Saint Laurent's Newest Look

Gucci Group wants to make it a luxury brand again

They've done it once before. Together, designer Tom Ford and Chief Executive Domenico De Sole turned Gucci Group from a frayed leather-goods company into a $1.2 billion fashion powerhouse. Now, this American duo wants to repeat that performance with Yves Saint Laurent, another faded star in the fashion firmament. The stakes are big: Success with YSL would clinch Gucci's reinvention as a diverse, high-profile luxury-goods empire with few rivals. "This is the moment when the company is being transformed from a single brand to a multiple-brand fashion group," says De Sole, who took over at an ailing Gucci in 1994.

That moment is indeed near. In YSL's Paris ateliers, Ford is now designing a Spring 2001 women's collection that premieres on Oct. 13. By all accounts, Ford's approach will be ultramodern but more elegant than Gucci's rock-star glam look. But Ford, 38, and De Sole, 57, will be sending more than a new line down the runway. Redesigning YSL itself has been one key to Gucci's future since De Sole acquired it, with the help of French industrialist Francois Pinault, last December. "Yves Saint Laurent is a phenomenal brand," says Sagra Maceira de Rosen, analyst at J.P. Morgan Securities Inc. in London. "It has huge possibilities." De Rosen thinks YSL's sales, $88 million last year, will grow 50% or more yearly starting in 2002.

While De Sole paid $1 billion for YSL, he has a lot more than that riding on the brand. A former tax lawyer who took charge of Gucci America in 1985 amid family feuds and financial controversies, De Sole is betting he can move Gucci into the big leagues. In particular, a YSL makeover will enable De Sole's expanding group to challenge players such as Bernard Arnault, the luxury-goods tycoon whose $8.9 billion Moet Hennessey Louis Vuitton group controls a slew of designer and luxury labels. LVMH nearly swallowed Gucci last year in a hostile bid.

While the YSL makeover will take time to reach the bottom line, De Sole is moving fast to overhaul production, marketing, and distribution. That's the strategy he used to relaunch Gucci--and a key to reviving luxury brands that have destroyed their cachet with too much exposure. By the time De Sole acquired YSL, the brand was stamped on everything from baseball caps to plastic shoes; licensing agreements accounted for 65% of revenues. But to build a luxury brand, "you have to walk away from revenues," says De Sole, whose Gucci turnaround is now a Harvard Business School case study.

FLAGSHIP SHOPS. The pruning is already well along. Soon after acquiring the house, De Sole flew to Tokyo with Mark Lee, YSL's new president, and spent three days terminating Japanese licensees. Within three months, the two had eliminated most of YSL's 167 product licenses, bought back 11 franchised stores, sold the ready-to-wear factory in Tours, and launched accessories and footwear lines.

Shops are another key area. YSL owned 25 when De Sole stepped in. Gucci, by comparison, owns 130, and they produce more than 60% of sales. Having developed a new store prototype, De Sole and Lee now aim to open 60 more direct-sale YSL shops over the next three years. Flagship shops are planned for Beverly Hills, New York, London, Hong Kong, and Milan. The first completely new shop will debut in Las Vegas by yearend. "You have to have the same collection worldwide, and it has to be consistent," says De Sole.

De Sole's discipline, combined with rapid-fire decision-making, revived Gucci quickly. He closed down Gucci's Hong Kong shop overnight four years ago, even though it was the company's most profitable, because he thought its tasteless appearance was destroying Gucci's image. Analysts expect some of the same uncompromising approach in the YSL turnaround. This year and next, they say, will see losses--and then the dividends will start to flow. "We have to see the pain before the gain," says J.P. Morgan's de Rosen. "Strategically, De Sole is making the right moves."

Ford has his challenges in all of this, too. Chief among them will be to keep the new YSL look distinct within the growing Gucci empire. There's a risk here: Ford still manages collections at Gucci. "The challenge is not to conflict with Gucci on the edge of trendier fashion," says Armando Branchini, president of InterCorporate Group, a Milan consultancy. A miscalculation in the new collection would leave Ford a few seasons--at most--to get the YSL look right.

WAR CHEST. If Ford can weave stylistic magic, though, De Sole's breakneck overhaul is likely to power strong sales growth. As with Gucci, success for YSL in the ready-to-wear market will redevelop lost cachet that will help boost sales of high-margin accessories. And YSL Couture, the clothing side, is only part of the picture. Gucci also owns YSL Beaute, which includes branded make-up, perfumes, sunglasses, and other accessories. Margins at YSL Beaute last year, at 5.6%, were half the industry average; De Sole aims for 8% this year and eventually 12%. Gucci's net profit margin in 1999, at 27%, was among the highest in the industry.

While Yves Saint Laurent is De Sole's biggest immediate challenge, he has others. He's juggling the integration of Italian shoemaker Sergio Rossi and French jeweler and watchmaker Boucheron, both recent acquisitions. Although both are profitable, De Sole is eager to expand their operations and tap their expertise for other brands. Bologna-based Sergio Rossi will now produce all YSL and Gucci shoes. At Gucci's headquarters in Scandicci, outside Florence, artisans are stitching together next spring's YSL handbags.

De Sole also has more than $2 billion in cash to spend on brands to add to his collection. Fashion industry insiders say he has approached Giorgio Armani as well as Dolce & Gabbana, but both deny they are in talks. Analysts say a Gucci-Armani fusion would be a perfect fit, since Armani is strong in ready-to-wear, and Gucci would complement Armani's weaknesses: accessories and Asia.

AMERICAN STYLE. De Sole, who lives in London and travels constantly, demurs when asked about takeover targets but concedes he may make a move before yearend. The cash flow will help. Morgan Stanley Dean Witter predicts group sales will jump 80% in 2000, to $2.2 billion, after rising 19% last year. Profits surged 70% last year, to $330 million.

As to YSL, De Sole is revealing something of his own style. The day the deal closed, De Sole, Ford, and Lee walked into the French fashion house on Avenue Georges V in Paris and introduced themselves as "Domenico, Tom, and Mark," stunning top managers accustomed to the formal "vous." "We are a very flat organization," De Sole says. "We have a very American management style."

De Sole is similarly undaunted by YSL's style makeover. Saint Laurent was a fashion visionary who redefined proportions and styles. What YSL will be as of Oct. 13 is a trade secret. But if De Sole and Ford get it right, it is likely to galvanize the fashion industry again--and shine like a jewel in Gucci's growing empire.

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