Problem
Case: Gucci in post-Covid China
Laurent Cathala, a former executive at Tiffany & Co., took charge of the Chinese operations for Italian luxury fashion house, Gucci, in June 2022 when Covid restrictions were easing across China. The country was once set to become the biggest market for the luxury sector by 2025 but was severely hit by Covid lockdowns. While customers have started emerging from lockdowns, there is little recovery in consumer spending due to income losses during Covid. Footfall in shopping centers remained low in large cities like Shanghai and Shenzhen after lockdown measures eased. Particularly for the luxury sector, experts expect luxury sales to drop by 15%. Laurent was now responsible to revive Gucci sales in China amid Covid.
Started by Guccio Gucci in 1921 in Italy, Gucci maintained its status as one of the most prestigious luxury brands in the world. Gucci largely follows the industry norms to take a top-down approach in fashion design, prioritizing the exclusivity and craftsmanship of creators. Such norms are actively enforced by educational institutions that attribute fashion design to the independent creativity of designers. As the Swedish School of Textiles advises newly trained fashion designers that they should let their creativity flow freely without considering commerciality at all. With similar philosophy, Gucci designers at Fashion Meccas like Paris and Milan developed exclusive designs that were sold around the world to high-income customers who valued the luxurious and sophisticated image of Gucci. To some extent, the top-down approach had earned Gucci its prestige and market leadership.
By the turn of the new millennium, however, Gucci was facing a new world that was undergoing substantial transitions. Generations Y and Z were contributing 40% of consumption and 100% of industry growth. These generations were markedly different. Instead of high-quality craftsmanship and exclusivity, Gen Y & Z assigned higher importance to the social responsibility and authenticity of the brand. Indeed, many customers were buying and selling pre-owned luxury goods on Platforms like Farfetch and Poshmark that facilitate the resale and repurposing of high-end fashion brands. Gen Y & Z also had a high digital orientation. There was an explosion of global and country-specific social media platforms, which Gen Y & Z frequently used to connect with brands. The competitive landscape was also evolving. In addition to large competitors like Chanel, or LVMH, Gucci was facing a new breed of independent fashion designers offering a larger variety of fashion designs at competitive prices via online channels. With its traditional approach of leveraging European Fashion to appeal to the world, Gucci found itself far behind the curve. Its classic products had lower appeal among new customers. It offered only a few designs each year, which put it at a substantial disadvantage against more agile independent fashion designers. The company also had a poor track record in terms of pollution and wastage. Participation in digital media and online sales activities was very low.
In 2015, the new leadership, CEO Marco Bizzarri, and creative director Alessandro Michele recognized the need to shift from traditional success recipes in the luxury fashion industry to more actively understand and respond to a fast-changing environment. Gucci revamped its design by blending luxury with streetwear. It also replaced old brand ambassadors to hire more contemporary ones who could attract Gen Y & Z. The company also took sustainability initiatives by vowing to stop using animal furs and going carbon neutral in its supply chains. In addition, Gucci substantially enhanced its digital presence through social media campaigns and a complete redesign of its website. However, most Gucci sales in 2019 still originated from its vast network of 487 physical stores. It invested heavily in revamping its physical stores to provide a more pleasant shopping experience. The humble approach to serving customer needs substantially enhanced Gucci's popularity among Gen Y & Z customers. Profits increased nearly four-fold during 2015-19.
The turnaround efforts met a major blow during Covid-19. Carefully designed stores of Gucci turned empty. Gucci sales dropped by 39% in mature markets and 27% in emerging markets. Nevertheless, the digital orientation paid off as the company's online sales soared at an unprecedented rate. Even when lockdowns started easing, some long-lasting shifts in customer behaviours were evident. Customers were drawing toward more mindful shopping with cutbacks in luxuries and discretionary products like apparel as well as lower preference for expensive products. Gucci also found some novel opportunities to sell virtual luxury items. The reliance on digital channels continued even after lockdowns were over. People were buying more and more items to express them in virtual worlds with virtual products. Gucci also experimented by creating a Gucci Garden in the metaverse. The exhibition attracted more than 20 million visitors. Gucci was also able to sell virtual handbags, sunglasses, hats, etc.
As lockdowns started easing around the world, rebounding Chinese sales became Gucci's top priority. Gucci had heavily invested in China due to its large market size, but the strategy of leveraging European prestige to win the key Chinese markets backfired due to Covid. Historically, Gucci relied on young Chinese shoppers traveling to Europe's fashion capitals and coming back inspired by Gucci designs. The freeze on international travel revealed the weakness of this model. Compared to rivals like LVMH and Hermes, Gucci faced a steeper drop in sales, partly because Gucci was more reliant on mainland Chinese customers who frequently travelled internationally. Although Gucci had been developing substantial flexibility to identify and respond to market dynamics across countries, unexpected transitions in a volatile, uncertain, complex, and ambiguous (VUCA) China took it by surprise. Now, Gucci was on the verge to start another journey by going to the grassroots level to assess evolving customer needs and build a more multilateral and multicultural business.
Some efforts were underway already. While Chinese regulations provided limited opportunities to sell over the metaverse, Gucci started promoting its presence in China's digital world by collaborating with Chinese pop culture IP Marsper, a virtual character that is a collectible figurine. Gucci offered Marsper figures dressed in Gucci's suits for sale in the Chinese market. Gucci also entered the high-end beauty category to reach a larger and younger audience. In a highly unusual move, newly appointed Cathala was tasked to bolster local teams, giving them control of marketing and advertising activities. Previously, Gucci's strategy was normally dictated by European executives based in Paris or Milan. With such autonomy to transform the Chinese business of Gucci, can Cathala lead Gucci back to success in a VUCA Chinese market?
Task
If you are appointed as an advisor to Cathala, what strategy you will recommend for putting Gucci back on track? While recommending a course of action, think about the current and rapidly changing institutional environment of China as well as emerging opportunities and threats in the VUCA Chinese market.