HBR.ORG

How I Did It...

Kering S CEO on Finding the *Elusive Formula for Growing

.Acquired Brandsby Franois-Henri Pinault

I n 2003 my father asked me to dinner athis favorite restaurant in Paris, wherewe both live. He was the chairman ofArtemisthe family holding companythat controls PPR, the conglomerate he'dfounded in 1963, and a variety of otherbusinesses, including Christie's, the auc-tion house. I had graduated from HEC busi-ness school in 1985, had been working atthe company since 1987, and had turned40 a few months earlier. Over dinner myfather told me he wanted to step down andmake me chairman and CEO of Artemis. Iwas surprised by the timing and told himso. "What are you going to do if you stopworking?" I asked him. But my father was67 and had recently seen a friend die unex-pectedly without having prepared for suc-cession at his family-run business, so hefelt it was time.

The dinner took place on a Thursday.When I walked into our headquarters thefollowing Monday, I found entirely newfurniture in my office-and my father sit-ting at the desk. "You don't work here any-moreyou work there," he said, pointing

THE IDEA

When Pinault's team buys a newluxury brand, it drives organicgrowth by helping the brandwith product development,logistics, and retail stores andby pairing creative designerswith strong business executives.

March 2014 Harvard Business Review 43

HOW I Di D IT

A FOCUS ON LUXURY

Pinault has streamlined

the conglomerate he

took over in 2003 to

concentrate on luxury and

sport brands.

ijfsi m M iiina Raises its stake inGucci Group to 67.6%

2003Acquires 42% ofGucci Group

Acquires Yves Saint Laurent

Acquires 70% ofSergio Rossi

Acquires Bouciieron

Acquires Alexander McQueen

999 3000

Raises its stake inGucci Group to 53.2%

Acquires Bottega Vneta

Launches Stella McCartney ina joint venture with McCartney

Acquires Balenciaga

2001

to the corner office that had been his. He'dhad everything moved over the weekend.

In 1992 my father had organized eightexperienced businesspeople into a groupcalled the Pinault Trustees. Their job wasto assess over time whether I was capableof doing his job. Every year I had one-on-one lunches with each of them and theycame to a big dinner at my father's house.They were amazing people, and I was luckyto get to know thembut I disliked beingunder the microscope. By 2001 they haddecided that I was a suitable successor, sothe group disbanded.

Two years after taking over the reinsat Artemis, I also became the chairmanand CEO of PPR and faced a key question:Should I leave things the way they'd beenunder my father, or should I take them ina new direction? PPR (renamed Kering inJune 2013) owned an eclectic set of busi-nesses. We manufactured building prod-ucts. We owned retail stores and mail-orderbusinesses in Western Europe and America.We'd acquired Gucci Group, the luxurygoods company, in a series of transactionsbeginning in 1999.1 was concerned that ourassets were too closely tied to Western Eu-rope, and to Erance in particular. The com-pany needed to become more international,more growth oriented, more profitable. SoI focused on our luxury segmentappareland accessorieswhich had strong poten-tial for long-term growth. A few years later.

in 2007, we acquired a controlling interestin Puma and decided to build a second stra-tegic pillar in sports and lifestyle aroundthat brand.

During the past decade we've sold offthe other components of the original com-pany and made a series of acquisitions tostrengthen our position in the global lux-ury market. Today, in addition to Gucci, weown 14 luxury brands, including AlexanderMcQueen, Brioni, Saint Laurent, Stella Mc-Cartney, and Bottega Vneta. One key tothis expansion has been our ability to helpthe brands we acquire flnd ways to scale.People tend to focus on the deal making,but how we help our brands grow organi-cally 2ind benefit from their collective expe-rience is the most important aspect of whatwe do. When we partner with a brand suchas Stella McCartney or Christopher Kane,we give it access to systems for developingproducts more efficiently. We help it locateand open flagship stores. We help it recruitthe right talent.

The transformation of our business hasmade us a much smaller but far more fo-cused and more profitable company. Since2003 our sales have declined by more thanhalf, from 24.4 billion to 9.7 billion, butour profits have gone up by about 40%.We have also become a much more globalenterprise. Since 2007 the proportion ofour revenue that comes from Erance hasdropped from 41% to 4%.

Narrowing Down in aGlobal EconomyI had worked in many of the B2B businessesmy father had put together as I came upthrough the company. I had run a divisionthat made windows. I had headed our Af-rican unit, which imported and distributedvehicles in 30 countries. Before we boughtGucci, I had no experience in luxury goods,but then I began serving on the Gucci boardand learning about the industry.

