At Gucci, La Vita Is No Longer So Dolce

The global downturn is disproving the notion that luxury goods are recession-proof, especially for Italy's Guccio Gucci. In tony shops from Milan to New York to Tokyo, Gucci purveys pricey items, such as $1,500 boar-hide briefcases and $275 suede pumps, to the world's affluent. But sales are slumping, and the company is losing money. As a result, sources say, Bahrain-based Investcorp International, the secretive investment group bankrolled by gulf Arabs, is quietly trying to sell off its 50% stake in Gucci. Investcorp declines to comment.

These troubles are a bitter setback for Maurizio Gucci, the Florentine retailer's 44-year-old president and chief executive, who set out four years ago to restore Gucci to its former preeminence among the world's elite retailers. A major blow has come from the recession in the U.S., which traditionally accounts for 45% of Gucci's sales. But critics say Maurizio's own free-spending style may have undercut his rebuilding strategy.

When Maurizio, grandson of the founder, captured control of Gucci in 1988, things seemed to be looking up for the first time in years. The company had been battered by suits and countersuits among feuding Gucci relatives until a white knight arrived in the shape of Investcorp. Fresh from a highly profitable turnaround of Tiffany & Co., Investcorp paid an estimated $160 million for half of Gucci. Maurizio, buying out relatives' shares, wound up with the other 50% and management control.

Backed by Investcorp, he launched one of the biggest brand repositionings ever attempted in luxury goods. In the 1980s, a rudderless Gucci had lost cachet by indiscriminately putting its name and trademark red-and-green band on more than 10,000 items. So Maurizio slashed the number of products by half and poured millions into refurbishing flagship shops in key markets.

To redo the Gucci image, he enticed American retailer Dawn Mello to Milan as senior vice-president with what insiders say was a $1 million annual compensation package. (Mello disputes that figure.) As president of New York's Bergdorf Goodman Inc., Mello had turned the rather dowdy store into a world-class fashion emporium. At Gucci, she cut back on popular cheaper items such as luggage made from plasticized textiles, restricting the Gucci name to more exclusive offerings, including leather goods, silks, and jewelry.

Unfortunately, profits remain elusive. The focus on big-ticket items, such as cashmere throws and 18-karat gold baubles, may be hurting sales by offering little to middle-class consumers. Maurizio tells BUSINESS WEEK that "we've brought efficiency back" and claims that the group is likely to break even this year. But a different picture is painted by Gucci executives as well as investment bankers who have seen the company's books. They say that losses are likely to total $30 million this year on sales of $180 million, down from $210 million in 1991 and $270 million in 1990. They add that Gucci, with around $85 million in bank debt, may even have trouble paying salaries in the next couple of months, although a company spokesman emphatically denies this.

While the worldwide slowdown has hit all luxury-goods purveyors, some experts think one problem at Gucci may be Maurizio himself. His management approach is lavish. For example, he bought a palatial 18th century villa outside Florence for use as a training center. That was in 1989, but the villa remains empty due to a wrangle over zoning restrictions. "His attitude to the whole operation" is a problem, says New York-based retailing consultant Walter Loeb.

WHO WILL SELL? Maurizio could soon have more than an attitude problem. Relations have soured with Investcorp, which sources say has been shopping its Gucci stake around. Investment bankers in London and Milan have been trying to interest French luxury group Cartier, Britain's Rothmans International, which controls Dunhill Holdings, and a couple of Japanese groups.

Retreating from Gucci would be a comedown for Investcorp, which has managed buyouts of Saks Fifth Avenue, Carvel Corp., and French luxury jeweler Chaumet. "Investcorp has to bear some of the responsibility for what is happening at Gucci," says one banker. "O.K., they were a sleeping partner. But they're on the board, and they get all the financial information."

Investcorp will have to decide whether to sell its stake or try to persuade Maurizio to sell his and then recruit a turnaround team. Counters Maurizio: "I always said that our strategic plan would take five years." Were it not for the recession, he insists, "we'd be there today." Maurizio, a yachtsman who sails a three-masted ship, seems to have forgotten what any mariner ought to know: When storm winds blow, trim the sails.

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