Executive Summary Gucci Group is a luxury goods retailer focusing on improving their market share while producing high quality fashionable items. Initially, Gucci’s poor business strategy and internal family conflict directly resulted in decreased sales and net income. When Investcorp took control of the company, Gucci regained their success through quality management and acquisitions. Gucci’s product line now includes a large range of products. We would like to continue Gucci’s success and believe that the next major business decision for Gucci is how to manage the new acquisitions.
We recommend that Gucci cease further acquisitions of companies to its portfolio and should not challenge the status quo by making big management changes at the group of companies that it has acquired. This will help sustain growth in different segments and maintain an existing customer base. Introduction Gucci Group’s iconic red and green stripe, as well as their G logo, has been associated with luxury, elegance and glamour since 1923. Once a family owned leather goods store, Gucci has expanded worldwide and increased its product mix to include other luxury goods such as purses and shoes.
Gucci’s business operations lacked experienced leadership since family members controlled business decisions. The market for luxury goods had become fiercely competitive and Gucci’s lack of business strategy had caused them to lose market share to their close competitors, Moet Hennessy-Louis Vuitton, Hermes and Prada. Gucci financial status had fallen while their competitors had increased their sales and operating margins (Exhibit 4). In 1993, Investcorp bought the remaining shares of the Gucci family and placed the necessary management personnel to help turn around Gucci’s struggling business.
Through a series of acquisitions and business line decisions, Domenico De Sole, President, and Tom Ford, Creative Director, help re-invent Gucci’s brand line and established a firm financial foothold for the company. Gucci acquired three major companies: Yves Saint Laurent Couture, YSL Beaute, and Sergio Rossi to create four divisions of Gucci Group while also generating $3 billions in cash. In the early 1990’s, Gucci’s core customer was a matured, conservative, wealthy woman but the company decided to change their business line to capture the market on the younger, more ashion conscious individual. Identification and Justification of Key Strategic Issue Gucci, as previously mentioned, has evolved from a family business into a global corporation. Along this evolution, Gucci has encountered many challenges. One of the key challenges faced by Gucci is preventing a buyout from one of it’s main competitors, Moet Hennessy-Louis Vuitton, Hermes. In order to prevent being acquired, Gucci has taken the path to acquiring other companies, and this is the key strategic issue that is challenging them moving forward.
Do they continue this path of acquisitions with the capital they have on hand or not. Another key strategic issue that had adversely affected Gucci in the past was streamlining their supply chain and distribution operations. This is related to their key strategic strategy of acquisition. As they acquire companies, they will face the same challenges they have had in the past. Identification and Evaluation of Alternatives Below are the strategic recommendations regarding the future position of the Gucci Group and its new acquisitions.
All of these alternatives are mutually exclusive business strategies, and we have evaluated each alternative’s pros and cons should Gucci choose to implement it. Alternative 1: Keep separate management structure and freeze new acquisitions. As of 2000, each of Gucci Group’s new divisions – Gucci, Yves Saint Laurent Couture, YSL Beaute, and Sergio Rossi – had its own management structure. A president or CEO of each of the divisions reported to Domenico De Sole. Our strategic recommendation is to continue managing the newly acquired brands independently while holding off on further acquisitions for now. Pros: Having separate management that ultimately reports to De Sole allows the new divisions to maintain the integrity of each brand and avoid brand dilution, while keeping the overall control of the company in the hands of one man who has proven to be a positive influence on the company. We can also leverage the strength and popularity of the Gucci brand to gain distribution for the smaller names, much like how LVMH leveraged Louis Vuitton’s popularity. By holding off of new acquisitions, Gucci can learn to handle the four brands they currently have before adding extra brands. Cons: Four brands with their own management structure may prove to be difficult for De Sole to wrangle, as the managers could bring their own management styles that may not mesh well with De Sole’s style. With the current hold on acquisitions, Gucci may miss out on opportunities to acquire strong brands. Alternative 2: Increase acquisitions in a number of diverse companies. Most luxury brands have been family-owned or -controlled and, consequently, were single-brand firms for the most part. However, mergers and acquisitions have been growing in the industry, with LVMH leading the way.
Our strategic recommendation is to follow LVMH’s lead and acquire a multitude of diverse companies to build the Gucci portfolio. •Pros: Family ownership of the Gucci Group had dissolved with the drama and tragedy that plagued the Gucci family, so moving away from the ‘family-owned, single-brand’ system seems like it would strengthen and stabilize the company. Depending on the acquisitions the company makes, Gucci Group could potentially become a lifestyle brand for luxury customers to go to for a diverse set of needs. Cons: If the Gucci name becomes associated with lower quality companies through poorly chosen acquisitions, the Gucci brand could be in jeopardy. Becoming a multi-brand company may take away the focus and attention that each brand, including Gucci, needs to continue being successful. Moreover, acquiring multiple companies now before Gucci management is comfortable with the acquisitions it has already made may be too much too fast for the company. Alternative 3: Extend Gucci brand through diffusion lines.
Extending the brand through diffusion is another strategic recommendation that would help Gucci increase sales. •Pros: With Gucci diffusion lines, the company could target different market segments while maintaining their core business. Extension lines have been successful for competitors such as Emporio Armani and their diffusion line of Armani Exchange. Gucci would be able to attract a new clientele while increasing their customer base. •Cons: Diffusion lines may weaken the Gucci brand strength overall due to different quality levels. A new line would also incur large initial capital investment and advertising.