“There was nothing in the stores,” recalled Carlo Magello, the managing director of Gucci U.K. from 1989 to 1999. “For a period of about three months the stores were empty—people had the impression we were closing!”
“No one faulted Maurizio for trading the product up, but he could have phased out the canvas gradually,” commented U.S. retailer Burt Tansky, who was president of Saks Fifth Avenue at the time and is currently chairman and CEO of Bergdorf Goodman, part of the Neiman Marcus retailing group.
“We used to plead with them—there is no reason to pull a product that is so successful without something to replace it,” Tansky said. “That was all the customer knew.”
As Investcorp reviewed Gucci’s plummeting sales, fighter planes started flying over Iraq. Tension had been building in the Middle East since August 2, 1990, when Iraqi troops invaded Kuwait. On August 8, Iraq formally annexed Kuwait, charging the country with overproducing oil and depressing prices. When Saddam Hussein failed to respond to a U.N. ultimatum to remove his troops by January 15, 1991, U.N. forces led by U.S. General Norman Schwarzkopf started a massive bombing campaign against Iraq, followed by a ground attack. Although a cease-fire was adopted February 28, the Gulf War devastated the luxury goods market.
“It hammered the industry,” recalled Paul Dimitruk, who had resigned from Investcorp in September 1990, but remained in close contact with the industry as a member of the board of directors of Duty Free Shops (DFS), the largest retailer of luxury brands in the world through its network of tax-free stores. “The Gulf War created a fear in the world that in hindsight was extreme, but at the time was very real,” Dimitruk said. “There was a feeling that something dreadful was going to happen. People did not want to fly at all, much less over the Middle East. Two groups fueled the luxury trade, the Americans and the Japanese. That trade just collapsed,” recalled Dimitruk. To make things worse, the Japanese stock market crashed around the same time, prompted by a collapse in the real estate market.
“The Tokyo stock exchange plunged from thirty-nine thousand to fourteen thousand,” Dimitruk said. “It was the single greatest destruction of real wealth in world history barring a war.”
After the failure of the Racamier deal and the outbreak of the Gulf War, Morante realized there weren’t going to be any white knights to rescue Maurizio. He had to dig into the guts of the company and see if it was going to be able to survive.
“I put together figures to try and scare Maurizio into action, but nothing happened,” said Morante, who had calculated that Gucci stood to lose as much as 16 billion lire (about $13 million) in 1991. “Sales weren’t coming back, profits were not there, costs were skyrocketing, and all the company’s cash had been eaten up. Maurizio had no concept how cash flow in a company worked. His style was management by intuition. And today if you try to manage by intuition, you can get away with it if things are good, but you can’t get away with it when things are bad.” What might have worked for Aldo—who also had a business fiber Maurizio lacked—wasn’t going to work for Maurizio.
By the time Morante tried to get Maurizio to focus on the most urgent problems, Maurizio had lost faith in him, so all of Morante’s warnings were in vain. Maurizio had found a new star, a consultant named Fabio Simonato, and brought him in as director of human relations. Morante resigned in July, though he stayed a bit longer at Maurizio’s request.
Since 1987, Morante had helped Maurizio break through Gucci’s stalled family shareholder situation, brought him a new financial partner, helped him bring in a new management team, and drafted a new shareholder proposal that would have delivered control to Maurizio and given Investcorp an elegant exit. “Unfortunately, the dream didn’t end the way I had hoped, although not for lack of trying,” Morante wrote in his resignation letter. “Now I have to go my own way.” Morante joined a small boutique merchant bank in Milan and later moved back to London for Crédit Suisse First Boston (CSFB), where he currently has responsibility for the Italian market. Though he came back in stride with the deal making he knew best, the memories of his days with Maurizio continued to flood back. Like Dimitruk before him—and so many others before them—his experience at Gucci had affected him profoundly.
