François-Henri Pinault, the man who transformed Kering, the owner of Gucci, Yves Saint Laurent and Balenciaga, from a sprawling conglomerate to the leading luxury industry giant.
Many people questioned themselves who is behind the €100m contribution to the reconstruction of Paris’ Notre-Dame Cathedral. Despite the fact that François-Henri Pinault is one of the world’s richest men, his name may not really be as familiar as one would expect outside of France or luxury goods industry. In certain circles, Pinault is even better known as the billionaire husband of actor Salma Hayek than the CEO of Kering, luxury goods giant that operates Gucci, Yves Saint Laurent and dozens of other luxury brands.
Luxury industry is today one of the industries where French dominate. With two world’s leading giants, LVMH and its smaller rival Kering, the country sets the global trends. The industry is doing so good that these two firms are reshaping even the France’s CAC 40 stock index. Fashion, for example, as one of the major segments of the luxury industry generates €150bn in direct turnover and employs one million people. According to government figures it contributes 2.7% to the GDP of France.
According to the Deloitte’s Global Powers of Luxury Goods 2019 report sales of top 10 luxury goods firms grew with a CAGR rate of nearly 7.5% in the 2015/17 period. Kering, the world’s number four, in the same period grew its sales more than twice as fast as the competition, at a rate of 17.2%. In spite of major changes in the industry – from the emergence of e-commerce to faltering consumption in China with a third of global luxury spending – Kering is thriving. And impressive growth rates are expect to continue …
The need for focus
The begining of Kering’s empire date back to year 1963, when Pinault’s father, François, founded the Pinault Distributions and started dealing with lumber. The retail came into the focus only in 1990s, with the purchase of French department store chain Printemps in 1992 and the mail-order catalogue firm La Redoute in 1994. Following the two acquisitions, the company was renamed to Pinault-Printemps-Redoute (PPR).
François-Henri Pinault, HEC Paris graduate, joined the family business in 1987 after he tried himself in the tech sector. He was working his way up the father’s company. In 2005 he succeeded his father as CEO and chairman of PPR and started thinking about radical changes (see his Harvard Business Review writing in 2014). He saw PPR’s businesses as an “eclectic” mix – including everything from department stores to building materials companies. The decision to divest from everything except the luxury goods assets the firm had gained from the 1999 acquisition of Gucci Group, was daring, but on spot. One would say visionary, since he understood very well what needs to be done to build a world’s luxury goods empire. His focus was on becoming more international, more growth-orientated and more profitable.
In order to realize its vision, François-Henri Pinault sold off assets including Printemps, La Redoute and Fnac and acquired more luxury brands, such as Swiss watchmaker Girard-Perregaux and Italian menswear couture house Brioni. These deals significantly reduced the company’s size. Sales from 2003 to 2014 more than halved from €24.4bn to €9.7bn, but profits shot up by around 40%. The share of the company’s revenue from France dropped from 41% in 2007 to 4% in 2014. François-Henri Pinault indeed found its niche. The company was renamed to Kering in 2013, which is a play on the English word “caring”, and a reference to the Pinault family’s roots in Brittany, where ker means ‘home’.
Steady, sustainable and profitable growth seemed to be the holy grail of financial success. The strategy of divesting non-core businesses had paid off. As a result of changes, the newly formed business was able to respond to market changes with agility and thus grow fast organically. François-Henri Pinault is a great example of how important is to focus and develop the right niche! The decision was truly a strategic decision-making master-piece.
Riding the industry growth wave
Following this dramatic shift in Kering’s portfolio, François-Henri Pinault became focused on generating organic growth at the company’s labels. He knew that having the right brand managers and creative directors is truly crucial for the success of individual brand. At Gucci, for example, CEO Marco Bizzarri and creative director Alessandro Michele both joined in 2015 and have had enormous success in overhauling the brand together. Kering’s crown jewel, is now one of the leading brands in the world. Its sales in 2018 surpassed €8bn after rising nearly 37%. François-Henri Pinault goal is to reach €10bn in sales in the following years, which would knock aside LVMH’s Louis Vuitton to make it the world’s top luxury brand.
Kering’s number two brand, Yves Saint Laurent, reversed the trends after Francesca Bellettini joined. Since 2013 when François-Henri Pinault made this decision, Yves Saint Laurent’s sales have tripled and the brand is now the second-largest in Kering’s portfolio.
François-Henri Pinault understands well that the net worth of Kering’s brands is largely related to their ability to grow. In this context, positioning is crucial. With its new streetwear-inspired look, the 100-year-old brand Balenciaga, was Kering’s fastest-growing brand in 2018. Targeting Millenials allowed the company to exploit the power of digital..
Smart staffing decisions are not the only reason that Kering’s brands are flourishing. Such a successful turnarounds require the alignment of many factors. One of them is giving each brand a degree of relatively high autonomy, giving the brands the leverage to experiment. For example, label’s creative director is not only in control of the brand’s products, but also the brand image, the store concepts and advertising. High level of independence, trust, and empowerment incentivizes employees. Not all experiments are of course successful, but the statistical findings support the approach.
