Interface News Reporter | Chen Qirui
Interface News Editor | Xu Yue
Kering is going through a tough time.
On April 24, Kering released its first quarter 2024 performance report, with sales revenue down 11% year-on-year to 4.504 billion euros (about 34.875 billion yuan). Comparable sales from the direct channel were down 11 percent, while wholesale sales were down 7 percent, with wholesale sales of luxury brands down 20 percent.
The cooling of the luxury industry has intensified. LVMH's sales in the first quarter fell 2% year-on-year, while the fashion and leather goods division and the jewelry and watch divisions fell 2% and 5%, respectively. Zegna Group's sales increased by only 8.1% in the first quarter, nearly halving compared to 15.2% in the fourth quarter of 2023.
But Kering's situation is clearly worse.
Sales revenue of Gucci, the main brand, fell 21% year-on-year to 2.079 billion euros, while the comparable revenue of direct and wholesale channels fell 19% and 7%, respectively. Kering issued a profit warning to the market at the end of March, saying that Gucci's sales could fall by nearly 20%. Kering's chief financial officer, Armelle Poulou, said in the earnings conference that Gucci's sales performance in the Chinese market is worrying.
Gucci's decline in the first quarter was mainly due to lower sales in the Asia-Pacific region, including China. As new creative director Sabato De Sarno's first collection was only launched around March, the collection accounted for less than 7% of sales in the first quarter, but the report reported that ready-to-wear and footwear received a good market response.
SAINT LAURENT, ONCE THOUGHT TO BE ABLE TO CATCH GUCCI'S HIGH GROWTH MOMENTUM, ALSO UNDERPERFORMED IN THE FIRST QUARTER, WITH SALES FALLING 8% YEAR-ON-YEAR TO 740 MILLION EUROS. Bottega Veneta's sales revenue fell 2 percent year-on-year to 388 million euros, while Balenciaga's "Other Brands" division, which includes Balenciaga and Alexander McQueen, fell 7 percent.
By region, excluding Japan, sales in Asia-Pacific, North America and Western Europe declined by 19 percent, 11 percent and 9 percent, respectively. Sales in Japan increased by 16%, and the advantage of price differentials due to the fluctuation of the yen attracted a large number of tourists to buy luxury goods. Revenues in other markets, including the Middle East and Africa, increased by 6%.
Following the earnings release, Kering's shares fell 9% after the market opened on April 24. Due to the cooling of the luxury industry and the need for continuous capital investment in the transformation of its brands, Kering does not expect to see a significant improvement in performance in the short term, and operating profit may fall by 40% to 45% for the first half of 2024.
Kering's performance can be described as "straight down". It is true that global luxury sales are cold, but it is also a gradual process. While Gucci's performance slowed after the outbreak of the pandemic, Yves Saint Laurent and Balenciaga maintained relatively high growth rates, allowing Kering to continue to record positive sales growth.
However, the fact that sales of major brands fell by more than 20% in the first quarter, and the group's operating profit is expected to fall by more than 40% in the first half of 2024, makes Kering, a large multi-brand company, particularly embarrassed – not only did sales fall quickly and sharply, but the multi-brand strategy to mitigate risk did not help much.
Gucci accounts for nearly half of Kering's total sales, while Louis Vuitton accounts for only a quarter of LVMH's sales of nearly 80 billion euros in 2023. Relying on Gucci has made Kering less resilient, and the management is not unaware of this, and its medium-term strategy in 2023 clearly states that it will support Yves Saint Laurent.
At that time, Yves Saint Laurent's performance was still growing. Yves Saint Laurent's previous growth was mainly due to a strategy of offering a large number of entry-level leather goods products, which were often shaped in line with market trends. However, as the purchasing power of middle-class consumers shrank, Yves Saint Laurent's performance began to decline, and it became the brand with the largest decline within Kering.
In fact, relying on entry-level consumers and products to drive sales is a common problem across all Kering's brands.
In regular-priced stores, Kering's brands offer a large number of entry-level handbags and shoes worth about 10,000 yuan, and these brands are often frequent customers of outlets. On social media, some netizens said that Gucci's practice of selling the popular Bacchus bag in the outlet has damaged the brand's value. After the departure of Daniel Lee, the former creative director of Bottega Veneta, the products he designed were quickly sold at outlets at less than 50% off.
Kering is not unaware of the damage to brand value caused by this approach. In the early days of Gucci's transformation, former creative director Alessandro Michele, Kering announced that it would cut back on its discount activities and scales, as well as shrink its wholesale channels. However, in the overall distribution of goods, Kering was still unable to withstand the benefits of low prices and discounts.
Today, Kering's brands are stuck in a situation where they are not high-end and luxurious enough, and consumers prefer to buy top luxury brands such as Hermès and Louis Vuitton. That's why Kering said in its earnings report that improving the attractiveness and scarcity of its brands is the most important thing at the moment.
At its core, Gucci remains. In addition to continuing to shrink its wholesale channels, Gucci plans to close some outlets as early as 2024 and re-establish its position as a core of leather goods products. For Gucci, which has experienced a surge in traffic over the past 10 years, reshaping classic handbags to avoid the impact of trends is key to maintaining its position in the industry and driving its performance.
It is not expected that Kering's performance will not improve significantly in the short term. Brand transformation requires a lot of capital investment, and profits will inevitably continue to be under pressure. But in the current environment, Kering has no other way than to completely reshape its brand image. If the focus remains on short-term gains, Kering will still experience another performance disaster beyond the next cycle.