13
A MOUNTAIN OF DEBTS
Neither Morante nor anyone else realized that as Gucci’s financial problems grew, so had Maurizio’s own personal debts, which mounted to the tens of millions of dollars. He had told nobody about his outstanding loans until he finally confided in his lawyer, Fabio Franchini, in November of 1990. He had quickly run through the cash his father had left him in the Swiss bank account and had mortgaged his future on the bet that Gucci’s turnaround would generate rich profits. He had taken out personal loans to finance the refitting of the Creole, the furnishing of a grand apartment on Corso Venezia in Milan, and ever-mounting legal fees to fight his relatives. Franchini had been initially hired by Maria Martellini to help straighten out Gucci’s legal affairs during her custodianship—and was invited to stay on by Maurizio when he resumed the chairmanship. Franchini had never forgotten one of Martellini’s first comments about Maurizio. “Maurizio Gucci,” she had said, “is sitting on a mountain of wealth.” Instead, Franchini realized in dismay, Maurizio was sitting on a mountain of debts.
“I was flabbergasted,” Franchini said later. Maurizio admitted to Franchini that his personal debts amounted to some $40 million. The bulk of the money was owed to two banks: Citibank in New York and Banca della Svizzera Italiana in Lugano. Maurizio explained to Franchini that the banks wanted to be paid back, but he didn’t know where to get the money. With the Gucci business in the red, he had no income from his 50 percent stake. His only other assets were his real estate holdings in Saint Moritz, Milan, and New York, most of which were already mortgaged. Maurizio had never responded to his bankers’ letters or returned their phone calls. Franchini started a seemingly endless round of appointments with new banks and entrepreneurs in another fruitless search for funding to help Maurizio.
In the meantime, pressure mounted on Investcorp as Gucci’s poor performance weighed heavily on Kirdar and his team, especially as they had just spent more than $1.6 billion to buy Saks Fifth Avenue in 1990 amid market criticism that Investcorp had grossly overpaid for the high-end retailer. By 1991, Gucci had lost nearly 38 billion lire, or some $30 million.
“A major complication was that the same investors that had gotten into Gucci were also in Chaumet and Breguet, which weren’t exactly home runs. People were unhappy,” said a former Investcorp executive. Kirdar sent Bill Flanz to Milan full time to exert more control over Maurizio.
An unassuming, soft-spoken man in his late forties, Bill Flanz had worked on the acquisition of Saks Fifth Avenue. He knew how to listen to people, nodding his balding head understandingly as he blinked his pale blue eyes behind thin tortoiseshell glasses. Even under pressure, he radiated a sense of calmness and peace of mind, qualities that had gotten him through some tight situations. In Tehran, he had negotiated with the Khomeini government in his smooth, measured voice over the nationalization of a bank after the fall of the Shah. In Beirut he had had several close calls during the civil war, where one of his subordinates was killed in the violence. The oldest son of a Czech-born political science professor, Flanz grew up in a working-class neighborhood in Yonkers.
After receiving his bachelor’s degree from New York University, where he studied tuition-free thanks to his father’s position there, he completed his MBA at the University of Michigan. From there he entered a training program at Chase Manhattan Bank, where he spent the next nineteen years of his career before cofounding Prudential Asia, a private equity business, and then joining Investcorp.
Flanz’s placid demeanor hid a sense of adventure and love for the outdoors—on weekends, depending on where he was, he traded his gray banker suits for black leather motorcycle gear and cruised the countryside on a big BMW, or donned hiking gear and disappeared into the woods, or clamped on ski equipment and whirled
off in a helicopter in search of untracked pistes. Seen as a bridge builder within Investcorp, Flanz, in Kirdar’s view, had the right kind of nonthreatening approach and personality to reconstruct the breach and work closely with Maurizio.
Flanz and another Investcorp executive, Philip Buscombe, flew from London to Milan and met with Maurizio in the spacious new conference room in the Piazza San Fedele offices. They set up an executive committee as a vehicle to get more involved in some of the business decisions Gucci faced, identifying eleven points that needed to be addressed.
“It was our way of trying to create a management spirit without offending Maurizio,” recalled Swanson, who was also involved. “A lot of work was done, but ultimately Maurizio was the guy who had to implement it and it just didn’t happen.”
