De Sole’s Virtues Of Discipline

If Domenico De Sole makes running Gucci Group look charmingly easy, that’s because he manages the $2 billion company with three principal tenants: discipline, common sense and leadership by example.<br><br>As chairman, president and chief...

If Domenico De Sole makes running Gucci Group look charmingly easy, that’s because he manages the $2 billion company with three principal tenants: discipline, common sense and leadership by example.

This story first appeared in the November 18, 2002 issue of WWD.  Subscribe Today.

As chairman, president and chief executive officer of Gucci Group, De Sole has had plenty of opportunities to panic: facing a skeptical financial market, the Asian economic crisis, the impacts of Sept. 11 and the slowdown in the luxury goods sector. But nothing has shaken his strategy to build Gucci and its umbrella of brands via a philosophy of total control.

Offering his perspective on the dramatic turnaround of Gucci over the past decade, from a crumbling empire to one of the most profitable luxury multibrand organizations in the world, De Sole admitted during a keynote address that its growth hasn’t always been easy, but it succeeded by constructing the direct operation of the retail, production and design of all Gucci products. Gucci then has applied that template to the other brands it has acquired.

“The success of a luxury brand requires you to have the drive and the ability to be unbelievably disciplined with your distribution,” De Sole said. “That’s really the key to understand at the end. Gucci is an incredible, powerful brand with a lot of great products, but I know intellectually that you’re not going to be General Motors by selling handbags at $1,000 a pop. You have to be realistic and understand in the long term, to be successful, you really don’t want to go down-market. You want to keep your brand profitable and exclusive, and then at some point you have to come up with other brands.”

In describing the dramatic events of the past decade that led to Gucci’s acquisition of such companies as Yves Saint Laurent, Alexander McQueen, Stella McCartney, Balenciaga, YSL Beauté, Sergio Rossi, Boucheron, Bedat & Co. and Bottega Veneta, De Sole offered several insights into the rules under which Gucci has grown: maintaining independent, creative structures of each brand with a minimal corporate infrastructure at the top; following a path of disciplined growth with a focus on directly operated retail; acquiring brands that have a critical ingredient of a little magic, and knowing that, along the way, mistakes that must be dealt with honestly and openly will be made.

“What we do is really similar to the pharmaceutical industry,” De Sole said. “You have a drug out there and they go through enormously lengthy cycles. It takes seven or eight years before there is approval for new drugs or new products. I remember discussing with Tom Ford very early on that the moment will come for us that we go from a single, monobrand to a multibrand. The reality has happened much faster and in a more exciting way than we ever expected.”

Part of the reason Gucci Group acquired so many brands so quickly, he said, was a result of its “battle with our nameless friends,” referring to the the three-year battle De Sole endured with LVMH Moët Hennessy Louis Vuitton over the ownership of Gucci. While audience members might have expected De Sole to pepper his speech with competitive barbs against his former adversary Bernard Arnault, he focused instead upon the advantageous position that resulted for Gucci when Pinault-Printemps-Redoute stepped in to finance its independence with a capital inflow of $3 billion. Such calm, yet decisive, moves are what led Gucci to its current position of strength since De Sole joined the company in 1984, first as ceo of Gucci America, then becoming its chief operating officer in 1994 and reaching his current position the following year.

“The story really goes back to starting to take the company public in 1994,” De Sole said. “The company was broke…and there were only two other companies public at the time. I remember, at the beginning, everybody was concerned and called it a fashion risk, but I kept pointing out that Armani had been successful for more than 20 years.”

De Sole and Ford ultimately led Gucci to its listing on the New York and Amsterdam stock exchanges the following year, with a stock price that quickly rose to $60, even though they expected an opening of $12 during Gucci’s road show. But concerns rose again during the Asian financial crises of the late-Nineties that sent the stock back to $28. “There was continuing concern that a fashion company was a big risk,” he said. “But we strengthened the company at that time. We were calm. We acquired franchises in Asia and made very wise investments in real estate, which really helped us after the crisis ended.”

De Sole pointed out that Gucci has continued to grow aggressively, reaching sales of $1 billion faster than expected and breaking $2 billion last year. Even after the negative impact on luxury spending after the Sept. 11 terrorist attacks, the Gucci division ended the year with a 30 percent operating profit as De Sole acted to cut costs dramatically and quickly. Adding new brands has only increased the complexity of De Sole’s scope, but he said it was a necessary means toward ultimately increasing shareholder value, most notably through the acquisition of YSL, which De Sole and Ford believe will become a second luxury pillar within the Gucci fold, providing the cash and profits to feed the growth of its smaller brands.

“People asked why we wanted to be a multibrand,” De Sole said. “On a personal level, being a multibrand is an incredibly punishing reality. People say to me, ‘Are you a glutton for punishment?’ We were one company with a great culture, where everybody knows everybody else and we got along well for years and years. Suddenly, we have other companies with different people, different points of view and new management styles. It becomes an enormous complexity that is very personal and very trying. You have to deal with a lot of different people at the same time. It is an amazing effort.”

