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  2. 2. INDEXSr. No. TOPIC Page No. 1 Introduction 4 1.1 Gucci India Story………………… 4 2 Indian Fashion Retail Landscape 5 2.1 FDI Scenario………………… 5 2.2 Modes of Entry of Foreign Retailer………………… 5 2.3 India as a Manufacturing Hub for Global Luxury Brands 6 3 Indian Luxury Market 8 3.1 Indian Luxury Product Market- A Snap Shot………………… 9 4 The Luxury Consumer Profile 10 4.1 Target Groups for Luxury Brands………………… 11 5 The Competitive Trend 14 5.1 Creating an International Luxury Fashion Brand……… 16 6 Key issues facing the industry 17 6.1 Major Cost Component………………… 18 7 Gucci as a Company 19 7.1 Gucci’s goals and values………………… 19 7.2 Philosophy………………… 19 7.3 Gucci as a Brand………………… 20 8 Marketing 22 7.1 Distribution Channel………………… 22 9 Revenue Breakdown 23 10 Prices in Indian Market 24 11 The Bumpy Road? 25© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  4. 4. GUCCI Fashioning India 1. Introduction The House of Gucci, or simply Gucci is one of the more established premium fashion brands in the world. Its success worldwide has depended largely on its effective marketing strategies and a wide product range. Founded in Florence in 1921, Gucci as a leading luxury brand has been created assiduously over a period of many years. Helping in this brand positioning are its core values: unequalled craftsmanship, outstanding quality and “Made in Italy” (with one exception of watches, which are produced in Switzerland) tag. This high profile luxury range portfolio includes the premier flagship brands: Gucci, Bottega Veneta, and Yves Saint Laurent. It ranks 46th in Business Week’s Top 100 Brands with a revenue of € 3,389 million in 2008. It has 560 stores worldwide and a number of franchisees and high-end department stores that display the brands. The total no. of employees at end of year 2008 was 11,484. The milestones of development of Gucci appears in Annexure I1.1 Gucci- India Story However, Gucci’s Indian story so far has been far from encouraging. It had entered Indian market three years ago but since then has parted ways with its Indian franchisee Vijay Murjani of the Murjani group. The Murjani group started as an apparel maker and grew up to launch several brands in India and abroad, retailing premium products line. It has also been distributors of Calvin Klein, Tommy Hilfiger and French Connection brands in India, yet, it couldn’t make the desired effect with Gucci brand name in the country. Presently, Gucci has entered an agreement with investment banker Ashok Wadhwa’s Luxury Goods Retail, set up by I- Bank Ambit Corp and is in the process of converting it into a 51: 49 joint venture. (Source: Economic Times 25 September, 2009).© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  5. 5. Luxury Goods Retail has now bought over Gucci’s franchisee rights as well as three operation stores in Delhi and Mumbai from the Murjani Group. In its new makeover, Gucci will follow many other international brands such as Marks & Spencer, and Mothercare to move from franchisee model to ownership model. The latter usually offers brands better control over operations and the flexibility to chart an independent course in the market whenever it finds a favourable business ambience. Understandably, Gucci wants to ensure that the re-emergence with Luxury Goods Retail gets all the push it needs, not only because it wants to be successful the second time, but also in view of the vast opportunity India provides in the luxury goods retail space.2. The Indian Fashion Retail Landscape2.1 FDI scenario: While considering the scenario in retail trading in India, one has to bear in mind that this sector is one of those few where FDI (foreign direct investment) is not freely and healthily allowed. Although, FDI is fully admissible in ‘cash and carry’ wholesale (back-end retail), it is admissible only up to 51 per cent in single-brand front-end retail. Most international brands look to set up their 100 per cent- owned stores in any market in order to ensure that they can stay in complete control and drive brand reputation their own way, but Indian rules do not allow that yet. All of these international brands, therefore, have either tied-up or trying to tie-up with local corporate and entrepreneurs, to make their presence felt in the country, and to offer their services for back-end operations like sourcing, logistics, inventory management, among others, for front-end retail operations.2.2 Modes of Entry of Foreign Retailers: Each country has its own sets of policies and regulations on the modes of entry which need to be complied with before accessing the market. In India too, foreign companies need to adopt one of the following methods to participate in its burgeoning market.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  6. 6. − Mergers & Acquisitions- most common. This may result in foreign majors looking to make strategic investment in existing Indian companies to leverage their presence in India and simultaneously by combining the local company’s expertise with greater understanding of Indian sensibilities. − Distribution Foreign brands entering in India through distribution channel wherein the foreign company sets up local distribution office and supplies products to Indian retailers. Swarovski, Hugo Boss etc. have chosen to enter the Indian market through distribution channels. Some Indian companies that are in the process of entering into distribution agreement with foreign brands include Thanks, Vama, Escape, Murjani Group etc. − Franchising Another mode which is also widely used by several global brands to enter Indian market is by engaging franchisees. This model provides benefits of owning a business without any significant risk. − Joint Ventures Since the partial relaxation of the policy allowing FDI up to 51 per cent in single brand retail, several luxury brands such as Louis Vuitton Moet Hennessey (LVMH), Christian Dior and Hermes have converted their franchise agreements into joint ventures. This is big news for fashion lovers in India, where business from out of the country has been restricted for so long.2.3 India as a Manufacturing Hub for Global Luxury Brands Global luxury brands have taken advantage of India’s human resources available at a more reasonable price. It is estimated that the manufacturing of luxury items in India can grow to US $ 5 billion in near future. There is no dearth of skilled talent in the country. Brands like ‘Louis Vuitton’ and Italian textile company ‘Frette’ known for its premium© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  7. 