Supply Chain Management of Gucci Group

N.V.
Gucci Group N.V.'s designs and clothing have become one of the most-recognized labels in the retail
industry. Along with Karl Lagerfeld, Cartier, Alfred Dunhill, and Ralph Lauren, Gucci offers wealthier clientele
from around the world an acknowledged badge: the "GG" on its leather products that symbolizes
membership in an elite club. During the late 1920s and throughout the 1930s, Gucci was the first company
to establish a label in the retail industry that is regarded by the general public as synonymous with wealth,
status, power, and luxury. However, due to family feuding in the 1980s and mismanagement of the Gucci's
image and resources, by the early 1990s, the company was almost bankrupt. As a result, shares in the firm
were sold to InvestCorp International, which eventually won full control in 1993 and took Gucci public. A
new management team and a revamped image, coupled with excess capital, soon enabled Gucci to reach
unprecedented financial success, and the company then began a series of strategic acquisitions, which
includes the French fashion house Yves Saint Laurent, Boucheron, Sergio Rossi, and Balenciaga. Gucci now
has over 200 franchised and company-owed stores worldwide.

Creating a Mythical Exclusive Brand: Early Roots 1923-1950

The founder of the famous retail empire was Guccio Gucci. Born in Florence, Italy, in 1881, Gucci was forced
to leave the country when his father's hat-making company went bankrupt. Driven out of the house by his
embittered father, Gucci traveled to London and landed a job as a dishwasher at the Savoy Hotel. The Savoy
Hotel was quickly becoming one of the most notable gathering places for the American and European upper
classes. The reason for its popularity was Cezar Ritz, the most famous chef in the world at the time. Ritz
knew how to lure the wealthy elite by appealing to the sensibilities of their taste buds, and Gucci soon
learned that the key to attracting moneyed customers was the perception of quality and exclusiveness.

Gucci worked his way up from dishwasher to waiter, all the while observing the lifestyles and habits of the
highest levels of international society. One of his most important lessons involved the way the hotel's
affluent guests transported their personal possessions from one grand luxury palace to another. Gucci
noticed that all the dwellers in the Savoy Hotel used quality-leather luggage, made by craftsmen from all
over Europe. Gucci also discovered that it was the notion of "quality" that obsessed people like Lilly Langtry
and Sir Henry Irving. Items that were most fashionable and of the best quality had to be possessed, and
people with good taste cared little about the cost. For three years, Gucci worked and learned about what
was needed to secure the patronage of the gilded class. After saving enough money, Gucci returned home to
Florence to begin a new life.

Gucci married a young seamstress, Aida Calvelli, and had four sons and one daughter; he also adopted a
boy that Aida bore out of wedlock. He first worked in an antique store and then at a leather firm. With so
many mouths to feed, money was always in short supply. When World War I started, Gucci was drafted to
fight for the Italian army, and he served as a transport driver. After the war ended, he returned home to a
city with an economy that had been destroyed. But Gucci recognized an opportunity to use the experience
he had gained in London, and so he started working at a leather firm that specialized in quality-leather
products. The owner of the firm, a man named Franzi, taught him all the elements of leatherwork, including
the selection of hides, the tanning processes, and how to work with different types of leather. An ambitious
and able man, Gucci was chosen to open Franzi's new store in Rome.

By 1922, Guccio Gucci had dreams of opening his own shop, and, encouraged by his wife Aida (who also
helped find an investor by the name of Calzoni), a Gucci leather business started operations in Florence one
year later. The little store made leather goods for the wealthy tourists who visited Florence in record
numbers during the 1920s. Soon he had made enough money to buy out his partner, Calzoni. As the
business grew, reputation of Gucci's sturdy, quality luggage began to spread in European social circles.
During this time, he also began a repair operation for luggage. This unexpected source of work helped
increase the reputation of Gucci's store for quick, careful, first-class workmanship. The sense of quality he
had learned from his time at the Savoy Hotel, and the perception that expensive products were more valued
than inexpensive ones, convinced him to raise his prices. By the end of 1923, the Gucci store had become
widely known for its distinctive craftsmanship, and it was frequented not only by wealthy tourists but by the
local elite as well.

