PARIS — In further bad news for traditional print media, Kering said on Friday that it would ramp up spending on digital communications in 2017 as it seeks to court Millennial consumers, while capping investment in new stores.
François-Henri Pinault, chairman and chief executive officer at Kering, said the group’s struggling Bottega Veneta brand would launch a digital push under recently appointed chief marketing officer Lisa Pomerantz, while Balenciaga will triple its budget for digital marketing this year.
“Millennials, which are crucial to our future growth and already represent close to half the sales at Gucci and Yves Saint Laurent, are always connected and are engaged in a permanent search for meaning that strongly influences their buying decisions,” he told a press conference at the group’s headquarters in Paris.
“All our brands, to varying degrees and depending on their nature, are reinforcing their online communications accordingly,” he said. “The organic growth of our brands will also be amplified by the growing role of e-commerce, in a genuine omnichannel approach.”
Digital should account for roughly 40 percent of brands’ global communications budgets, he added in a briefing with reporters afterward. They represent 35 percent of the marketing spend at Kering’s cash-cow Gucci brand, for example.
Reporting full-year results before the market opening, Kering said group net profits jumped 16.9 percent in 2016, driven by the strong performance of Gucci and YSL, where online sales rose by 20 percent and 75 percent, respectively.
The French conglomerate — whose stable also includes Balenciaga, Boucheron and Puma — posted sales of 12.38 billion euros, or $13.7 billion, in 2016, up 8.1 percent on a comparable basis, which it billed as their strongest annual increase since 2012. Online sales for its luxury division were up 22 percent.
Kering registered net income of 813.5 million euros, or $900 million. Recurring operating profit rose 14.5 percent to a record high of 1.89 billion euros, or $2.09 billion, beating market expectations. All dollar rates are calculated at average exchange rates for the period in question.
Its shares closed up 2.6 percent at 230.30 euros, or $244.84 at current exchange rates, on the Paris Stock Exchange on Friday as investors cheered the figures. For the year ahead, Kering said it would continue to focus on organic growth, with targeted store expansion and efforts to durably bolster its operating margins.
Revenues accelerated in the second half, with Western Europe seeing a return of foreign visitors in the fourth quarter after a year marred by a series of terrorist attacks, reported Pinault, noting tourist numbers in France were up 21 percent in December. This mirrored results at other leading luxury brands.
Sales rebounded in Asia as Chinese consumers bought more luxury goods in mainland China and South Korea, to the detriment of Japan. “We are also starting to see positive signals in Hong Kong,” Pinault said.
He spied a recovery in the United States between November and January and was sanguine about prospects for the U.S. market, which accounts for 20 percent of the group’s revenues, despite President Donald Trump’s threats of import tariffs.
Pinault noted that the cost of any customs tax would likely be passed on to consumers, and would be partly compensated by U.S. tourists buying more luxury goods in Europe. “There will be an impact, but it won’t be huge,” he predicted.
Kering reported sales of 3.51 billion euros, or $3.78 billion, in the fourth quarter, up 10.4 percent at comparable exchange rates. Luxury activities posted organic growth of 11.3 percent and the sports and lifestyle division registered a rise of 8.6 percent.
Gucci maintained its strong momentum under creative director Alessandro Michele, with organic sales rising 21.4 percent in the three months to Dec. 31 to 1.34 billion euros, or $1.45 billion, thanks to double-digit increases in all product categories.
The maker of Dionysus handbags and fur-lined loafers said sales to Millennials rose by more than 70 in the fourth quarter, fueled by the global rollout of its new web site and digital initiatives like #24HourAce, in which artists were invited to take over the brand’s Snapchat to mark the release of its revamped Ace sneaker.
Thanks to sustained demand for Michele’s collections, the company posted an average 15 percent rise in productivity per square meter in its stores last year. It was up 50 percent in its Milan and Beverly Hills flagships, and more than doubled at its Bond Street store in London.
“The rise in footfall in Gucci stores is way above the market trend. All these digital communications initiatives, in particular, generate huge traffic in stores,” Pinault said. To wit, Gucci was named the number-one brand in the annual Digital IQ Index: Fashion produced by digital benchmarking firm L2.
Nonetheless, the executive noted Gucci’s sales densities were still 50 percent below best-in-class luxury brands, indicating there was plenty of room for additional growth. Gucci ceo Marco Bizzarri has set a revenue target of 6 billion euros, or $6.4 billion, in the long-term.
In 2017, Gucci will launch e-commerce in mainland China and deploy its new store concept to another 60 to 70 stores worldwide. In addition, the brand will hold its first coed fashion show in Milan on Feb. 22 and launch its debut fragrance under Michele’s creative direction in the second half, Pinault said.
Saint Laurent was another growth pillar, with revenues rising 20.5 percent to 346.2 million euros, or $373.4 million, in the fourth quarter. Sales in directly operated stores were up 32.6 percent in the period, fueled by growth in Western Europe, Asia-Pacific and North America.
Wholesale revenues were down slightly in the quarter as deliveries of creative director Anthony Vaccarello’s first collection were shifted to early 2017, but Pinault reported healthy showroom orders.
Bottega Veneta continued to lag, with sales down 8.6 percent to 308.4 million euros, or $332.6 million, in the fourth quarter. Kering in September appointed a new ceo, Claus-Dietrich Lahrs, to lead the turnaround of the brand, but Pinault reaffirmed his confidence in creative director Tomas Maier.
Asked if Maier would remain at the brand, he said: “Absolutely.” Pinault praised Bottega Veneta as one of the most creative brands in leather goods. “He is probably one of the only designers capable of that kind of creativity. What we probably haven’t done well enough is highlight that creativity,” he said.
The house will open a new flagship on Madison Avenue this year in a bid to rev up its U.S. business, and will reinterpret its classic intrecciato handbags with new shapes, functionalities and finishes. Its digital push will be aimed at recruiting a new, younger customer.
Kering managing director Jean-François Palus said it was possible Bottega Veneta would return to growth in the second half of 2017, but it was not imperative, as Kering is seeking to lay the foundations for the next 10 years.
Revenues at its other luxury brands fell 3 percent in the fourth quarter to 479.5 million euros, or $517.2 million.
Kering reported positive momentum last year at Balenciaga, Alexander McQueen and Stella McCartney — the latter is set to open flagships in prime locations in New York, Paris and London in 2017. Brioni struggled under the brief creative direction of Justin O’Shea.
Jewelry brands held up well during the year, but Kering’s watch brands Ulysse Nardin, Girard-Perregaux and Jean Richard continued to suffer in a tough environment for luxury timepieces.
Nonetheless, Pinault said he had no intention of selling off any underperforming brands, including German sporting goods maker Puma, which saw an improvement in profitability in 2016 but still lags far behind its sector peers. “That is not a priority,” Pinault concluded.