Can Kering Make a Comeback to the Top?

Kering has shown signs of decline recently as Gucci’s sales dropped by 15% in Q4 and Balenciaga faced a scandal leading to a temporary halt in operations. However, it’s encouraging that the stocks are still rising as investors focus more on the Chinese market.

Summary: Optimistic recovery in the Chinese market The US market is in a “mid-game pause” Appointment of Gucci’s new creative director Balenciaga’s opportunity for transformation Entering a new playground – the beauty industry Kering’s Q4 revenue fell short of expectations, declining by 7% due to heavier impacts from the COVID-19 pandemic in China and reduced shopping demand in the US. Apart from macroeconomic challenges on the rise, Kering also faces internal difficulties, such as the “shift” in Gucci’s design leadership – with star designer Alessandro Michele departing in November – and controversy over Balenciaga’s collections related to children.

Even Saint Laurent, where China isn’t their playground and has long been the company’s most stable growth brand, slowed significantly: Q4 revenue increased by only 4% compared to the previous quarter’s 30% growth.

Optimistic recovery in the Chinese market

Luxury companies faced a challenging quarter last year as consumer shopping demand slowed in the US and Europe, where luxury purchases weren’t prioritized amidst economic crises – rising interest rates, high fuel costs, and rampant inflation. In China, government measures to combat COVID-19 severely affected sales.

Kering’s performance was more heavily impacted compared to luxury conglomerate competitors like LVMH and Richemont, where sales increased by 9% and 8% respectively in the previous quarter, or even Burberry, which achieved 1% growth.

Kering’s stock rose by 3% after they acknowledged the challenges in Q4 and hoped for increased Chinese customer returns this year.

Chairman and CEO François-Henri Pinault cited meetings with the Chinese government as well as luxury shopping centers during his February trip to the country. “It’s a very encouraging start to the year in China,” Pinault said. “I’m very surprised by the level of support for consumers and for private enterprises. The business environment is much friendlier than before.”

The Chinese market was a primary driver of Kering’s explosive growth from 2016 until the pandemic hit. Also, thanks to Michele’s aesthetic trends, which captured the increasingly discerning needs of young Chinese shoppers, both domestically and internationally. Chinese customers were also quick to embrace Balenciaga’s new aesthetic trends when they changed creative directorship to Demna, with products like the Speed and Triple S sneakers quickly attracting Chinese consumers.

While the “shopping frenzy” trend became a headline during China’s intermittent easing of restrictions since 2020, the share of Chinese customers in the luxury goods market actually decreased from 33% in 2019 to 17% last year, according to Bain consultancy. The relaxation of domestic restrictions and the reopening of international tourism could now drive a strong recovery.

The US market is in a “mid-game pause”

Hope for Chinese recovery emerges as business activity in the US market slows down, which drove growth for luxury brands in 2021 and 2022. In a meeting with reporters, Pinault said Kering will maintain plans to expand stores in the US, including locations in southern cities like Nashville and Charlotte.

Kering Americas Kering’s US headquarters

“From 2019 to 2022, our business operations in the US increased by about 80%. The number of customers has really increased, and they continue to buy our products,” Pinault said. “That demand won’t disappear.”

Appointment of Gucci’s new creative director

The largest brand in the Kering group, Gucci, continues to grow slower than its direct competitors since the pandemic. Kering said despite its efforts to “change” its post-pandemic sales strategies by focusing more on heritage and timeless products, overhauling its Chinese branch operations, and enhancing media appeal last year, the brand’s annual sales still only increased by 1% – Kering said on Wednesday.

Last month, Kering appointed a designer from Valentino’s studio – Sabato de Sarno – to “follow in the footsteps” of designer Michele as Gucci’s creative director. From now until September, De Sarno’s first show has yet to be unveiled, but collections are sure to hit stores in early 2024.

It’s Official: Sabato De Sarno is Gucci’s New Creative Director | GQ The man inheriting the “throne” of former creative director Michele

Kering still hopes this plan will be effective and customers will begin to appreciate the designer’s vision with curated collections and campaigns.

Pinault said, “Gucci balances authority in the fashion world and leverages heritage to build enduring products. Sabato is very comfortable with that. He understands the need for strong fashion products, but he also has experience balancing that with commercial collections, with heritage.”

While awaiting De Sarno’s debut, Kering commits to continuing to promote the brand through “major shows,” including designs contracted with non-Kering studios for the upcoming women’s fashion week in Milan and a show on a yacht in Seoul.

Balenciaga’s opportunity for transformation

Balenciaga, too, is seeking recovery as sales have been heavily affected following the outrage of fashion enthusiasts over two controversial ad campaigns, resulting in a wave of opposition and strong boycotts, especially in the key market of the US. Leading to the spokesperson for celebrity Kim Kardashian terminating her contract with the brand.

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This controversy had little impact in Asia, but the brand continues to be affected in the US and English-speaking countries, so they “still have a big job to do to restore their image,” Pinault said.

The company has almost stopped all advertising and promotions since the incident and is preparing to return to the spotlight with a show at Paris Fashion Week. They also announced that the brand will steer away from extravagance like previous collections and focus on developing its high-end fashion heritage products.

The brand has restructured its image team and hired an external company to oversee communications activities. Kering also created a “brand safety supervisor” position following the incident in the conglomerate. CFO Jean-Marc Duplaix said he hopes the commercial impact of Balenciaga’s advertising scandal will gradually decrease from the second quarter.

Entering a new playground – the beauty industry

Kering will enter the business of beauty Gucci is one of the few brands with a Beauty portfolio Last week, Kering confirmed that they are establishing a Beauty division to expand this category for some of its brands like Alexander McQueen, Bottega Veneta, and Balenciaga. Kering confirmed that contracts between its brands and beauty conglomerate Coty expired last year and were not renewed to prepare for new launches.

Kering plans to venture into the beauty industry by introducing new fragrances, as the conglomerate sees potential for collaboration through necessary advertising investments in the portfolio. They are eyeing M&A (mergers and acquisitions) projects that could support investments in this promising industry.