“Maurizio would say ‘Fine, OK,’ and then he would go on and do what he wanted to,” said Gucci’s former administrative and financial director, Mario Massetti. “It wasn’t that he denied there were problems, he was just always convinced that somehow he was going to come through it.”
Maurizio recognized that the costs of turning his dream into reality were higher than anyone had realized at the outset, and he initially welcomed Flanz, inviting him to set up an office in Gucci’s new headquarters.
Flanz, in keeping with his style, came into Gucci with an open mind and took his time evaluating the problems. But once he took a stance, no one could easily dissuade him from it.
“I liked Maurizio, but I became more critical of his decisions and the way he was doing things, the relationship began to feel the strain,” Flanz said. “I came to the conclusion that Maurizio was unrealistic as a businessman, ineffective as a manager, and only marginally effective as a leader. I decided that he wasn’t going to be able to make a success of the business—ever—and certainly not in the amount of time that the creditors were going to give us.”
In February 1992, despite the streamlining of Gucci America, Citibank raised a red flag for the company, calling in payment of its $25 million credit facility, which had been used to the limit. The company’s net worth was approximately a negative $17.3 million and sales had plunged to $70.3 million. Under a new goods pricing structure imposed by Maurizio, Gucci America found itself unable to pay its sister company for merchandise and meet payrolls and other operating expenses. That new pricing policy, which included much higher prices for the new, high-quality goods being turned out by Dawn Mello and her new design team, would later became a red-hot subject of contention between Maurizio, De Sole, and Investcorp.
“How were we going to sell thousand-dollar handbags in Kansas City?” protested De Sole.
Citibank assigned a man named Arnold J. Ziegel to the case. Ziegel notified Domenico De Sole that the bank had taken two strong positions on Gucci’s financial situation: first, that the bank didn’t want Gucci America to repay Guccio Gucci for any merchandise until the loan had been cleared, and second, Citibank would hinge its faith in the company on the continuation of De Sole as CEO. Although De Sole protested the latter stance, reluctant to appear to be milking the troubled situation for his own job security, Ziegel’s ultimatum would further deepen the growing schism between the two companies and the two men that ran them—Domenico De Sole and Maurizio Gucci.
At the same time, Ziegel also pressured Maurizio to pay down his delinquent personal loans with Citibank. The loans had been secured by the two apartments in Olympic Tower on Fifth Avenue—the one Maurizio and Patrizia had furnished in the early 1970s, and another Maurizio had bought later but never refurbished. Both had depreciated as New York City real estate values plummeted and by then were worth less than what Maurizio owed.
At the time, Investcorp knew nothing about Maurizio’s personal loans, but the financial situation at Gucci was deteriorating so fast that the Investcorp team prepared a slide show to drive home to Maurizio in simple terms the dramatic situation facing the company. Called to London, Maurizio sat silently at the oval marble conference table in the darkened room at Investcorp’s elegant Brook Street offices surrounded by Investcorp’s Gucci team as the slides clicked by.
“It must have felt like an inquisition,” Swanson said. “There were at least ten suits around the table and there it was, in front of everyone’s eyes, just how bad things were.”
“We finally got to the big conclusion slide, which read ‘Conclusion: Increase sales and decrease expenses,’” Swanson said.
At that, Maurizio’s eyes widened and he jumped up and turned toward Kirdar with a big laugh. “Increase sales, decrease expenses! Hey! I could have said that, the question is, ‘How?’”
“Maurizio, you’re the chief executive,” shot back Kirdar, in no mood for laughs. “That’s your challenge!”
Maurizio promised he would come back to London with a business plan. He returned to Milan, where a new leather-bound plaque stood alongside Aldo’s adage about quality being remembered long after price is forgotten. The new plaque read “Are you part of the problem or part of the solution?”
The agreed-upon date came and went with no plan. Kirdar flew to Milan to speak with Maurizio.
“Maurizio,” said Kirdar. “This is not good at all. Let us get you a chief operating officer. You are the visionary, but the company needs an in-house manager.”
Maurizio shook his head. “Trust me, Nemir,” he said. “Trust me. I’ll do it right!”
