and James McArthur, who joined Gucci from Morgan Stanley Dean Witter as director of strategy and acquisitions, shared responsibility for the operations of the group as a whole. Gucci retained deep roots in Italy, where most of its manufacturing (watches excluded) remained, but it was a remarkably international company, even before becoming a multibrand group.Incorporated in the Netherlands, Gucci traded in Amsterdam and New York. De Sole and McArthur were based in London, together with the design team, which had moved from Italy under Tom Ford. Bob Singer and Brian Blake operated out of Florence, although Singer, who had married an Italian, lived in Milan. Gucci also had an important presence in Switzerland, through Gucci Timepieces and its centralized warehousing facility, and on the retail level, in the United States and Japan. In addition, with its acquisitions, Gucci gained another outpost in Italy and a base in Paris, home toThis document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 13 Do Not Copy or Post 701-037Gucci Group N. V. (A) Yves Saint Laurent. De Sole laughed as he explained his secret for making the far-flung structure work: “We know each other very well, we talk constantly, and I go back and forth all the time. ” Sanofi Beaute was Gucci’s largest acquisition by far, but it was not the first. In November 1997, the company bought back the Gucci watch business from Severin Montres, a long-time licensee, for $170 million.Gucci’s strategy for Gucci Timepieces provided the management, in some respects, with a model for handling YSL and Sergio Rossi. Between 1997 and 1999, Gucci increased the average retail price of its watches from around $500 to $700 while cutting distribution from 7,000 points of sales to a planned 6,000 doors (of better quality overall) by the end of 2000. 36Gucci also realized considerable savings by consolidating back office operations, such as warehousing, for all of its product groups. But YSL and Sergio Rossi presented a challenge Gucci had never faced: the need to manage independent brands.YSL CoutureYves Saint Laurent was a name to conjure with in the fashion world. “Yves Saint Laurent almost invented the way a modern woman dresses,” Ford explained. “He put women in pants, jackets, tailoring…. If you look at collections Yves did in the ‘60s and ‘70s, we’re still living off of them. ” Born in Algeria in 1936, Yves Saint Laurent became Christian Dior’s hand-picked successor at the age of 21. Several years later, he started his own business in partnership with Pierre Berge. A prodigious talent, Saint Laurent created collections inspired by sources as diverse as Mondrian and the Ballets Russes.Many of the signature looks that became fashion staples—the belted trench coat, sharply tailored pantsuit, tuxedo dress, and scarf-necked chiffon blouse—were considered revolutionary the first time he sent them down the runway. However, the famously fragile designer suffered from recurrent bouts of exhaustion and depression, exacerbated by drug and alcohol abuse. By the time Gucci acquired the brand, Saint Laurent was no longer designing his own ready-to-wear, and many observers wrote off his haute couture as a recycled pastiche of old designs. Haute couture was fashion’s stratosphere, with one-of-kind, hand-fitted suits starting at $10,000 to $20,000 and up. A suit from a top ready-to-wear house, by contrast, typically cost around $2,000 to $3,000. ) Excluding fragrance and cosmetics, YSL had $88 million in revenue, with royalties accounting for 64%, and an operating margin of 1%. 37The company held 167 contracts with licensees, for products ranging from apparel to lighters and pens. In addition, YSL owned a small DOS network, with 11 stores in Europe and two in the United States, while wholesale distribution generated a few million dollars a year.While Gucci would own YSL’s ready-wear assets (which consisted largely of its licensing contracts) and the name, Artemis agreed to retain the haute couture part of the business. In addition, in February 2000, in a separate deal, the newly renamed YSL Couture bought Mendes, the French company that had produced and distributed women’s ready-to- wear for YSL since the late 1960s. With Mendes, YSL Couture recovered control of women’s ready- to-wear and took over three factories with 650 employees, together with 11 directly operated stores and a contract with an independent distributor in Japan.In January 2000, Gucci Group announced that Ford would add the job of creative director at YSL to his existing responsibilities. Ford’s new mission was to modernize and redefine YSL, while honoring its heritage and keeping YSL and Gucci visually distinct. He described his vision of the two brands in vivid terms: The Yves Saint Laurent woman and the Gucci woman are very different. The Gucci woman—and I hate to use this because it sounds corny—is much more of a James Bond kind of woman. She’s very sexy; she’s flashy; she’s very comfortable with her body; she’s very confident.The Gucci woman is getting out of a sports car in a blouse that’s open to her waist. She’s with some great-looking guy, they’re both wearing sunglasses, and they’re living more of a rock star, movie star life. The Saint Laurent woman might also be a movie star, but she’s different. All you have to do is think of the visual imagery of the Saint Laurent woman—it’s This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 14 Do Not Copy or Post Gucci