← The Business of Fashion Podcast
The Business of Fashion Podcast
Inside The Great Luxury Reset
01:06:09
Imran Amed, CEO of BoF, and Luca Solca, MD of luxury goods at Bernestein, speak to System Magazine’s Jonathan Wingfield about how luxury fashion is navigating economic headwinds, shifting consumer values and the urgent need for creative renewal.
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Transcript48 lines
- [00:00]
Luca
Let's kick off straight away. So Luca Imran, thanks so much again committing your time again to this. We're now two years on from the last time that we we spoke a little bit less. It was in the summer of 2023 and it struck me when I was thinking about what we're going to talk about today. The last time we spoke together, Bernard Arnault was officially the wealthiest individual on the planet. Chinese consumption of luxury fashion was booming probably at an all time high and America felt like a relatively benign presence. My question to start with is which specific factors in the past two years, world events and global economy are having the most acute impact on the fashion industry right now? Luca, let's start with you.
- [00:47]
Imran
I think that one of the most important factors has been the fall of the real estate market in China. This has caused a huge dent in Chinese consumer confidence and has kept Chinese consumers on the back foot as they all felt poorer. They saved a lot of money and they're still saving and not committing to discretionary spend as enthusiastically as they've done in the past and definitely not showing the same drive to enjoy life that people in Europe or in the US have shown getting out of the pandemic. I think that this has been by far the most important factor.
- [01:28]
Luca
Did you sense there was an inevitability to the housing crash in China or did it come sort of somewhat unexpectedly and therefore the knock on repercussions are as unexpected.
- [01:38]
Imran
I think that the affordability was very stretched. So it was surprised to a point that this was that the writing was on the wall that at one point the market would have to correct. We've seen crisis like those in other countries as well, in smaller countries like Spain, in bigger countries like Japan. I believe that at one point pushing was going to come to shove and so it did. So not a big surprise, but clearly a major factor for the luxury goods brands to get adjusted to. Nevertheless, they tried, I think, several ways to address this issue by for example, becoming far more relevant to R consumers. I think that in the past five years there's been a significant development of this consumer cohort and by focusing on the US as let's say a growth market that was kept on the back burner and as a second priority for a long time this seems to be working to a large extent, albeit with the 2024 industry growth being a bit of an atonement from what growth was produced in the recent past few years.
- [02:56]
Luca
What about you Imran? What's your sort of take on that? Is there Anything specific you want to add? Because my next question was, what can you tell us about the narratives behind these market figures, particularly in China? And are things as uncertain as the headlines suggest? And obviously your role with BoF is really about deciphering markets and actually sharing genuine narratives and information with the industry. So what's your take on it all?
- [03:21]
Johnny
Well, on the China phenomenon, the one thing I would add to what Luca said is that a big part of the issue here is that something like 80% of the wealth in China is associated with real estate. So when you have a real estate crash or correction like we've seen in China, imagine if any of us had 80% of our net wealth locked up in our property and all of a sudden we started to see the value of that property drop pretty precipitously. That would impact our overall sense of confidence. And so the degree to which this has impacted the Chinese customer is really interesting. Alongside that, as Luca alluded to, these Chinese customers are still saving money. So because they don't have confidence in the value of their real estate portfolio, they're not spending as much money. And so what's happening is we're seeing kind of the savings rate grow, which means at some point there may be an opportunity down the road to unlock some of that value. And I don't know, Luca, it seems like you might have something to add to that.
- [04:34]
Imran
No, no, absolutely. I'm totally on the same page. I think the only thing is, at one point when Chinese consumers digest the new value of their property, and if especially property prices were to find support, there's a lot of money that they have kept on the sides and that they can go out and spend. So I wouldn't definitely write off the Chinese consumer cohort with a medium term view, except probably this recovery is going to be U shaped.
- [05:10]
Johnny
Yeah, I guess the other thing is it's like they're going to spend again, but what are they going to spend on? Which kind of brings me to my next point, Johnny, which is, I think what we've seen in the industry around the world after what you might call the pandemic gorging of luxury goods, when there were no options but to spend on luxury products. Customers in other parts of the world, in the United States, in Europe, elsewhere, they're kind of trading off their spend on luxury products with other things, whether that be travel or dining or health and wellness or other things that are more experiential in nature. And I think this is the longer term force that the industry has to grapple with because there has been for a short period of time after Covid, when everyone was consuming like crazy, like that was an aberration, you know, that was a short period. And I think what happened is a lot of luxury brands began planning and operating their businesses as if that pandemic surge was going to continue. And they started making decisions that have come to bite them in the back, most notably the increase in prices. And so when customers are now making those trade offs and they're looking at a €10,000 bag that used to cost half of that, there's a real pressure that these brands are now facing because the value proposition just doesn't add up. If you combine that with the fact that those €10,000 products are made in the hundreds of thousands or sometimes millions of quantities, then also there's a lack of differentiation and people are wondering, well, why would I spend so much money on something that everybody else has, which has put a lot of focus in these brands, as Luca is saying, to try to deliver something different to entertain this particularly important cohort of say 2 to 5% of luxury customers that drive something like 30 to 40% of the revenues in the industry. There's a lot of things that happened in that post pandemic surgeon that I think the industry is now having to reckon with.
- [07:27]
Luca
I mean, do you sense there is any kind of feeling of luxury goods fatigue? I mean, obviously you talked to him around about maybe towards a shift towards more experiential purchases, but in terms of actual luxury goods, could there be a sense of fatigue that would have crept in and that may not return, certainly as voraciously as before?