7. linen are looking at India as a manufacturing base for their products. There are yet others who simply source their requirements from India. Thousands of factories in Dharavi (largest slum cluster in Asia) produce goods worth US $ 500 million, majority of them for the export market. The cost advantages particularly in labour intensive sectors like leather and accessories as well as apparel add to the advantage of the country. Cost is a major consideration while choosing a destination for manufacturing. The average cotton yarn spinning cost at US $ 2.5 per kg is lower in this country than it is in all the countries including China. The average wage rate in India is at US $ 0.75 per operator hour as compared to US $ 1 of China and US $ 3 of Turkey. Also, luxury products require a touch of exclusivity and handwork with much detailing. Such high demands cannot be economically met by mass producing countries like China. Bespoke luxury which is synonymous with Indian luxury makes India well poised to cater to the luxury industry’s requirement. India has manufacturing units of different production capacities and can cater economically to large and small consignments alike. International brands that have already started sourcing from India have found that the fundamental strength of the country is its strong production base of a wide range of fibres/ yarns ranging from natural fibres to synthetic and man-made fibres. While discussing India’s production capacity of yarns, Ludhiana’s recently launched Apparel Park, created over an area of 100 acres deserves a special mention. The park would facilitate access to world-class infrastructure and advantage of common facilities which include an effluent treatment plant, resource centre, conference hall, exhibition hall, training centre, commercial and retail outlets for suppliers, forwarding agencies, service units, testing lab, R & D centre and hostel for workers. The park, when in operation fully, is expected to add another US $ 200 million to the country’s exports. India is all set to challenge China’s position as the world’s backyard for manufacturing in the next 3- 5 years. China’s aging workforce is putting© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  8. 8. pressure on wages and costs. It is becoming a more expensive place, and India can work this to its advantage. In a survey by the US based business magazine Fortune, India made products were found to be preferred to China made products. A comparison of India vs China as a manufacturing hub is shown in Annexure II. 3. Indian Luxury Market To evaluate Gucci’s prospect of reemergence in India, it is important to look carefully at the country’s expanding luxury goods market. Fashion trends in India are being increasingly adopted from the Western styles of clothing and other fashion accessories and widely expected to witness high growth in the upcoming years. In recent years, the Indian fashion industry has started showcasing its work in ramp shows such as the many India Fashion Weeks and promotes Indian haute couture in the domestic as well as international markets, thanks to an ever increasing numbers of Indian diasporas abroad. The luxury goods market in India is one of the world’s most diverse and exciting – and a challenging one for brands seeking to gain a presence there. Brands – and retailers – that want to capture a share of this fast-paced industry need to learn its ropes and adapt to the market conditions, or risk missing the bus in one of the greatest untapped business opportunities in the country. The Indian retail market is also evolving rapidly with requirement of more product lines of fashion and luxury goods. The organized retailing is also developing at a breakneck speed. It is amicable to all that fashion is a vital part of both the retail industry as well as the brands. In fact, fashion has led the retail industry boom to a great extent and it has sustained its dominance in every malls, markets and stores and revolutionized the merchandising system in retail industry. Brands in apparel, textiles, jewelry, accessories, footwear, cosmetics and salons raised the business to more than 40,000 crore. In this scenario, India is still a virgin market for global high end luxury players. Companies like Louis Vuitton Moet Hennessey (LVMH), Swatch Group and Chanel are the only ones represented, in a limited way. Others,© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  9. 