Gucci Group: The ice cream man cometh

Polet, wearing a velvet Bottega Veneta coat, tries out a 2007 Gucci bicycle on a Milan street.

Polet and Gucci Group executives Viglezio (left) and Lombardo on the company plane

Cooking is one of Polet's hobbies. Here he prepares dinner at his home in London.

The Gucci gang in Milan

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The Polet Effect

The Gucci Group has outperformed even its own expectations. Here's how six of the ten brands have fared.

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(Fortune Magazine) -- Three months after Robert Polet took over as chief executive of Gucci Group in July 2004, he gave his new colleagues a glimpse of the self-confidence and single-mindedness that landed him the job in the first place - and that have contributed to the company's stellar performance ever since.

The occasion was a management conference at PPR, a retail and luxury conglomerate controlled by France's Pinault family. The Pinaults had just spent $8 billion acquiring Gucci, and they astonished the fashion world by not renewing the contracts of American star designer Tom Ford and the Italian CEO, Domenico De Sole, who had rescued Gucci from bankruptcy in the early 1990s and turned it into a red-hot worldwide brand. When PPR appointed Polet, an industry outsider, to replace De Sole, the reaction was an outpouring of skepticism bordering on derision. Polet had spent his entire career at the Anglo-Dutch consumer goods company Unilever, and many of the gibes were related to his most recent job as president of the global ice cream and frozen-foods division. "Can the emperor of ice cream survive under the hot lights of high fashion?" was the lead on the New York Times story. Even The New Yorker joined in, running a cartoon that showed street vendors hawking Gucci handbags from carts like snack food.

But by October the big question inside PPR was this: What sort of a person is Robert Polet, and what's he up to? There were already signs of change afoot, not least some new hires and an exodus of executives close to De Sole. At the PPR gathering, in Lisbon, Polet climbed onto the rostrum and, in front of then vice chairman François-Henri Pinault and 400 top executives, offered a first look at his plans to reorganize the Gucci Group, which included doubling its size and making profits grow faster than sales. And then, as the session was thrown open to questions, he looked at his watch and apologized. It was his daughter's birthday, he said, and he had promised her he wouldn't miss it. And with that he left for the airport. "Everyone just slid down in their seats," recalls Karen Lombardo, the group's head of human resources.

Polet, 52, has made a habit of thumbing his nose at protocol. A boyish-looking Dutchman with a sunny disposition who frequently whistles in the office, he has a favorite exhortation for people who work for him: "Break the rules." It's not just abstract talk. At several junctures in his career, Polet has ridden roughshod over long-established practices, at times even disobeying orders given by superiors. That's how Unilever came to be a pioneer of liquid margarine and why its once-messy ice cream operations became profitable. It's also very much the story at Gucci. That an outsider should be appointed to the top job was unusual enough in a notoriously clannish industry. But Polet's hands-off management approach - he calls it "the art of letting go" - and his unwavering focus on improving performance stand out in a business in which hemlines have traditionally been more important than bottom lines. Within weeks of taking over, Polet had turned the organization on its head. The Gucci he inherited had been a "Tom & Dom" show, in which Ford and De Sole had called all the shots. Polet immediately pushed authority down to each brand in the group, giving the creative and business directors a degree of autonomy exceptional in the industry.

The result has been the biggest surprise of all. Far from hastening the downfall of Gucci, as some fashionistas predicted, Polet has led the group through three years of booming sales and even faster profit growth. Gucci Group comprises ten luxury brands, eight of which, including Bottega Veneta, Balenciaga, jeweler Boucheron, and couture house Yves Saint Laurent, were losing money when Polet took over. The group's margins still aren't as fat as those of archrival LVMH. But in a boom time for luxury goods firms, it has easily outperformed the sector. Group sales have risen by more than one-third, while operating income has more than doubled. Analysts say all the brands are now profitable except YSL, whose losses have been cut by two-thirds and which could break even within the next two years. As a result, the group's overall operating profit margin has soared, from 10% in 2003 to 16% at the end of 2006, and it's expected to jump to more than 18% when 2007 results are reported.

François-Henri Pinault, now chairman and CEO of PPR, is delighted. The Gucci Group's performance has exceeded even Polet's own ambitious 2004 forecasts. PPR stock, which dropped on the announcement of his appointment, is up about 50% since, outperforming LVMH. Polet "has done exceptionally well," Pinault says - so well, he's willing to forgive him for walking out of the Lisbon event.

