In business, capital investment refers to money or resources invested with the hope of profit. Such investments are repaid through corporate earnings over time. Companies can make investments by acquiring physical and financial assets such as bonds and stocks (Javid 59). Large corporate expenses are considered capital investments as well. Capital investments also include property, plant, and equipment, which are not sold but are necessary for continued business operations. A capital investment, on the other hand, is not an expense for inventory, money spent on acquiring or increasing current assets, or cash saved. They are working capital expenses, not capital investments. The financial statements of Gucci show that property, plant, and equipment increased from 43, 63, 110, 173 million and then 315 million from 1995, to 1999. The shareholder’s equity also increased over the years as it was 175million in 1995 and has continued to increase to 3,861 million in 1999. The increase in shareholder’s equity and property plant and equipment is an indication of the company’s capital investment.
Gucci operates in the luxury industry which is very competitive. In all competitive industries, capital investment is a crucial to ensure the company maintains a significant market share. A look at the financial statements of Gucci shows the revenue has increased from $199 million in 1992 to $1,236 million in 1999. One of the main contributors to this increase in revenue is a high level of advertising. The company used fashion magazines to educate consumers about the luxury products available in Gucci. Between the years 1995 and 1999, luxury companies enlisted celebrities to sport their brands. They could dress the Oscar-nominated actresses to help boost the brand’s ego. That way, they would get media coverage around the world. Such strategies were not cheap, but the return they brought was worth. The companies looked at the cost of making those advertisements and compared them with the returns they would make in future.
Additionally, in 1996, Gucci embarked on a project of renovating its directly operated stores. Gucci was selling luxury products to a younger and hipper clientele. It was only right that the stalls would match the products, hence the renovation. The company hence collaborated with one of the top interior design companies who provided them with a clubby and modern look. With the new store look and the opening of other stores, the capital expenditure rose from $20 million in 1995 to $92 million in 1998. As the capital expenditure rose, so did the company’s revenue. Marketing and advertising are one of the main strategies that companies use to increase their sales. Investment in material and structures that are used to create good marketing and advertising is a capital investment. Companies like Gucci invest highly in such materials and infrastructure with the aim of earning a return. The return is measured by comparing the cash outflow and the cash inflows associated with the advertisements made. Gucci, for instance, can use a discounted cash flow analysis, risk-neutral valuation, utility theory or risk-return analysis to evaluate their capital investments.
In the mid-1990s, most luxury companies were using about three production strategies. The strategies were meant to reduce the costs as they increase the efficiency of production. Managers in a company make a wide range of decisions. The decisions should be in the best interest of the shareholders. When making the manufacturing strategy decisions, Gucci choose to outsource most of its production through a controlled network of Italian firms. The strategy helped save the company fixed asset investment which in turn helped earn a return on invested capital of 36% in 1998. During the same year, Hermes return on invested capital was 19% after the company used a vertically integrated approach to manufacturing. According to Fisher's separation theorem, the objective of the firm is to grow its value to the fullest (Eisfeldtet al. 1370). In this goal, the preferences of the shareholders is not considered. Fisher continued to explain that investment decisions of a firm are separate from its financing decisions. Additionally, the value of a firm’s investment is distinct from the mix of methods used to finance the investment. Therefore, following Fisher’s investment theory, Gucci increased the value of its shareholders by 36% while Hermes only increased the value of its shareholder’s by 19%. Gucci, therefore, used the most appropriate strategy and attained the highest earnings.
Conclusion
The increase in shareholder’s equity and property plant and equipment is an indication of the company’s capital investment. The main goal of any profit-making firm is profit maximization. To maximize profit, companies must minimize the expenses as they maximize the revenue. Gucci maximized its revenue through extensive advertising and renovation of its stores. In minimizing the expenses, Gucci embraced a system whereby, it outsourced most of its production from Italian firms, hence minimized fixed assets investments which in turn reduced the expenses. The capital investment earned a return as seen from the increase in net income. Property, plant, and equipment increased as the company continued to make capital investments regarding purchasing new machines and equipment for production. The total equity also increased over the years as the price of the stock rose.
Works Cited
Eisfeldt, Andrea L., and Dimitris Papanikolaou. "Organization capital and the cross‐section
of expected returns." The Journal of Finance 68.4 (2013): 1365-1406.
Javid, Esmaeil. "The Relationship between financing decisions and investment decisions
in different economic conditions." Academic Journal of Research in Economics and Management 2.3 (2014): 57-64.