9. like Aigner, Montblanc and Cartier, are present through licensee agreements in lifestyle store. But despite the immaturity of the market, there are already clear trends developing – particularly in the penetration rates of luxury brands into the men’s and women’s sectors. There also exists a dichotomy - while luxury clothing, fragrances, premium brands of footwear, home electronics and high-end watches have achieved good penetration among male Indian consumers, items such as cufflinks, belts, wallets, luxury wines, champagnes and cigars still rate low on the wish-lists of many Indian men seeking luxury brands. Among women, jewellery, cosmetics and skincare can already boast high levels of awareness, followed by categories such as underwear, handbags and mobile phones, but lifestyle items that have yet to make an impact include gourmet food, tableware and imported furniture even in the widely travelled consumer groups. For consumers who are brand-savvy, luxury brand names come under one of two distinct titles: classic brands and high fashion brands. Classic names include Chanel, Gucci, Versace, Salvatore Ferragamo, Balenciaga, Christian Dior, Louis Vuitton and Prada – names that suggest enduring value. Among the high fashion brands or brands in the luxury market that command consumers’ attention are names like Armani, D&G, Moschino, Calvin Klein, Hugo Boss and Ralph Lauren. The new Indian consumer’s earning has increased manifold and she is aware of internationally reputed brands, with increased foreign travels. In final analysis, more and more Indians are pursuing a lifestyle based on ostentation and consumerism, impressing others with wealth and power, owning exclusive items – and owning them fast.3.1 Indian Luxury Product Market- A Snap shot Luxury Product Market in India for the study of Gucci’s prospect will reveal a phenomenal growth:© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  10. 10. 2006 2010 2015 CAGR $ 500 million $ 1220 million $ 2550 million 20% ( 2,500 cr) ( 6,100 cr) ( 12,750 cr) Source: India Luxury Review, 2007. The Economic Times $ A.T Kearney Of this, Luxury Products, Luxury Services, Luxury Assets constitute 11.6%, 22% and 67.4% respectively. The table below gives an indication of consumer expenditure on clothing and footwear from 1995- 2007. Clothing includes: clothing material, garments and other clothing items. 1995 2000 2002 2004 2006 2007BillionsClothing 765.6 951.6 897.0 983.3 1,080.1 1,143.2Footwear 89.2 122.5 101.1 113.6 128.6 134.1TOTAL 854.7 1.074.1 998.1 1,096.8 1,208.7 1,277.2 Sources: Clothing & Footwear: Eurometer from trade sources/ national statics 4. The Luxury Consumer Profile Gucci’s entry when it re-launches in India will be shaped up by the new face of India to a great extent. The global luxury brands are realizing the potential of the new Indian consumers and while setting up shops in India are focusing on the target group. As disposal income rises, Indians increasingly spend on international lifestyle symbols. House hold incomes in India are accelerating© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  11. 11. with changing income pyramid as individual earning grows manifold. Around 1.7 million Indians qualify as rich (sub-definitions are Super Rich, Sheer Rich, Clear Rich and Near Rich) – a figure that is set to more than double in the next five years. In sharp contrast to consumers in more mature markets, the spending power of Indians earning between US $20,000 and US $40,000 still puts them on the country’s rich list – and makes them well worth targeting by brands keen to secure an Indian market presence. Annexure III provides the increase in the no. of Indian Households in the sub-definitions category of ‘Super Rich’, ‘Sheer Rich’, ‘Clear Rich’ and ‘Near Rich’. Profile of the Indian luxury consumer, based on the latest study by research group KSA Technopak provides the following information: − He/ She is primarily a resident of urban India − Lives in a household earning more than about 800,000 (US$18,000) a year, where the chief wage earner is male and average age between 36– 37 years − Owns a premium/luxury saloon car such as a Honda Accord, a Vectra, a Skoda Octavia etc. − Amongst the women consumers, 65% are housewives − Most consumers are educated to post-graduate level − Their incidence of foreign travel is 53% − 44% travel abroad for holidays at least once a year A chart indicating the average luxury goods spends vs average annual income under the international definition of ‘Rich’ and ‘Affluent’ of an Indian citizen is provided in Annexure IV.4.1 Target Group for Luxury Brands: I. India’s old money: The royalties of the industrial dynasties, the high net-worth Indians (HNI) were born and brought up in the proverbial lap of luxury. They are brand savvy and are jet setting the Mecca of© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  12. 12. shopping in London and New York. This group is notches above the emerging class of new rich in terms of tastes and knowledge about brands. II. The new money entrepreneurs: They are the poster children of new India creating their own hard earned wealth. In 2007 India led the world in HNI population growth at 22.7% (World Health Report). They have their own set of rules and values. Luxury brands targeting them have to tweak their message and marketing to woo them to this side. III. The gold collars of the corporate world: This age group of 35- 55 years is a paradoxical group. They have the wealth but not the mindset to spend on luxury brands like the previous two groups. With high brand awareness and conscious about the value for money, selling luxury brands to this group is a challenge and brands will have to communicate the value addition to their already achieved aspiration status to get them interested. IV. The BPO generation: IT/ ITE/ BPO, it’s a broad spectrum employing millions of young Indians; some of them are getting the first taste of good life and therefore yearning for more. As more money reaches their hands, this group is also aspiring to move up the ladder. And with some 200 million Indians in the age group of 20-30 and with heavy- bottomed population pyramid there’s an ever-increasing supply of people crossing into their 20’s, and being a part of this ever-swelling group. India at 22.7% has the highest High Net-worth Individual (HNI) population growth rate compared to Russia (14.4), Singapore (15.3), Indonesia (16.8), South Korea (18.9), Brazil (19.1), China (20.3) as shown in Annexure V. For any international brand trying to cater to Indian consumers has to bear in mind certain nuances in the spending manner of Indian consumers. For an Indian owning a luxury brand would mean accomplishment. According to a study by American Express, inside the Affluent Space, Indian consumer has a desire to prove that I’ve made it. He is an aspirer and for him luxury is a© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  13. 