When he bought Italian fashion house Gucci NV a decade ago, French billionaire François Pinault steered his family's lumber and distribution business into the high-profile, high-profit world of luxury goods.
Now Mr. Pinault's son is taking an equally transformative step: stripping the company of its once-core French retail business in order to focus entirely on global consumer and luxury brands, such as its high-end Yves Saint Laurent and mass-market Puma labels.
François-Henri Pinault, chief executive of PPR SA, is embarking upon a new plan to sell the company's European retail divisions, including the popular electronics retailer Fnac and the Conforama discount furniture stores. In an interview with The Wall Street Journal at PPR's headquarters near the Arc de Triomphe, Mr. Pinault detailed, for the first time, his plans to remake his family's company.
"The sooner, the better," said the lanky, sandy-haired 47-year-old, although he said he hadn't given himself a deadline for the planned divestments. "We have a major weakness -- retail. It is a business that cannot develop quickly abroad," because it takes consumers a long time to warm up to an unfamiliar name, Mr. Pinault said.
PPR could reap an estimated €4 billion (about $6 billion) from the sale of its retail businesses, analysts say. Mr. Pinault wants to use that cash to shop for other apparel and accessories brands to create a new mass-market division mirroring PPR's luxury-goods unit. The company is already expected to take in some €1 billion from a partial stock-market listing of its African consumer-goods division, which begins trading on Dec. 3.
For PPR, which is 41% owned by the Pinault family, exiting retail means giving up businesses that made up more than half of the company's €20 billion in sales last year and that are dominant chains in their home market. Long one of the Paris stock exchange's most dynamic blue-chip companies, PPR is now trading in its French retail operations for a more global identity.
PPR isn't alone in rethinking its retail business amid increasing competitive pressure. Wal-Mart Stores Inc., Gap Inc. and others are gunning for reluctant consumers who have been spooked by high unemployment around the world. Though many mainstream retailers have slashed prices, discounters such as Wal-Mart, Ikea Group and Gap's Old Navy stores, as well as e-commerce purveyors, have far outperformed rival chains.
A longer-term problem with retail is that it's stubbornly local. Though the Wal-Mart franchise stretches from Chile to Britain, the company makes three-quarters of its sales in the U.S. PPR's Fnac, a book, music and electronics chain founded by two Trotskyist activists in the 1950s, has expanded across Europe and Brazil, but makes 70% of its sales in France.
The retail business -- which in addition to Fnac and Conforama includes the mail-order catalog business Redcats -- has benefited PPR over the years, providing a counter-weight to the company's more volatile luxury-goods division. Demand for products PPR sells at its retail chains -- microwaves, books or sofas -- is steadier than demand for fashion, which can depend on the media hype over a catwalk collection.
Yet the retail business has also proven a drag on profitability. In the first half of the year, PPR said it made 1.7 to 3.3 cents on the dollar on its retail business, and 18.6 cents on the dollar on its luxury division.
Mr. Pinault's new strategy carries risks. Exiting from retail puts more emphasis on PPR's Gucci Group -- whose stable of brands also includes Italian fashion house Bottega Veneta and jeweler Boucheron -- just as the luxury goods sector is suffering. As wealthy consumers cut back in key markets, such as the U.S., Europe and Japan, sales at Gucci Group fell 6.4% in the third quarter of this year, compared with a 4.6% rise in revenue in the same period last year.
It's a big personal gamble for the younger Mr. Pinault, who is one of the first in a slew of second-generation executives being groomed to take over big French family businesses. Arnaud Lagardère of France's media and defense conglomerate Lagardère SCA took the helm when his father, Jean-Luc, died six years ago. Others -- including the daughter of the Pinaults' arch-rival, LVMH Moët Hennessy Louis Vuitton Chairman Bernard Arnault -- are waiting in the wings.
Though he's been running PPR since 2005, Mr. Pinault has not yet proven whether he will be as successful as his father, one of Europe's preeminent entrepreneurs of recent decades.
The elder Mr. Pinault, 73, elbowed his way into France's elitist business world as a high-school dropout who got his start in a lumber mill. The younger Mr. Pinault is better-known as a jet-setter often photographed in the front row of fashion shows with his wife, actress Salma Hayek.
Silver Beaded Bodice
The two married quietly on Valentine's Day of this year, in Paris, then renewed vows in April in Venice at a glittering event whose guests included Anna Wintour, Penelope Cruz and former French president Jacques Chirac. Ms. Hayek wore a sleeveless dress with a silver beaded bodice created by Nicolas Ghesquière, the designer for Balenciaga, PPR's most in-vogue luxury label.
His father, François, took over his family's lumber business in the west of France in 1963. He listed the company on the Paris stock market in 1988 and used the proceeds to buy Conforama in 1991 and then built the group into the multifaceted consumer goods empire it is today.
The younger Pinault watched on the sidelines as his father swooped in on Gucci in 1999, beating out Mr. Arnault's LVMH in what was then one of Europe's most acrimonious takeover fights ever. At the time, the son -- a graduate of prestigious French business school HEC -- was 37 and running electronics retailer Fnac. The job stoked his interest in technology. The young executive made frequent trips to Japan to test out new electronic gadgets.
