GUCCI’S TURNAROUND: FROM THE PRECIPICE TO THE PEAK IN 3 YEARS
Byline: Sara Gay Forden
MILAN — When Bahrain-based investment bank Investcorp sold off its remaining stake in Gucci Group NV last month for a formidable $1.7 billion, it seemed to some as though Investcorp had pulled a rabbit out of a hat.
Less than three years earlier, when Investcorp acquired control of the company after a bruising battle with the late Maurizio Gucci, the Florentine fashion house was on the verge of collapse. Few imagined the investment bank would ever be able to recoup its stated total investment of $295.8 million in Gucci, which consisted of $245.8 million for its 100 percent stake, acquired in two stages — 50 percent in 1989 and the outstanding 50 percent in 1993 — plus an additional $50 million in recapitalization funds.
But a thorough restructuring yielded results much faster than anyone expected. And the company issued yet more good news Tuesday: Net sales, including royalties, jumped 113 percent in the first quarter of this year to $193.5 million from $91 million. (See related story, opposite page.)
As a result, the stock has been nothing short of phenomenal, even spurring a host of fashion companies to consider public offerings of their own. After going public in October at $22 a share, the stock price has seen a stellar ascent, rising 5 1/4 to a new high Tuesday of $70 7/8 on the New York Stock Exchange. Investcorp’s proceeds from the initial, secondary and final offerings hit a grand total of $2.1 billion before paying off underwriting costs and Gucci’s debts that totaled $364.3 million.
“We are now a totally public company,” said Gucci chief executive officer Domenico De Sole, a 14-year company veteran and former chairman of Gucci America, during a recent interview in his offices at Gucci’s headquarters in Florence. “I can be fired,” he said with a laugh. “This is real life, and we have to perform,” added De Sole, whose three-year contract expires in January 1999.
“We have accomplished a lot, but a lot still needs to be done,” De Sole said. “There is still a big gap between Gucci [1995 sales were $500 million] and companies like Chanel, with $2 billion in sales, and Vuitton, with $1.4 billion.”
Nonetheless, the spectacular flotation of one of the world’s oldest and most widely recognized names in the luxury goods business came on the heels of one of the most successful, quickest and in many ways unexpected turnarounds in the history of fashion.
“There’s no question that we got further with the turnaround faster than anyone had a right to believe possible,” said former Gucci ceo William Flanz, a former Investcorp executive who was brought in to help put the company back on course. Flanz handed the reins over to De Sole last year.
In extensive interviews with current and former Gucci employees, as well as outside observers, WWD took a step-by-step look at how Gucci was turned around through a combination of planning, hard work, smart positioning and, perhaps, a little bit of luck.
When Investcorp took over in late September 1993, Gucci was not a pretty sight. The combined effects of mismanagement and the bitter battle for control between the investment bank and Maurizio Gucci, not to mention a worldwide slump in the upscale fashion business, had left the company staggering.
Losses climbed to tens of millions of dollars, sales were slipping, suppliers and staff weren’t being paid, the fall advertising campaign had been canceled for lack of funds and the banking community had all but turned its back on the company. That same month, Gucci’s board of auditors turned the company books over to a Florence court with the request to liquidate after management failed to approve the annual accounts.
The impasse between Investcorp and Maurizio Gucci was finally broken at the end of the month, when Investcorp convinced Maurizio Gucci to sell his 50 percent stake and retire. But the battle with the last member of the Gucci family to run the company had been brutal, moving from boardroom to courtroom as allegations and power plays flew between the two partners. Countersuits were filed between the Italian core company, Guccio Gucci, and Gucci America, contracts and licenses were canceled from one day to the next, employees were flocking to other jobs and production nearly stopped.
Investcorp found itself facing the daunting task of putting Humpty Dumpty back together again. After all, until then the investment bank had been in the business of buying and selling companies, not scraping them up out of chaos and bankruptcy.
Certainly, through its 73-year-history, Gucci had been no stranger to drama and turmoil. Founded by Guccio Gucci in 1923, the company’s initial tumult churned around the colorful antics and volatile personalities of his heirs, in particular his sons, Aldo and Rodolfo, who were the most active of the six children in the family business, and subsequently two of his four grandsons, Paolo and Maurizio.
