The strength of fashion label Gucci is in its established, strong brand image, international presence, and to some extent, the ability to control its distribution channels.
Gucci has a higher profile and recognition in China than many of its competitors — primarily achieved through its heavy investment in China. The company has expanded aggressively into the second- and third-tier cities, which have populations ranging from 2-8 million people. China has over 270 cities with populations over one million people. They are classified by a five-tier system based on the size, sophistication, purchasing habits, attitudes and disposable income of the population in each city. There are 30 tier two cities and tier three cities span about 150 county capitals.
Gucci is extraordinarily quick to capitalize on opportunities in China and has a successful growth strategy. The number of directly operated Gucci stores has grown to 39 stores in 2010 from 4 in 1997. Gucci CEO Patrizio di Marco plans to grow up to 40 or more in future years. According to Mr. Pinault, CEO of PPR which owns Gucci, a store in a “second tier” city can become profitable in two years.
Gucci’s success in China can be attributed to:
1. Strong Local Management
Unique among international luxury brands in China, Gucci uses a 100% Chinese workforce. Gucci’s Asia Pacific CEO Mimi Tang consider the challenge of overcoming China’s traditionally Communist-style customer service attitude to be more challenging than pirated goods in China. “Gucci’s commitment is to offer the total experience to the Mainland consumer, to pamper them, so we want our service to be good,” she explained. “Finding staff is quite difficult, especially in new cities. They all lack that luxury brand experience. In Wuhan we had over 1,000 candidates from advertising in newspapers. We chose based on attitude, so that they can take care of customers from the heart. Training is not about length but effectiveness, and then we have ongoing workshops for all levels of staff.” She believes the problem with hiring expatriate staff is that people don’t stay long enough and this lack of continuity coupled with the complexity of a large operation hurt business in the long run.
2. Effective Pricing Strategy
Unlike most brands that pass on China’s 30 percent import and luxury taxes and higher operating costs to customers, Gucci’s China prices are only 10 to 13 percent higher than global standards. “Our customer is not price conscious, but we want to be fair to consumers,” said di Marco. “Brands have two choices: either the customer pays, or not. We therefore have lower profitability, but versus something that is absurd: If there are 100 million Chinese traveling the world, they will feel annoyed if they feel taken advantage of.”
3. Astute Location Selections
Gucci is not adverse to expanding beyond China’s top cities. Currently in 26 cities, di Marco believes that differences in China’s cities are smaller than expected. He points out the store they opened in Wuhan in May 2009, which “is considered a third-tier city, but the population is huge. With a 450-square-meter (4,800-square-foot) store, in the first three days we did sales of 240,000 euros (or US$332,760). Two things are impressive: One is how well the Gucci brand is known in a market that is still developing. Two is how present the luxury consumer is in a city like Wuhan — the night before the opening it had a line outside.” He added, “Newer and more obscure cities offer additional growth potential. What is exciting is that McKinsey Research shows that, with migration into the cities, in three to five years China will have entirely new cities forming. Population is a factor to consider, as well as the widespread knowledge of luxury, and that is growing.”
4. Targeted Merchandising Strategy
The merchandising of each store is highly targeted and tailored to the local customer. Gucci has introduced more entry level priced goods in selected stores, especially in smaller cities. The company also targets younger men, a key consumer group, who are more likely to buy luxury products to display their wealth.