Fixing the Weakest Luxury brand: Kering

🧠 The Takeaways

Today we’re turning around Kering (€29B cap owners of Gucci and YSL) before this becomes a bargain basement brand.

1. Lean into the brand more. Stop with the soft palette nonsense.

2. Have more exclusive Luxury products that rich consumers crave.

3. Acquire brands in other categories to have real diversity.

+ Why we all need to study psychology more.

Let’s Community - Study More Psychology

I think the greatest disservice we do to everyone in biz is not forcing everyone to study psychology. In our industry, we end up learning it because we have to make sales, but it’s a crime that everyone doesn’t learn it as a basic foundation.

At a certain point, everyone in this game is in or serves a function of Sales & Marketing. And instead of studying Sales or Marketing really what’s more valuable is studying psychology.

Marketing and Sales as professions have put together some pretty decent frameworks on how people make decisions, but really they are adaptations of psychological research/insights.

If you want to be great you have to unpack the fundamentals: social psychology, human psychology, and economic behavioral economics to really understand the frameworks/principles on how humans make decisions. 

What is the underlying human philosophies and quirks of how people make decisions to truly understand how people exchange things of value for things that you think they want. AKA buying stuff.

If you want to be at the top of anything you have to master the art of convincing people to make decisions.

Here are my favorites:

• Daniel Kahneman - Thinking, Fast and Slow

• Robert Sapolsky, Behave

• Robert Cialdini - Influence

• Nasim Taleb - Black Swan, Anti-Fragile

• Chris Voss - Never Split the Difference

At the end of the day, what you really want is to do your own research into how humans make decisions. That’s where the true value unlock in a business is.

Arbitrages, disruption, new angles to take to market is really just studying human psychology, launching an experiment and re-investing if the initial results look good.

And then find a unique angle of how you can position that insight to the world.

Let’s Examine This Biz

Kering, owner of Gucci, Yves Saint Laurent (YSL), Bottega Veneta and a bunch of other Luxury brands is seeing sales and earnings slide so hard they need to issue a PSA.

Trading at €25.22/share with a €29B market cap, they’re -54% L5. This brand house is getting left in the dust by its peers and speedrunning to becoming a TJ Maxx supplier if they don’t turn the ship around.

Kering, which started in the 1960s as a lumber trading biz (I kid you not), acquired their luxury Fashion brands in the late 90s/early 2000s, scooping up Gucci, YSL, Bottega Venetta, Balenciaga, Boucheron, Brioni, and Alexander McQueen. Basically they’re a Luxury House Aggregator.

Now they are the second largest Luxury Conglomerate behind LVMH. Or at least they used to be.

Kering is the perfect ex of how a biz is just a legal entity, and they made the ultimate financial pivot. Shows if you have enough capital and wit, you can do anything with a biz.

Financial Summary

TLDR Analysis: The Loser is falling behind

• FCF fell off a cliff (-38%) compared to every other number. 😰

• Classic ex of falling sales crushing profit 🫣

• Trading at a P/E ratio of 9.6x. Insulting considering most of the category trades at 2-5x that. 😬

Where the cracks are really starting to show is in their Net Debt (Debt - Cash & Equivalents). Essentially Net Debt is how much debt would remain if all current cash were put toward paying down the debt. 

By the end of 2023, it skyrocketed to €8.4B (+269%). In 2021, that number was €168m. A 50x increase in 2 years. Needless to say we want that number to be as small as possible.

Luxury brands aren’t immune to the same doom loops that other brands can fall into. Gucci has missed the mark on dropping need to have products, forcing them to discount more. Lower margins/profits force them to take on more debt, which has escalated so quickly it could take the biz under.

In 2022, the biz had €3.7B in earnings and €2.3B in net debt. Essentially 1 year of earnings could have covered the debt if it needed.

In 2023, the biz had €3.1B in earnings on €8.5B in Net debt, which would require 3 years to pay it off. I’m not saying Kering is going bankrupt soon, but it’s these types of factors that get brands into sticky situations and make it virtually impossible to get out of them.

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How? 

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Here’s an example from Margaux’s site.

The customer prepays for the peace of mind that there won’t be any larger fees later. You keep the pool of money to offset, and potentially profit on, the downstream returns costs for the items that are returned (returns software costs, shipping labels, and drop-off options like Return Bars®).

This is yet another area where you should be flipping a cost center into a profit center in your P&L.

And the best part is with Offset, you can use the full Loop suite for free, including… 

• Exchange upsell features

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• 120+ Shopify ecosystem integrations

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If you’ve been considering adding a returns tool to your stack but didn’t have the return rate to justify investing in a tool, or you are looking for more ways to increase profitability, now is the perfect opportunity to join 4k brands like Patagonia, Figs, and Ruggable already using Loop.

Let’s Scale This Biz!

Here are the 3 moves I’d make to turn Kering back into a Luxury juggernaut.

1) Gucci needs to be more Gucci

Gucci is Kering’s crown jewel, representing 50% of the total portfolio’s sales. 

Basically, where Gucci goes, Kering’s performance follows. When you look through Gucci’s website, it honestly looks like any other luxury fashion retailer. Models wearing cool low logo clothes that look like they could be made by anyone. 

Let’s be honest. While Gucci needs to have high quality products, that isn’t why customers buy Gucci.

This whole subtle style is the wrong strategy at the wrong time.

No matter what you think of the Gucci design, they should be plastering the Gucci logo + the red and green stripes + the GG clasps on EVERYTHING.

Forget demure. Forget subtle fashion. Gucci thrives because of LOUD fashion.

In a luxury market where the aspirational reachers are retreating back to Walmart brands, and the truly wealthy need to spend their money somewhere, now is not the time to be the subtle, affordable luxury player.