When I became the CEO of PPR andstarted reviewing our strategy, I focusedon whether our conglomerate made sensein a global economy. That's been the bigchange over the past 15 years. Until the late1990s expanding overseas was complicated,and companies like ours preferred to diver-sify across product lines not far from theirhome markets. U.S. companies have accessto a huge domestic market, but Erance hasa relatively small one. PPR had ended up asa conglomerate not because of some granddesign but because my father kept acquir-ing businesses in order to fuel its growth.By the time I became CEO, the companywas doing very well but reaching the limitsof this model. That's why I decided to fo-cus on building a group of global brands inluxury and sport.

When I talk about our brands, I avoidusing the words "portfolio" and "collec-tion," because they make our approachsound slightly random when in fact it has

44 Harvard Business Review March 2014

HBR.ORG

Raises its stake inGucci Group to 99.4%

Acquires remaining 30% ofSergio Rossi

2004Acquires a 23% stake inSowind (Girard-Perregauxand JeanRichard)

\ \ . ^008

Raises its stake in Sowindto so.1%

Acquires Brioni

2011Launches a joint venturewith YOOX dedicatedto e-commerce

Acquires a majority stakein Qeelin

Acquires 51% ofChristopher Kane

Acquires a majority stakein Pomellato

Acquires a minority stakein Altuzarra

2013

been quite strategic. From the start we'vehad a very clear idea of what we wantedto achieve. One of our key assumptions isthat a brand cannot cover all segments interms of price or style. In theory we couldhave tried to expand Gucci to cover manymore segments rather than acquiring otherbrands, but we think that would havebeen at the expense of what makes Gucciuniquewhat we call its DNA. We choseto allow multiple brands to complement,rather than compete with, one another.Today when we think about an acquisition,we try to make sure the brand fulfills a clearmission within our group and matches adistinct segment of the market.

An important way we grow the brandswe acquire is by helping them develop aretail strategy. As luxury apparel brandsmature, they generally stop being driven bywholesale (selling primarily to departmentstores and specialized independent retail-ers) and begin creating their own retailstore networks. Flagship stores in marketssuch as New York and Milan can attract adifferent kind of customer, and they serveas advertisements as well. Getting theright location on the right terms and at theright moment is the key to success. Whena young brand joins Kering, it gains accessto a worldwide real estate team: We havepeople who know the stand-alone store lo-cations as well as the malls of every big cityin the world. We have relationships with

landlords. We know the fair price for rent. Ifyou're a small brand in London, opening astore in Berlin or Hong Kong can be daunt-ing. Once your brand is part of Kering, ourexperts will help you get it done.

But the growth of a retail network hasto align with the capabilities of the brand,and that's an area in which many luxurybrands, including some of ours, havemade errors. We didn't always know howto help our newer brands grow. Some-times brand managers think they can openstores sooner than they should. If youdon't have the product assortment to fill a3,000-square-foot store and you've signeda five- or 10-year lease, you may be facinga disaster. Ten years ago at YSL, we devel-oped the store network too quickly, andsome of the stores were too large. We hadto close or shrink several and stop openingnew ones for five years; we resumed storeexpansion when we deemed the brand wasready for it. Sometimes it's the other wayaround: Brand CEOs are too conservative,and we challenge them to move to the nextstage faster than they think they can.

A good example of how we are able togrow brands within the group is the suc-cess of Bottega Vneta. In 2001, whenwe acquired this Italian maker of leathergoods, it had sales of 56 million, only 30%of which it did in the 39 stores it operateddirectly. In 12 years its sales have multipliedby 17, and it now controls more than 80%

of its distribution through a worldwide net-work of 196 stores. In 2012 Bottega Veneta'soperating income reached 300 million.This is an incredible accomphshment thatthe brand couldn't have achieved on itsown. It was made possible by the resourcesof the group, interaction with Gucci andour other brands, and our approach to tal-ent management, which we think is fairlyunusual in the industry.

Talent and OperationalSynergiesSince we bought Gucci, we've reachedsome conclusions about the best way tomanage talent for a luxury brand. First, wegive the creative people a high degree ofcontrol. A brand's creative director doesn'tjust design the product; he or she controlsthe brand image, the store concepts, andthe advertising, with a 360-degree vision.Second, we're convinced that the creativedirector must be matched with a strong andcomplementary CEO. Getting that duo rightkeeps the strategic vision and the creativevision aligned. As a brand grows, executionbecomes really importantand we enablethe creative team to flourish by pairing itwith business partners.