His break came in 2003, when his father tapped him to run the family's holding company, Artemis, which owns the family's stake in PPR. In his new job, Mr. Pinault worked with Serge Weinberg, then PPR's chief executive, to complete the €7.2 billion buyout of Gucci Group and to hire the unit's chief executive, Robert Polet. Mr. Pinault appeared at Mr. Weinberg's side at a Gucci shareholders meeting in Amsterdam in April 2004, a fresh gash across his forehead from a skiing accident.
As head of Artemis and a member of PPR's board, Mr. Pinault began to think about the company's future. At the time, PPR was spending millions of euros to expand Conforama and Fnac outside France. Yet fashion house Gucci, buoyed by new markets in Asia and the Middle East, was making a quarter of PPR's profit.
In the middle of 2003, Mr. Pinault and a group of lieutenants at Artemis sketched out scenarios to split PPR's luxury and retail divisions into two separate listed companies. The plan for luxury was called Flaubert, after the French 19th century writer. The plan for retail was named Picasso for the Spanish painter.
Mr. Pinault showed the ideas to his father and Mr. Weinberg, but he thought it wouldn't generate enough money to reinvest in new business. The plans were shelved, but Mr. Pinault kept discussing his ideas with his father over dinners at Parisian brasserie L'Ami Louis, where the elder Mr. Pinault is a regular. After 18 months at Artemis and with the backing of his father, Mr. Pinault informed Mr. Weinberg that he would be taking the helm at PPR.
"I was 41, and I didn't see myself being just a shareholder. I wanted to run the business," recalled Mr. Pinault in the interview.
By the time Mr. Pinault became chief executive in March 2005, PPR was a business anchored around two poles: retail and luxury. One division was competing with labels such as Louis Vuitton and Chanel; the other with J.C. Penney and Ikea. Fnac had planted its flag in Taiwan and Switzerland, and Conforama bought chains in Spain and Italy -- but they still relied on France for the bulk of their sales. PPR's shares were trading at a 37% discount to rival and market leader LVMH, which is focused on luxury goods.
Exit Strategy
On a business trip to Japan at the end of 2005, over a meal of shabu-shabu hot pot, Mr. Pinault mapped out the first step of what would eventually become his strategy to exit the retail business altogether: the sale of PPR's iconic department store Printemps, whose value had soared from the real-estate boom. The sale was completed the following summer, for €1.1 billion.
As Mr. Pinault studied the exit from PPR's huge retail holdings, he began thinking about what could replace them. Making PPR solely a luxury-goods player wouldn't be enough because high-end fashion and accessories houses -- though high-margin -- aren't big-volume businesses.
"If we wanted to be sizable on a global scale, we had to have a mass-market business," Mr. Pinault recalls thinking. He cemented his plan with PPR's board, but the company decided not to disclose it in order to give executives more time to execute, Mr. Pinault said.
Mr. Pinault quietly tapped investment bankers at Goldman Sachs Group Inc. to come up with a strategy to sell Fnac. He began talking to possible buyers for Conforama and Redcats, the mail-order business, according to one person involved in the talks. He asked consultants Bain & Co. to draw up a list of possible luxury-goods and mass-market clothing and accessories brands as potential acquisition targets.
Among the 40 names drawn up by Bain was German sportswear company Puma, according to one person close to the company. Puma was already a global sportswear brand, but it couldn't afford to open its own boutiques around the world. (There was an added plus: Mr. Pinault says he got along well with Puma Chief Executive Jochen Zeitz, whom he had tried to recruit two years earlier for the top job at PPR's Gucci Group.)
Mr. Pinault moved quickly. In early 2007, he sent an adviser to a hotel at Paris' Charles de Gaulle airport to discuss the terms of a deal with a representative from Puma's controlling shareholder family. Two months later, PPR launched its €5.3 billion friendly takeover bid. PPR ended up buying 69% of Puma, for €3.68 billion. "Given [PPR's] size, he is very quick in making decisions," recalled Mr. Zeitz, who still runs Puma's business within PPR.
Taxi Trap
By early 2008, Mr. Pinault lost momentum as the financial crisis spread around the world. Creditors involved in talks aimed at selling Conforama and Redcats to industry buyers pulled out, according to a person involved in the talks. PPR retrenched; over the past year, it announced 1,872 job cuts at the two retail businesses and at Fnac. In March, enraged French workers swarmed Mr. Pinault's taxi as he left a meeting, holding him under siege for an hour by blocking the street.
With global stock markets stabilizing, Mr. Pinault is reviving his strategy. A 12-person team within PPR has drawn up two lists. The first enumerates a new set of 20 possible industry buyers for the three retail businesses up for grabs, Mr. Pinault said during the interview.
A number of sovereign funds and a South African investor have also expressed interest, according to a person close to the matter. Another option, said Mr. Pinault, would be to list one or all three on the stock market.
The second list targets a dozen potential luxury and lifestyle brands PPR would be interested in buying. To build its mass-market lifestyle brand, PPR could be interested in another label geared towards outdoor activities such as hiking, water sports, and street sports such as skateboarding, Mr. Pinault says. He says Mr. Zeitz, his like-minded friend and Puma chief, is the right man to run what will become the new mass-market division at PPR.
