A Letter to Kering’s New CEO

It’s worth commending Luca De Meo’s courage in trying his hand at the helm of a company facing serious issues in a sector that’s new to him. De Meo has had an outstanding career in automotive, with major achievements at Fiat Chrysler, Volkswagen and Renault. The announcement of his departure from Renault for Kering produced a combined €3.6 billion share price move, when the decline at Renault and the increase at Kering are added together. That said, the road ahead won’t be easy.

At Kering, there are two immediate priorities that De Meo needs to tackle:

1. Debt levels must be curbed

Kering embarked on a major M&A and capex spree just as business performance was sinking: Valentino, Creed, real estate, Maui Jim. In total, a good part of €14 billion was spent on these acquisitions, even as growth at both flagship Gucci and some of its other key brands started to slow to the tune of double-digit revenue declines. Continuing to sell back real estate (at a loss) seems a bitter but necessary medicine. Could the group also strike a larger deal with Mayhoola, trading Kering equity for the rest of Valentino? That may well be worth exploring.

2. The management organisation must be fixed

a) I see less and less logic in the dual co-CEOs structure. With company outsider De Meo replacing François-Henri Pinault as CEO, there would likely be too many cooks in the kitchen if a hands-on chairman, a CEO and two co-CEOs were to coexist. Not to mention the brand CEOs.

b) It is important to eliminate the ‘moral hazard’ the brand development position creates. Who will call the shots on Gucci and the other brands? The brand CEOs? The co-CEO responsible for brand development? The group CEO? The chairman? It seems appropriate for brand CEOs to be in charge of their business and fully responsible for it. This eliminates a potential disconnect.

c) It is vital to ensure the right leaders drive the brands, and that their teams are up to the task. Gucci’s performance raises serious questions about its leadership, especially if we look at the high churn in the brand’s core team. Relaunching a brand is a matter of vision (where the brand has to go to find success); team (who is needed to get there); and execution (how well one does what is needed).

d) Miracle expectations on designers need to be put into perspective. Designers are important. But they operate in the context of a vision from the CEO, and in coordination with all other company functions. There appears to be a lack of urgency amongst management “as Demna will fix the problem.” Or even worse, an implicit delegation to the designer of elements management must provide.