retail giant Pinault-Printemps-Redoute

In March 2013, the French fashion and retail giant Pinault-Printemps-Redoute (PPR)
changed its name to Kering. According to CEO François-Henri Pinault: “Kering is
a name with meaning, a name that expresses both our purpose and our corporate
vision. Strengthened by this new identity, we shall continue to serve our brands to
liberate their potential for growth.” The change in name followed the transformation
in the business of the company.
PPR was primarily a retailing company: it owned the department store chain Au
Printemps, the mail-order retailer La Redoute, and the music and electronics chain
Fnac. However, the acquisition of 40% of the Gucci Group in 1999 (later increased
to 99.4%) marked the beginning of a transformation from being a retailing company
to a fashion and luxury goods company. Table 1 shows the main acquisitions and
divestments of PPR/Kering.
This was not the frst transformation that the company had undergone. PPR/
Kering was the creation of the French entrepreneur Francois Pinault who had
established Pinault SA as a timber trading company before acquiring retailers Au
Printemps and La Redoute. In March 2005, Francois Pinault was replaced by his son,
François-Henri Pinault—a graduate of HEC School of Management—as chairman
and CEO of Kering. The Pinaults’ dominance of Kering is ensured through the role of
the Pinault family’s holding company, Groupe Artémis, which owns 40.9% of Kering.
(Artemis also owns Christie’s, the auction house, and the Château Latour vineyards.)
In recreating itself as a diversifed fashion and luxury goods company, Kering has
been widely viewed as modeling itself on LVMH—the world’s leading purveyor of
luxury goods. However, despite the close parallels between the two companies—
and their leading families, the Pinaults and the Arnaults—Kering has underperformed LVMH. During the ten-year period under the leadership of François-Henri
Pinault (March 2005 to March 2015), Kering’s share price growth was 121% compared to 271% for LVMH. Kering’s revenues had declined by 41% over the period,
compared to LVMH’s growth of 100%, while operating proft had grown by 21%,
compared with 67% for LVMH. (Figure 1 charts changes in Kering’s share price.)
It was widely believed that LVMH’s superior performance would continue: of the
investment analysts surveyed by the Financial Times during summer 2015, 62% rated
LVMH as a “buy” or “outperform” as compared with 36% for Kering.
Efforts to boost Kering’s performance included a shakeup of the management of Gucci—chief executive Patrizio di Marco was replaced by Marco Bizzarri
and Creative Director Frida Giannini by Alessandro Michele—and exploring the
Case 3 Kering SA: Probing
the Performance Gap
With LVMH
This case was prepared by Robert M. Grant. ©2015 Robert M. Grant.
460 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
possible sale of its sportswear company, Puma. However, if Kering was to close the
performance gap between itself and LVMH, a critical frst step was to understand the
sources of that performance differential.
Kering in 2015
In 2015, Kering SA operated in two segments:
● Luxury: designs, manufactures, and markets ready-to-wear clothing, leather
goods, shoes, watches, jewelry, fragrances, and cosmetic products through a
number of high-profle brands.
TABLE 1 Kering’s principal acquisitions and divestments, 2000–2014
Year Business
2000 Acquisition of Boucheron (jewelry and perfumes)
2001 Acquisition of Bottega Veneta and Balenciaga
Launch of Stella McCartney and Alexander McQueen brands
2004 Ownership of Gucci Group increased to 99.4%
Sale of Facet (fnancial services), Rexel (distributors of electrical equipment)
2006 Sale of Printemps
2007 Acquisition of 62% of Puma
2009 Acquisitions of Dobotex (manufacturer of Puma socks and apparel) and Brandon (corporate merchandising)
2010–2011 Acquisitions of Cobra and Volcom (sports equipment suppliers) and luxury menswear supplier, Brioni
2012 Divestment of Fnac
Sale of Redcats online businesses
Joint venture formed with Yoox for online sales of luxury brands
2013 Acquisition of Christopher Kane (fashion clothing), Pomellato (jewelry) and France Croco (processor of
crocodile skins)
Sale of La Redoute and Relais Colis (parcel delivery)
2014 Acquisition of Ulysse Nardin (watches)
Source: Tables 1, 2, 3, A1 and A2 are based upon information in Kering Financial Documents for 2014, 2012, and 2010.