- [07:48]
Johnny
I think there is fatigue. I would go so far as to call it in some cases a rejection of the luxury model, which for some customers just doesn't make sense anymore. And you know, the combination of pricing mass produced luxury goods combined with that, the questions around some of the ethics and the supply chains, the extraordinary margins that some of these brands have, are earning on potentially less than ethical manufacturing practices, some of which came out in the Italian investigation last year. I mean, there's a lot of factors at play and I think in some cases customers are saying, well, I just don't, I don't buy this anymore. So it's further than fatigue, it's deeper than fatigue. It's more like a rejection of the model altogether.
- [08:41]
Imran
Now that I would necessarily fully agree here. I think that for sure there's a lot of homework that luxury goods companies have to do. In the post Covid boom, they were so busy making Money. They were so busy trying to satisfy demand that they tried to increase prices in order to equalize supply and demand. They forgot to update and upgrade their styles. They let their gross margin explode. All of that definitely cannot go on. And we've seen the best brands already tackle these issues. Just look at the Vuitton windows and magically you see that the bags displayed there are all now between 2,000 and €3,000, which is where they should be. At the same time, we've seen a huge amount of musical chairs. When it comes to creative directors, people want new stuff. If they need to pay these prices, they need to be excited. They need to have a feeling that they don't already have those products, that they haven't seen them yet, and that they desire them. So I think that this music culture game will only continue. We saw a significant number of creative directors being excused and a significant number being appointed. But I'm not sure that we should necessarily draw a parallel between our own understanding deep within the industry and having a lot of sophistication on what the industry model is, and the broader consumer audience liking luxury goods products and embracing luxury goods products. I've been invited to a debate next week to discuss whether the luxury goods crisis is structural. One of the points I'm making there, in order to support the idea that it's cyclical, is that the first luxury goods product that was found in a cave in Essaouira in Morocco dates back to 140,000 years ago. And it was a shell necklace. You know, things could always change, but there's a deep appreciation of the mankind for products that enhance their appearance, enhance their perceived status, reassure their sense of identity. I don't know that that will ever go away.
- [11:31]
Johnny
Where Luca and I are aligned is that the industry's new focus has to be on creativity and innovation. And that's been sorely lacking in recent years. Not only has the range of products not been innovated or refreshed in a lot of places, but the formula around the way brands engage with customers and communicate about luxury has become very formulaic. And so one of the reasons I'm so excited about the coming months in fashion, I just keep thinking towards Fashion week, spring, summer 2026, when we're going to have the debuts of so many new designers at so many brands, whether it's Matthew Blasey at Chanel or possible changes at Dior, a new designer at Jill Sander, your new designer at Versace, a new designer at Gucci. I mean, what the brands seem to all be coming around to is the fact that they need to inject new creative energy into these houses to get customers excited. Again, what I'm not convinced of is that the current approach to pricing and some of the questions around ethics, some of the questions around the way the industry has tended to exist over the past five or 10 years, whether that model doesn't need some structural change as well, and you know, it's going to be really interesting to see. I think we're entering a very, very exciting moment for our industry, an interesting inflection point. So I'm all for it and I'm looking forward to see how it all develops. It's going to be for anyone like Luca or myself whose job is built around analyzing everything that's happening. It's a very interesting times indeed.
- [13:16]
Imran
But I agree with you on this point as well. I think that indeed pricing has to be corrected and part of the correction is to project a higher value in the products you sell. Maybe because you use better materials, maybe because you give more functionality. I saw that, for example, Vuitton has launched a reversible neverfull that gives people the impression that they're buying two bags. But for sure, I think that there's also a huge amount of work to introduce new enterprise products because the pricing has gone to heaven and it cannot stay there if you have to serve people living on earth. And I think that the new bags at Dior are a step in the right direction. In the meantime, we've seen that value for money for jewelry has become very attractive because jewelry, as it didn't go up as much in pricing, seems a lot cheaper today. But I wonder if, you know, soft luxury brands will not wake up and smell the coffee and adjust the multipliers back to where it's possible to keep them. I think 8 to 12 times was rich enough. And I also agree with Imran that, you know, after giving a lot of lip service to craftsmanship and to ethical and sustainability standards, a lot more has to be done when it comes to upstream manufacturing integration. If you have to come true with your marketing narrative, then you need to be carrying out a lot more directly. And I think this is the shape of things to come.
- [14:55]
Luca
Besides, the creative direction shifts in the brands. I know it's impossible to look into a crystal ball and foresee what's happening in the markets, but do you think the Chinese market will continue to be in a similarly dire place that it is now? And how long can the brand sustain this sort of anti growth? How long can they not be carrying on making the sort of levels of money that they were before. And does that require a significant shift in the way that they operate? Not so much from an ethical perspective, but actually from an operational perspective. I mean, I was obviously amazed that it seems that so few actually saw this coming and that they, as you say Luca, they were sort of so busy making hay while the sun shines, they weren't really aware of these things happening. But was it as simplistic as that to say that they were just so happy making money that they didn't sort of foresee these things happening?
