Structural integrity – transforming the Kering Group

10 June 2014

Kering Group is behind some of the world’s best-known luxury, and sports and lifestyle brands, from Gucci to Puma, and its latest move to exit the retail market and focus on its key brands has involved a great deal of effort from its finance team. We spoke to CFO Jean-Marc Duplaix about the transformation process and the company’s plans for the future.

There is sometimes more to a change of name than meets the eye; sometimes, the change is about more than marketing, and, in the case of the Kering Group - formerly known as PPR, an abbreviation of Pinault-Printemps-Redoute - it heralded a major shift in focus. In recent years, the company has been moving away from retail operations to become a pure apparel and accessories group in luxury, and sports and lifestyle markets by emphasising its core brands - Gucci and Puma.

Kering first divested some of its retail holdings in 2006, starting with the sale of high-end French department store franchise Printemps. More recently, it has also sold off home furnishings retailer Conforama and listed Fnac, a well-known seller of books and consumer electronics, through a distribution of the shares to Kering shareholders. This ongoing process of changing the company's focus is part of the DNA that Kering has inherited.

"The company has been reinventing itself since 1963," says Kering Group CFO Jean-Marc Duplaix. "In the late 1990s, for example, PPR was a B2B and B2C business, but it realised that it had to initiate a different state to capture growth in emerging markets and to deal with the challenge of the online retail model.

"A later part of that was our takeover of Puma in 2007, which is part of a strategy to focus on two flourishing market segments that are supported by very buoyant demographic and sociological trends, in particular in the emerging countries," he continues.

"In its new structure, the company feels more agile and adaptable, so it can respond to the deceleration of economic growth in mature markets and the continued high growth rates in emerging economies."

"In 2013, we adopted a new name and a new identity. Kering now has 22 brands in two sectors, luxury, and sports and lifestyle. Selling Printemps in 2006, and more recently demerging Fnac, along with other company sales, is a big step in the transformation of the company, which is moving away from retail operations and becoming a business that is more integrated with the opportunities around the world. Our retail operations were mostly focused in Europe and especially France," he adds.

The next retail operation to be sold off is mail order business La Redoute. France's CFDT trade union recently chose to back restructuring plans, giving the green light for the business to be bought out.

A form of progress

In its new structure, the company feels more agile and adaptable, so it can respond to the deceleration of economic growth in mature markets and the continued high growth rates in emerging economies, which is fuelling demand for luxury goods in China, Vietnam, India and across South America.

This growth could be key to revitalising the company's key brands, Gucci and Puma, which have been under pressure in recent times. In 2013, sales at Gucci fell by 2.1% (up 2.2% at comparable exchange rates), though across all of its luxury brands - including Gucci, Balenciaga, Stella McCartney and Alexander McQueen - profits rose by 4.4% to €1.7 billion. Much of this was counterbalanced, however, by the poor performance of the Puma brand in the sports and lifestyle market.

"The focus is now purely on our brands and their exposure in different markets. There is still solid development in mature markets such as Japan and the US, but global demand for luxury goods in China, for example, grew by 19% in 2012.

"It may be more muted now because of a complicated environment of political transition, but the long-term trend across a number of emerging markets is towards a growing middle class and an increase in purchasing power," observes Duplaix.

The function of finance

The transformation of the company has presented many opportunities for Kering to improve its financial footing.

A series of acquisitions that began in the late 1990s was heavily financed with debt, so Duplaix and his team have worked hard to improve the company's debt position.

Now, the company's debt is 1.7 times EBITDA, two thirds of which is on the market in bonds, themselves now having improved maturities. The company's credit rating has also improved to BBB.

With a new strategy in place and a view on extending the presence of its key brands further into the four corners of the world, Kering has had to look very closely at its internal structure.

Changes to the overall composition of the group - as retail operations were sold off and the emphasis moved to honing the supply chain from manufacturing stage to marketing - have meant that the nature of individual functions within the business has had to adapt accordingly.

The finance function has had to react more quickly than other elements of the business in order to facilitate the transformation across the rest of the business.

"We had to change the organisation of the finance function in order to fit the new profile of the group. It had to be international, which meant attracting talent with an international background to be able to reshape the organisation.

"We need manufacturing capability, support and expertise across many regions. Our key centres are in Paris, New York and Hong Kong, and we have shared services in Shanghai and in the major Asian cities for the transactional areas of finance," says Duplaix.

"Finance encompasses real estate, legal and tax on top of usual finance functions, and its focus now is to improve performance management and controls for each of these functions, and for regional operations.

"We must translate the strategy into the right financial metrics. The budget, the profit and loss, cash flow generation and many more metrics have to be translated into action plans."

Across a business that encompasses many different regional operations and a large logistics platform in Switzerland, there is already a robust infrastructure in place for capturing the data required for financial metrics. The challenge is to use that data to maximum effect in steering the business in its new form.

"The main task now is to set the right objectives - which may differ a lot between retailers of geographical locations - that may not be directly comparable in terms of profitability," says Duplaix. "The complexity comes in the operational execution of our strategy for growth in markets where different factors are at play."

This not only comes back to having the right expertise in specific markets but also requires that the finance function have the right tools and know-how to support teams across all parts of the business - and in every region.

"We had to change the organisation of the finance function in order to fit the new profile of the group. It had to be international, which meant attracting talent with an international background to be able to reshape the organisation."

"We need a different profile of people in the finance function - people who have the ability to anticipate change. That is a very important quality now," says Duplaix.

"We must understand the competitive environment, changes in local factors such as regulation, for example. We need to have a well-balanced team of experienced people. Finance must have the credibility to talk with the top management of each brand and propose the right actions to take those brands forward."

Change at the top

Transforming the finance function to suit a new kind of organisation requires more than building new teams of finance professionals that can work across brands and geographical boundaries: it also requires the head of the finance function to embrace a different paradigm from that which defined the early days of Duplaix's career.

"The CFO role has changed a lot. The organisation needs a CFO that does not just focus on the numbers and the control of financial processes. It needs a CFO with a more global view and a creative approach. A good CFO is one with a strategic vision, who can act as guardian of the rules across global operations," he says.

"Looking more broadly, the company now has a more international team, and only around 5% of the workforce is located in France. We have built up our understanding of emerging markets, so we are now very well positioned to take advantage of possible acquisition opportunities to consolidate in key markets. This could be part of our strategy to meet competitive challenges."

Duplaix has many important tasks at hand as he looks at ways of raising debt for a business that has a more complex international structure and examines the most efficient ways of managing the currency issues that Kering's new shape brings up.

At the same time, he is helping to shape a strategy that hinges upon maximising the synergies between the company's many brands, and he is looking out for the right opportunities in the M&A market.

"The internationalisation of the group is a never-ending road. We are looking, for instance, at new shared services centres, and Singapore is one of the options. We have to look at cash management too, and we are working with different banks, whereas ten years ago we were working mainly with French banks," he says.

Kering is reinventing itself and the process is far from finished. Now, the company's ultimate destination is to a large extent in Duplaix's hands.

Jean-Marc Duplaix is a graduate of HEC and holds a DESCF degree in accounting and finance. He began his career at Arthur Andersen as project coordinator and later director from 1994 to 2004. He has also been a board member of the FC Girondins de Bordeaux football club,TF6 and Série Club.