FIGURE 1 The share price of PPR/Kering, 2000–2015
 (log Scale)
200
150
100
50
30
2001 2003 2005 2007 2009 2011 2013 2015
Source: Yahoo! Finance.
CASE 3 KERING SA: PRObING THE PERfORMANCE GAP WITH LVMH 461
FIGURE 2 Kering Group: Simplifed organizational chart, January 2015
Source: Kering Financial Document, 2014.
KERING
Kering Americas Kering Corporate Kering Asia Pacific
Sport & Lifestyle
Division

Luxury Division
● Sport & Lifestyle: designs and develops footwear, apparel, and accessories
under the Puma, Volcom, and Electrics brands.
Figure 2 shows Kering’s organizational structure. Table 2 shows the performance
of major brands.
Table 3 shows revenue by geographical region.
Kering’s states that its mission is “To offer products that enable its customers to
express their personality. To reach this goal, the Group empowers an ensemble of
powerful, complementary brands to reach their full potential, while ensuring that
each of them stays true to its own values and identity—this is what Kering calls
Empowering Imagination.”1
Kering’s strategy comprises a combination of organic and external growth:
● Organic growth involves “(i) launching new product categories and continuously
refning existing lines; (ii) strengthening distribution channels through selective
expansion of directly-operated store networks, close relationships with thirdparty retailers, and implementation of a dynamic e-commerce strategy;
(iii) enhancing sales performance, notably through increasingly effcient
462 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
merchandising, in-store excellence, sophisticated customer intelligence, and
relevant, well-targeted communications.”2 For example, in 2014 Gucci launched a
range of cosmetics. Another strategic initiative is the development of an integrated
approach to eyewear comprising an internal value chain for product development, supply chain management, brand strategy, and sales and marketing.
● External growth involves acquiring brands with “exceptional brand identity,
well-rooted values and a sought-after legacy; a unique scope of expression
through lasting codes and language, often referred to as their DNA; an ability
to broaden their territories independently or through alliances; and an aptitude
to gradually expand their market coverage beyond their current borders.”3 For
example, Kering’s acquisition of watchmaker Ulysse Nardin was based upon
its complementary relationship with Kering’s other watch brands and Ulysse
Nardin’s potential for geographical expansion, especially in Asia-Pacifc.
Synergies across Kering’s businesses are achieved through:
● Talent development and deployment: “The idea behind the HR strategy is for
the brands to flourish through access to a shared talent pool [which] primarily targets the top 200 managers of the Group.”4
TABLE 3 Kering Group: Sales revenue by geographical region
2014
€million
2013
€million
Reported change
(%)
Comparable
change (%)a
Western Europe 3,152 3,022.0 +4.3 +1.6
North America 2,147 2,032 +5.7 +5.5
Japan 963 968 –0.5 +7.3
Eastern Europe, Middle East and Africa 728 710 +2.7 +4.9
South America 465 475 –2.2 +9.0
Asia-Pacifc (excluding Japan) 2,583 2,449 +5.4 +5.3
Total revenue 10,038 9,656 +4.0 +4.5
Note:
aChange in revenue after correcting for changes in exchange rates.
TABLE 2 Kering Group: Performance of the major brands (€ millions)
Brand
Revenue Op. Incomea Op. margin Net assets
2014 2013 2014 2013 2014 2013 2014 2013
Gucci 3497 3561 1056 1132 30.2% 31.8% 6373 6355
Bottega Veneta 1131 1015 357 331 31.6% 32.5% 1072 532
Saint Laurent 707 557 105 77 14.9% 13.8% 547 1005
Other luxury brands 1424 1337 147 144 10.3% 11.6% 2551 1935
Total Luxury Division 6759 6378 1666 1684 24.6% 26.4% 10542 9826
Puma 2990 3002 128 192 4.3% 6.4% 4399 4335
Other sport/lifestyle brands 255 245 10 9 3.7% 3.5% 277 418
Total Sport & Lifestyle
Division
3245 3247 138 200 4.2% 6.2% 4675 4753
Note:
aRecurrent operating income. Excludes impairment of goodwill, restructuring costs, etc.
