Gucci Strategic Analysis

Strategic Analysis of Gucci

1. What are the characteristics and attractiveness of industry?

The characteristic of luxury goods industry Gucci, Hermes and Louis Vuitton, all of these brands had been found more than 150 years ago. With the high amount of profit, as well as the sales growing 6% every year could make luxury goods industry one of the highest profitable market in the world. The industry has seven main product categories which are; leather goods, footwear, high-end apparel, silks, watches, jewelry and perfume.

The target group of this industry is women in the upper income brackets between the ages of 30 and 50.

However, in Asia, most customers are women between ages 21-25. In the past, most designer tried to focus on timeless designs that allowed them to sell the product time to time. Even if the products could not be sold out within a year, they could sell them again the following year. In doing these, they could lessen the over –production. The attractiveness of luxury goods industry In order to analyze the attractiveness of the industry, Porter’s five competitive forces are used to determine ability of the firm.

These are the five forces; threat of new entrants, threat from substitution products, bargaining power of buyer and supplier and the existing rivalry in the market. Threat of new entrants The threat of new entrants in this market is in the medium level. As the barrier of entry is very high as the company must has high investment and capital to develop their technologies to cope with existing brands, and to enter the distribution channel.

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Some small companies do not have capabilities to implement operation management as good as the existing company. They have to put much effort to truly understand the nature of this industry.

Also some countries have certain laws that might limit their distribution ability. Threat from substitution products There are very little of substitution products. Due to no substitution products that can really replace the luxury goods, the quality is different. * Bargaining power of buyer Even though the potential buyers have their own favorite designer, they may switch from brand to other brand easily. They usually buy products from different brands in relation to different goods. However, some are considered loyalty to particular brand as well.

Even though the numbers of buyers in this industry are only few but they are a large player in the industry. They all are willing to pay for high price product. Bargaining power of supplier The bargaining power of supplier is in lower level as all their products have yet been established into the market. Contrarily, the regular brands are more well-known to general customers worldwide. Existing competitors in the market There are several competitors in the market that are in better position than Gucci itself such as Hermes, Louis Vuitton, Prada or Chanel. These brands have very high quality products and good marketing plan as well.

It is quite tough for Gucci to handle with them. So the level of the rivalry is high.

2. The competition within the industry
The luxury market is highly competitive at present, with competition intensifying. The size of luxury goods market worldwide is estimated around US$60 billion with growing rate at 6% annually. There are about 35 top companies which produce 60% of goods. In one year, 6 companies were believed to earn more than US$1 billion while 15 to 20 earned US$500 million to US$1 billion range. 10 companies can earn US$500 to 100 million and the rest was up to US$500 million.

The top player was LVMH that disclosed the total revenue of US$ 8.2 billion in 1999. The key item of most top brands like LV, Chanel, Hermes and Gucci was leather goods such as handbag, silks and apparel. Even though there was economy recession in most countries, the luxury market was slightly affected as new segment of customers emerging. There are more working women and men who want to pamper themselves with the luxury products. As well as new generation shoppers have new tastes and styles. The income rate was increasing so the customers have more buying power.

3. Analyze generic competitive strategy company is using
Gucci had been focusing on both cost leadership strategy and differentiation in term of production, prices and services. Due to its remarkable effort to using outsource, it could reduce manufacturing cost and relatively product price by 30%. It also reduced fixed investment cost. Therefore, it could maintain the return on invested capital at 36%. In term of services, Gucci has differentiated by focusing on special customer service experience. It would provide the best and special services to customers any time they enter the stores.

For product differentiation, Gucci provided various ranges of products such as watches, jewelry, leather goods, apparel and ready-to-ware. The acquisition of YSL also initiated the new branding image ‘Saint Laurent Woman’ as well as Gucci Woman’. Two brands which suited with different styles. Moreover, Gucci has employed technologies to help boosting up sales rate. This includes online shopping via website, EDI network connecting Gucci-suppliers-partners, and data mining on customer preferences and market demand management and so on.

4. Define target groups of industry and each competitors
Target groups Most brands spread their channel to main three continents which are Europe, North America and Asia. In Europe and North America, The primary consumers of luxury goods are women in the upper income between the ages of 30 and 50. In contrast, in Asia, most consumers are younger between ages of 20 and 25. As they are still living with parents and have less responsibility, compared to European or American teenagers, they tend to intensely buy more stuff of accessories and ready-to-ware products. For Gucci itself, they are now focusing more on customers’ ages between 20 and 40.

