The Fall and Rise of Gucci Part 1
This article is part of a series on what causes a firm’s value to increase and will be in two parts
Readers of this column over the last fifteen months have kindly considered what I, and other strategists, think are the key strategy, operations and leadership elements that drive increases in firm valuation. This article and some others for the rest of the year will provide some quintessential company examples of putting the elements into practice. There is no better place to start than with the Fall and Rise of Gucci. Gucci is the firm that embodied high fashion and inspired design of leather goods and accessories and almost went bankrupt not heeding some of the key principles highlighted in this article series.
I will be paraphrasing a bit from Cynthia Montgomery’s great new book The Strategist: Be the Leader Your Business Needs. I will also supplement with my teaching of the classic Gucci Harvard case study based on my twenty-five years in the field as a strategy consultant.
A little history of Gucci:
Guccio Gucci opened his first leather-goods workshop in Florence, Italy in 1923, focusing on fine artisanship and a standard of quality shaped by his years working as a bellman in London’s Savory Hotel. There he absorbed the impeccable taste of the very rich and very famous. The formula was very successful and he built a reputation for products of style and beauty. At the urging of his son Aldo, Gucci expanded to Rome, Milan and in 1953 to New York. Just two weeks later, Guccio Gucci died.
Aldo became CEO and his brother Rodolfo was in charge of Milan and brother Vasco was in charge in Florence. The post WWII period saw phenomenal growth as there was a new appetite for luxury goods and the money to buy them. “Quality is remembered long after price is forgotten” was a frequent Aldo saying and gave Gucci another reason for very premium prices. Grace Kelly and Sophia Loren carried Gucci bags, Eleanor Roosevelt and the queen of England favored Gucci umbrellas. The brand conferred the status of belonging in the same company as these women and showed that you had the means to buy something exquisite. Women all over the world packed the stores and this enthusiasm lasted through much of the 1970s. Gucci’s strategic position through the 1970s was high cost but extremely high price that offset the high costs. To help picture this, Gucci was positioned like Hermes and Chanel, Ralph Lauren/Polo was at the mass low cost, but low price position. Prada was positioned in between. But all four were at their best at their respective positions.
From here I am going to fast-forward through a lot that will seem like a soap opera. After the death of Vasco in 1975, the company unraveled. Aldo and Rodolfo then each held 50% of the company. Aldo resented the non-work of Rodolfo and so started another company under the Gucci umbrella – the Gucci Accessories business. This business would reach a much wider audience, develop and license new products using new channels and extend the reach of the Gucci brand. Initially it was a great success – a lot of revenue and little expense due to licensing the rights.
This spurred Aldo’s son Paolo to develop his own line of cheaper products for younger customers. Aldo tried to stop this so Paolo turned his father Aldo and cousin Mauricio into the IRS for tax evasion, which sent Aldo to prison and Mauricio to flee to Switzerland. With the family often in court, Gucci’s unbridled licensing slapped the brand Gucci on everything and every price point – 22,000 products in all from sneakers to playing cards to whiskey. You could buy Gucci knock offs everywhere and as Women’s Wear Daily said, this “cheapened and overexposed the brand”.
In one year’s time, Mauricio returned from Switzerland to turn the company around and return it to its respected position – by recreating respected old products “you don’t discard after a season”. He was positioning to be able to charge premium prices again. But he also slashed the number of products to 7000 from 22,000, handbag styles from 350 to 100, closed more than 800 of the 1000 stores and shut down Gucci Accessories Collection. At the same time he was spending extravagantly on a castle as a training center, sail boat racing sponsorships, etc… But with all of this change there were no cost controls, no inventories, and no financial plans – just Mauricio’s charm. Thus in terms of strategic position, he really just increased costs drastically and tried to sell products at prices customers were not willing to pay. In 1992 Investcorp bought out Mauricio’s stake when the company lost $50 million on $200 million in revenue and then Investcorp tried to sell the company but could not.
It then turned to Domenic De Sole as CEO. In Part 2 we will discuss what De Sole did to transform Gucci. What do you think he did?
Next Up: The Fall and Rise of Gucci – Part 2
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at bbigler@lsus.edu