In luxury brands, heritage matters

Designer Alessandro Michele’s sudden departure from Gucci last November was welcomed by investors. His radical reinvention of the Kering vessel tripled annual sales to almost 10 billion euros. But after several quarters of underperformance, the consensus was that Gucci needed a creative shift to continue growing. Now, after two months of uncertainty, Kering has named Valentino fashion director Sabato De Sarno as Gucci’s next designer.

Historically, Gucci has benefited from sweeping, fashion-driven reboots harking back to Tom Ford, and arguably needs fresh blood to power a new cycle of growth. But relying too much on another aesthetic swing would be a mistake.

Last year, Kering chairman François-Henri Pinault has repeatedly stressed the importance of balancing designer-led creativity with timeless products, a point Gucci chief executive Marco Bizzarri emphasized when he said De Sarno would was charged with “reinforcing the house’s fashion authority. capitalizing on its rich heritage.”

If a brand’s fundamental codes are not strong enough, it may be doomed to rely too heavily on periodic reinventions, an inherently risky proposition.

At Kering’s fellow centerpiece, Balenciaga, Demna has captured the imagination with an aesthetic transformation as radical as Michele’s Gucci revamp, pushing Balenciaga past €1 billion. Indeed, Demna has created some of the most surprising moments in recent fashion history—from a veiled Kim Kardashian at the 2021 Met Gala to a dystopian runway on Wall Street—along with commercial success stories like handbags The brand’s Speed Trainers and Hourglass, both of which reference Balenciaga’s heritage. But Demna has taken that legacy and twisted it almost to breaking point, a problem deeper than the scandal the brand is facing over its latest ad campaigns.

To be sure, zeitgeisty reboots like those of Demna and Michele can yield great results, and relying too heavily on heritage can result in the kind of stagnation that has plagued brands like Salvatore Ferragamo. The holy grail is finding the right balance between relevance and duration. Here, Chanel offers a master class. The brand relies heavily on the old indicators of its heritage – tweed, quiltedpearls and camellia flowers – but there are enough fashion innovations to keep it current, a mix that has helped make it the second largest luxury brand.

Of course, it’s easier to play the heritage card with a business model that’s firmly rooted in accessories, since handbags are a more perennial proposition than fashion. The Chanel 2.55 bag, designed by Gabrielle Chanel in 1955, is a textbook example.

A strong accessories business, on the other hand, allows a brand to play more freely with its fashion collections, generating buzz without the risk of diluting its legacy. Take Virgil Abloh’s work at Louis Vuitton, where he was very successful in opening the brand’s doors to new consumers without challenging the primacy of its history.

It is no coincidence that most luxury brands aim to build large accessory businesses and that, in the long run, those who succeed consistently outperform their more fashion-forward peers.

The Savigny Luxury Index (“SLI”) fell 6.3 percent in December, underperforming the MSCI which fell 4.9 percentage points. Both indexes responded to interest rate hikes, not just in the US, which came with a warning of worse to come, but by 7 of the world’s 10 major central banks. The year 2022 has seen the fastest and biggest rise in global interest rates in at least two decades, as policymakers fully stepped up in the battle to contain rising inflation.

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SLI vs. MSCI

Climbing up

Swatch and Estée Lauder gained 5 percent in December in response to the easing of lockdown restrictions in China, which were seen to particularly benefit the two groups.

Going down

Kering lost 16 percent of its value in December as uncertainty surrounding Gucci (following the sudden departure of Alessandro Michele) and Balenciaga (following a major scandal over an ad campaign) weighed on the stock.
LVMH lost 8 percent in December, largely as a result of the stock going ex-dividend at the start of the month.

What to see

Investors have been nervous about Gucci. Kering shares lost more than 15 percent of their value in the past 12 months (during which LVMH rose 9 percent). Gucci’s owner has been quick to name a successor to Alessandro Michele following his sudden departure. Sabato De Sarno, although largely unknown to the public, has a solid reputation and Gucci CEO Marco Bizzarri will remain at the helm of the brand, according to Kering chairman François-Henri Pinault. That should be reassuring to investors. However, the fact remains that Gucci relies more on its fashion moment than its more heritage-motivated peers. Restoring the balance by driving Gucci’s heritage story will be key to how the brand and its parent company are perceived by investors. Much is still up in the air in Kering’s golden goose.