Microeconomics Individual Assignment  - By Ashila 

Gucci is a world-renowned, High End Italian Luxury, Fashion Firm.

The Gucci firm directly manufactures & sells Luxury Bags, Accessories, Footwear & Ready-to-wear Clothing. Gucci is ranked by BusinessWeek & Forbes as the “Biggest-Selling Italian Fashion Brand Worldwide” (Tony Mauro 2013).  The firm has managed to generate more than $ 4.2 billion in revenue (at the beginning of 2013), steadily increasing by 30% each year.

From its initial humble beginnings, the Gucci Brand was found & established by Mr. Guccio Gucci (in 1921), within his native home town of “Via delle Caldaie”, Florence, Italy. Together with his three eldest sons, he successfully established his first upscale “stand alone” boutique in Italy’s biggest trading center: “Palazzo della Mercanzia”. 

Within months, there was an overwhelming demand for his sought after handcrafted leather goods.The brand instantaneously captured the devotion of Italian Royals & Socialites.  Business was so outstandingly well that Mr. Guccio Gucci expanded his company. New stores opened in Milan, Rome, France, Spain, Portugal, as well as additional new stores in Florence. The main reason for Gucci’s prosperous success was their ability to produce such finely crafted leather accessories e.g. handbags, shoes, accessories, in their exclusive signature “Gucci Monogram” pattern. The manufactured products were distinctive & easily recognizable. No other brands (back then) were able to compete with their intrinsic high levels for detail, perfection and craftsmanship. Thus making the Gucci brand having small traits of being “Monopolistic”, (back then in the 1920's fashion industry).

Fast-forward to the present day, Gucci has now fully expanded internationally in over 230 countries worldwide, with over 500 exclusive “stand-alone” stores & counting. It only offers its products for the public only through carefully selected, standalone upscale city-center boutiques and through the e-commerce section of its official website. This is done to maintain the “exclusiveness” and “uniqueness” of their products. They do not sell their products through any other channels of distribution.

In my blog, I will solely focus on Gucci’s Asia Pacific Sector, and in particular: the Exclusive Gucci Boutique located in Pavilion Kuala Lumpur Malaysia. (above)

The Gucci Brand is considered to be in the Luxury Sector, as it solely only provides “Luxury Goods” sold at very high price points. The prices of goods at the Gucci Boutique starts at RM 680 for a Small Gucci Key-chain & can significantly increase to over RM 80,000 for a custom order Rare Breed“Salt-Water” Crocodile Skin Gucci Clutch Bag or at RM 95,000 for a Python Snake Skin Gucci Purse as pictured below.

Gucci’s key target markets are individuals with high levels of disposable income, (Upper Class & Upper-Middle income earners). These individuals are willing to pay more for goods, which are better in terms of quality, design & appearance, in comparison to less expensive substitute brands that are available. Gucci’s products can also serve as a “status symbol” to individuals; this is due to the fact that they can signify the purchasing power an individual can successfully splurge on.

Gucci uses skilled artisans to individually handcraft each product. Location: Casellina, Italy

All items manufactured & sold by Gucci are only made in Casellina, Italy (in the outskirts of Florence, Italy), they do not outsource their production plants to any other parts of the world. Many people may question why the Gucci firm only manufactures its products in Italy & not in Asian countries, where the cost of production (e.g. labor, land rental) is significantly cheaper.

In Gucci’s Moto: “The impeccable Luxury Italian Craftsmanship & Heritage”, (Nigel Parry 2013). The firm strongly believes in staying true to their strong Tuscan Italian roots. Gucci believes that the only way to maintain consistent High Levels of Quality for their products is to keep production methods the same as their founder Guccio Gucci (in the 1920’s.)

This wise decision made by Gucci shows how noble and reputable the brand strives to satisfy & please their consumers. Unlike other luxury designer brands e.g. Burberry, Marc Jacobs ,Prada that have recently move their Manufacturing / Production Plants to China & other parts of Asia to save  colossal amounts of money on their “cost of production”. The Gucci firm opposes this “new trend”, doubting that cheaper unskilled workers are unable to manufacture goods of the Italian Craftsmanship Standards. If goods are not produced to their standards, consumers might not be pleased with their end products. This can lead to negative damaging effects towards Gucci’s famed historical reputation, of manufacturing goods of high standards.

Below shows A Pie Chart of The Manufacturing Locations, For High End Fashion Firms (Similar to Gucci)

Figure 1

However there is a downside for Gucci to only manufacture its products in Italy. It leads to arising economic problems within Gucci’s economic structure.  As mentioned previously, due to Gucci’s intention to only strive for superior Italian workmanship to manufacture their quality products, It leads to inefficient levels of output, due to the fact that only 4000 employees are fully well versed in the full manufacturing process (Ella Alexander. 2013).

