Written by: Maria Arratibel Ayesa, Bianca Boranda, Alejandro Garcia-Salmones Martinez, Markus Schuelde
Background and Business Model
Gucci is a well-regarded Italian fashion house that’s been around since 1921. It is the darling of luxury products conglomerate Kering as it’s been growing at an impressive rate since a relaunch in 2015 helmed by new CEO Marco Bizzarri and creative director Alessandro Michele. For instance, in 2017, Gucci posted an EBITDA growth of just over 60%, which was 20% higher than that of comparable players.
Gucci has a standard business model as other fashion houses: it sources high-quality materials, and it creates trendy and aspirational products; it uses strategic locations for its network of retail stores and partnerships with high-end department stores; its fashion shows are memorable and filled with influencers.
Where Gucci stands out from other top luxury players is in its unique creative and merchandising strategy put together by the duo mentioned above. Its products are undoubtedly exclusive, yet the company managed to create a culture of inclusiveness and a cult factor for their staple products (like the sneakers or the fur-lined loafers). It has also employed an intelligent digital strategy in which it worked with lesser-known influencers to post organic content and drive home the feeling of authenticity. Finally, its global marketing strategy has been aptly adjusted to the needs and emotions of the local clientele, thus managing to secure substantial market shares in countries with growing middle-classes such as India and China.
Climate change impact on Gucci
According to the Carbon Disclosure Project (CDP), around 50% of the average company’s CO2 emission stems from the supply chain. For Gucci, this statistic is even more concerning – 67% of Gucci’s CO2 emissions occur in raw material production and its initial processing stages. Hence, significant changes in the early stages of the supply chain are necessary to become sustainable.
Gucci is particularly affected by climate change due to the dependency of raw materials such as cow and calf leather, sheep and lamb leather, silk, vicuña, cashmere and (extra fine) cotton. The raw material quality is critical to creating outstanding products. Climate change will have a significant impact on agricultural production and hence raw materials considering temperature changes, water scarcity, and implications from catastrophic climatic events, such as cyclones and droughts. These developments will lead to less availability of raw materials. Thus, limited geographical availability and dependence on natural systems lead to business disruption and increasing cost. Gucci needs to make a more significant effort to source these materials or think about innovative ways to substitute these raw materials.
Furthermore, climate change affects the behaviour of major stakeholders, i.e. consumers, and regulators. Consumers all over the world become more aware of their environmental footprint and are more conscious about their purchasing decisions. The demand for products with high CO2 emissions and a negative environmental footprint is likely to decrease in the next years. Also, regulation is continuously adjusted and is expected to affect the way Gucci is doing business. For example, in 2008, China already modified their regulation and prevention of freshwater pollution impacting Gucci’s manufacturing process.
To remain the leading luxury fashion player in the long-run, Gucci needs to develop a sustainable supply chain via enhanced efficiency and innovative approaches for raw material production.
Gucci’s response to climate change
Gucci announced an ambitious plan to become carbon neutral throughout its entire supply chain. It extends into the deepest manufacturing operations, including the tanneries where it sources the leather and the factories where raw materials are processed. Gucci committed to offsetting each unit of carbon that is not possible to eliminate. Through a partnership with the UN, Gucci offsets the non-eliminated emissions by investing in forest conservation projects in developing countries. All of the brand’s emissions from 2018 have been measured and offset. The company is currently tracking its 2019 emissions due to being offset before the end of the current year.
However, many climate activists state that offsetting alone is not enough to avoid the worst impacts of climate change and that companies need to reduce the amount of carbon they produce proactively. Along these lines, in 2015, Gucci started a 10-year program to reduce its emissions by 50%. The brand has worked on reducing its footprint in many ways, from upgrading to more energy-efficient machinery to up-cycling leather scraps. As of 2019, it had already achieved a 16% reduction.
Furthermore, under the umbrella of its conglomerate, François-Henri Pinault (CEO and Chairman of Kering) led a coalition of 32 companies in the fashion and textile industry that pledged to work towards making the industry more sustainable. The Fashion Pact is unprecedented and focuses on actions in three essential areas: global warming, biodiversity restoration and oceans protection.
Besides, Gucci has been sharing its environmental profit & loss financials (EP&L) since 2015. It also has committed to offsetting the emissions of its fashion shows, by compensating its guests’ carbon footprint and reusing the set of the shows in its shops.
Overall, Gucci has shown its commitment to take actions to eliminate the footprint of its company. It has also led the efforts to decrease the environmental impact of the fashion industry as a whole. However, many argue these efforts will not be enough to compensate for the industry-wide problems of overconsumption and overproduction.
Additional steps that Gucci should take to capture climate-related opportunities
As seen above, Gucci has established ambitious environmental goals, especially with regards to maintaining the carbon-neutrality of its entire value chain. The means by which this is accomplished have an evolving nature, nevertheless. Gucci currently offsets the emissions incurred during the processing of its products, although it also proactively works towards reducing the current levels of emissions. The next step in this direction could be to ensure the carbon neutrality of its supply chain operations without recurring to carbon-offsetting activities. Such could be accomplished through the application of cradle-to-cradle design principles. It would also have two additional key advantages:
- Higher scalability of the carbon-neutral operations and
- Extended benefits of carbon-neutrality to other downstream players in the luxury fashion space. For instance, if other luxury retailers use Gucci’s providers, they would also benefit from a value chain that is carbon neutral on its own, without further need to offset activities.
Additionally, the current accounting of carbon emissions is still being refined, and more general sustainability accounting principles which are universally accepted and applicable are under development as we speak. Gucci can maintain its status as a sustainability champion in the luxury fashion industry by pioneering the swift application of the new (more rigorous) sustainability standards as established by, for instance, the Sustainability Accounting Standards Board (SASB).
Very interesting blog. Didn’t know luxury companies like Gucci are so much impacted by climate change too! It would be nice to know what is the reason behind the drop in EBITDA in 2018. Is it somehow related to climate change?
That’s a great question, Vivian. I believe the EBITDA growth decrease is two-fold:
1 – The spike in the first two years since the revival of the brand was so large that it wasn’t sustainable to maintain indefinitely – from my perspective, it was bound to drop.
2 – You can also see a similar trend for its peers as well, albeit not at the same rate. Thus, the industry slowed down a bit, too. There can be many reasons for this, including some degree of saturation in fast-growing markets such as China and India, but also a shift in the consumer mindset becoming more sustainable and buying fewer clothes overall.
Amazing post! It was great to know that they are up-cycling their leather scraps. Such circular economy measures have a positive effect beyond climate action. Maybe it also has a direct economic sense of raw material cost reduction. I wonder how they will reduce the remaining 34% of emissions in the next 5 years. Perhaps shifting 100% to renewable energy and changing their future designs to be more sustainable (e.g., use less leather)?