Adding YSL to Gucci’s Italian heritage brought the incorporation of a French brand and the complexity of the country’s 35-hour workweek. With McQueen, McCartney and Balenciaga — “suddenly what was a beautiful — small operation became sort of a lot of excitement, and obviously everybody has the same priority,” he said. “Everybody has the fashion show at the same time and everybody believes, rightly so, that their product, their brand, their ready-to-wear is the most important in the universe. And I get calls at three in the morning because something happened or somebody did something faster than someone else. It is massive personal aggravation at times, but I really believe that for a luxury brand, there is no other way, and I’ll tell you why: Once you go public, in the end, you make a commitment to grow. And if you believe, as I passionately do, to have a brand be very successful, you need to have great control, great product, great design, great quality, and, most importantly, you have to have some exclusivity.”

De Sole and Ford practiced that discipline when it came to making acquisitions. “I remember, in 1993, when the company was collapsing, I couldn’t get arrested,” he said. “In 1999, when it came out in the press that we had all this money, people tried to sell me boat companies. I’m not joking. We had the most bizarre requests. People called me up, and suddenly everything becomes luxury. There was a lot of temptation to really go and spend like drunken sailors, but one thing that really distinguishes our company is that we are a very disciplined group.”

In identifying potential targets, De Sole addressed three points that would ultimately lead to an acquisition. The starting point is to understand “what we know and what we don’t know,” he said, citing one lucrative presentation that Gucci ultimately did not accept because it was a company that De Sole and Ford felt they did not understand. “I said to Tom, ‘If something goes wrong, can we fix it?’ And the answer was probably not,” De Sole said. They passed on the deal.

The second requirement for a brand is to have “some kind of real magic to it,” he said. Yves Saint Laurent is a globally recognized brand that is important and meaningful, while some brands that Gucci bought reflected the talent he and Ford recognized was there, and others were viewed as complementary. “The guiding light was not that complicated,” De Sole said. “A lot of banks presented us with great, fancy studies, but it really was common sense. We wanted to be very, very disciplined and stay in an area that we did understand.”

Lastly, Gucci looks for brands that could stand on their own creatively, yet benefit from the operations and production facilities, as well as the clout, of the corporate group.

“The image and style of a company has to be totally separate,” De Sole said. “Each brand has to have its own creative director, its own point of view, image, styling and advertising. It has to be totally and completely precise, different and unique because people don’t want to have Gucci 1, Gucci 2 and Gucci 3. That would be suicidal. On the other end, you have to generate value for your shareholders, and you help the companies with distribution, and obviously, Gucci has a lot of power. It is critical to have enough muscle in negotiations with department stores, to make sure they locate space for the new brands.”

Creatively, each brand remains independent, but De Sole’s thin level of management liaises closely with brand managers from a main office in London that is made up of only a few employees: Ford, De Sole, a cfo and a general counsel. “It’s a very flat organization,” De Sole said. “We really are absolute workaholics. We don’t believe in the 35-hour workweek in France, we believe that the rule should be 35 hours a day….We always believe that everything must be done a month ago. What has made us successful is that we make decisions. We try to understand the facts, but not deciding is a deadly situation. Sometimes we make mistakes, but we really need to move forward.”

De Sole also recapped some of the progress Gucci has made within each of its divisions. Yves Saint Laurent, for instance, remains on track to turn a profit in 2004, even though the brand was completely gutted when Gucci took over in 1999, cutting more than 100 licenses and a secondary collection within three weeks and basically taking its volume from $87 million to zero. After renovating its existing 14 stores, YSL now has expanded to 43 directly operated stores and built a strong accessories business, as well. The goal is to have 60 stores operating by the end of next year. The YSL Beauté division has similarly become more disciplined in distribution, having cut its 23,000 doors to about 15,000 at the close of this year, while planning new fragrance launches for Alexander McQueen and Stella McCartney next year, a Zegna license and a Balenciaga fragrance in 2004. The beauty company’s profits equaled about 7 percent of sales last year, and De Sole said its goal is to reach higher than 10 percent.

Boucheron is similarly developing its retail network with a San Francisco location planned this month, while Gucci also recently secured a prime Fifth Avenue site in New York.

As for its new fashion brands, even De Sole said he was surprised at how they have adapted within the Gucci organization, noting that he was at first concerned about McQueen’s reputation as an enfant terrible. The first time they met at a party, he recalled, McQueen asked if they could take a picture together. “This was in the middle of World War III,” De Sole said, referring to the contretemps with LVMH, which then employed McQueen as the designer of Givenchy. “I said, ‘That’s great, but what are you going to do with this picture?’ He said, ‘I’m going to give it to Bernard Arnault.’ And I said, ‘This is my kind of guy.’”