Group N.V. (A)701-037 Catherine Deneuve. The Saint Laurent woman would have on a blouse that might be completely closed to the neck. However, when she takes her jacket off, it’s totally transparent. It’s sexy, but it’s a different kind of sexy—a more intelligent sexy, a more restrained sexy, a little bit chic-er, more French. While Ford focused on the design side of YSL, many open questions about YSL remained, ranging from how to handle manufacturing, which was currently done in-house in France, to appropriate strategies for distribution, branding, and the launch of new product lines. See Exhibit 7 and Exhibit 8. ) YSL BeauteYSL Beaute held the cosmetics and fragrance brands that Gucci Group acquired with Sanofi Beaute. In addition to Yves Saint Laurent, they included Roger & Gallet and licenses to produce and distribute fragrances for Van Cleef & Arpels, Krizia, Fendi, and Oscar de la Renta. Sales were estimated at $583 million in 1999, with YSL products generating more than 70%. De Sole moved swiftly to reinforce the senior management team at YSL Beaute, hiring Chantal Roos as president and managing director.Roos returned to YSL Beaute from Beaute Prestige International (BPI), where she successfully launched Issey Miyake and Jean Paul Gaultier Parfums. Prior to founding BPI in 1990, Roos spent 14 years at YSL Parfums, where she was responsible for developing and launching Opium and Paris, two of the company’s most popular fragrance lines. Sergio RossiCalzaturificio Sergio Rossi produced high-fashion shoes, both under its own name and under license for companies like Dolce & Gabbana and Versace. The company had 13 directly operated stores and eight franchised stores in Europe and Asia. 8In the United States, Sergio Rossi shoes, which sold for around $400, were primarily distributed through exclusive department stores, including Neiman Marcus and Saks. In November 1999, Gucci paid $96 million for 70% of the company, which was estimated to have $59 million in sales. Founder Sergio Rossi, who remained as chairman and creative director, retained the other 30%. Conclusion As Tom Ford reflected on the challenges facing Gucci Group, he identified one clear priority for the months ahead: I think we have to make really smart acquisitions.I think we have to be careful and not just feel that we have $3 billion burning a hole in our pocket and just snap up brands for the sake of snapping up brands. I think our acquisitions will make or break us. Aside from that, the period we’re in is also quite crucial because we’re in transition. Once we learn to handle four brands or four companies, which is what we are today, handling six or seven or eight or nine or ten will, I think, be less of a struggle. What we’re struggling with is a total change in the mentality of how we work. Once we’re comfortable with that, adding extra brands will not be a struggle.This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 15 Do Not Copy or Post 701-037Gucci Group N. V. (A) Exhibit 1Selected Financial Data for Gucci ($ millions): 1992-99 19991998199719961995199419931992 Net revenues Gucci division SergioRossi YSLCouture 8——- 1,236 1,042 975 881 500 264 203 199 1,187 1,042 975 881 500 264 203 199 10 – – – – – – – YSLBeaute Gross profit SG&A Warehouse Store Communication Selling* G&A** Operating income (loss) Net income (loss)***Total assets Total current assets Cash & equivalents Inventories, net Property, plant & equipment, net Long-term debt**** Shareholders’ equity Gross profit margin SG&A/sales Operating margin Return on sales*** Return on invested capital Return on equity Sales per sq. ft. in DOS Head count 32 – 831693 558453 NA 16 NA199 NA80 NA 19 NA 140 270240 330195 5,253914 3,713539 2,948168 251157 315173 14317 3,861577 67%66% 45%43% 21%23% 27%19% 9%36% 15%38% NA$2,548 NA2,660 – – – 611568329 375329208 14 12 7 177148100 696128 17 13- 989674 237239121 18916883 710609330 451523268 116231126 16313573 1106343 -0. 8 461327175 63%65%66% 38%37%42% 24%27%24% 19%19%17% 46%63%60% 48%67%NM $3,248$3,400$2,300 1,9541,5041,176 – – – 168120114 136115143 5 NA NA 6451NA 136NA — 5443NA 325(29) 18(22)(32) 176160193 NANANA 392313 514462 NANANA 22423 (164)(6)28 64%59%58% 52%57%72% 12%2%NM 7%NMNM 46%NMNM NMNMNM NANANA 1,0961,1871,329 *Selling expenses primarily represent expenses related to wholesale distribution. **General and administrative expenses primarily represent expenses related to design, product development, merchandising, administration, information systems, and discretionary bonuses. **Net income for 1999 includes $133. 6 million in net financial income. ****Less current portion. Notes: Gucci financial year ends on January 31 of the following year; figures for Sergio Rossi are consolidated as of November 21, 1999; figures for YSL Couture, and YSL Beaute are consolidated for one month. Source: Company reports. This document is authorized for use only by Usha Narasimhan until September 2012. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 16 Do Not Copy or Post Gucci Group N. V. (A) 701-037 Exhibit 2 100% 0% 60% 40% 20% 0% 1998 Sales by Product Category: Selected Competitors Notes: Louis Vuitton is a subsidiary of LVMH; data for Louis Vuitton are Morgan Stanley estimates. Source: Gucci presentation, October 1999. Other Apparel Jewelry & Watches Leather Rest of World North America Europe Asia Exhibit 3 100% 80% 60% 40% 20% 0% 1998 Sales by Region: Selected Competitors Notes: Data for Prada are for 1997