- [15:47]
Imran
You know, these companies are run by human beings and if you don't give people incentives to change, they will. You know, if you see that you're making as much money as you like and the business is as good as it ever was, then you probably will not change. I think that adjusting to a more normal environment is causing a lot of soul searching and is getting these companies back in line. I think that this was absolutely appropriate. And I couldn't agree more with Imran, that the post pandemic boom, which was also dictated by the fact that we were all very happy to have survived and we wanted to enjoy life and spending money was no longer a problem. Let's enjoy while it lasts. Nobody wanted to be the richest man in the graveyard. I think that this euphoria has been dying down and now people are getting back into the swing of things. They're no longer fearing that they will die tomorrow. And as a consequence they went back to a more normal discretionary spend willingness which requires a lot more work from companies in the luxury goods industry. But in other industries, industries as well, let's be clear, to convince people to part with their money. I see that. For example, I think I was reading in New York a number of people have decided to go on restaurant strike because prices at restaurants had gone up so much and the quality didn't go hand in hand with that. So there was a bit of a widespread overexcitement that has to be reined in and people need to go back to planet Earth.
- [17:31]
Johnny
I think operationally what that phenomenon means, Johnny, is that we're talking about a game or an industry now where people are fighting for market share. They just can't ride the wave of widespread industry growth where the rising tide raises all the boats. The tide is very still at the moment, which means in order to grow you need to be doing something different. You need to be finding an opportunity to take market share away from existing players. And there are certainly Some examples of brands who, despite the still waters, are growing steadily and in some cases astronomically. You know, just take the steady growth of Hermes, Loro, Piana, Brunello, Cucinelli, whose brands are offering something that still resonate with customers. And also brands like Miu Miu, which the very, very slow growth of the overall sector is, you know, growing at 80, 90% per year. I mean, those kinds of growth figures would be even impressive in a growing market. And so when you see that happening, you know that customers are still drawn to certain kinds of brands for certain kinds of reasons. I was having a chat with a luxury department store executive late last year and asking him about the quiet luxury phenomenon and if that was going to continue. And he said he broke things down quite nicely for me. He said, you know, listen, Imran, when it comes to the men's market, quiet luxury is still booming. You know, men tend to buy things in multiples so that when they find something they like, they'll buy it over and over again. They'll buy it in multiple different colors and styles. But for women, the quiet luxury phenomenon is really on the decline. And this return to maximalism and the kind of expressiveness that we've been seeing on some of the runways, you know, women are looking for something different, something more interesting again. And this is where all the creative innovation that we were speaking about earlier is going to come in. So there are brands that are operationally succeeding, but it's because they're winning share from their competitors and kind of more.
- [19:46]
Luca
Broadly across the industry with the brands as a large scale luxury fashion brand, what happens when you're posting results which are up to 20% down? I mean, how do you weather the storm? I mean, obviously, Imran, you said, you know, one of the things is to go and grab market share from your competitors. But operationally, from a logistics perspective and from a financial perspective, do you sense that brands, are they slashing workforces? Are they closing stores? Are there other things that they're being forced to do?
- [20:14]
Johnny
Yes. I mean, there are brands out there, Luka will probably know better than me, that are cutting their store footprint significantly. I think Gucci is one of those brands in China that's paring back. Someone told me something like 50 stores in China are going to be closed for Gucci. You can also see it in the budgets that brands are spending on discretionary things. Fashion shows are getting smaller, yes, for intimacy, but also because it costs less to stage them. We saw a lot of brands in the past few months combine their men's and women's shows because they suddenly felt like their decision to separate the two brands was not the right strategic decision. And what they needed to do was combine them to have a unified perspective. I think a lot of what we're seeing is a reflection of trying to find ways to cut costs.
- [21:04]
Imran
Totally. Totally. You need to take into account that a lot of the costs in this industry are fixed. The cost of goods sold and the variable element is relatively small. So when sales decline as much as 20%, you really need to cut the fixed portion of your costs, which means rental costs, which means your own organization. And as far as the discretionary SGA portion is concerned, you also need to tune that down. We saw major events and I suspect this year we'll have a lot of intimacy, as Imran is pointing out too, as a way to try and bring those costs line back into order. But you also saw clearly, if you look at the likes of Gucci, for example, that this protected the bottom line to a point. You went from operating profit margins in the high 30s to operating profit margins in the low 20s. And that is unfortunately, the operating leverage of this industry kicking in reverse.
- [22:13]
Luca
Besides the calling off of the Chinese market, and I know it's still early days, but on the other side of the world, President Trump's American government seems to be sort of turning its back on the idea of Europe. We hear a lot of threats of tariffs, and the reality of that has yet to truly sort of made itself clear. But do you sense that maybe that will then have a knock on effect where it may permeate the psyche of the American consumer? When it comes to buying European luxury fashion, do you think that that may hit the European brand, given that so much of luxury fashion is based on sort of the European dream?
- [22:50]
Imran
I think that there's a risk which I think is the most important risk here, more than tariffs, but nationalism, not only in America, but in China as well and in other parts of the world, rises to a level. But anything that comes from abroad, anything that is foreign becomes bad by definition. Hopefully we're not going to go there, because the moment we go there, then we could potentially be in the antechamber of war. But the risk is definitely there. And it is quite clear that luxury is a global industry and it has thrived on the back of markets opening up, on the back of globalization, on the back of more countries participating to the global economy and benefiting in terms of increasing their GDP and also increasing their Gini factor and creating audiences for luxury goods to be consumed But I think it's the nationalist element, the most potentially dangerous in Port Harris, even if they were in the 25% that President Trump has mentioned. And, and let's see if after declarations get decisions in this line. But we need to take into account that luxury goods companies would be selling to their own American companies at transfer price, and transfer price would in most cases be wholesale, and wholesale is 40 cents to the dollar. So even if it was 25% additional import duty, this would mean another 10 cents that you could potentially offset by increasing retail prices by 10%. Not ideal, for sure, but not the end of the world either. So import duty is, I think, less of a concern than what the nationalist escalation could in fact, potentially provide.
