China graft purge will pay off, says Gucci’s François-Henri Pinault
Kering chief identifies long-term gains from rule of law and stronger digital presence
The sun is pouring through the window of François-Henri Pinault’s London office where the head of Kering, the lifestyle group, looks remarkably relaxed given the turmoil in the luxury market.
High-end retail groups including Kering brands Gucci and Yves Saint Laurent have suffered as terror attacks have cut the flow of free-spending tourists to Europe, and from sharply falling sales in Macau and Hong Kong since the 2014 pro-democracy protests began.
Even worse, Beijing’s crackdown on lavish spending and gift-giving, launched more than three years ago, has flattened sales in China after a decade of remarkable growth. In 2014, following the abrupt change in policy, luxury spending in mainland China fell for the first time, according to consultants Bain & Co.
But, Mr Pinault, husband of Salma Hayek, the Hollywood actor, believes his Paris-based company and investors more will ultimately benefit from Chinese president Xi Jinping’s campaign.
“If you look at emerging economies, in those economies that reached a ceiling and couldn’t go beyond, it was usually because there was no rule of law,” says the French billionaire. “It had a negative impact short-term, but it is probably a very good decision long-term for China — and for investors in China.”
Faced with the crackdown, many Chinese consumers changed the way they bought luxury goods. Exane BNP Paribas estimates that Gucci went from serving two-thirds of Chinese demand with sales inside the country before the crackdown to as little as one-third at the lowest point afterwards.
That shift has left Kering and its rivals vulnerable to another Chinese challenge: increased taxes, as well as greater enforcement at customs, on people bringing in more than one luxury item from overseas.
Mr Pinault, who has headed the group since 2005, acknowledges that those measures will probably hit sales to Chinese customers in Europe and other markets. But here too he sees a silver lining — the taxes should also reduce the number of luxury items sold in China through third-party channels.
“You don’t control anything,” he says of such sales. “We are not just selling products, we are selling brands and brand values. It is about what is behind the product — and that completely disappears when people buy on the parallel market.”
Mr Pinault says China continues to offer huge potential. “The Chinese tradition to offer gifts is still there and will remain,” he says. “But part of that gift giving used to be related to corruption, and you cannot build a business on this . . . it’s not sustainable.”
Mr Pinault, a rugged-looking but softly-spoken figure, joined his family’s company in 1987 when it was known as PPR. He held a string of managerial positions in the retail group created by Francois Pinault, his father, including its wood supply company and its distribution arm.
Since taking over more than 11 years ago, he has transformed the retail empire into what is today the world’s second-biggest luxury group — beyond Gucci, brands include Balenciaga, Bottega Veneta and Boucheron — by sales. Revenue last year was €11.6bn, 68 per cent from luxury sales and the rest from Kering’s sport and lifestyle division, which includes the Puma brand.
In 2014, Mr Pinault moved with his family to London, though Kering stresses that he continues to pay taxes in France. He enjoys the relative anonymity. “I’m not a celebrity but people recognise me in Paris,” he explains.
He also likes London’s cosmopolitan profile. “At private dinners here, there are five or six nationalities around the table, and it’s normal — it’s not a big deal,” he says. “It’s not exactly the same in Paris.”
Amid the multiple complexities facing luxury, Kering can point to several bright spots. Sales at Gucci, which accounts for half the group’s luxury revenue, have been picking up after the appointment last year of Alessandro Michele as creative director — a move aimed at breathing new life into what was then considered a flagging brand.
The shake-up has produced a change of focus. Gucci is moving away from an emphasis on craftsmanship to one that puts “trendy” centre stage. It seems to be working: women’s ready-to-wear sales, typically the first category to show the performance of a new designer, have grown 66 per cent year to date.
Mr Pinault says there is more to come: Gucci’s product range will only fully reflect Mr Michele’s designs by the end of this year. “We are addressing category after category,” he says. “The products that come from the brand’s new positioning are growing very, very fast. The more we increase their share in the complete offering, the better.”
One of the biggest questions in the industry is whether luxury brands can successfully embrace ecommerce — an area in which leading groups have, for the most part, hesitated. But Mr Pinault says, “luxury cannot afford not to think about digital”.
Yet he acknowledges that the shift online “is an ongoing process”. Kering, like other groups, has struggled to provide the same level of service for online purchases as customers who buy in-store, such as personal fittings and alterations.
“Can you offer an alteration service that is available at home?” he asks. “These are basic things. We are dealing with the same person online and offline so you have to deliver the same experience.”
Mr Pinault says Kering brands are shifting more of their advertising budgets to digital offerings, which he says are ideal for reaching a wider audience. “We sell to few people but you need to communicate to the many,” Mr Pinault says. “What is specific to our industry is that you also need to communicate towards people who will probably never buy your brand because this is part of the dream and the sense of exclusivity.”