Strategy & Operations » Financial Reporting » Is the end nigh for Burberry?

Burrberry’s recently published first quarter results have offered a more positive outlook than their annual report did in May.

The luxury fashion brand announced a 3% rise in underlying profits, with retail revenue at £478million. This will cheer investors, after Burberry reported a 21% fall in underlying pre-tax profits to £462million for the full year.

This fall in profits has been partly due to a blow from the market decline in the US, which is a key region for the UK-headquartered company, and slow sales in Hong Kong, as an economic downturn and political unrest have curbed the tourism market.

Despite strong sales reported in the UK and China, which was met with much applause, the overall slump in sales was too big to be buoyed.

While the brand’s unprofitability could be put down to mere misfortune, caused by an overall decline in the luxury market as consumer spending falls, retailers like Louis Vuitton owner, LVMH, have managed to turn profits around, citing double-digit sales growth in all five of its divisions in Q1.

Burberry has been making efforts to regain its seat at the table. Former CEO-turned-Chief-Creative-Officer, Christopher Bailey, crafted a major turnaround strategy to bring the business back to profitability. The plan includes a huge shakeup of senior management that has seen the appointment of luxury-fashion veteran, Marco Gobbetti, as CEO.

The ambitious strategy also includes plans to cut costs by £100million, improve operations and drive sales over three years. The strategy is built on five key areas: product focus; productive space; e-commerce leadership; operational excellence; inspired people. The first three strategies are about optimising revenue growth, while the latter two are in place to enable it, according to the company website.

A key cost-cutting measure was the consolidation of the company’s three different lines, Prorsum, London and Brit, to be unified under the one brand name, Burberry.

At the time the plans were announced, then-CEO, Bailey, reasoned: “The behaviour of the luxury customer is evolving; their style is more fluid and this is reflected in the way they shop.

“The changes we are making allow us to serve this new behaviour more intuitively.”

Another major change made under the new strategy is the partnership deal between Burberry’s beauty division and Coty. Only four years ago, the British brand took its beauty lines in-house after ending its partnership with Interparfums.

Burberry’s new CFO Julie Brown, said of the move: “We are in a very different position now to the position we were in four years ago.

“There was quite a high level of distribution of beauty products four years ago and what we wanted to do was bring it back in-house, control it a lot more carefully, and ensure we repositioned it, alongside the rest of the Burberry range.”

However, the brand already seems unable to keep up with their ambitious plans. As part of their new strategy to spur growth, Burberry had planned to open a £50million factory in Leeds, but after putting the plans on hold for a year, the brand has now made a complete U-turn, announcing it will not buy the former mill that was to house the facility and citing Brexit as the reason.

CFO, Julie Brown, who joined the company in January this year, said: “It’s a very important decision for Burberry. It’s too early to say.

“Clearly we have had a number of management transitions and we have a new CEO starting in July. It’s a big decision for Burberry.

“We are considering the implications for Brexit.”

Much has also been made of the appointment of Marco Gobbetti, who took the reigns as CEO this month.

Gobbetti has previously worked at Givenchy, Moschino and most recently, Celine, which saw double-digit sales growth and strong profits under his leadership, while other brands struggled.

Yet while he brings decades of expertise, this is the first time Gobbetti will have worked for a listed company.

Outgoing chief executive, Christopher Bailey, was keen to emphasise the changes being made to turn the brand’s fortunes around, saying: “The actions we have taken to lay the foundations for future growth are yielding early benefits and I remain confident that these will build over time.”

However, Bailey, who will step into the newly created role of President and Chief Creative Officer, has been unable to convince investors that the company’s new strategy will create a profitable return and shares fell by almost 6% when the brand’s annual report was published.

Despite the numerous efforts being ploughed into the brand’s regeneration, is it now time for the brand to start considering other options?

Marco Pozzi, senior analyst at Contactlab, says that Burberry has spent too long trying to offer “aspirational prices” to customers, with lower pricing than luxury bands such as Gucci and Prada. This positioning, says Pozzi, means Burberry has been edging into the Premium brand market, rather than the Luxury market.

The problem with this is “a market segment where growth and profitability are more difficult to achieve due to product commoditization” because of production in regions such as Asia and North Africa.

Burberry’s decision to consolidate its brands, however, has been a step in the right direction. Rebuilding exclusivity might give it the push it needs to attempt a move back into the Luxury market.

But Pozzi is sceptical: “Is this enough for Burberry to reposition upward, moving away from Premium brands like Coach, Ralph Lauren and Hugo Boss and trying to re-enter the Luxury league?

“Probably not, because the company still has to work on the fundamentals of the product offer, improving quality and desirability”.

Other Premium brands are also attempting to enter the Luxury market, with Coach pulling its products out of more than 250 department stores last year and acquiring Kate Spade, which boosted its shares.

E-commerce is another big area of focus and as luxury brands strive to increase their online presence and offer a better digital experience, it is difficult to balance this with getting shoppers in-store and offering exclusivity.

Brands such as Fendi, Louis Vuitton, Saint Laurent, Moncler, Bulgari, and Cucinelli all recently increased their online product offer by more than 20%, according to Exane BNP Paribas and Contactlab’s report Online offer dive and pricing landscape, 2017.

Prada and Ferragamo have taken a similar approach, by putting their whole catalogue online to view, but with the difference of making only some items available to buy online, in an attempt to encourage in-store visits and purchases.

Burberry has instead chosen to reduce its online catalogue by 18% over the last year.

It remains to be seen if Britain’s most valuable luxury goods brand can turn things around. Its Q1 statement reported a prediction that underlying wholesale revenue (excluding Beauty) for the second half of the fiscal year 2018, will be down due to brand control, while the business has faced a backlash from investors over its remuneration report.

What Burberry needs now is a renewed focus on exclusivity and the agility to react to political and economic upheaval. But will a new leadership and a new strategy be enough to turn the fashion brand’s fortunes around in such a tough market?