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To maintain growth momentum, Gucci is bringing production in-house

by Hilary Milnes

Gucci isn’t slowing down, so Kering is revamping its production process and manufacturing network to account for the brand’s continued growth.

In the third quarter of 2017, Gucci’s revenue rose 49 percent on a comparable year-over-year basis, to $1.9 billion, beating out the first half of the year, which saw a 43 percent increase in revenue. Overall, Kering had a 23 percent lift in revenue, to $4.6 billion.

According Kering CFO Jean-Marc Duplaix, the group’s priority is to realign Gucci’s production cycle, in order to faster respond to customer demand as it continues to scale. To support that rate of production, shorten lead times and move the brand closer to being a vertically integrated organization, the company is in the process of opening the Gucci Art Lab, a design and production facility, in early 2018.

“We’re confident Gucci will maintain this growth of market share,” said Duplaix during a call with investors on Tuesday. “In this regard, significant investments have been committed to the supply chain, with a focus on preserving manufacturing know-how, fostering innovation and increasing vertical integration to reduce lead time.”

The Gucci Art Lab, which will be a 35,000-square-foot space in Italy, will specialize in manufacturing leather goods and shoes. The center will employ a full-time staff dedicated to responding to customer trends, sourcing sustainable materials (the brand banned the use of fur this month) and keeping the Gucci supply chain closer to home, in order to speed up the rate at which new capsule collections can be released.

“This is a step toward internalization of production, especially leather goods,” said Duplaix. “Over time, there will be better control over product development, sampling and material development.”

Better control over product development and lead times — getting new products to customers faster — also supports the brand’s push of direct retail sales. Gucci has been in the process of overhauling its physical store network to match the brand’s “New Store Concept” initiative: The goal is to turn the spaces into more experimental, digitally driven shops that specialize in cross-channel customer service. Right now, about 25 percent of its 550 stores have been remodeled, with 30 more stores to be completed by the end of the year.

The effort to emphasize Gucci-owned stores is paying off: In the third quarter, sales in Gucci stores increased by 51 percent, with sales in directly operated stores now accounting for 83 percent of overall revenue. While Kering doesn’t break out online sales for individual brands, the company reported that across brands, online sales were up 80 percent.

While Duplaix said that full control over Gucci’s prices and distribution would be “arrogant” to expect, he added that the bulk of sales growth is being driven by full-price purchases. Wholesale revenue for the brand was up 43 percent for Gucci, and Duplaix noted that the department store “problem” was significant to the U.S. market and not affecting wholesale retailers in other regions.

“This brand momentum is boosted by a network of operational investments at Gucci,” said Duplaix. “We’ve continued to improve the replenishment process, maintain exclusivity and regain control over the supply chain. The reason why, at the end of the day, is that it gives us the levers to improve the performance.”