Stock story: Kering

Offering Gucci, Yves Saint Laurent and other luxury brands to the world.

Stock story: Kering

Celebrating its centenary year in 2021, Gucci invokes a glamorous, romantic, eclectic and inclusive ideal. The brand, in its premium position in fashion, is cemented in popular culture and beloved by its followers.

Gucci is the flagship and highly profitable brand within the glittering portfolio of greatly coveted brands owned by Kering, one of the largest luxury groups in the world. Kering is controlled and managed by the Pinault family from France.

In addition to Gucci, Kering owns Yves Saint Laurent, Bottega Veneta, Balenciaga and Alexander McQueen among other clothing, jewellery and eyewear businesses.

The business has generated substantial growth in the past decade. The brands have seen insatiable demand from the rapidly growing affluent class of consumers within China and the Gucci brand has enjoyed a revival under the stewardship of star manager Marco Bizzarri, and star designer Alessandro Michelle with his “more is more” aesthetic, since 2015. As such, Kering’s sales more than doubled in the five years to 2019 to just short of 16 billion euros.

Kering is a high-quality business with its economic moat supported by four pillars.

The first is the remarkable equity of its brand portfolio dominated by Gucci, which represents more than 80% of company earnings and has Florentine heritage and desirability stretching back to 1921 – Grace Kelly and Jackie Onassis are among the famous wearers of the brand. This positioning cannot be replicated and instils a unique brand cachet and desirability. Gucci is successfully courting millennials, who comprise more than 60% of the brand’s sales, and the brand is a fixture among young Hollywood actors and musicians.

The second is the craftmanship of the brands. They are acknowledged for their unique design, instantly recognisable signifiers such as the horse bit, tri-stripe and flora patterns, and designed and made-in-Italy credibility and product quality.

The third is control of its distribution. About 87% of Gucci’s products are sold via its owned-retail or online networks, which enables control of the presentation, ambience and, importantly, pricing. The products are never sold at a discount (even by third parties) – an important factor in the maintenance of the cachet of the brands.

The fourth element is economies of scale. This creates a virtuous circle as it gives the company the ability to outspend peers on advertising and promotion and control the customer conversation around its brands. These factors in turn beget its prestige, which in turn supports brand awareness, pricing power and greater potential for revenue growth. Established global brands such as Gucci generate higher profits than smaller and more mass-affluent peers. Gucci enjoys the highest ‘earned media value’ of any luxury brand.

A further element that ought not to be overlooked within the Kering portfolio are the company’s industry-leading environmental and social responsibility credentials. This is intertwined with the brand equity of its portfolio. Kering has shown leadership in carbon neutrality, in removing fur and exotics from its product suite and via investment in sustainable fabrics – a commitment that also resonates for its socially conscious customers. Recently, the company took steps to reduce the speed and inevitable ‘waste’ of the fashion cycle, having pivoted to fewer show extravaganzas and moved to more intimate customer relationships. Many within the fashion industry have followed Kering’s lead on these key issues. Notwithstanding this leadership, the business is still exposed to ESG risks, given leather production has impacts on deforestation, methane production and animal welfare, and cotton production is a water-intensive commodity. Kering has committed to improving traceability across its supply chain, with targets for 100% sustainably sourced leather and cotton by 2025 (currently 88%) and investment in organic cotton. Kering has controlled and integrated production including, in many cases, ownership of sourcing. The company has reduced sourcing from higher-risk locations.

The key disruptive forces relevant to Kering are the shift to e-commerce within discretionary retail, and the saturation of brands in this arena. Although social media has lowered the barriers to entry in fashion and has democratised the ability to create a brand, this does not pose a worrying threat as there are few substitutes for heritage luxury brands such as Gucci, Saint Laurent and Balenciaga, particularly in comparison with alternative brands found on multi-brand sites.

Kering is also leading the industry in using digital marketing (now comprising more than 60% of marketing budgets), digital commerce and appealing to millennials. The brands have substantial followings on social media and have the reach to create newness, engagement and enhance the brand in the digital sphere. Kering’s ability to outspend challenger brands is a competitive advantage and thus we regard the business as resilient to disruption risks.

Other risks that are relevant to Kering are macroeconomic ones, given the discretionary nature of purchases, and any damage to customer perception of its brands. Fashion risk is important as there is always a trend element in the brands’ sales trajectories as well as the risk of potential missteps such as that seen by peers in China or for Gucci in its historic inspiration from African-American culture in its designs, where appropriate recognition and representation become important. These risks, however, are temporary rather than structural and do not impede the long-term business quality nor the growth opportunities inherent in the business

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