Gucci Using Python as Rich Drive Margin Above 30%: Retail

Gucci Using Python as Rich Drive Profit Margin
A shopper carries a Gucci-branded shopping bag on the first day of the new year sales in Rome, Italy. Photographer: Alessia Pierdomenico/Bloomberg

For Gucci Chief Executive Officer Patrizio Di Marco, attracting the wealthiest clientele comes at a higher price.

Since joining Gucci from sister company Bottega Veneta in 2009, Di Marco has put more emphasis on precious materials and craftsmanship amid concerns the label was becoming less exclusive. This “fine-tuning,” as he puts it, accompanied by a 30 percent increase in average selling prices for handbags, is boosting sales and margins even as Europe’s debt crisis weighs on consumer confidence and growth slows in China.

“In any possible psychological swing, you’ll always have the upper tiers of the pyramid that stay there, that keep on being wealthy, and they stick to you,” Di Marco, 49, said in an interview in Paris. “The important thing is to do whatever it takes to have this loyalty base increase.”

Gucci is using its double-G logo more sparingly, producing bags in python and adding crocodile and leather trim to printed fabric purses as it seeks to appease its wealthiest and most demanding clients as well as others like them. About 5 percent of the Florence, Italy-based label’s customers account for “a good deal” of sales, the CEO said, declining to elaborate.

At Gucci, “if you look at the price and you look at the products, you say that this is definitely worth more,” he said. “No one has a crystal ball and we try to do our best with consumers, but they are the kings and they decide.”

Record Revenue

Revenue at the maker of $4,100 green python shoulder bags climbed 19 percent on a comparable basis to a record 3.14 billion euros ($4.16 billion) in 2011, though the fourth-quarter’s 12 percent gain disappointed analysts including CA Cheuvreux’s Thomas Mesmin. Total sales at owner PPR SA’s luxury unit, of which Gucci is the largest brand, rose 19 percent in the last three months of 2011. The division’s growth was slightly higher in January, according to PPR.

Moving average prices higher should help Gucci’s operating margin widen to 31.8 percent in 2013 and lift so-called organic sales 9 percent this year and next, estimates Antoine Belge, an analyst at HSBC. Gucci’s profit as a percentage of sales was 30.2 percent in 2011 compared with a 35.3 percent margin at LVMH Moet Hennessy Louis Vuitton SA’s fashion and leather goods unit, which is adopting a similar strategy at its Vuitton brand.

Di Marco started shifting Gucci upscale in 2009 as the luxury industry endured its worst year. Economic turmoil has deepened with Italy in its fourth recession since 2001 and European finance ministers pressing Greece to implement cuts to secure another rescue payment.

Cash Crackdown

Europe isn’t “a picture of health and happiness,” which is a concern, particularly regarding local consumption, Di Marco said. In Italy, local traffic is down at Gucci’s stores and legislation limiting cash purchases to 1,000 euros hurt sales in December and January, he said. Italian Prime Minister Mario Monti introduced the cap in December to wean Italians off using so much cash, which makes it easier to evade the taxes needed to shore up the country’s finances.

Still, store visits by Gucci’s best customers in Italy are “stable if not increasing,” showing that efforts to “go deeper” with these clients are working, he said. Moreover, an increase in the number of tourists from China and Russia is helping boost European sales, the CEO said. Gucci gets less than 50 percent of sales from tourists in Europe, he said.

China Breather

In China, sales are “fine” so far this year, Di Marco said, declining to specify further. After expanding rapidly in the region since the second half of the last decade, “we need to breathe a minute and consolidate the structure,” he said. The labor market in China, where Gucci employs 1,500 people, is very mobile and it takes time to train staff, Di Marco said.

“You may have the best religion in the world, but if you don’t have preachers and missionaries, you’ll go nowhere,” he said.

The label will open 45 stores in 2012, of which about 20 will be in Asia Pacific region, excluding Japan, according to PPR. Chinese expansion will focus on so-called second- and third-tier cities, while Gucci will also renovate or relocate some units in Beijing and Shanghai, Di Marco said.

“The challenge is to keep the competitive edge that you have when you open first,” he said. Gucci opened 59 stores in 2011, net of closures, taking to 376 the number of boutiques it operated as of Dec. 31. It has about 9,000 employees worldwide.

Gucci will maintain “pretty much” the same product mix in 2012 as it has in the last two years, Di Marco said. Leather goods accounted for 56 percent of 2011 sales, while footwear accounted for 13 percent and apparel for 12 percent.

Retail Sales

The company aims to increase the portion of sales its gets from retail from 74 percent as it continues taking over some of its so-called corners in department stores as well as investing in e-commerce and digital initiatives, Di Marco said. He declined to quantify the goal for the distribution mix.

PPR said Feb. 16 it’s seeking 54 percent of revenue from retail by 2020 and will raise luxury prices this year without specifying by how much. Hermes International SCA, the French maker of Birkin bags and silk scarves, plans to increase prices by as much as 5 percent this year, according to Mesmin.

While higher prices and more favorable product and distribution mixes will help drive margin improvement at Gucci, the shift upscale will take time as consumer perceptions aren’t “something that can be dramatically improved in the course of one day,” Di Marco said.

To drive change, coherence is key, he said.

“Sometimes when I go to bed, I have a lot of concerns,” Di Marco said. “The important thing is to wake up in the morning and be optimistic, not on how things will go or happen but about being very much consistent in what you do.”

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