- [24:52]
Johnny
And I think along with that escalation, I guess my one observation and having seen the dynamics around this emerging trade war over the last few weeks has been that sometimes things move to an irrational response. And so just the other day, I think in response to the EU responding to American tariffs on steel, you know, Donald Trump said he was going to put the tariffs on European spirits and champagnes to 200%. And you're getting to this point where, you know, people are using these tariffs as bargaining chips as part of a very complex negotiating strategy, but it can get out of hand. And I think notwithstanding some of the kind of caveats that Lucas, you know, rightfully put forward, I just worry that we're entering this period where, you know, things are just going to become irrational. And when you try negotiating with irrational people, you often don't get a good outcome. And so, you know, as a Canadian, I've been watching everything that's been happening as well. And, you know, Canadians are not the most patriotic bunch of people. I've never seen a very strong nationalistic surge in Canada since Quebec tried to separate from Canada in 1995. It's the only time I've seen Canadians waving flags and kind of around the country, you know, you know, professing their love for, for our country, which, you know, we're all very proud of, but we're very quiet about. But, you know, when my mom is sending me text messages about not buying anything American, not wanting to travel to America, you really see this surge has happened across the country. And I think there is this kind of sense of pride. So we're going to really have to monitor how this whole develops. It's something I've never seen before.
- [26:50]
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- [28:58]
Luca
Let's turn our attention now to the brands and you'd alluded to it before Imran, when you were talking about many shifts now towards different creative directors and I was curious to know. You know we have three huge brands, right? Diorsh and Alan Gucci who are all sort of in this holding pattern awaiting their own respective creative reboots. And then we have brands of varying other scales. Versace, Celine, Balenciaga, Loewe, Margiela, Gill, Sande. The list goes on and on and on. And obviously then how that then has a knock on effect across the industry in many different sectors in the industry. My question is that you've just returned from the fashion shows for this season. Awesome. Winter 2025. Did you sense that any of this sort of uncertainty and this imminent change was reflected on the Runway and what you were seeing on and off the Runway, did you sense that there was a direct response to kind of world affairs and industry turbulence?
- [29:55]
Johnny
I mean, yes, obviously there were two important debuts that happened this season. Not at brands of the same scale or note as Gucci or Chanel or Dior, but the debuts at Givenchy, an under loved neglected brand within the LVMH portfolio, and Tom Ford, which is a big beauty business and you know, small fashion business. Both of those debuts had such creative and emotional resonance with those of us who go to 40, 50, 60, 70, maybe 100 fashion shows in a season. And you know, it really brought my love for fashion back. I feel like the shows that I've been going to where designers are turning out the same heavily merchandise collections focused on copycat luxury products that aren't distinctive. When you see people, designers like Heider Ackerman and Sarah Burton, you know, two very talented designers, put real thinking, emotion and consideration into what brands like Givenchy and Tom Ford can stand for in the context that we're all operating in now. Yes, there was absolutely a feeling that there was a response on the catwalks. If that kind of effort, thoughtfulness, emotion and love is put into the collections that we see coming down the pipe for the rest of the year, I think the industry is going to have a surge of creative excitement and I think it's great for our industry because sadly, you know, as someone who's now been going to Fashion Week and attending fashion shows for 18 years, the past few years of post pandemic fashion have just not been very exciting. And I for one am very much looking forward to everything that's going to happen in September. I don't think we will have ever seen a fashion month like this with debuts at all of those brands. Like, I can barely contain myself right now. So I'm really excited about what's going to happen.
- [32:01]
Luca
When we spoke in 2023, Imran, you said, I think a brand's creative strategy is a function of its business strategy. That stuck in my mind, especially now in the current climate. Would you say the current business strategy is survival? Is it cost cutting? Is it regrowth? And how might that manifest itself in creative strategies? On one hand we have sort of these sure fire temporary things which can happen. Like I saw the Louis Vuitton, very impressive RE edition of Murakami the collaboration, which was a fantastic success. But conversely, is this the time where, you know, as you said, more audacious creative expressions are actually required when you're searching for brand distinction. And do you think that brand distinction will become a key factor in the coming months, in the coming season?
- [32:49]
Johnny
Yes, I think it goes back to that point I raised earlier around market share. So when you're trying to win market share, there's a basis for competition that you need to look for, which is, and I think a lot of the brands will be competing on the basis of creativity and innovation. Now some of those brands are doing that while still growing their businesses. Some of them are trying to execute a turnaround, some of them are trying to continue steady growth like Hermes. So like, not every brand is going to approach that fight for market share in the same way. But I think one general rule is there'll be a focus on creativity, design and innovation and quality. All of these things that when a customer is weighing the value ratio between price and quality, they'll be thinking about it. So that means how unique is the design, how well is the product made, how available is it to everybody else? Essentially how special is the product I'm being asked to buy vis a vis the price I'm being asked to pay? And where that ratio adds up for people they will buy and where it doesn't, they won't. And I think a big part of that is going to come down to design and creativity.