13. reward, a hard –earned indulgence which is a mindset very different from a European consumer for whom luxury is an experience. The Asian middle class powered by India and China is fast replacing Europeans and Americans as the global consumers who anchor the world economy, says a study by the Asian Development Bank. India’s booming middle class – or those who spend between $2 and $20 ( 93 to 930) a day on purchasing power parity basis – is now spurring consumption and innovation in the country, said the study. 205 million Indians joined the ranks of those spending this amount from 1990 to 2008, second only to China’s 800 million. This countrys growing middle and upper-middle classes have recently given rise to self-described "brand freaks”, who crave the latest luxury goods. Some quotes appear in Annexure VI. Indias elite have long enjoyed luxury goods imported from the West. But Indians who cant afford $600 sunglasses -- yet still have some disposable income -- have also been splurging now. Recent openings of stores at two of the countrys highest-end malls puts into focus the ever increasing consumerism amongst Indians. At New Delhis Select City Walk, women nearly caused a stampede as they crowded into a MAC cosmetics store, many of them in search of a popular brand of eye shadow. Women said they were thrilled that they didnt have to wait to go abroad to shop for these items anymore. International designer houses including Prada, Jimmy Choo, and Louis Vuitton, as well as brands such as Rolls-Royce and Mont Blanc, have already identified this growing consumerism as business opportunity and have either set up shop or beefed up operations here. The media houses have also joined the bandwagon, creating aspirations and awareness amongst Indian consumers. Vogue magazine, the bible of high- end fashion, launched its thick Indian edition; the most glamorous in a long line of magazines from Elle to Marie Claire that now have editions here. A recent article in Vogue headlined "The rise of ME culture" chronicled how much the Indian paradigm has changed, with women finding more disposable income and freedom to spend on their own needs rather than on the traditional extended family.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  14. 14. 5. The Competitive Trend: Market for classic brands and high fashion brands has remained largely untapped though there is already a competition at the high end mass market brands with Gap, Benetton, Adidas and Reebok and other international brands very commonly seen on the Indian high streets. Reebok leads the sports footwear market in India, outdoing Nike and Adidas. That competition heats up in Indian market can be judged from the following points - − The success of brand clothing stores such as Pantaloon, Westside and Shopper’s Stop has made erstwhile textile manufacturers turn to apparel marketing. In the future, large textile chains – Vimal from Reliance Industries, Madura Garments, Aditya Birla, Siyarams and S Kumar for example are expected to become strong apparel brands. − India’s largest apparel maker Madura Garments is emerging on the retail canvas with a two pronged agenda. It has embarked on capturing the value conscious consumer with ‘Smart Buys’ at one end and is currently moulding its Planet Fashion formats into mini- departmental stores replete with industry leading brands. Madura Garments has supplemented its portfolio by roping in Levi’s for denim wear and Monte Carlo for winter wear. It is also exploring other brands across sportswear, ethnic wear and accessories. − Aditya Birla Nuvo’s fashion arm – which owns brands such as Van Heusen, Louis Philippe, Allen Solley and Peter England – has been keen on identifying with the average customer at price points of 249- 449 through Smart Buys. This format has also been designed to liquidate stock for the company. With a warehouse look, it will revive in-house labels Elysee, Byford, SF Jeans and Spin Off through three stores in the first leg.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  15. 15. Names of some foreign retailers who received FDI clearance recently: Company Product Etamint Women’s Wear Louis Vuitton (LVMH) Pens, Shoes, Travel Bags, Jewellery Fendi Bags , Dresses, Accessories Christian Dior Travel Wear, Shoes, Readywear. Lingerie Grotto Retailing ‘Gas’ Brand Of Clothing Moja Shoes Retailing Sportswear and Shoes Polo Ralph Lauren Apparel, Home, Accessories and Fragrance − Brand Nautica owned by US Apparel major VF Corp, is present in India through a 51:49 JV with Arvind Mills, called VF Arvind Brands. They also offer sharper price points averaging at 2500. The brand has also expanded its limited range − Fashion label Tommy Hilfiger has been acquired by US based apparel company Philip Van Heusen (PVH). This is marketed in the country by Arvind Murjani Brands, JV between Murjani group and Arvind Brands. They also hold license for PVH- Calvin Klien − Riding on Reliance Retail’s shoulders Reliance Brands a subsidiary of Reliance Retail in their endeavor to become a luxury retail powerhouse tied up with Marquee brand Polo Ralph Lauren and Versace prêt-a- porter which cater to the lower end of the fashion conscious market. Reliance Brands is entering into equity partnership on 49:51 with other global fashion houses.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  16. 