Talk with Pinault-Printemps-Redoute CEO
Serge Weinberg: "There is no ideal corporate structure"
True to form, the CEO of Pinault-Printemps-Redoute SA (PPR) is an elegant, cosmopolitan Frenchman with great charm.
Although he describes himself as a "mild authoritarian", his staff seemed to like and respecte him.
PPR, with revenues last year of €24.4bn, clearly wants to increase its exposure to the luxury and fashion business. One only needs to recall its purchase of Gucci.
In view of the high margins, this is obviously an enticing proposition.
The more PPR moves in this direction, however, the more its current structure as an unwieldy French conglomerate seems out of place.
This most obviously applies to furniture retailer Conforama, but, if one thinks the proposition through to its logical conclusion, then inevitably also to consumer electronics retailer Fnac.
Of course, all this is taboo when PPR talk with the media, but who knows what they think when they are alone in their beds at night? At any rate, Weinberg doesn't strike one as a man without imagination.
Monsieur Weinberg, would it be fair to call Pinault-Printemps-Redoute (PPR) a bizarre collection of assets?
We are familiar with this criticism, but it's not an accurate characterization of PPR. Our recent divestments have made us much more focused than in the past. We are a retail and luxury group, centred on the individual customer.
Moreover, I regard any question regarding ideal structure as purely theoretical and not capable of a satisfactory answer.
The acid test is how we perform against our competitors. Printemps achieves a higher operating margin than Galeries Lafayette; Redcats more than Neckermann or Quelle; Conforama more than But; and Fnac more than Virgin.
How do you manage the complexity within your business?
By being flexible and decentralized. At group level we define global strategy, allocate financial and human resources, and provide central services.
However, PPR is not based primarily on synergies, but on cooperation where it adds value, and I want the CEOs of each division to be fully responsible for what they do.
What do you do when a division has difficulties? Do you force your more profitable divisions to subsidise or do you let the division stand or fall according to its results?
Either there is a chance to fix the problem, and we do it, or we exit. Obviously, we are very results-driven, but we make long-term investments in our business.
For instance, in the internationalisation of your business?
We are pragmatic and feel no obligation to have our flag everywhere. Our strategy is based on our assumptions regarding long-term growth on the major global markets.
Although our existing formats provide us with a strong engine for growth in Europe, we are not that optimistic about its long-term macroeconomic prospects. Therefore, we see a need to be strong in both the US and south-east Asia.
Why the US? Growth isn't exactly spectacular there either.
Because of its flexibility, demographics and openness to immigrants. It is much more able to integrate waves of immigrants than Europe because it has more space and a more open culture.
What formats will spearhead your internationalisation?
In the US, primarily mail order and luxury goods. This is one of the main reasons we entered the luxury goods business because global brands really mean something in this segment.
How do you define a global brand?
A brand which one can start selling from day one in most countries world-wide without local media support.
Have you ever thought of exporting any of your retail formats to Germany?
Fnac had already decided to exit Germany before we bought it. We also made a small start with mail order, but brought out only one catalogue. We then had a very hard look at the furniture market, but decided not to go ahead.
What didn't attract you about the German furniture market?
Real estate is expensive so we would have been obliged to acquire an existing operation. However, Conforama is not a thoroughbred furniture concept because it also offers electricals, and therefore local regulations would have made things difficult.
The alternative of reducing our concept to furniture alone would have been counterproductive because all of our potential German competitors are exclusively focused on furniture and make very low returns.
So you would never return to Germany?
There is no point in being in the largest market in Europe if that means losing money. However, I would never say never. It depends on how the market evolves.
How would the market have to evolve for it to entice you there?
Unemployment would have to fall and both consumption and retail sales grow. Also protection-oriented regulations would have to become less restrictive.
As the big French hypermarkets diversify into non-food, are you worried that they will take business away from Conforama or other PPR retail companies?
After gaining market share through massive investment in the expansion of their store base, the French hypermarket groups have been losing market share in food and now also in non-food generally. This is only logical because their customer traffic is driven by food.
In addition, they also have problems in specific product categories. They cannot allocate more space to furniture because the sales per square metre would be too low for them.
In electricals and technical products, they still lack the service competency to beat the category killers like Conforama and Fnac. In apparel, customers find the purchase of clothes less agreeable in a hypermarket.
Will the success of Lidl and Aldi in France polarise the market between high-margin and price-oriented retailers?
It will very much depend on the strategy adopted by the hypermarket groups. If you look at the evolution of their profitability, it went up very strongly in past years because they reduced their price aggression.
This gave the German hard discounters a breathing space in which to develop. The hypermarket operators have become aware of this, and if the "loi Galland" is reformed they will probably become more aggressive on prices.
Will this stop the development of the German hard discounters in France?
Their market share in food will continue to grow because, if you assume that the unemployment situation is not going to improve significantly and that hypermarket revenues will continue to come under a certain degree of pressure, economic developments will be very favourable to them in structural terms.
As regards apparel, although overall growth on the textiles market will be limited, I expect the hard discounters to continue to take market share from the hypermarkets and certain specialised apparel chains over the coming years and to obtain 4 per cent of the national market.
Does this worry you?
With La Redoute we are already market leader in the French apparel market.
We are not a discounter and yet continue to gain market share because we have improved our fashion content and can provide style, quality and value without having to be the cheapest on the market.
How much potential do you see in online retailing?
Internet has been the big development for mail order companies like Redcats over the last decade, and provides us with a fantastic opportunity to expand our customer base.
In the past, behavioural patterns made it very difficult to convert a non-mail order shopper to a catalogue shopper.
The world-wide web has removed this barrier so that in most of the countries where we operate 20 per cent of new customers are internet shoppers. Also our production costs have fallen because customers are doing some of the work we had to do in the past.