CASE 3 KERING SA: PRObING THE PERfORMANCE GAP WITH LVMH 463
● An e-business strategy developed initially for Gucci but then extended to
each of Kering’s brands.
● A group-wide approach to sustainability that “represents long-term differentiation and competitive advantage by offering new business development
opportunities, stimulating innovation and in many cases helping to reduce
costs. It is also a motivating factor for the employees … The Kering sustainability department acts as a platform of resources to accompany the brands’
own activities.”5
Appendix 1: Kering SA: Selected Financial Data6
TABLE A1 Selected items from the fnancial statements of Kering SA, year to 31 December
(€million)
2014 2013 2012 2011 2010
INCOME STATEMENT
Total revenue 10,038 9,656 9,736 8,062 11,008
Cost of sales 3,742 3,615 3,776 3,087 5,639
Selling, general and admin. expenses 1,545 1,516 1,494 1,229 1,637
Non-recurring net expenses 112 441 25 24 98
Other operating expenses, total 3,087 2,774 2,675 2,245 2,405
Total operating expense 8,486 8,345 7,970 6,584 9,779
Operating income 1,552 1,311 1,766 1,478 1,229
Net income from continuing operations 1,008 874 1,324 968 709
Net income from discontinued operations (479) (825) (276) 18 255
Net income 529 50 1048 986 965
BALANCE SHEET
Assets
Cash and short-term investments 1,196 1,527 2,168 1,316 1,449
Total receivables, net 1,168 1,069 1,061 1,183 1,317
Total Inventory 2,235 1,806 1,737 2,203 2,227
Total current assets 5,273 4,925 5,460 5,277 6,940
Property, plant, and equipment 1,887 1,677 1,376 1,372 1,424
Goodwill, net 4,040 3,770 3,871 4,215 4,540
Brands and other intangibles 10,748 10,703 10,490 10,331 10,200
Total assets 23,254 22,811 25,257 24,954 24,695
Liabilities
Accounts payable 983 766 685 1,536 1,928
Notes payable/short-term debt 1,254 540 362 892 372
Current portion long-term debt/capital leases 1,247 1,310 1,223 1,095 1,799
Total current liabilities 5,780 4,559 4,381 7,072 6,495
Total long-term debt 3,195 3,133 2,989 3,066 3,148
Total debt 5,696 4,982 4,212 5,053 5,319
Total liabilities 12,620 12,224 13,843 14,029 14,095
Total shareholders’ equity 10,634 10,587 11,414 10,925 10,599
CASH FLOWS
Net cash from operating activities 1261 1521 1366 1,332 1,264
Total cash from investing of which (903) (966) 259 402 79
—Capital expenditures (551) (675) (442) (325) (305)
464 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Appendix 2: LVMH: Selected Financial Data
LVMH Moet Hennessy Louis Vuitton SA (LVMH) is a Paris-based luxury goods company.
Tables A3 to A5 show fnancial data for the company and its main businesses.
TABLE A3 LVMH’s businesses and brandsa
Revenue
(€million)
Op. proft
(€million)
Division 2014 2013 2014 2013 Major brands
Wines and
Spirits
3,973 4,187 1,147 1,370 Moët & Chandon, Dom Pérignon, Veuve Clicquot, Krug, Ruinart,
Mercier, Château d’Yquem, Château Cheval Blanc, Hennessy,
Glenmorangie, Ardbeg, Wen Jun, Belvedere, Chandon, Cloudy
Bay
Fashion and
Leather
Goods
10,828 9,882 3,189 3,140 Louis Vuitton, Céline, Loewe, Kenzo, Givenchy, Thomas Pink,
Fendi, Emilio Pucci, Donna Karan, Marc Jacobs, Berluti, Nicholas
Kirkwood, Loro Piana
Perfumes and
Cosmetics
3,916 3,717 415 414 Christian Dior, Guerlain, Parfums Givenchy, Parfums Kenzo, Loewe
Perfumes, Beneft Cosmetics, Make Up For Ever, Acqua di Parma
Watches and
Jewelry
2,782 2,784 283 375 Bulgari, TAG Heuer, Chaumet, Dior Watches, Zenith, Fred, Hublot,
De Beers Diamond Jewellers Ltd (a joint venture)
Selective
Retailing
9,534 8,938 882 901 DFS, Sephora, Le Bon Marché, la Samaritaine, Royal Van Lent
Note:
aNet assets by business in 2014 were: Wines and Spirits €10,543m; Fashion and Leather €9,484m; Perfumes and Cosmetics
€1,397m; Watches and Jewelry €7,196m; Selective Retailing €4,849m.