Kering strongly supports brands when it comes to supply chains, marketing budgets, IT and other less glamorous aspects of the industry. Especially for smaller brands the “parenting role” makes a big difference. François-Henri Pinault believes that helping brands grow organically and benefiting from their collective experience is the most important aspect of what Kering does. Learning through experimenting on smaller brands is what allows the big brands to strengthen their position in the long run. It is a sort of a statistics play for the creatives.
Understanding luxury goods is also crucial for the business success. In this context knowing which segments grow at what rates and where is crucial. For example, cosmetics & fragrances and bags & accessories segments grow at rates that are much above those of clothing & footwear. Roman-speaking countries, i.e. France and Italy, have highest number of companies within the top 100 industry players, and are also in terms of markets experiencing the highest growth rates.
Convenience is beginning to win out over convention, so the luxury industry giants were making the fast transformation towards digital in last decade. Online shopping, however, does not mean that luxury brands will be ignoring the in-store experience in the future. In fact, quite contrary. Recent $1bn investment on a Paris mall called La Samaritaine of Kering’s rival LVMH, that included 15-years restoration of priceless paintings, indicates that luxury brands will continue to rely on so called “Retailtainment”, communication of the prestige through a real-world shopping experience. Gucci, for example, was working a lot to keep its brick-and-mortar shops relevant with marketing campaigns that were focusing on transforming stores into interactive art galleries or spaces that feature augmented virtual reality experiences.
Kering shows an “outstanding ability” to manage the tricky balance of upholding tradition while pursuing innovation. E-commerce is crucial for the luxury industry, and François-Henri Pinault, with his tech background, understands that very well. In 2017, Gucci’s e-commerce sales rose by 86%, according to Deloitte. The brand addressed the rising significance of online shopping with a redesign of its website and the addition of online stores in key markets, such as China and the Middle East.
It is also of extreme importance for luxury industry players to match up the experiences of online and in-store shopping. In other words, what brands do online should be perceived sames as what they do offline. If this is not so, the brand may be destroying its net worth and this is a big problem. Further digital advances may be available to Kering in the near future as the company brings its online operations in house from 2020, following the conclusion of a 2012 joint venture in e-commerce with Yoox Net-a-Porter.
Gucci, Kering’s crown jewel, is world’s second most valuable luxury brand
Luxury industry is confronting consumer’s growing concern over sustainability. United Nations report that the sector is responsible for around 10% of global greenhouse gas emissions and 20% of global wastewater production.
Kering is indeed standing out in terms of his care for the environment. By 2025, the company aims to cut its carbon emissions by 50% and for 100% of its suppliers to meet its standards on environmental stewardship, trace-ability, animal welfare, working conditions and use of chemical products. In order to track this, Kering even came up with its own environmental profit and loss methodology, which is being publicly shared and promoted. Kering’s pioneering work in this area has earned it the title of the second-most-sustainable company in the world in Corporate Knight’s 2019 Global 100 ranking. It is worthless to point out that this impacts the brand identity significantly.
Comparison of Kering’s net sales growth and EP&L intensity
The richest will be richer
LVMH, controlled by billionaire Bernard Arnault, in 2019 acquired American jeweler Tiffany & Co. for $16.2bn, which was the biggest luxury brand acquisition that ever occurred. With this purchase, LVMH further increased its dominance in the luxury industry sector.
The luxory industry is growing relatively fast, so the acquisitions are not so much about the consolidation, but more about smart investments of excess cash. The timing for more significant acquisitions seems to be just about right and there are plenty of business opportunities in the market.
As for Kering, engagement in M&As could perhaps mean even a switch in their strategy. Smaller companies such as Danish Pandora A/S, Italian Moncler SpA, French Hermès International SCA and many others prove that their value generation model is one of its kind and that even the leading ones can learn something from them. Since it is crucial for each company to keep the pace with its rivals, some analysts believe that we are about to see a wave of acquisitions in the future. Perhaps even François-Henri Pinault already thinks about expanding his growth experiments with acquisitions of competitive smaller peers …
Over the last two decades, Pinault has worked to reshape Kering into a steadily growing pillar of strength in the luxury market by reviving struggling brands, developing a niche in which to operate and expanding the company’s international reach. Along the way, Pinault redesigned France’s luxury market and positioned fashion as one of the country’s leading economic drivers. While luxury fashion has been, and always will be, deeply ingrained in French culture, its relevance today is stronger than ever. One thing is for sure. Selected Kering’s brands, especially Balenciaga and Yves Saint Laurent, indeed have the potential to outperform, if only the company will be able to successfully link the right people and the ability to interpret the most current cultural trends and exploit them.
Read more about Kering on their webpage.