16. − High-end international brands such as Armani, Noraletto, Raymond Wiel and Burberry have entered the Indian market through joint ventures with Indian retail players. − Christian Dior opened its first ever boutique in India, with other luxury brands like Versace expected to follow right behind. Other international retailers like Louis Vuitton, Fendi and Bulgari already have stores opened in India, as the demand for luxury goods keeps rising5.1 Creating an International Luxury Fashion Brand Foreign companies are always fine-tuning their marketing strategies and adopting a brand-positioning that maintains a strict consistency between perceived prestige and price premiums so as to preserve their brands exclusivity. Product categories of different premium brands and their relative positioning with respect to their elite clientele are provided below and represented in Annexure VII. • Bvlgari – Jewelry, Watches, Accessories, Fragrances, Jewels, Leather Goods, Skin Care and Hotel & Resorts • Ralph Lauren - Apparel, Shoes, Belts, Bags, Sunglasses, Hats, Fragrances, Accessories • Christian Dior – Fashion products, Accessories , Handbags, Shoes, Small Leather Goods, Timepieces, Jewellery, Dior Phone, Baby Dior, Perfumes, Bags • Louis Vuitton - Men’s bags, travel products, wallets and small leather goods, belts – ties and accessories, fashion jewellery, sunglasses, books and pens, shoes, watches, ready to wear dresses • Versace – Fashion accessories. Atelier, watches, fine jewellery ,mobile phones, fragrances and cosmetics, home collection, pallazo Versace, Versace corporate© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  17. 17. • Gucci – Baby products, belts, fine jewellery, fragrances, handbags, hats and gloves, men’s and women’s shoes, scarves, silver and other jewellery, small accessories, sunglasses, ties, travel and business stuff, wallets, watches • Yves Saint Laurent (YSL) – Fashion products, accessories, beauty products, fragrances • Bottega Veneta – Ready to wear dresses, handbags, small leather goods, shoes, accessories, key - rings, sunglasses ,fashion jewellery, fine jewellery • Burberry – Men’s and women’s and kids apparels, pre-collection, sports products, accessories, eye-wear, time-pieces, beauty products, fragrances, 6. Key issues facing the industry: Apart from competition, any brand entering the Indian market has to take into account several constraints and limitations that the market condition poses. Lack of high-caliber workforce: The demand for skilled workforce for the luxury sector is increasing, however the supply is limited. While the number of luxury brands prevalent in the country is increasing there is an insufficient pool of high- caliber sales associates to cater to the growing demand. To broaden the resource pool of retailing professionals in the country, many retailing institutes have emerged in the country such as Indian Retail School, with many other retailers setting up in-house training programmes and training institutes. Lack of suitable infrastructure: The rentals are steep and choice is limited for luxury stores which are typically limited to five start hotels. The high real estate cost drives the rental pricing and it does not get offset by the actual sale figure and therefore it will be few years before retailing bears fruit. Vacant spaces in the luxury corridor such as Taj Mahal Palace & Towers , Mumbai, The Oberoi Hotel or DLF Emporia mall at Vasant Kunj, New Delhi© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  18. 18. where the fashion brands put up their outlets in 1200 to 2000 sq ft area, the rentals hover around 800- 1200 per sq ft. Even as organized retailing growth is taking place at a fast clip, luxury brands often find it difficult to locate the desired destination for luxury brands. These brands need presence at high streets, which is typically the global norm. But in India, high street concepts have yet to catch up at right locations. Though shopping malls have proliferated, luxury brands need to be extremely choosey about the location and be conscious about other tenants which form the complexion of a mall. High end malls in India are scarce and the ones marked for completion have been delayed owing to various problems like costs and labour. Many brands make big errors in their estimate for the intrinsic nature of the country. They rarely crossed $500 per square feet / year sale against an expected minimum of $1,000. Fendi, Girad Perregaux and Burberry have pulled out after partnership failed to click and business calculations went wrong.6.1 Major Cost Component: Rent: The rental costs are skyrocketing. Typically rent is 8- 10% of sales in matured luxury markets whereas, in India it constitutes 25- 30% whether they are stand-alone store or located in a shopping mall. Marketing and Sales: Retailers spend approximately 3- 4% of turnover to promote the brands and create awareness. Capital expenditure: Usually capital expenditure for setting up a luxury brand retail store in the range of US $ 400- 600 per sq ft while for premium brands it usually ranges from US $ 80- 100 per sq ft. Inventory cost: Retailers typically maintain inventory from 2 months to as high as 6 months. In the case of apparels there is a lot of dead stock each season owing to the fast changing nature of fashion. This entails substantial working capital financing requirement and the capacity to absorb dead stock.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  19. 19. Duties: Given India’s high tax and duty structure, many brands are absorbing some of the hit in an attempt to keep prices parallel to other markets. However, this is severely affecting their competitive spirit. For example watches attract excise duty of 16% and customs duty of maximum 20%. The landed cost of watch imported to Mumbai turns out to be 50- 60% over and above the CIF value. If variable costs such as sales tax, octroi are added, it totals to 88%. 7. Gucci as a Company Tradition: Italian Incorporation: The Netherlands Listing: NYSE and Euronext Amsterdam (AEX index) Senior management: Mix of several nationalities The workforce: About 11,484 employees at the end of 2008 Distribution: Over 560 directly-operated stores Clients: Predominantly European and Asian 7.1 Gucci’s goals and values • Create value for the shareholders. • Create value in the brand by continuously managing the brand and acquiring and developing new brands. • Acquire and reposition struggling brands. • Directly operate store. Internal Analysis • Acquisitions • Partnerships • Management • Horizontal Corporate Structure© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  20. 