For Gucci-owner Kering, cost-cutting is an up-and-coming trend
In the rarefied world of luxury, flair makes or breaks brands. While fortunes in other industries hinge on profit and loss, the maisons appear to thrive on chiffon and intuition. Even so, the financial savvy of former Renault boss Luca de Meo will be instrumental in turning around Gucci-owner Kering.
The root cause of the luxury conglomerate’s troubles is that sales at Gucci, which account for roughly half the parent company’s revenue, have collapsed. This year, they are expected to be down over 40 per cent, on Deutsche Bank numbers, compared to their peak in 2022.
This tumble has largely been blamed on fickle fashions, and Gucci’s struggles in getting on the right side of them. The brand’s attempts to reverse this have so far floundered. Creative director Sabato De Sarno’s understated elegance only lasted two years. Kering has now plumped for a more flamboyant designer, Demna Gvasalia — whose first looks appeared on the house’s Instagram account on Monday — but whether or not he will be a hit with clients will not be clear for several months to come.
Nailing fashion fads may look like a job for a cashmere-clad luxury veteran rather than an auto sector lifer. But that misunderstands the issue at hand. While falling sales may mostly be blamed on creativity, reviving them is only partly to do with the esoteric business of picking the right designer, or identifying the season’s must-have print. A lot of it is about having the resources to back the company’s vision. Buying inventory, marketing it and sprucing up stores to reflect the new zeitgeist are all necessary, and all cost a money.
Trouble is, as things stand Kering has little cash to spare. The cost of running the business — excluding that of the goods sold — has already risen to almost 60 per cent of revenue, or a third more than LVMH. Gucci’s divisional operating margin has more than halved from 35 per cent in 2022 to 16 per cent in the first half of this year. Meanwhile, Kering has acquired brands and stores with abandon, meaning its net debt, by its own measure, is now a toppy 3.4 times adjusted ebitda.
And that is where de Meo’s experience will come in handy. Already, he has postponed the date at which Qatar-backed fund Mayhoola can force Kering to buy its residual 70 per cent of Valentino. He may well step up sales of stakes in Kering’s real estate portfolio, which includes a €1.3bn building in Milan’s Via Montenapoleone. Costs, too, are likely to come in for some streamlining.
Granted, in luxury, wielding the scissors doesn’t have the same impact that it does in carmaking: closing a Gucci store in one place would not make the others more productive. But an auto expert such as De Meo will know that, when reversing out of a tight spot, every inch of extra room is precious.