One stormy board meeting that took place in the offices over the historic Tornabuoni store in Florence made headlines around the world and is now Gucci legend. One afternoon in 1982, a furious Paolo Gucci emerged on the street pressing a bloody handkerchief to his head after a particularly heated tussle with his family. He later filed charges against his father, brother and cousin for the pummeling he said they gave him over his efforts to tape the proceeds of the meeting. Years later, Paolo sent his own father, Aldo Gucci, to jail in the U.S. for tax evasion after turning documents over to authorities about Gucci’s off-shore companies.
In 1986, Rodolfo’s son Maurizio fled to Switzerland to escape an arrest warrant over allegations that he had forged his father’s signature to avoid paying inheritance taxes on his 50 percent stake in the company. (He was later cleared.)
But the drama never seemed to die. Towards the end of the 1993 battle with Investcorp, the situation even grew somewhat grotesque — at one point Maurizio almost lost his 50 percent stake in the company to the banks after putting it up as collateral for personal loans, which he later repaid with funds he said he found “under the floorboards” in his St. Moritz house after his dead father came to him “in a dream.”
Growing desperate to hold on to his company, Maurizio even went so far as to sue Gucci America, to cancel the lucrative watch license with the Severin group (which was later reinstated) and to attempt to fire the entire design staff.
“I simply refused,” said De Sole, who as then chairman of Gucci America, went ahead and paid the designers’ salaries.
Only when Investcorp took complete control of the company, marking the final exit of the Gucci family, did the luxury house enter the most stable ownership situation it had seen since the days of Guccio Gucci.
“Investcorp was very good at stabilizing the situation,” said De Sole.To some, the turnaround seemed almost an overnight success story — after less than a year, the Gucci name was suddenly on everybody’s lips.
Patience paid off for Investcorp. Offers to buy Gucci from big industry players such as the Richmont group and LVMH, rumored to be in the range of $300 million to $400 million, started coming in and were quietly turned down. And last year, Investcorp announced its plan to take Gucci public.
To others, however, the seeds of recovery had already been planted by Maurizio Gucci himself, who had pioneered Gucci’s march back into the upscale market in the early Nineties after the name had been cheapened in the Seventies and Eighties through unrestrained licensing and over-distribution, the days when Gucci’s interlocking Gs and red and green stripes appeared on everything from key chains to coffee mugs.
“He was a man of great vision,” said Bergdorf Goodman president Dawn Mello, another person whom observers credit with helping Gucci achieve the success it enjoys today. Mello was recruited from Bergdorf Goodman by Maurizio Gucci in 1989 to help reposition the brand at the top of the luxury goods market. She stayed on through Investcorp’s consolidation of control until April 1994, when she returned to Bergdorf’s.
“He wooed me all summer [in 1989],” Mello recalled. “He said he wanted me to help him bring back the quality of this once-important trademark, and that’s what really interested me.”
While most observers credited Maurizio with giving Gucci a new dream, they also invariably noted that his ineptness as a manager almost squandered his very achievement. He made rash, big-ticket decisions, such as opening an expensive headquarters in the heart of Milan and buying an historic villa outside Florence for conferences and training sessions that were never held.
“He would send me to Tokyo for one day, and then, because he was also a kind person and didn’t want me to get too tired, he would charter a private plane to bring me back,” said Mello.
While Maurizio’s decision to slash product lines and close down wholesale distribution was deemed correct under his repositioning strategy, it proved a disaster economically, as it cut off major well-springs of revenue without providing alternative sources of income.
“Maurizio was never denied much in his life, and when he took over the company, he didn’t use much restraint,” explained Mello. “He always managed to get what he wanted, and that’s what was so bizarre about him losing the company,” she added. “Perhaps that was also why he died — he didn’t recognize a tragedy about to happen. He was a risk-taker; there was a certain recklessness about him.”
Maurizio Gucci was gunned down in March 1995, 1 1/2 years after selling out of the company. His assassin still hasn’t been found, though investigators suspect foul play in connection with Gucci’s efforts to launch a casino in Crans Montana after he sold his stake in the family business.
After Investcorp struck its deal with Maurizio in 1993, its first move was to send Flanz, a member of the bank’s management committee who had followed the Gucci investment closely, to Milan. Although the move was initially seen as a temporary measure, a subsequent hunt for a ceo either failed to turn up a satisfactory candidate or was abandoned as the wind came back into Gucci’s sails. Flanz ended up spearheading the restructuring for two years until De Sole took over, last October.
“I put everything into it I could,” said Flanz in a telephone interview from his Hong Kong offices. “Gucci became very close to my heart.”
