Kering reviews its strategy following Balenciaga ad controversy

By

Dominique Muret

Published
Feb 15, 2023

"Balenciaga has had an excellent year, despite a difficult December". In its annual results report for 2022, Kering barely devotes a line to one of its most prominent brands. Clearly, the fashion house led by designer Demna and CEO Cedric Charbit has not yet recovered from its controversial advertising affair. But the luxury group is counting on the creative evolution and upward repositioning of the label to get things moving again.

No details were disclosed on Balenciaga's results in 2022, as it is grouped with Alexander McQueen, Brioni and the group's jewellery brands within the "Other Houses" category, which generated sales of 3.874 billion euros in 2022, up 16% on a comparable basis. However, in the last quarter, sales of this division fell by 4% on a comparable basis (-3% in published data). While they increased by 2% in the network of directly operated shops "supported by double-digit growth in Western Europe and Japan", they collapsed by 26% in the wholesale channel, which is undergoing intense rationalisation.

During a conference with analysts, Kering's deputy CEO Jean-François Palus acknowledged that "the unfortunate controversy" had affected the brand's performance in late November and December. In particular in the US, UK and Middle East. "The impact is fading, but it is still affecting the business now. Nevertheless, we expect this impact to end in the second quarter." As a reminder, Balenciaga was hit hard at the end of the year by the scandal surrounding two disturbing advertisements featuring the image of children with sexually suggestive objects and court documents related to child pornography.

After launching two internal and external investigations, the luxury group led by François-Henri Pinault said there was no fault "because the procedures were correctly followed, but an error of judgement" and took measures to prevent it happening again. "We are in the process of changing some of the procedures and completing others, by reinforcing the formalisation of this type of internal control," said Jean-François Palus. In particular, a new position of manager in charge of brand security should be created at group level.

For its part, Balenciaga "has overhauled and reorganised its image department with the creation of an image council, responsible for the wider supervision of all content", while a renowned external agency has been chosen "to also supervise the control of marketing content". A new approach has therefore been put in place, as the director explained at length: "More than changing people, it is a question of strengthening the organisation by encouraging more diversity and collective intelligence as well as the ability to express a different opinion in judgements".

From there, an in-depth reflection was carried out on Balenciaga's communication, which until now has been driven by media stunts. From spectacular fashion shows, such as the latest ones organised in a snowstorm or a huge muddy field, to the memorable episode with the Simpsons, or the many provocations designed to create a buzz, such as the marketing of destroyed sneakers and bags that look like garbage sold for 1,500 euros. Today, it would seem that these sometimes subversive, sometimes disruptive ideas, which have made the house so successful in recent years, ensuring its explosion on social networks and among fashionistas, are no longer on the agenda.

In a lengthy interview with Vogue on the eve of the results, Demna said she wanted to focus on the product, strengthening ties to the legacy of founder Cristóbal Balenciaga. The next show, scheduled for March 5 in Paris, in a setting that is "deliberately simple, to allow everyone to focus on the collection," should show the new face of the house and confirm its strategy of elevation.

"It's not a break from streetwear to something else. It's a natural evolution that will accelerate," sums up Kering boss François-Henri Pinault. "The haute couture collection showed our ability to elevate the brand. Like all our houses, Balenciaga has a plan to move upmarket which began last year. Demna is working on it, as he mentioned, with more craftsmanship and focus on the product. It will probably be less theatrical, with a simpler, more dedicated and product-focused approach. In any case, it's a risk for the brand, whose desirability was strongly stimulated until now by the media agitation accompanying each of its projects.

On the commercial side, this refocusing on a more upmarket product is accompanied by a reorganisation of distribution with cuts in the multi-brand customer network to focus more on direct sales. "Next year Balenciaga, in terms of retail contribution, will be at a very high percentage with a very exclusive distribution," says Kering's CFO, Jean-Marc Duplaix. This policy will have an impact on profitability, with major investments. But as the manager reminds us, "Balenciaga is still a very profitable brand. We are confident that we will continue to invest in the company, without diminishing its capacity to increase its profitability".