20. External Analysis • Declining Economy o Euro crisis • Demographic Trends • Luxury Taxes • Fluctuating Exchange Rates o Asian MarketDifferent product category and product variety with the percentage contributionfor each variety under Gucci’s stable is explained in Annexure VIII.7.2 Philosophy Gucci’s wide range of products comprises watches, jewellery, clothes, perfumes, eyewear, baby wear, home goods (including furniture, bedding and wallpaper), luggage, handbags and gifts (that include gadgets for pets). These items are highly priced so why do customers buy these goods over similar, less costly products or their cheap counterfeits? Following is the extract of an interview with Rober Polet, chairman of the Gucci Group, that spells out the brand’s philosphy: “…we do not try to sell dreams we do sell dreams. People buy our brands because they want to be part of our particular dream. ... People, before going in our store, they decide: I would like to be part of their dream. And this is a emotional decision.” On the question of exclusivity, striking a balance between exclusivity and making sure that the products are available worldwide through international distribution channels, his comment is: “We do things to actually make sure that we remain exclusive. 80% of our products that Gucci brand sells are sold through the stores that we have around the world. … The points of sale are actually quite limited. … with© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  21. 21. limited quantity of the same product. So the likelihood that two people are seen with the same clothes at the same place is very low. 7.3 Gucci as a Brand: Gucci’s unique positioning is built on three key principals: creativity, exclusivity and the culture of Italian craftsmanship. Constant creativity and innovation are its key drivers. Its growth strategy is based on three areas: distribution, product offering and brand positioning. Gucci maintains several brands in its portfolio. The group’s portfolio i.e. breakdown of 2008 revenue by brand is provided below: Gucci Bottega Vveneta Yves Saint Laurant Others brands 65.3% 11.9% 15.0% 11.9% Source: Their key and upcoming brands with its relative industry standing are givenbelow: BRANDS: Core brand: Gucci Next to the core brand: YSL (Yves Saint Laurent) Upcoming brands: Boucheron; Sergio Rossi; Bottega Venetta; Bedat & Co. Promising designer brands: Stella McCartney; Alexander McQueen; Balenciaga POSITION: Soft goods: Leading industry position Hard goods: Development of jewelry and watch© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  22. 22. business Through rigorous management of image, a tight communications policy, outstanding product quality and a carefully controlled distribution network, Gucci Group has maintained the exclusivity of its brands and enhanced their positioning over the last few years. Gucci’s core market is Europe. However, with the world’s fastest growing economies, Asian countries other than Japan will be a significant contributor in the future. Europe Japan Asia Pacific America Rest of World 34% 24% 22% 19% 1% Source: 8. Marketing Gucci has adopted an international marketing strategy of communicating a consistent image to its customers around the world. Gucci’s products and marketing methods are not tailored according to any specific national needs or customs. It aims at reaching the growing global market segment of the rich and “newly rich”. This group, as analysis shows has a similarity of taste for luxury products. 8.1 Distribution Channel The channels of distribution of Gucci products for its eleven leading brands are different for each. It makes the products available to its consumers through a network of carefully selected and directly operated stores. This type of network according to the company is the best way to showcase Gucci products and convey their brand philosophy. Gucci’s four main distribution channels are:© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  23. 23. • Directly operated stores • Franchise stores • Duty-free boutiques • Department stores In the United States, E-commerce has also become a valuable complementary channel. The Group operates their stores directly in major markets throughout the world and in the wholesale route offers their products to franchise stores, duty-free boutiques and leading department and specialty stores. Yves Saint Laurent uses not only directly operated stores but also points of sale in leading department stores mainly in Europe to extend its reach of customers. In 2008 the directly operated Gucci stores in Europe numbered 560. Gucci: 212 Bottega Vveneta: 91 Yves Saint Laurant: 67 Others: 78 Total: 560 The Distribution Channel flow and Gucci’s Wholesale on-line Membership is shown in Annexure IX.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  24. 24. Contribution of retail sales over wholesale has been gradually increasing over the past two decades. In 2001 the ratio of retail to whole sale had reached 51% and47% respectively whereas, in 1997 the retail sale was very marginal. The directly operated stores of Gucci ensured the brands retain control over their products that could build their image around these stores. About 70% of sales come from Gucci stores alone. A manager runs these stores independently; bureaucracy is avoided resulting in efficient management of the stores. Gucci Group CAGR has been higher than Gucci Brand CAGR. This is reflected in Annexure X. Group revenues by Regions and Retail Network Development appears in Annexure XI. 9. Revenue Breakdown: Gucci generated US$2.4 billion worldwide in revenue in 2008 according to Business Week magazine and climbed to 45th position in the magazines annual "Top 100 Brands" created by Interbrand. Gucci is also the biggest- selling Italian brand in the world. Gucci’s total revenue in 2008 was €3,380. 