- [34:03]
Luca
Right. Luca, I have a question for you about. We talked last time about this idea of the cash cows at the groups. You know, Louis Vuitton for lvmh, Gucci for Kering and Cartier for the Richemont Group. And obviously it was announced yesterday that Demna the designer was going to be taking over at Gucci. We've read today that the Kering shares plummeted by 12%, which may or may not be an accurate representation of kind of, you know, how that information was received. But my question is, when a cash cow like Gucci for the Kering Group is operating at a pretty significant loss, how much of an existential crisis does that represent to across the group? And when a big brand in the group is bleeding, to what extent does that impact the kind of the funding of the mid sized brands?
- [34:50]
Imran
I think it's difficult to understate how big this problem is for Kering, Gucci has to come back and it has to come back sooner rather than later, especially at a juncture when Kering has committed to very significant M and A with the acquisition of Creed and the acquisition of Valentino and also very significant real estate investments. And also at a time when the smaller brands like Saint Laurent, Bottega, Veneta probably need to go back to the drawing board. There was this idea that they would need to produce operating profit margins in the 30s, but in order to get to that level of, with that relatively small size, they had to cut a lot of corners. And in today's market you cannot cut corners. You need to execute properly when it comes to the quality of your flagships, when it comes to the quality of your products and so on, and also the amount of money that you commit to your communication and marketing budgets. This is a fight for attention and in communication volume, what accounts is indeed the sheer amount of money that you bring. So you cannot be saving on that. So this is a very, very important turning point for Kering, which is why there was so much attention on the new creative director appointment at Gucci and which is why I think the market today is expressing some disappointment about the name that has been brought forward. Also because to some extent the caring share price had started to rise. On the back of the appointment potentially being more convincing and on the back of the change potentially opening up an opportunity for Gucci to improve. Markets react very quickly to good news when it comes to self help stories. Look at what happened since September last year to the Burberry share price. As a new CEO came on board, a new strategy was announced. It made sense. New communication was brought to the market which also sounded convincing. The share price has doubled on the back of a promise that this is all going to work here. The promise doesn't seem to be particularly convincing. And the share price is down today because I think the market in general is thinking maybe that is not a good fit. And business of fashion was carrying out the survey on Instagram. And I think that the outcome of that survey, whether Demna is the right creative director of Gucci or not, at least in the minds of the 9,000 people that responded, seems to be very clear.
- [37:46]
Johnny
It's interesting. I've written a editor's letter which will go out tomorrow morning which addresses this very topic. And I talk about the market plunge, I talk about the survey indeed on Instagram. But you know, having reflected on the decision to appoint Demna a little more, I understand where Kering is going. There's so few Designers in the industry that would be available, who have the proven ability to transform a brand, who have name recognition in the industry, who have the caliber of experience that Demna has at Margiela, at Louis Vuitton, working alongside Marc Jacobs and Nicolas Gasker, having run a startup company that disrupted the industry, Vetements having transformed Balenciaga into a multi billion euro brand. The fact that Demna was already inside the group means they could take him without having to deal with pesky non compete clauses that would slow down their progress. Which means that although he's going to be working on a couture show for Balenciaga in July, he can still work on his plans for Gucci. So hopefully they can bring something to market soon. And so when you consider all of the factors, I think the real test for caring, and I agree with Luca, that this is somewhat an existential choice for them, is can Demna move his aesthetic and his design look beyond what he has become known for from Vetements, Balenciaga? That for me is the fundamental question here. And having spent some time with Demna over these last 10 or 12 years since he first burst onto the scene across varying steps in that journey, I really think this is a designer who has the real ability. He's one of the most thoughtful, one of the most talented, one of the most provocative designers we have in our industry. We're lucky to have him. The question is like, can he deliver the goods? Can he change Gucci and can he change himself? That's what this all rests on, do you think?
- [39:58]
Luca
Coupled with his own creative input will be the requirement for, well on one hand, significant investment from the group and from the house of Gucci to allow what could be a radical new, quite a radical new vision right for the brand and for that to play out in terms of communications, but also in a more deep rooted way towards would stores need to be redesigned, refitted and all the other costs that go with that? Do you sense that that puts an added pressure on a company of Gucci scale to say we've made this decision to hire this person, this person's vision will certainly will be in some ways disruptive. What's the appetite for Gucci and what's the necessity in terms of investment, but also patience to actually see that through? You know, when we think about some of the previous examples, you know, when Hadi Slimane came into Celine, he had to or he chose to, they collectively chose to completely disrupt the existing customer and reconstruct it. And of course it became more successful. But they had to invest heavily to actually trigger that long term success. So what are your thoughts on that, Luca?
- [41:11]
Imran
I think that in this particular juncture they will have to be very pragmatic and very practical. I don't think that Gucci can afford a complete overhaul and I don't think that Kering can afford to commit huge investments before we see a turnaround. There must be a way, if indeed things have to play out in the right direction, to re energize the consumer interest for Gucci without committing too much capital at this stage because capital is short and so indeed, I agree with Imran. Even before we look at the stores, we need to take into account what kind of new aesthetics is Demna going to bring to Gucci and is that going to have the power to add back to Gucci twist? I think that what was missing, missing under Sabato was the twist. Gucci has been relevant to consumers in the past 25 years when it was over the top one way or the other. And for sure, even if this is once again an abrupt move in terms of how and where Gucci has to go, Temna is one that could potentially be providing this twist and this disruptive element. Definitely he was able to do so in spades at Balenciaga and what he was doing back then resonated with the market enormously. His approach, I think, was to use irony and a sort of iconoclastic approach. Think about the Ikea bags or the garbage bag handbag that he launched back then. It reminded me to some extent of Moschino and the irony within that brand. He also used a lot streetwear. I don't know that either of those two approaches would be relevant for Gucci today. First of all, because Gucci is very big. So I don't think that being too visible with something which is iconoclast is necessarily the right recipe to make Gucci relevant again. And my impression is that streetwear is, yes, yesterday's story. So you will need to invent something new. And that is why creative directors have such an important role in our industry and why they paid so much. So at the end of the day, this is the challenge ahead and then when the heat comes back, we can talk about everything. We can talk about making the stores nicer, we can talk about communication and whatever, but that the heat has to come back to the brand and the organic decline has to be stemmed. If we need to have a chance to play in the top tier.