Those first few weeks, however, were touch-and-go as he tried to untangle the company. “When I first showed up, I had about $15 million in a suitcase to deal with the most pressing liquidity problems,” said Flanz, who had already confessed ruefully in a previous WWD interview that on his first day, he managed to lock himself and a group of top managers out of Gucci’s Milan headquarters after giving strict instructions to security guards not to let in any unauthorized people. The next day, he was on a train to Florence to reassure angry workers of Investcorp’s intentions to bring the Gucci business back.
Over the next few months, working quietly, often in individual meetings with Gucci staffers, Flanz made key moves. The first and most obvious was to close down the expensive Milan offices and move the company headquarters back to its traditional home in Florence.
“Some people felt I did it to save money — and we did save millions — but that was really secondary,” said Flanz. “I decided to consolidate the management back in Florence, where it had been until 1990, because it was clear to me that the company was suffering from a top-down management and communication problem, and if you don’t run the core properly, the rest of the company can’t function.”
Next, he focussed on identifying which of his 22 top managers was truly making a contribution to the company. “I wound up pushing out 15 of the top 22 people in the first eight months,” Flanz said. “I basically told them that those who could be team players would remain. It was much more than weeding the garden — it was more like cutting off the head,” Flanz said.
“I had one-on-one meetings with about 50 people, including key middle-management people, and I tried to get a feeling of who they were and what they felt the company’s strengths and weaknesses were,” he explained. “I never asked them what they thought of their bosses — I didn’t want to create the atmosphere of a witch hunt — but I asked the opposite: Who they really respected, who was really contributing. Then it was up to me to read between the lines.”
Decisions that emerged from those meetings strengthened rather than debilitated the company, Flanz said, because as existing staff was promoted and responsibilities were redistributed, middle managers who had known the company for years for the first time got the a chance to identify problems and develop solutions. Furthermore, the credibility these moves generated with workers also helped boost morale, which had ebbed to an all-time low.
As the restructuring continued, Flanz negotiated with unions to cut 25 percent of the Italian work force, many of whom were engaged in redundant positions in bookkeeping, warehouse and general services. “The company was losing lots and lots of money, and there was no way to even come close to breaking even unless the expense base was cleaned out,” Flanz said. “We had a few work stoppages, and there were a few tense moments, but in the end we did everything on a negotiated, consensual basis. We brought in outplacement firms to help managers relocate, and I even personally intervened to help retrain the coffee boy in Milan and find him a job at Citibank. We treated each person like a human being,” Flanz said.
Another key decision was to immediately double the company’s advertising budget. “We had good products and a good campaign, and we had to get it out there and let people see what we had to sell,” Flanz said.
In the meantime, with the help of outside consultants and market studies, it became clear that the Gucci name had far more potential in world markets than its performance had indicated. Global sales penetration was nowhere near the brand awareness Gucci commanded.
“The most important thing is that through all that happened, the Gucci name really never lost its strength,” said Gucci creative director Tom Ford, during an interview in his new design offices above the Tornabuoni store in Florence. “Gucci might have lost its shine within a certain fashion community, but in a wider sense the name was still good.”
By April 1994, Flanz completed his phase of the turnaround and was reassigned by Investcorp to the Far East to seek out new investments. In March of this year, Flanz struck out on his own and now works in Hong Kong as an independent consultant in investment banking.
Succeeding Flanz, De Sole left his post as chairman of Gucci America and moved to Florence to revamp Gucci’s sourcing, logistics and production systems.
De Sole’s immediate challenge was to get the right product in the stores at the right time. He started the “Partners Project” with 24 Gucci suppliers, many of whom work exclusively for the company, which in turn offers them technical and financial support. Gucci is currently working with 10 new suppliers with the goal of adding another four or five to the project.
He also recast the production/merchandising process to speed up the schedule for classic, continuing items. “This isn’t a very complex business; we are not making atomic bombs,” De Sole said. “So if each year we sell so many black handbags, why not get a head start? Part of it all is just basic planning. Before, we were perennially late.” Finally, De Sole opened the door to significant technical advances under the supervision of logistics director Claudio Degl’Innocenti that included Gucci’s development of a state-of-the-art computerized leather cutting machine for handbags and small leather items that slices through the uncut leather at twice the speed of sound. From an initial prototype, Gucci has now perfected the machine with the collaboration of Vigevano-based Atom and is installing two more in its Florence factory, with plans for another 10 machines to be placed with various suppliers of bags and small leather goods. While local artisans still do the cutting of precious and exotic leathers, the new automated system allowed Gucci to boost production overnight.
By June 1994 the results were beginning to show.