For instance, we need fewer call centres because customers place the order. We still send out catalogues because tests have shown that we still need to do so, but not with the same pressure as in the past.
Finally, the internet has enabled us to accelerate our product cycles as well as the speed with which we send them so that we have been able to reduce our markdowns.
But surely internet is not the right medium for selling such an emotional and tactile product as fashion?
It is true that a certain number of customers still want to have the perception of touch. However, growing numbers are not embarrassed by internet shopping. Anyway, they know that the goods can always be returned, if they are not satisfied.
How serious competitors are Quelle & Neckermann for La Redoute?
In France, La Redoute has been taking market share from 3 Suisses, Quelle and Neckermann for nearly three years.
However, we like to have competitors who share our vision of the market and of the need for profitability. We'd rather have competitors in good shape who behave as we do rather than ailing ones who might be tempted to start price dumping.
How strong an international challenger to Fnac and Conforama are Media Markt and Saturn in Europe?
They are our most important competitors. In France we continue to take market share from them. Abroad, there is intense competition in Spain, Italy, Switzerland and Belgium.
How do you view the potential in eastern Europe?
Revenues per head are lower than in the West, and western European retailers have created excess supply in some countries in the region. Also, real estate prices have been very high although the bubble is beginning to deflate. Certainly EU entry will benefit the region long-term.
In Germany, department stores are in deep trouble. Why are you successful with Printemps in France, and what is the right positioning for a department store?
Success has a lot to do with demographics and how the apparel market is evolving. I do not believe that department stores can do good business with upper-segment brands in small and medium-sized towns.
Our performance is much better in larger towns because we have the size to sustain the business. Success is also about branding and focus.
The era of the department store which sold everything is dead. So, since 1995, Printemps has exited such categories as brown goods, electricals, books and records, and now specialises on fashion brands and beauty, and, to a lesser extent, on home textiles.
Have you ever considered exporting Printemps to Germany?
No, the concept of an international chain of department stores makes little sense. We are in a brand rather than a volume business so why go for volume abroad?
There is also a very strong link between the identity of a department store and its home country. The national component is very strong.
When tourists travel to London, they would always want to visit Harrods rather than Karstadt. When they fly to the USA, they want to go to Saks rather than Galeries Lafayette.
To what extent do you give floor space to fashion brand shop-in-shop concepts within your department stores, and how can you avoid diluting the overall image of the Printemps brand?
We have concessions for around 30 per cent of our store surface in Printemps Haussmann, the Paris flagship, and an average of 20 per cent in the rest of the chain. However, we are not a mere real estate operator providing certain site services.
We have a clear vision of what we want to express and have pre-defined a visual concept which gives unity to the whole store and allocate space to the brands accordingly. Otherwise we would lose our identity.
Surely this makes for difficult negotiations with the fashion brands?
We have to be strong when discussing the subject with them, but obviously a Gucci or a Chanel are not going to transform their brands for any department store operator, and we have to take their wishes into consideration.
We recognise that brands need to express their identity, which is why customers want to buy them in the first place. We have therefore created a framework in our stores which is compatible with the brands in question.
To pay for your €7 billion acquisition of Gucci Group you have sold some of your most profitable assets. Couldn't the big gamble on the high-margin, but volatile luxury goods business be the ruin of the whole PPR empire?
Once we have exited Rexel at the beginning of next year, PPR's balance sheet will be more solid than ever before. As regards Gucci, even if you take the EVA multiple of the Gucci brand alone, which is currently around 15, it amounts to €7 billion.
This calculation would value the remaining brands in the Gucci Group stable at zero, which is absurd.
Perhaps just as well as they are haemorrhaging cash?
Yves Saint Laurent is still losing money, but we made a big investment in the store network. We also have a number of smaller brands, such as Boucheron, Stella McCartney and Alexander McQueen, which are still losing money, but they are reducing their losses.
YSL Beauté, which sells perfumes, cosmetics and skin care products, is profitable; and Bottega Veneta, which is primarily a leather goods maker, is growing spectacularly and is on track to break even.
So, the asset value is there, and it is our job to convert it into more free cash flow which, by the way, will already exceed €200 million this year.
Since your acquisition of Gucci, 13 directors have left. Aren't you running a troubled ship?
The matter has been grossly exaggerated in the press.
In fact, there were very few resignations. Some had outside offers, which is normal in business, and didn't renew their contracts, but, in most cases, we terminated the contracts because their jobs didn't mean anything any longer within the new organisation.
For instance, we had no need for an investor relations manager in a non-public company or a personal communications manager for a designer who is no longer working for the company.
Your new three-person designer team may be easier to control than former star designer Tom Ford, but will it ever be able to reproduce his charisma?
It is not an issue of control. What manager wants to do the job of creator, or who can? We want each brand to be strong and to have its own creative capacity while avoiding any confusion between brands.
Tom Ford was responsible for designing two brands, and I think that led to unsatisfying results.
Good strong brands like Gucci need a lot of focus, and at Yves Saint Laurent we had to change the nature and structure of the collection in order to avoid the risk of sameness where Gucci was strong.
What is your philosophy on the franchising and licensing of brands?
The key question for us is how to leverage our brands as rapidly and as profitably as possible. We are only open to franchising and licensing in relation to our smaller brands where it is difficult to build a profitable network within a narrow category.
However, this must be done with very strict control. Although we do not own the retail estate or the rent contract, our contracts are very strong regarding the control we have of the visual image.
How do you see yourself as a manager, and what is your vision for PPR?
Probably, I could be defined as a mild authoritarian. My vision is quality, whether that be in the products we deliver to customers, our services, staff or external relations.
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 48, 26.11.2004