In the global environment of inflation and polarization of the consumer market, French luxury conglomerate Kering has faced headwinds in China with its flagship brand Gucci, causing its market value to plummet to about one-sixth of its competitor Hermès. The group is attempting to reshape the brand by implementing operational strategies such as closing some Gucci outlet stores to reverse the situation.
According to a report from Nikkei Asia, due to weak demand, the consumer market in China is showing a stark divide, with the very high-end luxury market and the value-for-money low-price market thriving, while the mid-range market continues to shrink. Positioned in this “middle ground,” Gucci has been experiencing declining sales as a result.
As its core brand, Gucci contributes about two-thirds of the revenue for Kering, with the Chinese market accounting for approximately one-third of Gucci’s total sales.
The company’s financial report shows that in 2023, Gucci’s revenue was 9.873 billion euros, a 6% year-on-year decrease. In the first quarter of 2024, Gucci’s sales plummeted by 18%, with sales in the Asia-Pacific region dropping by 28% year-on-year.
The financial statement points out that the decline in sales in the Asia-Pacific markets, including China, due to the sluggish market environment and brand positioning adjustments, are all reasons that led to Gucci’s performance decline in the first quarter.
In comparison, rival Hermès saw a 14% increase in revenue in Asia (excluding Japan) and a 25% increase in Japan. LVMH saw only a 6% revenue decrease in Asia (excluding Japan); due to a significant depreciation of the yen, revenues in Japan surged by 32%, contributing 9% to the group from 7%.
As of June 2019, Kering’s market value was around $70 billion, on par with Hermès, and higher than the parent company of Cartier, Compagnie Financiere Richemont SA. However, five years later, Kering’s market value has dropped by about 40%, while Hermès’ total market value is nearly 230 billion euros, leaving Kering’s market value at only one-sixth of Hermès’.
Kering’s operating profit margin has decreased by four percentage points over the past five years, reaching just over 24% in 2023, lagging behind Hermès’ 43% and LVMH’s 27%.
Due to sluggish sales in the Chinese market, Kering’s inventory has nearly doubled in five years. It now takes 354 days to clear inventory, an increase of 85 days from five years ago. Luxury brands, including Gucci, have raised prices this year. However, some older Gucci products have quietly entered outlet stores, starting discount promotions.
Brand management experts generally believe that these discounts are damaging Gucci’s brand value, a result of the company’s confused positioning in the high-end fashion sector and ineffective management strategies. Competitors like Hermès and LVMH do not have discount stores.
Kering has also recognized this issue. In February of this year, the company announced the new phase of Gucci’s plan to reduce product discount activities and their scale, with plans to close some Gucci outlet stores starting this year.
To revitalize Gucci, Kering appointed a new creative director last year, the brand’s first appointment in eight years. The brand is transitioning to a “quiet luxury” concept, aligning with a global trend where people prefer high-quality but understated products. The group aims to have new designs account for around 30% of its product lineup by the end of this fiscal year.
In May of this year, Gucci announced the appointment of Chinese actor Song Weilong as its latest brand ambassador. Song was selected for the “2019 Forbes China 30 Under 30” list and won the Best New Actor award at the 2019 China Film Channel Media Awards. Song Weilong’s appointment is seen as Gucci’s attempt to maintain its influence in China.