35% of its annual revenue (€2,206 million) comes from Europe. North America and Japan contribute 20% and 15% respectively. Annexure XII shows 70% of sales revenue comes from Gucci division and also the overall turnover has risen strongly by acquired brands since 1999. Moreover, the operating profit remained relatively steady. 70% of its revenue comes out of its directly operated Gucci stores. (The above three annexure relate to the year 2001) Gradual shift towards Luxury Goods has enabled Gucci to post better EBIT (earnings before interest and taxes) over the retail selling sector. This is indicated in Annexure XIII.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  25. 25. For Gucci group as a whole the most important products are Leather goods which contribute to 57% of sales, followed by shoes at 15%. Year 2008 revenue breakdown by product category (%) is given below: Ready to wear: 14.3% Watches: 5.1% Leather goods: 55.3% Jewellery: 3.7% Shoes: 15% Other: 6.6% Total €3,380mn Source: 10. Prices in Indian Market The indicative prices of luxury items in the Indian market are provided below. The JV of Gucci with Luxury Goods Retail will compete in the same product range where they are likely to find a ready market. Gucci is of the opinion that given their global brand image and product exclusivity they would be able to price their products 50% higher than these prices. Women’s Price Range Men’s Price Range Womens Ready 3800 + Mens Shoes 3000 + to Wear Handbags 2300 + Small 1100 + Accessories Womens Shoes 2600 + Wallets 1700 - 2500 Fragrance 2600 + Belts 1300 + Sunglasses 5500 – 25000 Ties 1700 + Other© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  26. 26. Fine Jewellery 7000 + Silver Jewellery 12500 + Watches 7000 – 1,00,000 Scarves 1500 + Hats 1500- 2500 11. The Bumpy Road? Even as there is a sense of heightened optimism about the luxury brands market in India, the fact is that the country still represents a very small percentage of the entire global market for luxury brands. Also, the country’s rank in global competitiveness list has slipped two notches to 51st in Global Competitive Report (GCR) of the World Economic Forum. About 139 countries have been rated for different business criteria in terms of policies and productivity. The global market stood at US $ 220 billion in 2007. Foreign luxury brands have realized that India is a nascent luxury market and there are still many challenges to overcome. Luxury brands have a minimum entry price point in each product category. Examples could be Rolex, Cartier, Louis Vuitton, Roll Royce and so on. The next level of products including fashion brands like Tommy Hilfiger and Ralph Lauren would largely fall in the super premium or premium category. While the premium segment has seen some growth over the last few years in the country, super premium and luxury segments have not seen volumes getting even remotely close to make them economically viable. A recent study by some multi luxury brands showed that average super-rich Indian spent less than one-third of what an American family with same income in dollar terms spent on luxury goods. The truth is that the wealthiest in India still maintain a somewhat austere lifestyle compared to their global counterpart. They are not conspicuous consumers and spend conservatively except for weddings. The country has recognized value in premium segment products which are now available in large format stores. The market is not yet mature for luxury and super-premium products.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  27. 27. There is also a belief that a global luxury product is best purchased overseas because it would be genuine and cost less. So, while Indians will remain a large consumer target audience, the catchment area will be overseas markets where Indians travel on business or leisure. In spite of some luxury brands closing shop, there are many that have managed to expand their presence after a certain number of years. It is widely believed that the segment has potential for players with a long-term focus and staying power. With an economy clocking one of the highest growth rates, with the world’s fastest growing population that is also English speaking, a large and thriving black money running a parallel economy and a culture seeped in festivals and gifting, India could be poised to be the new Luxury logo land. Luxury home, expensive car, the opulence of big fat wedding, fashion clothes and single malt collection in the bar are all loud tell tales. There are still many challenges to overcome, in retailing infrastructure and, in the absence of talented human resource. But then, so was it for luxury cars, high-end mobile phones, LCD TV’s and airlines. All the 470 million Indians born after 1980 were born into consumerism and they present too compelling a market for the luxury invaders to ignore. Source: i. ii.National Statistical Offices iii.OECD, Eurometer International iv. India as a Future Manufacturing Hub for Global Fashion & Luxury Goods- FICCI publication2009 v. Economic Times vi. Inputs from IILM Retail Management students (PGP 2008-10) from their project work “Bipolar Consumer” vii. Inputs from Ulrike Stagl, Ulrike Fasbender, Ben Grub & Hannes Green - International students of MCI Management Centre, Innsbruck, Austria under the exchange program at IILM (PGP 2009-11) (End of case)© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  28. 28. Issues for discussion: 1. Having failed in its attempt to make a presence in the Indian market with the Murjani group, can Gucci be certain whether they would succeed in the market place? 2. Describe and evaluate Guccis current positioning strategy. Should Gucci reposition itself against its competitors in India? 3. What are the principal key drivers for Gucci in terms of its retail strategy? Would e-marketing be a viable option? 