Why Kering has a questionable competitive advantage
Kering's 60% plunge: can Gucci reclaim its luxury throne or face a premium brand future?
“Empowering Imagination”
Kering
We have a full fundamental analysis written on Kering. Are you interested in reading this, along with many other reports? Take a look at our TDI-database, filled with a brand-new deep dive every week.
Kering is a large French ‘luxury holding’ (similar to companies such as LVMH and Richemont) that focuses on luxury goods. Kering is not a standalone brand but a luxury group with many well-known luxury brands (see examples below).
High-quality fashion and leather goods
Jewelry
Eyewear
Porcelain
Beauty
Kering is therefore a global luxury group that manages the development of a range of renowned brands in fashion, leather goods and jewelry.
The company was founded in 1963 and is known for its luxury fashion and accessories brands such as Gucci, Saint Laurent and Balenciaga. In this piece, we will discover how Kering was founded, how the company has developed over the years, and which key moments in the company's history have contributed to its current success.
Why Kerings moat is questionable
Kering, a prominent player in the luxury goods market, has built its reputation based on brands like Gucci, Saint Laurent, and Balenciaga. However, despite its impressive portfolio and strategic acquisitions, Kering's competitive advantage appears to be on shaky ground. Just take a look at its returns over the past 5 years.
The luxury market is defined by several unique characteristics:
brand recognition;
customer loyalty and
heritage.
These elements are of the utmost importance for establishing and maintaining a (durable) competitive advantage. Kering's strategy largely depends on taking advantage of these intangible assets across its various brands. However, the strength of Kering’s competitive advantage varies greatly among its brands.
Kering's primary competitive advantage lies in its strong brands, but not all of them are equally robust. Gucci, which accounts for a significant portion of Kering’s revenue, has recently shown signs of weakening brand strength. While Gucci remains one of the most recognizable names in luxury fashion, its appeal has been declining, as evidenced by a drop in sales and market share, which we talk about more in depth in our Kering research report. The brand value of Gucci amounted to approximately 17.8 billion dollars in 2023, a slight decrease of around 300 million dollars compared to the previous year.1 Just to show how strong of a brand, Gucci (still) is:
Gucci is one of the top luxury brands globally, ranking high among its peers. Interbrand has it ranked fourth in the world, behind Louis Vuitton, Chanel, and Hermès.
It generates over $10 billion in annual revenue with more than 500 stores in over 50 countries.
Gucci leads luxury brands on social media, boasting over 40 million followers on Instagram.
Celebrities like Beyoncé, Rihanna, and Jennifer Lopez frequently wear Gucci.
Gucci often features in popular films and TV shows, highlighting its iconic status.
So what’s Gucci’s (and Kerings) problem?
Problem 1: not the same level of ‘luxury’
Compared to other luxury giants like LVMH and Hermès, Kering’s brands, particularly Gucci, do not exhibit the same level of resilience and customer loyalty. Hermès is known for being exclusive and luxurious. They have a sizable base of devoted customers who are unaffected by the economy. The popularity of Gucci is changing, which raises questions about its long-term viability as a premium luxury brand.
Problem 2: economies of scale are not the same strength
One of Kering’s advantages is its ability to achieve economies of scale and synergies through its portfolio of brands. The company can negotiate better rates for advertising, marketing, real estate and other operational expenses, benefiting from its size. However, these economies of scale are not exclusive to Kering, and competitors such as LVMH, Richemont, or even Hermès also benefit from these advantages, often more effectively.
Problem 3: not all brands are performing well
Kering’s strategy of allowing each brand to maintain its unique identity while benefiting from shared resources is a good one. Yet, the execution appears inconsistent. For instance, while Saint Laurent (YSL) and Bottega Veneta have shown some growth, other brands within Kering’s portfolio, such as Balenciaga and Alexander McQueen, have not performed as well, dragging down the overall performance.
Kering's significant stock price decline by 60% reflects the market’s growing skepticism about the company's ability to sustain its competitive edge and the future of its flagship brand, Gucci. The key question is whether Gucci can regain its position as a leading luxury brand, or if it is destined to become merely a premium brand. If Gucci fails to reclaim its luxury status, it risks being perceived as a premium brand rather than a luxury one. This shift could be disastrous.
Is Gucci capable of reclaiming its luxury status, or will it have to contend with a premium future?
Try our service for free for 14 days and access all our current research reports. Plus, you'll get an exclusive preview of the next two upcoming reports!
When the economy is struggling and luxury buyers have to make tough choices, Gucci tends to be the brand that people forgo, compared to brands like Hermes and Louis Vuitton.