- [44:19]
Luca
Let'S turn our attentions to the other group. LVMH For a moment, Imran, I read a really interesting it was an article that had been written on Bloomberg that you posted on BOF last month in which the writer explored the possibility of Louis Vuitton splitting and becoming a separate entity from lvmh. Now obviously it was a very, you know, it was a very significant thing. There was no real actual proof that this was in the mind of executives and of Bernard Arnault. But the idea that obviously was that it would increase the overall market value. And in that article it said Elmes market capitalization touched 300 billion in mid February, edging closer to LVMH's overall valuation. That may focus Bernard Arnault's mind on whether LVMH's conglomerate structure, so long a source of strength, is now a hindrance. And that really is a very thought provoking thing for the person to write. Tell me more about that. What's your take on that? Imran?
- [45:15]
Johnny
I know Luca definitely has a point of view on this because he's written some reports on it. I mean, I think it's less about separating Louis Vuitton from LVMH and I think it's more about refining the overall portfolio and removing some of the underperform businesses that are dragging down margin from the core LVMH group. I would be surprised if Mr. Arnault, at least until he's in charge of that brand and now that's going to be until possibly until the age of 85 that he would take Louis Vuitton out and spin it off and separate it from the group. I very much doubt that that would be a good strategy. However, there are underperforming parts of that group, namely in the selective retailing category, dfs, the duty free stores, which was really built around that traveling Chinese tourist customer that we all know is not traveling as much anymore and that is struggling. I'll be very curious to see what happens with the champagne and spirits division of lvmh, which is now run by the former CFO Jean Jacques Guillaume and Mr. Arnault's third eldest child, Alexandre Arnault. Some people are saying the reason they've put Mr. Guilleni into that role is because potentially there's a way of taking that out of the business because there is a structural change happening in the alcohol sector with a lot of people, particularly young people, drinking less. And so I very much doubt that Louis Vuitton gets taken out of the LVMH group. But there may be opportunistically some parts of the group that get spun up or divested strategically so that they're not dragging down the overall margin of the group. And I think the markets would reward them from that. But I'm not the expert on the market. That's Luca. I'm curious, Luca, what you think about a structural change to the group?
- [47:11]
Imran
Yeah, we were indeed, as you pointed out, Imran, writing about the opportunity that LVMH has spinning off, not selling, but spinning off the Winton Spirits business. The same way as Richemont in 2008 decided to spin off the tobacco assets. The idea would be you put those in a special purpose vehicle that is publicly traded, you put the Moen Se assets in it, and then you distribute the shares to the LVMH shareholders as a proportion of their ownership of lvmh. This way, if you like, you can keep the shares in your portfolio. And I presume that Diageo and the Hanno family will do so. And I also presume that many investors instead would not and could potentially sell those shares, which would allow the controlling shareholders to have an even bigger stake down the road and even potentially split that business between them down the road. The advantage of that is that Winded Spirits is not only underperforming, but also operating under a completely different logic. It's all wholesale, it's all maintaining product rather than newness. What they do and what they try and do is maintain the taste of the Champagne, maintain the taste of the cognac here on ear, blending whatever they need to blend in order to keep that constant. And all the innovation is in the packaging. So a very different setup. And when it comes to communication, communication is the heart and soul of fashion and leather goods, while it is in most cases even prohibited in some markets on spirits. So very different logic, no synergies, and not even an advantage when it comes to diversification. Maybe 15 years ago there was this idea that, you know, wines and spirits on the one side and fashion and other goods on the other would provide similar profit contributions to the group. But today, fashion and leather goods is very big and winter spirits is very small. So this diversification de facto is no longer there. And yet the presence of spirits prevents a lot of investors in the Middle east, in the ESG camp, to buy the shares. So where is the advantage? And I agree with Imran. One set us off. And the reason why we wanted to be upfront with this logic in the market is the fact that Jean Jacques Guilloni has become the head of this business and his ability as an M and a architect and as a CFO is unquestioned. So I wonder if maybe on the back of a slightly better consumer demand environment, this is going to be a priority in due course. As far as the rest is concerned, I agree that potentially selling dfs, which has been clocking such a significant amount of losses, would be a very good idea. Well, investing to consolidate the sort of triangular force of fashion, leather goods, fragrances and beauty and selective retail when it comes to Sephora, which is an accelerator of Dior, Parfum, Givenchy and any further beauty brands that LVMH was to acquire could be a very good idea.
- [50:55]
Luca
I wanted to ask you a question that was you know, again, it's part of this conversation about lms about Chanel being obviously private companies and then LVMH and Keri Chanel doesn't have the need to grow in the same way because it's not a public company. The Todds Group has been delisted from the Stock Exchange with the help from El Catterton to the layman reading this, what are the pros and cons today of a luxury fashion business trading publicly or remaining a private enterprise?