Source: Tables A3, A4, and A4 are based upon LVMH Annual Reports for 2014, 2012, and 2010.
TABLE A2 Kering Group: Divisional information
Luxury Sport & Lifestyle
Brand 2014 2013 2014 2013
Brand value (€m) 6578 6629 3887 2523
Goodwill (€m) 2944 2523 1096 1247
Number of stores 1173 1088 677 608
Number of production & logistic units 140 110 44 51
Divisional revenue by product 6759 6378 1666 1684
Apparel (%) 16 16 40 43
Footwear (%) 12 13 40 39
Leather goods (%) 53 54 — —
Watches & jewelry (%) 10 9 — —
Other (%) 9 8 20 18
Divisional revenue by region
W. Europe (%) 32 33 30 30
N. America (%) 19 19 26 25
Asia Pacifc (%) 31 31 14 13
Japan (%) 10 10 9 10
Other (%) 8 7 21 22
CASE 3 KERING SA: PRObING THE PERfORMANCE GAP WITH LVMH 465
TABLE A4 LVMH’s revenues by geographical region, 2014 (€million)

TABLE A5 Selected items from fnancial statements of LVMH (€million)
2014 2013 2012 2011 2010
INCOME STATEMENT ITEMS
Total revenue 30,638 29,016 27,970 23,659 20,320
Cost of sales 10,801 9,997 9,863 8,092 7,184
Selling, general, and admin. expenses 14,117 12,979 12,164 10,304 8,815
Non-recurring net expenses 289 116 174 95 155
Operating income 5,431 5,898 5,742 5,154 4,169
Net income 5,648 3,436 3,425 3,065 3,032
BALANCE SHEET ITEMS
Cash and short-term investments 4,091 3,397 2,187 2,448 2,511
Total receivables, net 2,628 3,132 2,173 2,750 2,155
Inventory 9,475 8,492 7,994 7,510 5,991
Total current assets 18,110 15,971 14,167 13,267 11,199
Property, plant, and equipment 10,387 9,621 8,694 8,017 6,733
Goodwill, net 8,810 9,058 7,709 6,957 5,027
Brands and other intangibles 13,031 12,596 11,322 11,482 9,104
Total assets 53,362 56,176 49,850 47,113 37,164
Accounts payable 3,606 3,297 3,118 2,952 2,298
Notes payable/short-term debt — 3,661 — 1,825 823
Current portion long-term debt/capital leases 4,189 1,013 2,950 1,219 1,011
Total current liabilities 12,175 11,639 9,405 9,594 7,060
Total long-term debt 5,054 4,149 3,825 4,132 3,432
Total debt 9,243 8,823 6,775 7,176 5,266
Total liabilities 31,599 29,297 25,426 24,742 19,966
Shareholders’ equity 21,763 26,879 24,424 22,371 17,198
CASH FLOWS
Net cash from operating activities 4,607 4,714 4,115 3,907 4,049
Total cash from investing of which (2,007) (3,917) (1,690) (3,016) (2,691)
—Capital expenditures (1,775) (1,657) (1,694) (1,749) (1,002)
Notes
1. Kering Financial Document 2014: 8.
2. Ibid.: 8.
3. Ibid.: 9.
4. Ibid.: 10.
5. Ibid.: 11.
6. LVMH 2014 Annual Report.

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