4000 employees may seem as a considerable vast number of employees for a firm, however when manufacturing for a global scale, for over 500 stores worldwide (including Malaysia), the labour workforce is unable to cope with high demands during peak seasons e.g. Christmas holidays, New Years, Valentine’s Day. During these phenomenal festive periods, individuals are most likely to splurge and purchase goods from the Gucci store. Resources such as leather & raw materials are available in large quantities; however the workforce is unable to cope with the high demands requested by consumers. In economic terms, this can lead to a “ceiling-cap” on Gucci’s rate of output, as the manufacturing force can only produce at a maximum potential level of output.

A Customer Making A Purchase From The Gucci Store. Kuala Lumpur, Malaysia

To resolve this issue, Gucci now allows individuals to pre-book and order items they desire from the store. This helps consumers avoid disappointment during peak holiday seasons when inventory stock instantaneously runs low. This pre-order procedure is also beneficial to the Gucci firm, it is able to inform the manufacturing plant based in Italy what consumers tastes and preferences are. If there is high pre-order demand in quantity for a particular good, the manufacturing workforce can increase production for the particular product. In this “win-win” scenario both the consumer is satisfied, as he/she is able to purchase the desired product, while the Gucci firm (producer) is able to maximize its profits by manufacturing more of the desired product for other consumers to enjoy.


The Demand & Supply Graph below Illustrates, How Demand for Gucci’s Goods Increase during the Festive Seasons. Due to the limited number of skilled laborers, the supply in quantity of Gucci’s handcrafted goods remains the same (unchanged). However, extremely high consumer demand for Gucci’s products during the festive seasons will cause the Demand curve to shift to the right.
 

Figure 2

There are many determinants that influence Gucci’s consumers, on what they purchase from the boutique.

Gucci is a highly sought-after Luxury label, therefore it is a common sight for Famous Celebrities, Socialites and Royals to been seen wearing / using Gucci products. When a publicly well-known individual photographed using a particular Gucci product, this immediately motivates fans and admirers to consequently purchase the same product. Therefore it can be firmly stated that Celebrities, Socialites and Royals play a big role towards Gucci’s output and sales figures, by directly influencing consumers on what to purchase. This can sometimes lead to trends in the fashion industry. (Cyril Foiret 2008) Gucci uses celebrities and VIP’s to its advantage by lending out its ready to wear collections & accessories to during red carpet events, so that they can be photographed in it. This can be seen as a form of free advertising for Gucci, as Celebrities & VIP’s are able to persuade consumers on what to purchase.

Heavy media advertising is also done by Gucci, in Well-Known Leading Men’s & Women’s Magazines, Television Commercials & through its direct website: www.Gucci.com

 Gucci carefully selects the choice of media to advertise in, this is due to the fact that it wants to maintain a level of “exclusiveness” and “superiority”. Gucci’s takes it media advertisements very seriously, as good advertising can help boost sales and increase overall brand awareness. Therefore Gucci has even spent a large substantial amount of money to hire Oscar & Academy Award winning Director David lynch to handle all its advertising aspects. (Cyril Foiret 2008)

An example of a Gucci Magazine Advert

Other important determinants that also influences Gucci’s sales and revenue figures includes Gucci’s  yearly men’s & women’s fashion show held in Milan Italy. From here prospective buyers are able to catch a glimpse of upcoming trends and styles.

Discounts & Sales also play a big role in the sales of goods. When old stock & past season’s items need to be cleared, Gucci generously slashes a hefty amount off the original price. Consumers who are financially conscious may be strongly attracted towards this benefit. Having regular in store promotions and sales, helps Gucci get rid of the Excessive Supply of goods that may seem no longer desirable to some consumers. This is due to the fact that the fashion industry is constantly changing; for Gucci to stay “ahead of the game” the firm must be alert and conscious of what trends in fashion consumers are looking for.

Bar Chart to show the main influences / reasons for customer’s in-store purchases

Figure 3

Gucci Malaysia did a survey for the year ending of 2012, to find out what were the reasons / influences for each customer’s purchase. A total of 600 customers were surveyed.  From the bar graph below, it can be deduced that money (price) was the main key factor individuals were conscious about. Due to the high rates of inflation, consumers were more calculative with their money. Secondly “Current Trends in Fashion” played a role in what consumers purchased, (at 20%). “Advertising” & “Celebrities” had the same equal impact on consumer’s purchases. Lastly Fashion shows had the least impact, this is due to the fact that Gucci only hosts its fashion shows in Europe. Therefore if local Malaysians were to view it , they would have specifically find & stream the video.