Being part of a bigger company createsmajor operational synergies. We know allthe suppliers for all types of fabrics andleather, so we can help our brands findwhatever they need. Obviously, our brands

March 2014 Harvard Business Review 45

HOW I DID IT HBR.ORG

have varying requirements: For example,Cucci and Bottega Vneta use completelydifferent types of leather. But coordinatingsourcing still generates economies of scale,enables us to find new suppliers around theglobe, and enriches our expertise.

We have two product developmentcenters, one for ready-to-wear (near Milan)and one for leather goods (near Florence).These centers help speed the process ofturning a designer's initial concept intosomething that can be manufactured forsale in stores. People tend to associateluxury brands with Fashion Week, whichshowcases design, but the reality is that tosucceed, a company needs a logistics sys-tem that can deliver finished products tostores anywhere in the world very quickly.After Fashion Week, buyers place ordersfor collections, and we st2irt the productionprocess. After the spring-summer fashionshows in September, we have from Octoberuntu early February to meike our first deliv-eries. These are not T-shirtsthe processis complicated, and the products have alife cycle. If a delivery is late, you can't re-coverand if you can deliver a week earlyto start the season, that means extra salesand extra profit.

To become a global company, we've hadto transform our culture. In 2008 only oneof the 150 people working at our headquar-ters was not French. By the end of 2012 wehad 18 nationalities there. We have moreItalians than French now. Today our aver-age employee tenure is four yearsmuchshorter than in the past. At the same time,we try to move cautiously and remainaware of our roots: Many of the practiceswe follow, notably our decentralized ap-proach to the management of each brand,were already in place.

Taking Luxury OnlineThe way we acquired Christopher Kane, aLondon-based women's apparel brand, isa good exeimple of how we approach deals.We announced the acquisition in January2013, but we'd been watching the companyfor several years. We saw it as having a verypromising brand and a strong creative vi-

sion that complemented what we weredoing. I met with Christopher early in theprocessmore than a year before the dealwas announced. I went to his studio andsaw his collection. He and his sister, who'dbuilt the company together, weren't look-ing to sell, so I explained to him how weoperate. "If you ever need a partner, weare very flexible," I told him. In the endwe didn't buy 100% of the businesswebought majority control, and Christopherremains a shareholder.

After the deal was signed, we sent ina small integration team, which worksmostly to create a reporting system so

Kering Facts & FinanciisFounded 1963

(as Etablissements Pinault)

Headquarters Paris

Employees 29,378

Number of Brands 22

Since 2003 Kering's sales have declined

by more than half, but its profits have

gone up by about 40%.

1,201.721I

20,2011,721

REVENUE (IN MILLIONS)

RECURRING OPERATINGINCOME

16,S2S

14,605

12,2271,602

9,7361,792

2008 2009 2010 2011 2012

SOURCE KERING

that we can track financial results. We alsoworked with Christopher to find a CEO. Wehad explained to him that we think it'simportant for creative directors to be ableto focus on creative tasks. We're prepar-ing to open a flagship store in London in2014. Without Kering, Christopher Kanewouldn't have had the means to do that.

We're still looking to build our group ofbrands. We view luxury goods as ready-to-wear, accessories (primarily leather),and jewelry and watches. Until a coupleof years ago, we owned only one jewelrybrand, Boucheron, which is very high-end, and the only watches we sold wereGucci's. Since then we've bought Girard-Perregaux and JeanRichard, two presti-gious Swiss watchmakers; Qeelin, a makerof fine jewelry and our first Chinese brand;and Pomellato, a midrange luxury jewelrycompany. But we're still a work in progressin watches. We'll be much stronger in thatcategory in 10 years.

We'll also grow stronger in e-commerce;our goal is to create a platform across all ourbrands. We've entered into a joint venturewith an Italian company called YOOX thatspecializes in luxury e-commerce sites.E-commerce is especially challenging forluxury, because it's difficult to re-createthe quality of the in-store experience on-line. Websites are about photos and shop-ping carts and checking out, and it's hardto distinguish mainstream from luxury onthem. We think we can differentiate theexperience by developing completely newservices that won't be accessible by main-stream brands. For instance, in ready-to-wear today, people can order two or threesizes or two or three colors, try them on athome, and return what they don't want.But what if we could send one of our storetailors by appointment to your house tomake alterations? That's the kind ofthingI have in mind for the online customer'sexperience of a luxury brand. It will be ahigh priority over the next decade.

HBR Reprint R1403A

Franois-Henri Pinault is the chairmanand CEO of Kering.

46 Harvard Business Review March 2014

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