4. What are Guccis Key Success Factors (KSFs) and sources of competitive advantage? Are its competitive advantages sustainable? Can Gucci transfer its key success factors to new markets as it expands in India? 5. When and how should Gucci focus on the other brands under its umbrella in the Indian market vis a vis their international positioning and performance? 6. With the business ambience getting favourable and untapped opportunities the Indian Luxury market presents, chart out a long term strategy for Gucci based on their international standing?© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  29. 29. ANNEXURE- IKey dates • 1923: The company is founded by Guccio Gucci in Florence, Italy. • 1953: Guccio Gucci dies; and internationalization begins with new stores in Philadelphia, San Francisco, Beverly Hills, Palm Beach, and Chicago. • 1989: InvestCorp International acquires a 50 percent interest in Gucci and forms a 50/50 joint venture with Maurizio Gucci. • 1993: InvestCorp buys Maurizio Guccis shares and gains full ownership of the company. • 1994: Tom Ford is named creative director. • 1995: Domenico De Sole is appointed CEO, and the company makes an initial public offering on Amsterdams AEX, New Yorks NYSE, and Londons SEAQ International Market. • 1996: InvestCorp sells remaining shares in the company. • 1999: LVMH (Louis Vuitton Moet Hennessey) acquires 34.4 percent of Gucci shares and in response Gucci forms a strategic alliance with PPR (Pinault-Printemps-Redoute); LVMH challenges the legality of the alliance; and Gucci acquires Yves Saint Laurent. • 2001: A settlement agreement is reached among Gucci, LVMH, and PPR.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  30. 30. ANNEXURE- II India vs China as a Manufacturing Hub Parameters India China Investments in textile India imported around China has invested 5 machinery 7500 units of shuttle less times the shuttles looms looms invested by India, Pakistan & Bangladesh Key export Cotton Man made fibre Types of taxes levied on 1. Customs duty Customs duty imported luxury goods 2. Countervailing 3. Excise duty 4. VAT Total percentage of tax 58% 11% charged on luxury goods % of customs duty 10%- 150% 11% chargedIn spite of above drawbacks, India is all set to threaten China’s position as theworld’s backyard for manufacturing in the next 3- 5 years.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  31. 31. ANNEXURE- III The Indian Wealth League Category Annual Annual Estimated Estimated Income Income (US $) HH* 2005- 06 HH* 2009- 10 Super Rich 10 million+ 200,000 53,000 141,000 Sheer Rich 5- 10 million 100- 200,000 103,000 255,000 Clear Rich 2- 5 million 40- 100,000 454,000 1,037,000 Near Rich 1- 2 20- 40,000 1,22,000 2,373,000 million Total 1,732,000 3,806,000 Source: NCAER MISH Survey *HH- No. of house holds ANNEXURE- IV Show me the money- Wealth definitions International definition Average annual income Average luxury goods spend Rich $390,000 $81,000 17,600,000 • 3,650,000 21% of annual income Affluent $153,000 $27,000 6,890,000 • 1,220,000 18% of annual income© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  32. 32. Source: American Express© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  33. 33. ANNEXURE- V 14.4 18.9 19.1 20.3 22.7© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  34. 34. ANNEXURE- VIIndias Brand Freaks(Washington Post)AHMADABAD, India -- Amid buttery leather handbags and $200 torn jeans,Anuga Shah and her friends were shopping in this boomtowns newest mallrecently, proudly humming that they were "spendy.""This week, its all about Tommy," Shah, 26, cooed as she petted hoodedsweaters inside a glitzy Tommy Hilfiger boutique. "In India today, we love to bebranded. Ill spend my whole salary for a really swank brand and eat idli[steamed rice cakes] for the rest of the month.""This year, India really unleashed the brand beast," said Saloni Nangia, "It usedto be just five-star hotels that had the high-end shops, but now India is actuallygetting upgraded with both premium brands and very high-end luxury. Theright real estate is here now and the brand-freaks market is only going to getbigger.""This is the year of the Indian woman as a confident brand-buyer not abroad,but finally at home," said Bandana Tewari, fashion features editor at VoguesIndian edition. "I find it refreshing that we have choices and a better lifestyleriding the optimism of the economy."In a country with a rich tradition of textiles, Indian haute couture is flourishing,too."India still loves its colorful silk saris. We havent gone to wearing black andwhite like the rest of Asia," Tewari said. "We refuse to change our intrinsicpersonality. We are remembering that India has always had superbly expensivejewelry, and insanely luxurious hand-woven seven-yard saris that are 800 yearsold. Its a good reminder to us that it shouldnt just be about importing. We weresprinkling very expensive saffron on our dessert before we got caviar."© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  35. 35. ANNEXURE- VII PERCEIVED PRESTIGE© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  36. 36. ANNEXURE- VIIIGucci Group divisions The following diagram shows the product-diversification of the Gucci Group. As the diagram points clearly, the overall turnover has risen strongly by acquired brands from 1999. Moreover, the operating profit remained relatively steady in contrast.© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  37. 37. ANNEXURE- IX Distribution channels With Gucci Wholesale online Normal Distribution Path Membership Designer Factory (i.e. Gucci) Designer Factory (i.e. Gucci) Jobber #1 (Italy) Jobber #1 (Italy) Jobber #2 (Italy) Customer Distributor Wholesaler Retail Store Customer© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  38. 38. ANNEXURE- X ANNEXURE- XI© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010
  39. 39. ANNEXURE- XII ANNEXURE- XIII© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010