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Gucci was once a symbol of red-carpet luxury, but its brand, along with its sales numbers, is faltering. This Tuesday, Gucci’s parent company Kering reported its latest earnings: Gucci’s comparable revenue dropped by 18% in the first quarter this year. Kering also warned that recurring operating income will continue to plummet in the first six months of this year.

On today’s Big Take podcast, Bloomberg’s Angelina Rascouet and Sara Forden talk about what went wrong at the house of Gucci, and how its billionaire owner family, the Pinaults, plan to rescue it.

Read more: Billionaire Pinaults Fight to Pull Gucci Off the Discount Rack

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TikTok User 1: If you love designer shopping and you're going to Paris anytime soon, you need to come to the designer outlets

TikTok User 2:  So we're starting off with this beautiful green bag, which was going for 2150 normally now at the outlet 1500.

TikTok User 3: Wallet. Carrying bag. Gucci luggage. €1500. Crazy. 

Paskin: Angelina Rascouet covers luxury brands from Bloomberg’s Paris bureau and she recently visited this outlet for a story about Gucci.

Rascouet: First of all, there was a lot of traffic, a lot of customers inside the outlet. And they were really trying to get rid of the previous collections. So I could see, for instance, yellow pumps with the Gucci, the double-G monogram, but also with the logo of Adidas superimposed on it. They were like 75% off, you know, really flamboyant jackets,

Paskin: These mega discounts point to two things: A) Gucci is available to everyone, and B) There’s enough to go around. For a luxury brand like Gucci, that’s a huge problem. Because if anyone can have Gucci, it’s not much of a luxury, is it?

Rascouet:  You can try to sell your stuff everywhere and have everybody wearing a Gucci cap or a Gucci t-shirt. At the end of the day that's not what you want. You want to make sure that people desire your brands. And, at some point, they splurge on a €2,000, €3,000 or €5,000 handbag.

Paskin: But Gucci has done something different. It’s tried to find the intersection of luxury and fashion, jumping on the latest trends. But fashion is fickle. And Angelina says that strategy has made Gucci vulnerable to the changing demands of consumers at a time when luxury shopping is already down across the board. 

Rascouet: What we know is that the whole market, there's a slowdown. So obviously if you're in a weaker position like Gucci, it's going to be even trickier

Paskin: Figures released by Gucci’s parent company Kering on Tuesday showed an 18% drop in Gucci’s  comparable revenue in the first quarter. Today on the show: Gucci’s popularity problem: How Kering’s strategy has put the brand in a tough spot… and what’s at stake for the future of the fashion house? This is the Big Take, from Bloomberg, I’m Janet Paskin.

Paskin: While Gucci has been through many phases as a brand – it hit a bright spot in the 1990s when it brought on an American named Tom Ford.

Rascouet: There comes this Texas designer and all of a sudden he turned Gucci into something very desirable by basically, putting out these collections that were empowering to women, to men, sexy, they were elegant, you know, stilettos, cleavage.

Paskin: Ford’s “sexy power” style immediately made waves. And he and Gucci’s CEO at the time, Domenico De Sole, were praised for breathing new life into the hundred-year-old brand.

Rascouet:  They pretty much transformed it, turning Gucci from a staid and underperforming Italian brand known for its horsebit loafers into a fashion-forward label whose products Hollywood embraced with gusto. For instance, Madonna famously wore a turquoise silk blouse at an award ceremony in 1995, and Gwyneth Paltrow also became a fan. She wore a red velvet suit, for instance. And Tom and Dom, as the pair were known then, brought back Gucci from the brink, with sales soaring.

Paskin: Gucci was suddenly a hot commodity. So hot in fact that the brand became the center of a power struggle between two very rich, very ambitious men.

Sara Forden: Bernard Arnault, who was the luxury king at the time, and his company, LVMH, owned Louis Vuitton and Moet Hennessy Champagne and Arnault had set his sights on Gucci and he wanted to take it over and have it for himself.

Paskin: That’s Bloomberg editor Sara Forden. She wrote House of Gucci…you know the book that became the movie the one with Lady Gaga, Adam Driver. And Sara says Arnault was not the only interested party—François Pinault, the founder of the company that is now called Kering—also wanted Gucci. And after a pitched, public battle for control of the brand—François Pinault came on top.  

Forden: And they ended up signing an agreement with François Pinault, who was the white knight who came in and sort of slipped Gucci out from under the grasp of Bernard Arnault.

Paskin: With a new parent company and Tom Ford holding the reins, Gucci continued to soar. But in 2004 – it lost the star team of Tom and Dom. They quit in a power struggle with the Pinault family. In 2005, a new CEO took over at Gucci’s parent company now known as Kering. François-Henri Pinault, the son of the company’s founder. People call him FHP. Under FHP, Gucci named a new creative director – Frida Giannini. She was at the brand for more than ten years, but critics never really loved her designs and neither did consumers.

Forden: And that's when he brought in Alessandro Michele, who ended up being a huge phenomenon for Gucci. And literally Alessandro had something like five days to design his first men's collection and he pulled it off and it was a hit and it— people had a visceral reaction to it. 

Paskin: Michele didn’t bring back Tom Ford’s “sexy power” aesthetic. Instead of low-cut bodysuits and leather, Michele’s designs had bold floral patterns, neon colors, the ad campaigns featured flowers and feathers and flamingos in the center of the frame.

Rascouet: The adjectives that have been used to describe his aesthetics is like bohemian chic, flamboyant, maximalist.

Paskin: One of his most iconic creations?

Rascouet: Furry slippers. They're called the Princetown Slippers, So they're leather and it’s an open ankle. And so you wear them as slippers, but they were furry. And that became really popular.

