Major Strategic Shift for Luxury Conglomerate
Kering‘s newly installed chief executive Luca de Meo has pledged rapid and sweeping changes to the luxury group’s structure and strategy, according to reports, following the completion of a €4 billion deal to sell its beauty operations to L’Oréal. The executive, who recently joined from automotive manufacturer Renault where he engineered a significant turnaround, indicated this transaction represents just the beginning of his transformation agenda for the Gucci-owner.
Sources indicate de Meo moved quickly to finalize the beauty division sale, telling the Financial Times that “you’ll see others” as part of his comprehensive overhaul plan. The luxury sector, which experienced substantial growth during the pandemic driven by housebound consumers and Chinese market expansion, has since faced headwinds from reduced consumer spending and economic challenges in China.
Refocusing on Core Fashion Brands
Analysts suggest de Meo’s primary objective involves sharpening Kering’s focus on its fashion portfolio, particularly its flagship brand Gucci, which reportedly accounts for approximately half of group sales and two-thirds of profits. “The urgency is to focus on the things where we have a critical size and skills,” de Meo stated in an interview. “That will help me lighten the boat and be able to focus on the relaunch of fashion brands.”
The report states that Gucci has fallen out of favor with consumers in the challenging luxury market, compounded by over-dependence on China when demand in that country slowed. Industry observers note that this strategic refocusing comes amid broader market trends affecting global luxury retailers.
Beauty Division Acquisition Details
Under the agreement terms, L’Oréal is acquiring perfumer House of Creed along with 50-year licenses to develop and sell fragrances under the Gucci, Bottega Veneta, and Balenciaga labels. The French beauty giant will pay undisclosed royalties to Kering in return. According to sources familiar with the situation, negotiations accelerated from August, though they had begun before de Meo’s arrival from Renault.
L’Oréal’s chief executive Nicolas Hieronimus reportedly described the transaction as the company’s largest acquisition ever, stating it would cement L’Oréal’s position as the high-end beauty market leader. He indicated the company would initially concentrate on developing Creed, with ambitions to nearly triple its annual revenues to €1 billion “fairly quickly.”
Financial Implications and Future Moves
UBS analyst Zuzanna Pusz suggested the €4 billion proceeds would help Kering substantially reduce its debt, thereby addressing “one of the biggest investor concerns.” According to the analysis, the transaction could decrease Kering’s net debt from 3.1 times EBITDA to approximately 2 times, potentially outweighing impairments the group has taken on parts of its beauty business.
De Meo reportedly remains “pragmatic” regarding additional potential asset sales, including the possible disposal of Kering’s successful eyewear division. While acknowledging he doesn’t “want to close the door,” he highlighted that the eyewear business remains important to valuable clients and represents the industry leader in high-end segments.
Market Reaction and Growth Potential
Kering’s shares reportedly increased 4.1 percent following the announcement, extending a rally of more than 80 percent over the past six months. This performance reflects investor optimism that de Meo can successfully reposition the group and that the broader luxury industry malaise may be easing. L’Oréal’s shares edged up 0.3 percent on the same day.
Hieronimus noted that L’Oréal currently generates about €3 billion in annual beauty revenues from Yves Saint Laurent, another Kering brand, slightly exceeding YSL’s €2.9 billion fashion sales last year. This comparison suggests substantial growth potential for Gucci’s beauty range, which reportedly generated only approximately €600 million in revenues last year compared to the label’s €7.7 billion fashion revenues.
The transaction represents significant industry developments in the luxury and beauty sectors, with implications for how conglomerates manage brand portfolios. According to people with knowledge of the situation, Spanish fragrance and fashion group Puig also expressed interest in Kering’s beauty division, but ultimately the partnership with L’Oréal offered a more logical and expansive arrangement.
Looking forward, related innovations in brand management and portfolio optimization may emerge as luxury groups navigate changing consumer preferences and economic conditions. De Meo’s transformation of Kering will be closely watched as an indicator of strategic approaches in the evolving luxury landscape.
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