They have been changing from Timeless Design to more fashionable design as their customers are likely to change their models every season. Competitors Competitors can be divided into four distinctive categories. First of all, ‘Hermes’ is considered to be the top brand of the market with the leather goods, “Kelly bag” the starting price was $4,300. The latter is ‘Chanel’, who sells the leather bag with the starting price at $1,500. ‘Gucci’, ‘Louis Vuitton’ and ‘Prada’ are in the middle range, with the basic leather goods pricing at $600 to $1000. And the one at the bottom is ‘Ferragamo’ that is in the end of luxury scale.

5. Compare Competitive positioning of all players and Map Positions of competitors in luxury goods business and who are in the best position players and why?
Competitive position of each player can be identified by 2 main factors. 1) Brand Value and 2) Operating Margin Operating Margin: Louis Vuitton is at the top with 30% followed by Gucci at 20%, Hermes at 20%, Prada at 19% and Chanel at 10%. Brand Value (US$ Million): Louis Vuitton is 24,312, followed by Hermes is 11,917.

Gucci 7,449 Chanel 6,823 and Prada 3,585. Figure 1: Operating Margin of Each Brand Figure 2: Brand Value of Each Brand For mass market, Louis Vuitton was considered in the best position so far, also the strongest competitor worldwide. As well as niche market, Hermes was in the best position in case of leather goods. As an initial designer, people have strong trust in quality of leather bag from Hermes. LVMH LVMH or Moet Hennessy Louis Vuitton was in the best position regarding to marketing and retailing worldwide. It is the world’s largest luxury goods, the mother of 60 sub-brands.

It was firstly merged by producer Moet de Chandon and Hennessy, a leading manufacturer of cognac. LVMH is also the mother company of Louis Vuitton. There are several factors that made Louis Vuitton become the strongest market leader position and strong competitive in mass luxury goods market among other companies as these following factors. * High quality product. Louis Vuitton has an image of the brand that produces the best quality luxury goods towards customers’ minds. * Louis Vuitton and LVMH have full control of every operation, production and distribution stage.

Instead of using outsource, they manage them all by themselves. In doing so, they could control the product quality and brand image better than others. * Louis Vuitton was the very first brand that had expanded its product line. It also made the most effective acquisition from buying or merging with other brands. For example, Louis Vuitton bought Sephora, the biggest cosmetic and perfume’s retailer in France. By the end of that time, LV had expanded almost 80% of its brands retails through 1,005 stores, including 261 for LV itself. Louis Vuitton’s best strength was the asset that supported other members of the group. LV’s popularity could help boosting up the popularity of relative brands among LVMH group as well Hermes The French high fashion house, there are many products such as ready-to-ware, leather goods, accessories and perfume. The house was founded by Thierry Hermes in 1837 and inherited by his son later. The strong points that made Hermes became the high luxury brand as these following; * Hermes introduced its products in term of uniqueness and different from any other brands.

Though the price of Hermes was very high, customers still willing to buy due to the quality and uniqueness that recognized by Hermes. * The term ‘most luxury item’ became the initial of Hermes immediately. * Even though Hermes had been growing slowly in this business, the house was always stable either normal or crisis’s period. However, since the house became stronger, it is even expanding its connection throughout the world over time. 6. Analyze situation and position of GUCCI The situation of Gucci can be divided into three period; year 1990, 1994 and 2000.

In 1990, Gucci had been facing difficulties to run business as it was unable to pay suppliers and employees. After Maurizio Gucci’s death, William Flanz, a member of Investcorp’s management committee had replaced him as CEO, while Domenico De Sole moved to Florence instead. It was a huge reorganization in order to appoint professional management and financial controls. Cost-cutting was the first priority due to high cost from distribution channel since when Maurizio was still controlled everything. De Sole had developed all production stages and delivery systems while Tom Ford took charge of designing.

In this period, Gucci was positioned ‘Market follower’ and ‘Weak’ when considering in competitive position analysis. In 1994, the first start of De Sole and Tom Ford was tough. They had facing difficulties from what Maurizio had done throughout the years. Ford was not only responsible for designing goods but also advertising, public relation, stores design or even the look of company annual report. Everything was assigned to each employee to responsible in different field. Hence, the progress was remarkably fast. They had been recovering the whole company ithin only four years. In this period, Gucci positioned themselves as ‘Market challenger’ from recovering strategies of De Sole and Tom Ford. They were emphasizing more on middle level pricing and youthful brand image. For this period of 1994, Gucci had positioned of ‘Favorable’. In 1995, De sole had combined all 7 Gucci around the world for the first time. Domenico De Sole was named CEO of the entire group in July. During the years, Gucci had changed their direction in many categories such as Fashion. From the conservative look to modern, urban and youthful styles instead.