During the 1920s, Benito Mussolini rose to power as Italy's dictator, and many nations imposed harsh
sanctions on the country. As a result, Guccio Gucci was no longer able to purchase all the leather needed for
his shop. This apparent misfortune, however, turned to Gucci's favor. Without the needed leather, Gucci was
forced to design and make handbags and luggage of both canvas and leather. Leather was employed only
on the most-used parts of the luggage, such as corners, clasps, and straps. In addition, new items including
belts, wallets, and various ornamental designs were becoming more fashionable, and Gucci capitalized on
their popularity. By the end of the decade, the Gucci store had become one of the most important shopping
places for wealthy customers from Italy and abroad. Flocking to his business in order to buy beautiful and
highly innovative leather creations, people were willing to pay premium prices for quality goods made by
expert craftsmen. The Gucci mystique had been born. Some of these early Gucci creations are displayed at
the Museum of Modern Art in New York City.

The war clouds that grew over Europe during the 1930s did not affect the Gucci store. Tourists from around
the world, especially the United States, traveled to Florence not only to view famous works of art such as
Michelangelo's David but to purchase a piece of Gucci luggage. Business boomed and the family grew in
wealth and prominence. With the onset of World War II in 1939, however, life changed suddenly for
everyone in Italy, including the Gucci family. The war between Gucci's customers--British, German, French,
American, Italian--almost destroyed the company. Sales dropped precipitously, and plans for expanding into
other major Italian cities were indefinitely delayed. The family shop that already had been opened in Rome
kept the family in business since the ancient metropolis had been declared an "open city" by the Allies and
was not bombed during the early part of the war.

Unfortunately, by the end of the war Italy was in ruins as a result of the fighting between German and Allied
forces, and the tumult and chaos left behind did not contribute to the sale of Gucci's premium-priced leather
goods. Almost every person in Italy suffered from deprivation and impoverishment, and the Gucci family
was not immune from the postwar hardships. Yet Guccio Gucci was able to arrange loan money from a
number of Italian banks, and immediately he began to revitalize his shops in Florence and Rome. Guccio
Gucci's son, Aldo Gucci, was in charge of the shop in Rome and achieved new heights of success during the
occupation by Allied soldiers. American soldiers thronged the shop and purchased anything that Gucci had
made to send to mothers, wives, and girlfriends back home. Within one year after the end of the war, both
Gucci shops in Florence and Rome had achieved sales figures near prewar levels.

During the postwar period, Guccio Gucci and oldest son Aldo began to create a myth to surround the
company's products. An exclusive design--back-to-back linked stirrups in the founder's initials "GG"--was
printed on all the firm's luggage and handbags, and hunting and stable yard colors were used to give the
Gucci shops an aristocratic air. The legend that the Gucci family had been saddle makers to the great
Florentine families also started at this time. All of this history was contrived, of course, but it helped place
the Gucci family on a level more equal to the people who bought their wares.

The early 1950s brought many celebrities to Gucci's store in Florence, including Princess Elizabeth of
England, Eleanor Roosevelt, Elizabeth Taylor, and Grace Kelly. Grace Kelly once appeared at the store in a
panic, explaining that she was in desperate need of a gift for a friend's wedding. When she asked if the store
had a floral scarf, Gucci replied that he did not but that he would be happy to make her one. This incident
gave rise to the Gucci floral scarf that soon thereafter became world famous. In spite of the worldwide
interest in the purchase of his products, Guccio Gucci was reluctant to expand his operations. However,
when Guccio died in the summer of 1953, son Aldo Gucci immediately arranged for a Gucci company to
open stores in the United States.

The Rapid Expansion of a Legend: 1950s-1980s

After the death of the founder, three of Guccio Gucci's sons, Rodolfo Gucci, Vasco Gucci, and Aldo Gucci,
became equal shareholders in the company. Rodolfo acted as the general manager, Vasco as the supervisor
of operations at the manufacturing plant in Florence, and Aldo as the director of foreign operations. Under
Aldo's direction, new Gucci stores were opened in Philadelphia, San Francisco, Beverly Hills, Palm Beach,
and Chicago. The factory in Florence located on the Via Caldaie was expanded, and land was purchased in
the Sandicci area outside the city for a new production plant. Demand for luxury items was growing by leaps
and bounds in the late 1950s, and Gucci was at the forefront of companies that were frequented by the rich
and famous.