“I do trust you, Maurizio!” said Kirdar. “But things are not going well. I understand your problem, you have to understand mine. I have to rescue this sinking ship. The company is losing money. I am not your rich partner; I have a responsibility to my investors.”
In the meantime, Flanz discovered that Gucci had warehouses full of old stock that Maurizio had removed from stores under his repositioning plan. Flanz found stacks of old canvas bags, bolts of fabric, and piles of leather, all left to rot.
“Maurizio had no concept that unsold inventory declined in value,” said Flanz later. “He felt as long as he could put a rug over the old goods and hide them someplace, they didn’t exist anymore for him. They might exist on a balance sheet somewhere, but they didn’t exist in his mind.”
Claudio Degl’Innocenti, the burly production manager at Scandicci, was already familiar with Maurizio’s position on inventory. As part of the overall restyling of Gucci products, Maurizio had changed the color of the gold fixtures on bags and accessories from yellow gold to green gold.
One day, during a product meeting in Florence, Maurizio called Degl’Innocenti up from the factory. A big bear of a man with a full head of wild, curly brown hair and a beard, he nodded in greeting as he entered the design studio where Maurizio was working with Dawn Mello and the other designers.
“Buongiorno.” He stood to one side as they finished talking, dressed in his usual attire of cotton button-down shirt, jeans, and heavy work boots.
“Okay, Claudio, from now on, instead of using 00 gold, we are going to use 05 gold,” Maurizio said, referring to standard codes for the different tinted metals.
“That’s fine, Dottore,” Degl’Innocenti said in his gruff voice, “but what about all the merchandise in the warehouse?”
“Claudio, what do I care about the merchandise in the warehouse?” Maurizio answered.
Degl’Innocenti nodded silently, left the room, and went back to his office, where he made some phone calls and calculations. After less than an hour, he walked back upstairs to Maurizio’s office.
“Dottore, there are some items that we can repaint with green gold, but many of the clasps can’t be treated. We are talking about merchandise worth at least 350 million lire [at that time nearly $300,000],” Degl’Innocenti said.
Maurizio looked at the workman. “Who is the chairman of Gucci, you or me?” Maurizio asked Degl’Innocenti. “The old products are obsolete! Throw them away, do what you like, as far as I am concerned they don’t exist anymore!”
Degl’Innocenti shrugged and left the room.
“I didn’t throw anythi
ng away,” Degl’Innocenti admitted later. “In fact, we were eventually able to sell the merchandise. The crazy thing was that we got such contradictory messages. On the one hand, big money would be thrown away; and on the other, we were instructed to save on pencils and erasers, our telephone calls were monitored, and at one point we even had to start turning out all the lights by five P.M.”
Flanz pressed Maurizio to find a buyer for the old goods and offered to help. Finally, one day Maurizio proudly announced he had found the solution to the inventory problem. He had signed a contract to sell the entire lot in China. Maurizio reassured Flanz that he had taken care of everything.
“He was just as pleased as he could be, and he was strutting around the office telling everyone on the board that they could relax because he was taking care of the problem personally,” Flanz said. Gucci shipped out huge containers of the old merchandise—which disappeared into warehouses somewhere in Hong Kong. Not only was the company never paid for the merchandise, it paid some $800,000 in advance to an intermediary for arranging the contract. Flanz and his colleagues at Investcorp steamed with frustration and rage over the entire stock episode, which initially cost the company an estimated $20 million in merchandise.
“The whole China transaction evaporated,” said Flanz. “It was just another one of Maurizio’s rainbows.”
Months later, Massetti flew out to Hong Kong, found the merchandise, and finally sold it.
As time slipped away and Gucci showed no signs of improvement, Gucci board meetings grew confrontational. Although the days of flying handbags and tape recorders were long gone, Flanz and the other Investcorp directors now openly challenged Maurizio’s decisions.
“You are throwing this company down the drain!” said Investcorp’s Elias Hallak, who had replaced Andrea Morante on the board in 1990. “We are not happy with the fifty-fifty relationship. Nobody wants to oust you, we want you to stay at the helm of the company, but we want to bring in an experienced CEO; we have to have control.”
The House of Gucci Page 27