As well as pricing, Gucci reduced the price of average by 30%. Even though this strategy would position Gucci lower than Hermes and Chanel, became the same position with Prada and Vuitton, it wanted to represent product that give good value to customer. In 1994, Bernard Arnault wanted to acquire Gucci as one of his brand, but he resisted to buy it for $350 million. However, after Gucci became one of the strongest competitors in luxury goods market, he eventually decided to pay 1. 4 billion to become Gucci’s largest shareholder, with 34. %. Later the controversy of De Sole and Arnault begun, Francois Pinault, the chairman of Pinault-Printemp-Redoute (PPR), had bought 40% of Gucci with $2. 9 billion. He was also an owner of Artemis, the beauty business in France that owned Yves Saint Laurent and several other brands. Therefore, in November 1999, Gucci bought Sanofi Beaute which owned Yves Saint Laurent Couture (ready-to-wear and accessories) and YSL Beaute (fragrance and cosmetics). From this action, Gucci had transformed from single-brand to multi-brand.

In 2000, Gucci still positioned themselves as ‘Market challenger’ from continued strategies of De Sole and Tom Ford. Moreover, Gucci changed itself as not only multi-brand but also international brand. In this period, the position of Gucci had almost hit ‘Strong’. 7. What are critical moves made by management to reposition the company? The critical step that Gucci had made to reposition the company was the acquisition of Yves Saint Laurent and Sergio Rossi as it made Gucci from Single-brand to become an international brand.

In early 2000, Gucci had included four divisions which are Gucci, Yves Saint Laurent Couture, YSL Beaute and Sergio Rossi, an Italian shoemaker that Gucci bought in November 1999. Since Gucci had founded in Italy, it had deep presence there. As an international brand, it widely had foundation in diverse locations around the world such as Amsterdam, Netherlands, Switzerland, Florence, New York, Japan, and Hong Kong. As well as its acquisition like Yves Saint Laurent that has base in Paris. However, Gucci has no problem with independent management of each brand as they have their own management structure. . Evaluate GUCCI strategy move to buy Yves Saint Laurent and Sergio Rossi why do so? As Tom Ford stated that making the right move would help company going forward, acquisition also. Since Gucci had passed the struggling time over the years, they have to make smarter decision in the future. The acquisition of YSL and Sergio Rossi also impact the brand in positive ways as these following. Yves Saint Laurent Yves Saint Laurent was a well-known brand on the topic of ready-to-wear, leather goods under the brand ‘Yves Saint Couture’, also cosmetics and fragrance under the brand ‘YSL Beaute’.

Even though Yves Saint Laurent Couture, one of the most prestige fashion design. Tom Ford was impressed by modern but classic at the same time of YSL Couture design. The arts of designing new things pull off the fabulous look of every type of clothes, such as women dress, tuxedo, pants and so on. YSL also owned 11 stored in Europe and 2 more in United States, while wholesale distribution generated a few million dollars a year. Tom Ford also dedicated himself as a creative director to modernize and redefine YSL. However, he still honors its heritage by separately distinct YSL and Gucci.

He revealed that YSL women and Gucci women have different styles so he did not want to put them altogether. The benefit of acquisition YSL Couture had improved many things especially the appropriate strategies for distribution and launching new product lines. YSL Beaute had generating more than 70% of sales $583 million in 1999. With a hand of Chantal Roos as president and managing director, she successfully launched Issey Miyake and Jean Paul Gaultier Parfums in 1990. Roos was responsible for developing and launching Opium and Paris, the company’s most popular perfume in fragrance line.

Sergio Rossi Gucci could expand the product line into shoes which they had never done before. Sergio brand, itself is a specialist of shoemaker, in manufacturing and designing. It already had various 13 directly operated stores and 8 franchise stores in Europe and Asia before Gucci bought 70% of the company (the remaining 30% owned by Sergio Rossi himself). It normally sells shoes starting price at $400 in United States since it sells only high quality product. It would help enhance the sales volume of Gucci in case of shoes categories.