The Gucci stores were most successful during the 1960s. Anyone who had the money sought the Gucci
name on shoes, luggage, handbags, and scarves. The Gucci moccasin was worn by John Wayne and Jerry
Lewis. Princess Margaret of England, Audrey Hepburn, and Imelda Marcos purchased Gucci shoes--a lot of
them. Revenues were at an all-time high, and profits were pouring in. Although there were minor
disagreements, the Gucci brothers and indeed the entire family lived and worked in peace and harmony.
When Vasco Gucci died in 1975, everything at the company began to change. Over 9,000 customers per day
were buying products from the Gucci stores in the United States, over 600 employees were on payroll, and
the business had increased 25 times over the previous decade. Gucci shoes were "the" item to buy and
wear, along with Gucci belts, luggage, and accessories. Gucci products had achieved world status. Yet
employees in the New York store, as well as in the other U.S. stores, developed a reputation for rude
behavior toward customers. Discourteous treatment, icy stares, and put-downs were widely known to occur
at Gucci, and rumor had it that Aldo did nothing to discourage the way his employees treated customers.
Although this report was not good news, a more important problem had arisen. In 1978, Gucci Shops
Incorporated, Aldo's U.S. branch of the family firm, had recorded revenues of over $48 million--but no
profits. According to Aldo, the costs of opening up new stores across the United States had soaked up the
firm's hefty profit margin.

Family Breakdown and the Loss of an Empire: 1980s

As the company grew during the early 1980s, family feuds and disgruntled employees marred the
aristocratic image the Guccis had carefully nurtured since the 1920s. Paolo Gucci, the son of Aldo, was bitter
since he had been left out of the major decisions made during the board of directors' meetings. He began to
inquire into his father's record-keeping procedures and informed the Internal Revenue Service about certain
discrepancies. Rodolfo died in May 1983, and his son, Maurizio, also began to take a keener interest in the
company since he was now one of the major shareholders. A consummate businessman with a charming
personality and ruthless disposition, Maurizio arranged for his cousin Paolo to sign over his shares in the
company and forced his uncle Aldo to relinquish the position of president.

By 1985, despite what the world press had termed the "Gucci Wars," the company itself was still growing.
The family squabbles and power plays had hurt the firm's reputation, but its long history and its pervasive
trademark contributed to Gucci's continuing financial success. In the United States, Gucci Shops
Incorporated reported profits of over $5 million on revenues of $62 million. In Italy, company shops
reported revenues of over $200 million and profits approximating 8 percent of the total. The Gucci operation
in London made over £10 million, with profits running at 10 percent. By 1986, 153 Gucci stores around the
globe were selling over $500 million worth of merchandise.

The late 1980s were terrible times for the Gucci family and their luxury retail empire. In the United States,
Aldo Gucci was charged with tax evasion and misappropriate use of company funds. Over $7 million worth of
taxes had been evaded while Aldo was head of Gucci's U.S. operation, with approximately $11 million
spirited out of the country. Aldo was sentenced to a year and a day in jail and was fined $30,000. He had
already paid back over $1 million to the U.S. Treasury. At the age of 81, Aldo began serving his prison time
in the "country club," the Eglin Penitentiary in Florida, where many of the convicted Watergate defendants
had been incarcerated.

The conviction of Aldo was just the beginning of more to come; by the early 1990s the Gucci operation was
in disarray. Sales dropped precipitously, and debts began to accumulate. Now in complete control of the
organization, Maurizio brought in an outside investor group from Bahrain, InvestCorp International, to help
revive the firm. Yet even the influx of cash from InvestCorp did not help. In 1992, the renamed Gucci
America Inc. had lost over $30 million, not counting past debts of over $100 million. As a result, InvestCorp
brought suit against Maurizio for withholding information about the state of Gucci's U.S. operation. In
attempting to force Maurizio to sell his remaining 50 percent ownership to InvestCorp, the Bahrain group
said that additional money would be forthcoming only if Maurizio left the company. Maurizio fought back
with counter suits, but finally he gave in and sold his remaining interest to InvestCorp in September of
1993. This transaction marked the first time that control of the firm was not in family hands. Yet, the Gucci
family's problems did not cease with the loss of the company. As it reeled from the chaos it had created, an
assassin shot Maurizio Gucci on a street in Milan on March 27, 1995. Although, at the time, Italian
investigators speculated that he had been killed because of personal debts, in 1998 Maurizio's widow was
charged and eventually convicted for his murder; she was sentenced to 29 years in prison.