The initial skepticism of many of Polet's peers has also disappeared. "Everyone was a little nervous after Domenico left, but the transition turned out to be uneventful," admits Ronald Frasch, president of Saks Fifth Avenue, which carries many of the group's brands. "I'm very impressed with Robert. I find him to be open-minded, very direct, very transparent, and a fine person to do business with."

Three years of great results haven't convinced everyone. Some argue that Polet is still living off the legacy of his predecessors. David Wolfe, creative director at New York fashion consultants Doneger Group, says the Gucci brand's catwalk shows are receiving less rave coverage than they did when Tom Ford was the designer and contends that "once the media is no longer giving the hype, it ripples out and affects sales in a way that has nothing to do with the catwalk." Gucci "has lost its fashion edge," Wolfe says, although he concedes "it takes a long time for the momentum to die."

Mark Lee, whom Polet moved from YSL to run the flagship Gucci brand in 2004, isn't seeing any loss of luster. Quite the contrary. Sales jumped by 16% in 2006, and last year the brand reduced markdowns because of the success of designer Frida Giannini's collections. "The word in the industry was that there was no hope for the brand, that there was a lack of leadership and a lack of creativity," he says. Given the rapid growth in 2005 and 2006, "we've now proved everyone wrong."

Yet Polet does have an immediate problem: a flagging U.S. economy and the slumping dollar. They hurt the group because most of its costs are in euros, but less than half its sales are in Europe; the U.S. alone accounts for about 20% of revenue. Along with its rivals, Gucci Group has reacted to the currency fluctuations by raising prices. Saks's Frasch says he's seeing "significant" price increases for fall collections of up to 15%. While price hikes might work as long as demand is buoyant, there's growing nervousness in the industry that a slowdown could be in the offing. Pinault acknowledges "we can't raise prices indefinitely," but he remains upbeat. "We're not worried about the U.S.," he says. "Even in the short term, we aren't seeing a slowdown of luxury in New York. Even with the exchange rates, there will be significant growth in 2007."

Polet won't offer any financial projections, but ask him what hasn't worked out since he took charge, and he answers simply: "Exchange rates." Yet he reckons that the biggest challenge "is complacency - that we start to believe too much in ourselves." If success hasn't gone to his head, he does allow himself one small moment of satisfaction by recounting a story about an industry conference in Dubai in 2005. Polet was a keynote speaker. Introducing him was Suzy Menkes, the International Herald Tribune's fashion writer and a doyenne of the industry. The gist of what she said: We all mocked you as the ice cream man, and you have proved us wrong. "That was a nice moment," Polet says. "It made me feel good."

When Polet sat down in Amsterdam in November 2003 with Béatrice Ballini of Russell Reynolds, the headhunter conducting the Gucci CEO search, his first words were, "I'm a modern gypsy." Born in Kuala Lumpur, he went to school in Britain and the Netherlands, got his MBA at the University of Oregon, and was sent by Unilever to Belgium and Malaysia. He reckons he has moved from country to country 11 times. That background fit well with Ballini's brief. PPR was looking for someone with international experience above all and a strong track record of managing brands and groups of brands. Polet had that in spades. All jokes aside, Unilever's ice cream division was an $11 billion business - more than twice the size of Gucci Group today - and in Polet's three years running it, he drove the operating margin from 3% to 15%. "There was a very important misunderstanding about the nature of the job," says Serge Weinberg, then PPR's chief executive and still on Gucci's board. "It wasn't about choosing someone to design dresses." With PPR founder François Pinault and his son François-Henri, Weinberg ordered a broad search to include executives at consumer goods companies, not just the usual fashion industry suspects. The reason was that, in PPR's analysis, Gucci had changed in nature as a result of a three-year spending spree by Ford and De Sole, during which it snapped up YSL, Bottega Veneta, and seven other brands. The Pinaults had ridden to the rescue of De Sole, who invited them in as "white knights" to counter a 1999 hostile takeover bid by Bernard Arnault of LVMH. The battle was bitter and protracted, and once it was over, PPR began to worry about what it had acquired. "Gucci was in a sort of awkward organization, with lots of centralization," Weinberg says. "The balance of power between designers and managers was absolutely wrong, and the ability to follow a reasonable business line in each brand was impossible." Moreover, "the results were just not there." Adds François-Henri Pinault: "De Sole did a very good job at Gucci, but he didn't have the experience to run a multibrand group."

De Sole disputes that judgment. "The company was a big success," he says. "In 1994 it was broke, and we sold it for billions." As for the structure, he says, "we had an excellent team in place."