- [51:25]
Imran
If I may, I would disagree with the premise. I don't think that it's the fact that you're public that forces you to grow. I think it's the fact that this is a fixed cost industry that forces you to grow. If you want to stay a protagonist of the industry, you might as well stay very small. But in the end you're going to risk becoming a high quality acquisition target. Which is the reason why since 2008 Hermes has been so eager to beef up its growth. Because if it gets big, then not only it will be avoiding turning up again as a potential acquisition target, but also it will be able to have the funds and the resources required to play on the continuing rise of new fronts that are popping up. You must have noticed that if you are big you can expand competition to other levels. Think about sponsoring the Olympics, think about the real estate spending spree, think about the Formula One sponsorship. If you're small you're going to become invisible because you have no way of playing in the same league in terms of having the same visibility and matching what the leading company in the industry is doing. Bigger flagships, social media presence, influencers, itinerant couture and pre collection fashion shows, you name it. Every day there's something new that you need to find money to spend on. So if you're small, you're dead. And at best, if you're really differentiated. You can be a high quality niche player if you're Cuccinelli, say if you are a maybe Montclair, but if you're just mainstream, well, you see how it is difficult for Ferragamo to stand out and to sort of find a reason why they should be having a space in the market. And that I think comes primarily from a huge scale disadvantage that is continuing to escalate. So that's my two cents. I don't think that even the biggest guys, I don't think the channel can afford to go back to, you know, 15 billion or 10 billion because, you know, we're good and whatever and we're private and we don't care. No, no, no, no, no. You will not be able to compete if you're not in the same league.
- [54:06]
Luca
That's a good point. Anything to add to that, Imran? It was very, very well put.
- [54:10]
Johnny
I mean, I would just say scale really matters for all of the reasons that Luca mentions. I think when you are a privately run company, you can run your company in different ways, which I think is maybe the important benefit to underscore. So if you're Chanel and you're the Wertheimer family, I still think you want to grow your business and make money for all of the reasons that Luca says. But you can think much more long term about it. I know a lot of CEOs, the former CEOs of Burberry, Diego de la Valle, a lot of CEOs are frustrated by the way short term quarterly market reports impact the way they have to make decisions. And so when you don't have to deal with that quarterly report from Luca, analyzing how your business has performed and all the other analysts, it really changes the way you can think about decision making with a kind of a short term versus a medium or long term mindset. And so I think when you have, you know, Mr. Delavalle, I'm pretty sure he delisted the company and went with El Catterton so he could take a longer term perspective because he felt like they might understand his business better. But let me tell you, El Catterton definitely wants that business to grow and they're going to expect a return as well. So, yeah, that would be the one thing I would just add in the landscape right now. Right.
- [55:34]
Luca
We've obviously we've talked about Chanel and Ms. And Vuitton and Dior, Gucci, you know, the big businesses. Do you sense there will ever come a time when a mid level or a smaller business would ever be able to catch up with them and operate at the same scale? Or do you think they have now separated themselves and they're almost operating in a completely different way? Almost in a, you know, almost in a slightly different industry from say something like Bottega or Loewe or Celine?
- [56:02]
Imran
There's no evidence of that. This is a very good question. We wrote a black book talking about the challengers dilemma. And at one point Kering seemed to be able to be a challenger growing faster than the leading brands in the industry. But that was coming on the back of becoming more visible and on the back of running a significantly higher risk in terms of at one point potentially getting consumers bored and wanting to go elsewhere and cutting corners in order to get this growth. And at the peak of the Gucci boom, M. Pinault was indeed talking about a potential catch up of Gucci with Witton. We remember all that distinctively. I think it's very difficult. I think it is very difficult because the nature of the industry is that you need to sell exclusive or perceived exclusivity. If you become like, think mu. Today, Mumiu is incredibly successful. They are really on the sweet spot. But maybe just because they're on the sweet spot, their risk of tiring the market in one year, in two years is very high because they are in a way a lot more visible. We've seen it a number of times that at one point smaller brands hit gold. Think Celine and the Fibi Filo think, you know, that we have plenty of examples and at one point they are in a way succumbing to that very success because they become too visible and people move elsewhere. So they tend to be a bit of a flash in the pan or they tend to have a sort of glass ceiling which today could potentially be around 2 or 3 billion euros. And that is very difficult to break through. It's a very interesting intellectual question. I'm not sure that I would provide an affirmative answer, but I'm very curious to see what Imran thinks about it.
- [58:06]
Johnny
I mean, I think it's very tough, honestly, for similar reasons as Luca, that once you have scale, you have built in advantages and trying to get scale when you have these dominant players who have all the best stores, who have a lock on the best advertising pages because they can buy in bulk, I mean, all of the things that matter and you know, who work with the top talent. I mean, we, we discussed a lot of this last time in our conversation just how the brands who have scale have such almost in the barriers to entry for other players who are trying to like compete with those dominant players is very, very hard. I do look at smaller, disruptive businesses like Jacquemus, who in a short space of time built a 250, 300 million euro revenue business. And it happened really quickly. And then he reached a ceiling where he just didn't have enough capital to continue to grow the business. He had to take on an investor. And it feels like there's these ceilings that these fashion brands hit that there needs something at every one of those ceilings to unlock. So that exists. That happens at 10 million, it happens at 50 million, it happens at 250 million, it happens at 1 billion. And as we see with Gucci, it happens at 10 billion even. And so to continue to scale a fashion brand is very, very challenging. And only very few businesses have proven the ability to do it. I did have a conversation with some people at Vito about how big that business could become one day. And maybe we'll discover that there is a ceiling at which you just cannot grow one of these businesses any further without making your business so available, so visible, so ubiquitous, that it becomes less and less desirable.