“As we started getting the right products into the store at the right time, growth started to advance very strongly in the second half of 1994,” Flanz said, noting that sales were increasing at a rate of 50 percent in the third and fourth quarter.
Dovetailing with Gucci’s logistical restructuring was the sudden success of Tom Ford’s designs. Promoted to creative director from design director in the spring of 1994 after Dawn Mello’s return to New York, Ford for the first time was faced with the full responsibility of determining Gucci’s style.
“Dawn laid the groundwork for what I’ve been able to do; she gave Gucci credibility,” said Ford. “However, it wasn’t until Dawn left that I was forced to really think for myself,” he said. “Before, all I had to do was ask myself, ‘Will Dawn like it?’ I wasn’t that challenged,” he admitted.
“It’s easy to fall back on what you know and what is safe, but I started to realize that my generation had grown up with more violence, more cynicism and a higher tolerance for vulgarity — these things don’t scare us as much,” Ford said. “Our beauty ideal is neither safe nor nice, and I realized I wanted to bring an edge back to Gucci that it had had in the Fifties and Sixties.”
Ford’s reflections touched a nerve, as the fall/winter ’95-’96 collection presented in March, 1995 was deemed a smash by the press and buyers. And the smoky-eyed Marianne Faithful types he sent down his runway weren’t just dream girls — the clothes boosted Gucci’s commercial success, too, as women of all ages grabbed up the slinky satin shirts, mohair jackets, skinny velvet hip-huggers and metallic patent leather shoes. Sales from the fall ’95 collections jumped 100 percent from the year before.
Ford turned out another strong collection for spring, featuring Seventies-style caftans, and an even stronger one last March when he changed gears and sent out one of the most elegant and refined collections of the season.
And though the apparel currently makes up 12 percent of the business, it is growing and considered essential in driving the other businesses, including accessories and footwear (leather goods represent 52 percent of sales; footwear 18 percent). Moreover, the rtw has helped Gucci reach a more prominent position on the fashion map.
“Ready-to-wear is critical for us,” said De Sole. “It is the platform for fashion for us and it has really made a difference.”
Ford’s success hasn’t gone unrecognized. In addition to valuable Gucci equity, he’s gotten a virtual blitz of press and design awards.
“Tom has become an overnight movie star, and we kid him about it,” said Mello. “But he deserves every bit of success that he’s gotten. He went through a very tough time,” she added, noting that during the hard months of ’93 and early ’94, Ford was solely responsible for the design of all the Gucci product categories, including men’s and women’s rtw, men’s and women’s shoes, bags, accessories, luggage, small leather goods and gifts. Now that the bonds have been strengthened with Gucci’s three licenses — perfume, watches and eyewear — he is also responsible for coordinating their image.
Ford also develops the twice-a-year advertising campaigns and is overseeing new packaging as well as store refurbishing and design in accordance with Gucci’s new fashion edge.
“Had the company not faced the problems it did, Tom would never have had the opportunity to do the things he did,” Mello noted. “I think there are few designers that have this scope. He was up for it, and now he knows how to set the vamp of a shoe or the handle of a bag,” Mello said, also crediting Ford for sticking with Gucci during the tough times despite attractive offers from other design houses.
“At that time, working at Gucci felt like being on a ship that was sinking,” Mello said, “and one day Tom told me he was being wooed by Valentino, and being offered big money to go there. I waited for him to come back from Rome, knowing full well that if he left, we wouldn’t have had a collection. He came back and said, ‘I’m not going to leave you.”‘
What convinced Ford to stay? Between bites of a rushed tuna salad lunch in his Florence studio, he shrugged his shoulders. “The reason I stayed was that I could see what Gucci was, where Gucci could go, and where I could go with Gucci.”
One of Ford’s biggest supporters is De Sole, who sees the designer’s talent as one of the three key prongs of Gucci’s strategy: style, quality and “a value-oriented” price.
With first-quarter sales continuing the upward climb from last year’s $500 million revenue and $81 million net profit, that strategy is humming right along.
“I think Maurizio Gucci’s vision of a great luxury goods brand has been achieved,” continued De Sole, “though I think it’s much more fashion-oriented than he ever would have thought. He didn’t have the courage to go all the way. It’s only natural that if your name is Gucci, to have a designer like Tom associated with the label would have been difficult.
“But for me it’s different,” De Sole said. “I’m a professional manager, and I think what Tom is doing is fantastic. And in terms of positioning and prestige, Gucci’s dream has been achieved.”