Polet is careful not to get drawn into this debate and has gone out of his way not to trash his predecessor's legacy. He called De Sole on the day he was appointed and later visited him at his home in South Carolina. "It was important to understand the culture of Gucci Group and what it represented," Polet says. He had every reason to tread carefully: De Sole, a flamboyant lawyer who would round up staffers at the end of the day and take them out to dinner, hired many of the people still in the group and retains their affection.

Polet's pragmatic management style is derived in part from his own experiences. He learned early lessons on the virtues of autonomy as an up-and-comer at Unilever, which put him in charge of its Malaysian operations when he was just 35. Polet remembers how difficult the situation was: stagnant revenues, paltry profits, and a dysfunctional board whose Chinese, Malaysian, and German members weren't on speaking terms. One day, faced with a particularly tricky issue, Polet put in a call to Unilever's head office to ask for help. The advice that came back was simple: Take a piece of paper, write down all the options available, and pick the best one. "The next morning I said to my wife, 'They're right,'" Polet recalls. "It's only by going through tough experiences that you can grow."

Polet also soon discovered the joys of experimentation. Jan Zijderveld, who worked for him twice at Unilever and is now chairman of that company's North Africa and Middle East operations, recalls how Polet was determined in the mid-1990s to try out production of liquid margarine. His boss at the time balked at the idea, but Polet went ahead anyway, secretly buying a machine and setting up a pilot line in the back of an existing factory. Liquid margarine has gone on to become a big hit. "Asking for forgiveness," Polet says, "is better than asking for permission." Says Zijderveld: "He hates rules. He believes in keeping it simple."

That same spirit of self-reliance and pushing the limits is taking hold at Gucci Group. Some functions, such as IT, global communications, and human resources, remain coordinated at the slimmed-down group head office in London, but everything else has been kicked down to the brands, which have full responsibility for their profits as well as their products. In exchange for their newfound control, the brand CEOs must sign a two-page document that spells out which issues need to be elevated to the group level, and every year they work through a strategic plan with Polet for the next three years. Every month they give him a detailed performance report, and the group's top management gets together four times a year. But that's about it for the formal part. Polet has dubbed his system "freedom within a framework," and executives say it took time to get used to. For one thing, it's different from the way most luxury companies run their operations. It's also a break with the past. "With Domenico, if you had a problem, you would go to him, and he would fix it in half a nanosecond with a phone call," says one former executive. "With Robert, you pick up a bag and go to Italy and work it out yourself."

The brand heads say they find the autonomy empowering. "I don't need someone who keeps telling me what to do," says Patrizio Di Marco, who runs Bottega Veneta, which has become the big growth story of the group, swinging from a $10 million loss to an $80 million operating profit in two years. "It's a question of trust," says Valérie Hermann, a former Dior executive recruited to run YSL in 2005. YSL has been the most troubled brand, but Hermann and designer Stefano Pilati have been working to plug the holes. She credits Polet for being a valuable sounding board. "He asks good questions and isn't afraid to take risks," she says. One example is the way the group is using the Internet. YSL launched an e-commerce site in October and has seen its traffic double. Even Boucheron has gotten into the game: This fall it put its high-end jewelry catalog online, a move that has set its rivals abuzz.

The flip side of giving autonomy to your direct reports is that you don't get sucked into daily crises and can organize your time. And if Polet is a stickler about anything, it's about his private life. In fact, he says, "the family comes first." He calls his 83-year-old father, a businessman who spent years as a Japanese prisoner of war, "my life's coach." He tries to leave his office on London's Grafton Street by early evening and claims he switches off his BlackBerry and mobile phone on Friday night and doesn't turn them back on until Monday morning. On vacation, he refuses to be disturbed except in case of true emergencies. When Ballini of Russell Reynolds tried to get hold of him while he was with his family in Botswana, she was politely informed by someone in his office that she couldn't.

Even before he was offered the Gucci job, Polet says he had decided it was time to leave Unilever after 26 years, because "I no longer felt I had the entrepreneurial freedom I needed." Three years into his new job he exudes the self-confidence of someone who has found his calling, even cracking jokes about "the ice cream man cometh." But ask him about his performance, and he replies, "I hit the ground running because 80% of what I'm doing is the same as what I have always done - it's about leading and coaching people." Sure, luxury is about coming up with exquisite products. But, he says, "I'm not the one who can judge them." Such statements may rankle industry insiders. Yet Polet's track record so far is proof that what really glitters, even in the most pretentious of businesses, is the bottom line.