Paskin: Michele also leaned into collaborations with mass-market sportswear brands like Adidas and North Face. And suddenly, everyone was buying Gucci products.

Rascouet: That was the designer that really managed to over the space of four years, you almost tripled the size of the brand. This is, this is unprecedented.

Paskin: At this point, Gucci could have taken a page from some of its rivals like Chanel and Hermès, limiting the amount of Michele’s pieces it made. It could have created waiting lists, manufactured scarcity. But instead outlets—which sold Gucci goods at a discount—remained part of the company’s strategy. Angelina said that hurt the brand. 

Rascouet: A big problem at Gucci on the business level was the presence of these outlets. Outlets, it accomplishes a function, you know, at some point, it's the end of the season there's some unsold inventory. And then you're going to be basically selling them at a discount in outlets. However, all the most desirable brands, if you think about Louis Vuitton or Hermès, they don't sell via outlets. It's against their principles because they reckon it devalues, it cheapens the brands in the eyes of the consumer. 

Paskin: This is Gucci’s problem: It wants to appeal to the masses and be a high-end luxury product at the same time—a “heritage” brand whose clothes and bags and shoes become heirlooms, family treasures. 

Rascouet: The issue with Gucci—as opposed to, let's say, more classic, more heritage brands—it was always very, as they call it, fashion-driven, fashion-forward, meaning that they became very trendy. But then a fashion trend, the issue with the fashion trend is that it's a trend. You can surf that wave for a while, but eventually consumers will tire of it because that's what a trend is. That's what a fad is. 

Paskin: But luxury doesn’t work that way. And even FHP knows it.

François-Henri Pinault: All the big brands have the same challenge. How do you remain exclusive and at the same time continue to grow? 

Paskin: Here he is talking to Bloomberg back in 2014:

Pinault: If the growth was based on selling more and more.  We will please everyone, but this will be the greatest danger for the brand. 

Paskin: So can Gucci turn things around? That’s after the break.

Paskin: Gucci’s parent company Kering—has lost about a third of its value in the last few years while shares at competitors LVMH and Hermès have more than doubled. Reversing Gucci’s slide—and restoring the value of the brand—won’t be easy. Angelina says it could hurt sales, or profit margins, or both.  

Rascouet: They've been saying we're on a turnaround phase. They've been saying we're trying to reduce outlet distribution. We're trying to reduce wholesale distribution. We're, you know, in a bid to elevate the brand— this pledge to elevate the brand basically means to cater to the customers with the highest purchasing power, who are not going to be as, let's say, vulnerable to the economic cycles. If you want to elevate the brand and create desirability, you have to take basically short term hits. So that means potentially, you know, because if you sell into these outlets and to and via wholesale, you're going to have bigger sales volumes, but then the margin is going to be lower, right? So there, there's probably going to be, and they said it, short term pain. So this year, for instance, they expect the profitability of Kering to be lower than last year in order to basically, strengthen and boost the fundamentals of this brand on the business side and on the creative side.

Paskin: Representatives for FHP and Kering declined to comment on Angelina’s reporting. These aren’t easy changes, even in the best of times. And these are not the best of times for luxury fashion overall. Inflation has cast a chill on luxury consumers, and Kering, more than others, is seeing buyers pull back. Meanwhile the company is waiting to see how the designs from the newest Gucci creative director will sell. In 2023, Sabato de Sarno took over and his new collections are slowly starting to show up in stores. 

Rascouet: Basically, the reception and the appetite of consumers for the new collections is going to be critical. And I think we'll have the fuller picture by the end of this year. Because all of the new creation under the new creative design team led by Sabato De Sarno will be really fully distributed into the— all of the Gucci stores. So that's why the market needs to be also perhaps a little bit of patience and that's why Kering and the executives, they say, at pretty much every every single quarterly call.

Paskin: How’s it going so far? In its latest quarterly earning report released on Tuesday, Kering, Gucci’s parent company warned recurring operating income will drop between 40 and 45% in the first six months of this year compared to the same period a year ago. It says sluggish sales in China are part of the reason. Talking to reporters on Tuesday, Kering’s Chief Financial Officer said that Gucci is suffering in China in part because consumers there want high end items or more affordable products. Gucci is stuck in the middle. But the company noted that Gucci’s new collections have so far been quote “very well received.”  

Paskin: So is it too late for Gucci, Angelina ?

Rascouet: I mean, it's true that if you look at the market cap, it's, it's shrank a lot. And obviously the biggest sort of the, the ones who are suffering the most are the Pinos themselves, right? The, if you look at the fortunes, it's, it's, it's about 30 billion dollars right now. I would never dismiss them because they've shown that they can really manage the turnaround. 

Paskin: Obviously this is a family-owned company, but Angelina, is FHP the wrong guy for the job? 

Rascouet: Yes. I mean, that's pretty much something that our story found when we're doing the reporting is that some investors, they think, you know, he's been there for years, he's chairman and CEO. Why don't you, maybe he should just be chairman and appoint somebody like Francesca Bellettini. Francesca Bellettini runs Yves Saint Laurent. She's known to be—even luxury rivals we spoke to say—he's one of the best out there. Maybe she should be CEO of Kering and he should probably step back and be, and be chairman. He's got the credentials to, you know, on the, on the professional, you know, he's, he's made some really good calls in the past. It's just that right now it's in a tricky situation and some investors are really getting impatient because what happened is that the last four years, luxury rivals did this on the stock market. They saw their share price rally, like, you know, to extreme levels. And unfortunately over the same period, Kering shares have lost about a third of their value. So that's why if you're a luxury investor, like, I'm getting impatient now.

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