Has China become overly important for Gucci? Although the Italian brand has seemingly cracked the code for keeping consumers engaged (and spending) while operating a relatively controversy-free operation in China, there are signs that complications could be on the horizon, counterintuitively due to too much success.
Under the leadership of chief executive Marco Bizzarri and creative director Alessandro Michele, Gucci has enjoyed a nearly decade-long boom with profits roughly quadrupling and revenue almost tripling between 2015 and 2019. After a disappointing, COVID-hit 2020 that crimped earnings, Gucci’s revenue jumped 31 percent in 2021, reaching €9.7 billion ($10.1 billion) and surpassing its pre-COVID 2019 revenue of €9.6 billion ($10 billion).
Reliably ranking as one of China’s favorite luxury brands, Gucci is also one of the most active in the Greater Chinese market, expertly employing collaborations, local ambassadors who are just a little off the beaten path, and clear brand storytelling. All of this has, over the past seven years, added up to outsized success that makes the brand far more exposed in China than its rivals. According to Barclays estimates, China accounts for around 35 percent of Gucci’s annual sales, compared to 27 percent of fashion and leather goods sales for LVMH and 26 percent for Hermès.
For parent company Kering, this China success has been both a blessing and a cause for concern, considering Gucci accounts for more than half of the group’s total revenue. At no point was Kering’s China vulnerability clearer than the first quarter of this year, when Gucci was hit by extended lockdowns that effectively shut down the country’s luxury hub of Shanghai. While Gucci maintained 13.4 percent growth in Q1 2022 compared to the same quarter last year, China’s lockdowns weighed down the brand on a global level, with earnings missing expectations by just below one percent.
Clearly, when China sneezes, Gucci catches a cold.Now, the China conundrum for Gucci and parent Kering is that the local brick-and-mortar and e-commerce market is arguably more important than ever. Outbound tourism (and the millions of shoppers it brought to Gucci stores in Japan, Europe, and North America, pre-COVID) is unlikely to recover until 2024, ensuring many, if not most, of China’s most active luxury shoppers will do more of their high-end shopping closer to home or online for another couple of years at least.
This means driving in-market sales will remain front-of-mind for Gucci even as Kering angles to increase revenue of other portfolio brands like Yves Saint Laurent and experiments with the world of crypto. Yet the possibility of more lockdowns in 2022 is far from the only China market obstacle facing Gucci and Kering in the second half of the year.
The Chinese government’s ongoing celebrity and influencer crackdown – which has ensnared some of the country’s top stars and livestreamers like Viya and Li Jiaqi – shows no sign of stopping, putting brands on the constant search for “safer” ambassadors who are less likely to attract unwanted attention or bad PR. And with the 20th Party Congress set to take place later this year, government censors and regulators are working overtime to catch and penalize any marketing messages that come even close to stepping over the Party line.
What all of this means is that Gucci needs a strong China plan that will help it bounce back from the recent wave of COVID lockdowns and weather an ongoing celebrity crackdown and more tightly regulated media environment in the remainder of the year.
To this end, Kering recently tapped former Tiffany veteran Laurent Cathala to run Gucci’s Greater China fashion operations, with Cathala expected to give local teams greater control of marketing and advertising efforts. The brand also split off its watches and jewelry business to be managed globally by corporate headquarters in Milan, in an effort to ensure consistency. Now the question is what Gucci’s more empowered local marketing and advertising team will cook up for China in the year ahead, and what other brands can learn from their efforts.
As a seasoned expert in the luxury fashion industry with a deep understanding of market dynamics, consumer behavior, and brand strategies, I've closely followed the trajectory of renowned brands like Gucci. My extensive background includes analyzing global market trends, tracking the performance of luxury brands in different regions, and interpreting the intricate balance between cultural nuances and business strategies.
The article discusses the evolving dynamics of Gucci's relationship with China, and it's crucial to delve into several key concepts to grasp the situation fully:
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Gucci's Success in China: Gucci, under the leadership of CEO Marco Bizzarri and creative director Alessandro Michele, has experienced unprecedented success in China. The brand's profits quadrupled, and revenue nearly tripled between 2015 and 2019, making it a favorite among Chinese consumers.
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China's Significance for Gucci: China has become a cornerstone of Gucci's success, accounting for approximately 35% of its annual sales, a higher percentage compared to rival luxury brands like LVMH and Hermès. The article highlights the brand's adept use of collaborations, local ambassadors, and compelling brand storytelling to resonate with the Chinese market.
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Impact of COVID-19: Gucci faced challenges in 2020 due to the COVID-19 pandemic, leading to a dip in earnings. However, the brand rebounded in 2021 with a remarkable 31% increase in revenue, surpassing pre-pandemic levels.
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China's Influence on Global Performance: The article emphasizes that Gucci's success is closely tied to the Chinese market. The brand faced setbacks during China's lockdowns in 2022, impacting its global earnings, highlighting the brand's vulnerability to the Chinese market's fluctuations.
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Kering's Dependence on Gucci: Gucci contributes more than half of the total revenue for Kering, Gucci's parent company. This dependency on a single brand poses challenges for Kering, especially when external factors like lockdowns in China affect Gucci's performance.
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Market Challenges in 2022: The article discusses the challenges Gucci and Kering face in the Chinese market in the second half of 2022. These challenges include the government's crackdown on celebrities and influencers, leading brands like Gucci to seek safer ambassadors to avoid negative publicity.
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Government Regulations and 20th Party Congress: The Chinese government's strict regulations, particularly leading up to the 20th Party Congress, pose additional hurdles for Gucci and other luxury brands. Government censors and regulators are vigilant, scrutinizing marketing messages that could cross political boundaries.
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Strategic Moves by Gucci: In response to these challenges, Kering appointed Laurent Cathala, a former Tiffany veteran, to lead Gucci's Greater China fashion operations. The move aims to give local teams more control over marketing and advertising efforts, adapting to the evolving Chinese market dynamics.
In conclusion, Gucci's success in China has been substantial, but the brand faces unique challenges in maintaining its position amid a changing market landscape and government regulations. The strategic moves made by Gucci and Kering reflect the importance of a nuanced approach to navigate the complexities of the Chinese luxury market. Observing Gucci's strategies in the coming year will provide valuable insights for other brands navigating similar challenges.
