Gucci, owned by Kering SA, has been facing challenges in keeping up with luxury brands such as Brunello Cucinelli and Hermes. Kering reported a 9% decline in third-quarter sales, worse than what analysts had predicted, while brands like Hermes exceeded expectations and saw no signs of weakening demand from their wealthy customer base. The reason behind this divergent performance lies in the different customer bases that these brands cater to.
The decline in spending among the simply affluent in the US and Europe has affected Gucci’s performance, as these customers have seen a decline in confidence. On the other hand, the ultra-wealthy continue to spend, with a shift in fashion trends towards more refined elegance. This trend is well-suited to brands like Hermes and Brunello Cucinelli, which cater to the desires of the ultra-wealthy. Meanwhile, Gucci appeals more to young fashion-obsessed shoppers who may be facing financial pressures or have shifted to other designers.
To overcome this challenge, Kering needs to pivot towards the top echelons of buyers, even if it means facing short-term obstacles such as raising prices, toning down on its fashion flair, and reducing sales through third-party retailers. This transition won’t be easy for Gucci, as it is already moving away from its bold maximalist style to a sleeker aesthetic under new top designer Sabato de Sarno. Gucci’s organic sales fell 7% in the third quarter, worse than expected, although positive feedback has been received for the new collection. The true impact of the transformation will only be visible when the first items hit stores in January.
In addition to Gucci’s challenges, other Kering brands like Yves Saint Laurent and Bottega Veneta are also facing difficulties. Yves Saint Laurent is experiencing competition from LVMH’s Celine and Loewe, resulting in a 12% decline in organic sales during the third quarter. Kering has strategies in place to reorient its business towards understated luxury and the purchasing power of the super-rich. The reinvention of Gucci is crucial for the company, as it requires a fresh creative direction to attract customers and elevate the brand’s clothes and accessories, even if it means charging higher prices. While Saint Laurent faces competition, it operates in the more subdued luxury space, and Kering should continue to develop the brand despite sacrificing some sales. Bottega Veneta’s performance has also been affected by efforts to make the brand more exclusive, but there is potential in pushing its iconic products further. Kering can fill the void until Gucci’s performance improves.
However, investors remain skeptical about Kering’s future, as its shares have fallen by as much as 5% and are down 17% this year. The shares trade at a lower price-to-earnings ratio compared to its rival LVMH. To bridge this gap, Kering needs to ensure that its transformation appeals to the old money clientele rather than the nouveau riche.
Links:
1. Gucci Official Website
2. Hermes Official Website