Gucci needs to unleash the beast to turn sales around. They’re running a smart play by updating the design of the GG emblem, forcing loyalists to upgrade if they want to have the latest & greatest.

But what Gucci is really missing is capturing the new money that’s entering the space and driving most of the new growth in Luxury.

They need to target Gen Z & Millennials more. Gucci and YSL are both targeting older customers and more mature looks when, really, they should be trending in the opposite direction.

They should be tapping into Millennials’ early 2000s Rap nostalgia and bringing back their favorite rappers’ favorite Gucci products. This went so deep that a rapper named himself Gucci Mane, and if you’ve listened to his music you’d know subtle/demure isn’t his brand.

With how competitive the Luxury space is and how demographics are changing (from an age + income perspective) Gucci should be reintroducing themselves to the younger generation in an unapologetic way.

And they are still doing this in certain areas of their biz. Their Travel line, Home decor, and Beauty all scream Gucci. They’ve just pulled their punches where it counts on their core products (Handbags and Clothing).

Takeaway: When times are tough, revert to better versions of your greatest hits.

2) Drive more Exclusive products

Hermès (€224B) is absolutely crushing Gucci playing 1 game. Making the most exclusive handbags on the market and intentionally under deserving the demand.

Hermès is one of the only Luxury brands growing right now because they’ve tapped into the buying habit that will keep the wealthiest customers coming back to buy more than anywhere else.

Extreme exclusivity. 

And I mean EXTREME. To be eligible to buy the most popular types of Hermès bags (Birken and Kelly bags), you need to spend so much money at their stores that you develop a relationship with a sales rep.

I’m not joking. You literally need to buy a friend (who’s an employee) to get you access to the good stuff.

We can argue whether that’s ethical all day long, but what it does is drive intense customer loyalty from one of the most brilliant forms of scarcity the world has ever seen.

Want to know how to sell something to an insanely wealthy person who has it all?

Show them something new and tell them they can’t have it. Not that they can’t afford it. Just that they can’t access it.

If Gucci wants to move away from being the discount Luxury brand, they need to move back to the hyper exclusive end of the Luxury spectrum. They have to create a product that people will be obsessed with and intentionally not make enough of them.

Constantly leaving more demand on the table than you serve is painful in the short term, but long-term, it’s what converts a brand into a Luxury brand. Demand >>>> served supply.

The opposite defines a discounting brand.

Gucci made the mistake over the last decade of relying too much on the aspirational reacher. It’s incredible when the market size is growing and you can maximize the brand halo, but it’s equally crushing (as we’ve seen) when the market corrects.

Takeaway: Gucci needs to return to being an ultra-luxury brand.

3) Diversify into other Categories Or Stay in the Fashion Lane

Kering started the diversification playbook but never completed it.

Kering, the literal brand not portco name, was recently launched as the manufacturers of eyewear, jewelry, and beauty/cosmetics for the famous logos they’ve acquired. They make Gucci, YSL and Bottega’s glasses, cosmetics and jewerly.

It’s a smart play, but the major mistake they made was not diversifying more. Acquiring more brands in other verticals.

They have diversification but not enough of it.

Do you know what the most popular Gucci, YSL and Bottega Veneta products are?

Fashion & Leather Goods (AKA Clothing + Handbags)

They’re stuck in luxury purgatory where they have baby diversification, but not enough to meaningfully protect them in downturn markets like this one. If consumers stop buying essentially fashion items Kering doesn’t really have anything else to sell them.

Over the last 25 years, they should have been acquiring more Luxury brands.

Kering doesn’t break out their sales by product category, but considering 75% of their sales come from Gucci, YSL and Bottega Veneta, my best guess is 60-70% of sales come from Fashion & Leather Goods.

LVMH, on the other hand, has 50% of its sales come from Fashion & Leather Goods. Still a high concentration, but when some of their brands have a tough year, they can rely on Perfume & Cosmetics (10%) or Wines & Spirits (8%) to bridge the gap.

The other crazy idea here would be to sell off Kering (the brand) to another player like Luxxotica and go all in on the Fashion Houses. Kering is the latest development in the brand portfolio, and seems more like a hedge than a true diversification play.

Either way, they need to pick a lane. 

1. They can continue to acquire and scale more Luxury brands, but they need to diversify into categories that are not Fashion & Leather Goods.

2. Or they streamline the biz, go all in on the core houses, and live or die on Fashion & Leather Goods.

Takeaway:  If you’re running a diversified strategy… Actually diversify.

Final Thought

International brands scale in Asia. It’s why every luxury brand is hurting right now, but it’s been the backbone of their largest growth over the last decade.

I think too many U.S.-focused brands think all of their growth can and will come from the U.S. And while this is right up to a pretty serious scale (hundreds of millions), real international bizs dominate in Asia.

After analyzing the earnings for a bunch of these Luxury brands (Kering, LVMH, Luxottica, Montcler), one thing they all have in common is >20% of sales happen in Asia. Mostly China + Japan, depending on the brand.

Is that harder, more complicated, and does it require developing different products and Go-to-Markets for different regions? Absolutely. 

Is it worth it? 

Ask every brand who has scaled past €1B in Revenue.

Since the Luxury consumer base is so much smaller than the typical consumer brand, they need to think about internationalization so much faster, but at the same time, they need to play better defense because they open themselves up to competitors in new markets faster.

Winning each customer matters a lot more when you have less of them and they spend way more money.

Overall, I think it’ll be a good thing for the ecosystem. The path they are forging now will make internationalization more attainable for more brands, as they build more infrastructure around the world to sell their products.

Those with the patience and the quality will continue to grow, dominate and drive demand in new markets. It’s all about figuring out when to strike while the iron is hot.