- [59:59]
Luca
I was interested, Luca, when you mentioned before about the alcohol and the spirits sector of lvmh and you said very rightfully that generationally the relationship that younger people have with drinking alcohol and the allure of champagne and spirits brands is very different now than it has been in previous generations. And I'm just curious to know, do you think there is a possibility that new generations of young consumers, as time goes on, may feel increasingly less aligned with the values of the big luxury brands? I mean, there could also be coupled with the fact they may not have the same brand, some of funds available to consume at the same levels as previous generations. But I'm particularly interested in this idea of the sort of the values and is kind of quote unquote cooled still a big factor commercially. And do the big brands, do they need to kind of reconsider what their values are and how they seem to be cool and appealing to emerging generations?
- [61:00]
Imran
We carried out an in depth study of, of how Gen Z consumers are using their spare time, how they're behaving, how they're feeling. It was very interesting to see that these younger consumers spend a lot less time with their peers. Didn't have in the same proportion the same social experiences that people 20 or 30 years older had, like going out, being part of a community, being part of a political party, having a boyfriend, having a girlfriend. Everything was further down and interestingly. Enough, there was also a very fragile sense of identity. And the answer to are you satisfied with yourself? Seemed to be collecting a significantly lower score than in the past. I think that to some extent the very significant exposure that social media has brought to people is corrosive to their sense of identity. And in this respect, I think that luxury goods brands could be even more relevant today because in my definition, they're a sort of identity crutch. You can look better because you have this or that product from a brand and that serves in a way as a support for your sense of identity for who you are in the community where you are. And I think that this has brought the ambition and the aspiration to luxury to be even broader and more universal than it had been in the past. So in this respect, I'm a bit more relaxed when it comes to affordability. We need to take into account that lots of changes have converged to make people afford luxury goods products, never mind the price inflation they have experienced. Well, first people are marrying later and later and so they can piggyback on their parents for board and lodging for a longer amount of time and spend their own salary for discretionary services and products. Then there's been a huge de averaging in the economy. You have the discount version of this and that. Think about budget airlines, think about Walmart, think about anything that you can save money on. Then there's the sharing economy capital expenditure that you would have committed in the past. Buying a car is no longer the order of the day for younger consumers. And then there's there's the huge effect that is coming from the inheritance that the younger generation is going to get from the previous generation at a time when in most countries the number of people is reducing, so there's a lot more wealth concentration. So with these things in mind, I'm quite comfortable that sort of the ground for luxury is still there to grow and to become more relevant.
- [64:25]
Luca
Imran, the last question to you, and I know it's a question that you often ask people that you interview and I wanted to turn it back to you. What does success look like for a luxury fashion brand right now in the current climate? There is so much uncertainty, there's so much change that is inevitably going to be happening over the coming months, over the coming seasons. Right now. What does success look like for a luxury fashion brand?
- [64:50]
Johnny
I was having this debate with someone at a dinner that we hosted the other night with McKinsey regarding our State of Fashion 2025 report. The CEO of a brand and you know for me, it's about alignment and clarity around strategy. And, you know, before you referenced a comment I had made last time around how creative strategy is a function of business strategy, I think I think the reverse is also true. Business strategy is a function of creative strategy. And where brands work best is where there is that impeccable alignment between the creative leadership and the business leadership. And I have seen this yo yo a lot over the course of my time in fashion. When I first arrived in this industry back in 2007, and I'd meet with so many creative people and business people, I got the sense that the creative people kind of looked down their noses at the business people, that they really didn't think the commercial part of fashion, the business of fashion was really the important part. You know, they thought, you know, everything on the business side should be downstream from the creative side. I think what we've seen recently is that the pendulum has swung the other direction and that actually the creative side of fashion has become downstream the business side, that the business side is dictating and making fundamental creative decisions. Say, like this brand has a bag of this shape that's doing really well because I heard it from this department store executive, so we need to have a bag of this shape as well, or, you know, any number of decisions like that which are made based on what's happening in the market and what retailers are asking for or what we see as happening as working as other brands. I think that's when we've ended up in this situation where everything looks the same everywhere. And so what I think it takes to be truly successful in this current climate is having that lockstep alignment, clarity, synergy between the creative and the business side of fashion. So that the strategy is coming from both sides together, sitting down and saying, how do we do something that's genuinely special? And in those rare cases where you see that alignment between a CEO and a creative director, it's pretty magical. And I think what we're seeing now, and you talk to a lot of the creative directors in the industry right now, that's not how they feel. They feel like a lot of the decision making, a lot of the creativity is being dictated to them as opposed to it being a conversation with them. And I think that's what we need to see now. So we were talking about all of those debuts earlier and how excited I am about it. But in order to make it work, it's going to have to come from a really nice synergy between the creative and business leadership at the brands that are going to be making all of these changes.
- [67:52]
Luca
I mean, you said it right. You said it's in the rare occasions when you've seen it and observed it, it often the results are incredible from a both from a creative and from a business perspective. And yet it's defined by its rarity. Yes, to be seen, to be seen. Thanks Imran. Thanks always for your time. Really interesting to catch up with you and with luca. I really look forward to seeing what happens in the next season, the next few months. We'll catch up then.
- [68:22]
Elise Hu
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