Gucci case only110910

GUCCI- FASHIONING INDIA

A CASE STUDY ON RE-EMEREGENCE OF THE BRAND GUCCI IN INDIA

SUJIT SENGUPTA

PROFESSOR (MARKETING)

IILM INSTITUTE FOR HIGHER EDUCATION

3 LODHI INSTITUTIONAL AREA

NEW DELHI- 110003

© Prof. Sujit Sengupta, IILM Institute for Higher Education, New Delhi. September, 2010

INDEX

Sr. 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


ANNEXURES

I KEY DATES………………… 28

II INDIA VS CHINA AS A MANUFACTURING HUB……………… 29

III THE INDIAN WEALTH LEAGUE………………… 30

IV SHOW ME THE MONEY- WELATH DEFINITIONS…………… 30

V HNWI POPULATION GROWTH RATE 2007 (%)…………… 31

VI INDIA’S ‘BRAND FREAKS’………………… 32

VII NO. OF CATEGORIES VS MARKET IMAGE………………… 33

VIII GUCCI GROUP DIVISIONS………………… 34

IX DISTRIBUTION CHANNELS………………… 35

X REVENUES BY CHANNEL………………… 36

XI GROUP REVENUES BY REGION………………… 36

XII CAGR 1994- 2001………………… 37

PPR CONSOLIDATED FIGURES AT YEAR END
XIII 37
2004……


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 I

1.1 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).


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 Landscape

2.1 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.


− 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


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


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,


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:


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 2007
Billions

Clothing 765.6 951.6 897.0 983.3 1,080.1 1,143.2

Footwear 89.2 122.5 101.1 113.6 128.6 134.1

TOTAL 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


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


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


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 country's 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.

India's elite have long enjoyed luxury goods imported from the West. But
Indians who can't afford $600 sunglasses -- yet still have some disposable
income -- have also been splurging now. Recent openings of stores at two of
the country's highest-end malls puts into focus the ever increasing
consumerism amongst Indians. At New Delhi's 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 didn't 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.


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.


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.


− 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 rising

5.1 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 brand's
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


• 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


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.


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


External Analysis

• Declining Economy

o Euro crisis

• Demographic Trends

• Luxury Taxes

• Fluctuating Exchange Rates

o Asian Market

Different product category and product variety with the percentage contribution
for 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


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: www.gucci.com

Their key and upcoming brands with its relative industry standing are given
below:

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


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%


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:


• 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.


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 magazine's
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.


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


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

Women's Ready 3800 + Men's Shoes 3000 +
to Wear

Handbags 2300 + Small 1100 +
Accessories

Women's Shoes 2600 + Wallets 1700 - 2500

Fragrance 2600 + Belts 1300 +

Sunglasses 5500 – 25000 Ties 1700 +

Other


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.


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. www.gucci.com
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)


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 Gucci's 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 Gucci's Key Success Factors (KSF's) 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?


ANNEXURE- I

Key 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 Gucci's 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 Amsterdam's AEX, New York's NYSE, and
London's 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.


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%
charged

In spite of above drawbacks, India is all set to threaten China’s position as the
world’s backyard for manufacturing in the next 3- 5 years.


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


Source: American Express


ANNEXURE- V

14.4

18.9

19.1

20.3

22.7


ANNEXURE- VI

India's 'Brand Freaks'

(Washington Post)

AHMADABAD, India -- Amid buttery leather handbags and $200 torn jeans,
Anuga Shah and her friends were shopping in this boomtown's newest mall
recently, proudly humming that they were "spendy."

"This week, it's all about Tommy," Shah, 26, cooed as she petted hooded
sweaters inside a glitzy Tommy Hilfiger boutique. "In India today, we love to be
branded. I'll 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 used
to be just five-star hotels that had the high-end shops, but now India is actually
getting upgraded with both premium brands and very high-end luxury. The
right real estate is here now and the brand-freaks market is only going to get
bigger."

"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 Vogue's
Indian edition. "I find it refreshing that we have choices and a better lifestyle
riding 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 haven't gone to wearing black and
white like the rest of Asia," Tewari said. "We refuse to change our intrinsic
personality. We are remembering that India has always had superbly expensive
jewelry, and insanely luxurious hand-woven seven-yard saris that are 800 years
old. It's a good reminder to us that it shouldn't just be about importing. We were
sprinkling very expensive saffron on our dessert before we got caviar."


ANNEXURE- VII

PERCEIVED PRESTIGE


ANNEXURE- VIII

Gucci 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.


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


ANNEXURE- X

ANNEXURE- XI


ANNEXURE- XII

ANNEXURE- XIII


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