From the above bar chart, Gucci is able to know that having regular “Sales & Promotions” can help attract more customers towards it business & boost sales revenue.

Government intervention is executed to ensure that an adequate goods and services are being produced at the socially most desirable price. (Jodi Beggs 2011) This ensures that merit goods, beneficial towards the society are not under produced and that luxury goods are not overproduced.


In Malaysia, there is a significant number of local “Malaysian designer brands”, e.g. Zang Toi, Jimmy Choo, Melinda Looi. Therefore the government encourages the sale of “Made In Malaysia, By Malaysians” fashion products.  (Nina Hidayat. 2012)

Malaysian Fashion Designer, Datuk Jimmy Choo

  Therefore a high rate of Sales Tax / VAT (up to 10%) is added to the selling price of imported fashion goods. This adversely affects Gucci’ end selling price on its products, as prices are significantly marked up for the consumer.  

Figure 4

In this unfavorable scene, Gucci is forced to lose a large sum of potential consumers from its Malaysian boutiques. Malaysian consumers would be more willing to purchase Gucci’s products when abroad overseas in Europe. This is due to the fact that prices are significantly lower to due to scant tax rates in Europe. Transportation & handling costs for the goods are not incurred, when bought locally at Gucci Stores in Europe. Therefore consumers are able to save a hefty sum of money, when purchasing overseas instead of locally.



Luxury goods are said to have high income elasticity of demand (> +1). When people become wealthier, they will buy more units of luxury goods. (Mike Moffatt 2012)

Figure 5

All goods manufactured & sold by Gucci are considered to be Luxury Goods. When people’s income levels increase, it leads to a larger “increase in demand” for Gucci’s Manufactured Goods. (YED is greater than one).

However in Juxtaposition to this theory, when an unexpected recession or economic downturn occurs, these items are the first to be “let-go”. This is due to the fact that Gucci’s products are not items of necessity that are exceptionally needed for human survival.  

Gucci’s manufactured goods can also be considered as “positional goods”. These are products where the consumer can derive high amounts of satisfaction by not just from consuming the good or service itself, but also from being seen to be a consumer by others. In popular Asian Culture (Inclusive of Malaysia), Consuming luxury designer brands such as Gucci “can help display the level of one’s wealth.” (Andrew Roberts .2012) Individuals can feel more “self-confident” in society by owning luxury designer goods.   

Referencing

Andrew Roberts .(2012). Growth in Gucci's Fourth Quarter. Available: http://www.businessweek.com/news/2012-02-17/ppr-sees-growth-in-2012-after-gucci-slowed-in-fourth-quarter.html. Last accessed 17th October 2013.

Cyril Foiret. (2008). Gucci by David Lynch. Available: http://trendland.com/gucci-perfume-by-david-lynch/. Last accessed 19th October 2013.

Ella Alexander. (2013). Gucci Annual Profits Surge. Available: http://www.vogue.co.uk/news/2013/03/21/gucci-2012-profits-rise-by-17-per-cent. Last accessed 17th October 2013.

Jodi Beggs (2011). Government Intervention in the Economy. Available: http://economics.about.com/od/governmenttheeconomy/a/intervention.htm. Last accessed 17th October 2013.

Mike Moffatt. (2012). Production in the Short-run & Long-run. Available: http://www.tutor2u.net/economics/revision-notes/a2-micro-shortrun-longrun-production.html. Last accessed 19th October 2013

Nigel Parry. (2013). Gucci: A History Lesson. Available: http://www.wwd.com/fashion-news/fashion-features/history-lesson-3512770. Last accessed 17th October 2013.

Nina Hidayat. (2012). FASHION ACCESSORIES IN MALAYSIA. Available: http://www.matrade.gov.my/en/malaysian-exporters/showcasing-malaysia-export/directory/malaysian-products-directory. Last accessed 17th October 2013.

Tony Mauro. (2013). Company Overview of Gucci . Available: http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4307107. Last accessed 17th October 2013.

Yuval Atsmon. (2011). Tapping the luxury-goods market. Available: http://www.mckinsey.com/insights/marketing_sales/tapping_chinas_luxury-goods_market. Last accessed 20th October 2013.

Bibliography

Frida Giannini (2011). GUCCI: The Making Of. Italy: Rizzoli. p70-73.

Xu Tianran. (2011). Asia-Pacific has become largest Gucci market . Available: http://www.globaltimes.cn/NEWS/tabid/99/ID/686459/Asia-Pacific-has-become-largest-Gucci-market.aspx. Last accessed 17th October 2013.