Rebuilding Gucci to Become a World Leader in Luxury Goods: 1990s

During the mid-1990s, InvestCorp appointed its own management team and began the arduous task of
rebuilding the company. In 1994, it promoted several key staff members, including Tom Ford, who was
given the title of creative director, and Domenico De Sole, the head of Gucci America, who became Gucci's
CEO in 1995. De Sole immediately started work on reclaiming Gucci's image as a luxury brand, which had
been cheapened in the 1980s by plastic and canvas products bearing the trademark of the intertwined "G"s.
To this aim, he continued a process he had started in the United States of cutting back franchise and duty-
free outlets and began spending heavily on advertising. In a further effort to bring the company back to
profitability, De Sole closed the extravagant new headquarters opened in Milan by Maurizio four years earlier
and relocated the management to the company's native city of Florence. He also increased the budget for
staff development, thus improving the atmosphere in Gucci shops as employees began to treat customers
more respectfully. These management decisions, along with Tom Ford's bold and updated Gucci designs,
which boasted a flashy, 1960s style, helped sales and profits to increase dramatically in both Europe and the
United States. By late 1995, projected figures were very promising and the outlook for Gucci and its U.S.
operation improved substantially.

After several years of reshaping Gucci and finally returning it to profitability, InvestCorp decided to capitalize
on its investment in 1995, making an initial public offering (IPO) in October and selling a 30 percent stake in
the company. At the time, Gucci was valued at about $135 billion. Due to a delay in filing by the Italian
stock market authority, the company did not offer its shares in Milan, but instead traded shares on the New
York and Amsterdam Stock Exchanges and London's SEAQ International market--a mistake the Italian stock
market authority would come to regret deeply. The offering was 16 times oversubscribed and the $22-per-
share opening price was immediately shattered due to the stock's high demand. And this demand did not
decrease. By March of 1996, less than six months after the initial offering, InvestCorp's remaining 51
percent stake had more than doubled in value. Encouraged by the unprecedented value in its shares and an
excellent economy, InvestCorp sold the rest of its shares. At the end of the 1997 fiscal year, Gucci's sales
were $975 million with an 18 percent profit margin. Since the IPO, shares had risen 323 percent. Gucci had
finally completed its move from a troubled money-losing company to one of Wall Street's most popular
stocks.

However, this tremendous success did not mean that Gucci was without its problems. Competitors had
noticed the company's quick ascendancy to the top, and by 1998 Gucci was watching several of its investors
for indications of a hostile takeover. One of its archrivals, Prada, had secretly amassed a 9.5 percent stake
in the company. Although Gucci had based its operations in the Netherlands for its favorable tax laws, the
country's lack of business regulation left the company vulnerable. Under Dutch law, investors that wanted to
buy a controlling interest in the company were not compelled to make a bid for all the stocks.

By 1999, this vulnerability became a serious threat when Louis Vuitton Moet Hennessey (LVMH), a French
luxury goods group, bought Prada's shares and combined them with its own, giving itself a 34.4 percent
interest in the company and--Gucci executives feared--enough power to claim controlling interest. A bitter
battle ensued to secure Gucci's future. Eventually, Pinault-Printemps-Redoute (PPR), an LVMH competitor,
made a controversial deal with Gucci to increase the company's capital and purchase a 40 percent stake in
the company. The capital PPR invested effectively reduced the value of LVMH's stock to 20 percent. LVMH
challenged the legality of the move and over for the next two years fought the issue both in the courts and
in the press. Finally, in 2001, with the pending investigation of its business practices, PPR made an offer to
LVMH for 100 percent of its shares. The deal was accepted and Gucci's management was secured.

PPR's investment in Gucci gave the company tremendous influence and capital, which enabled it to purchase
Yves Saint Laurent at the end of 1999. This acquisition turned out to be the start of a string of strategic
acquisitions that helped Gucci branch out into other industries, expand its lines, and dramatically increase its
profits. By 2000, its revenue reached $2.25 billion, with a profit margin of 47 percent. Although the world
economy soon slowed down, by 2002 Gucci was relatively financially undamaged and announced in March
its intention to open 70 new stores around the globe.

Principal Subsidiaries:Alexander McQueen (51%); Balenciaga (91%); Bédat & Co. (85%); Bottega Veneta
(78.5%); Boucheron; Gucci America Inc.; Gucci; Luxury Timepieces Design; Luxury Timepieces
International; Sergio Rossi (70%); Stella McCartney (50%); YSL Beauté; Yves Saint Laurent.

Principal Competitors:Chanel SA; LVMH Moët Hennessy Louis Vuitton SA; Compagnie Financière Richemont
AG.
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