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14 years ago, Burberry was all but put out to pasture, suffering from a dusty
image and its logo being pasted on cake tins, doilies and aprons. Rose-Marie
Bravo was put in the saddle and took Burberry for a ride down Chav lane to the
gates of the luxury racecourse. Despite doing a great job in fixing Burberry over
her 9-year tenure, setting the foundations for her successor and consistently
beating market expectations, the jury was still out as to whether Burberry could
ever become a thoroughbred luxury brand.
The next phase of growth was spearheaded by Angela Ahrendts, who joined
Burberry in 2006. Since her arrival Burberry has galloped to the top of the luxury
valuation leaderboard, more than doubling in turnover and market capitalisation
to £1.5 billion and £5.8 billion respectively, twice the rate of growth of LVMH’s
turnover and market value over the same period.
The recent results announcement was very strong with revenue growth of 27%
and operating profit increasing 37%. However, initial market reaction was muted
by the company’s warning that more investment was required in its flagships and
that margin growth would suffer in the short term as a result.
In this article we will examine how far the brand has come, where the potential
for growth lies and what pitfalls it may encounter along the way.
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A clearly defined brand architecture is the foundation on which a brand’s
business is built. As is the case with houses, the foundations of a brand are
sometimes added to over the years in order to adapt to new markets or demands.
The end result is a mixed bag of brands and sub-brands that have no common
thread and which, by trying to appeal to all, end up appealing to no-one. This was
the case with Burberry 14 years ago. The cleaning up task was gargantuan,
consisting of termination of licenses (32 product licenses in 1998 to 3 product
licenses in 2011), closure of wholesale accounts, re-branding/positioning of retail
outlets, and the phasing out of inconsistent (albeit profitable) sub-brands often in
the company’s most strategic markets such as Japan and Spain.
Burberry now has three main sub-brands: Prorsum, London and Brit (which
includes Burberry Sport). Prorsum took a good decade to earn its stripes: Anna
Wintour attended the Prorsum fashion show for the first time in 2009, when the
show relocated to London from Milan. London and Brit are reaping the benefits
of this investment and have been the main engines of sales and profit growth.
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2. The potential for Brit to outgrow London in size is there to be seized. One only
has to look at Armani Jeans to see how far this label can potentially go.
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Burberry rightly believes that, outside its stores, the best way to reach its
customers is through digital media. The company’s digital strategy covers more
than the main bases: with 5 million fans, it is the most liked luxury brand on
Facebook, it has had 4 million channel views on Youtube last year, its social
networking site “artofthetrench” is engaging and it has built a presence on a
number of international and local social networking sites such as Twitter, Sina
Weibo, Kaixin001, Douban and YouKu. The company has also invested a lot into
its website, which is live in 6 languages and transactional in 45 countries. Off to a
shaky start (slow and difficult to navigate), the website is improving and has great
imagery.
The group’s new store formats are also filled with digital features, such as digital
walls/screens and Ipads for sales staff providing access to the full collection.
This all serves to make the brand a lot more relevant to today and tomorrow’s
luxury consumer.
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Burberry’s outerwear image has proved a solid foundation, but the brand is not
finding it easy to establish itself as a fully-fledged ready-to-wear brand.
Outerwear still accounts for more than half of the mainline apparel sales and is
over-represented in womenswear. We believe there is immediate potential for
growth in menswear, which has only recently been brought fully in-house and in
sportswear, both categories allowing for an easier transition from outerwear.
The more “fashion” offering, led by Prorsum credibility, will find it harder to grow
but will undoubtedly find its customer base over time, particularly in the very
promising emerging markets.
Burberry has made some solid gains in the non-apparel category (mainly in
leather goods), which has grown at an average annual rate of almost 20% since
2001 and now accounts for 44% of wholesale and retail revenues. The company is
now looking to focus on small leather goods and shoes for further growth. Other
areas the company is looking to develop include childrenswear, colour cosmetics
and home accessories. There will be customers indeed for such products due to
the strength of the brand, but the obvious categories have already been tackled
and the company is now venturing further outside its comfort zone.
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3. DDDDiiiissssttttrrrriiiibbbbuuuuttttiiiioooonnnn – rrrreeeeiiiinnnnvvvveeeennnnttttiiiinnnngggg iiiittttsssseeeellllffff aaaassss aaaa rrrreeeettttaaaaiiiilllleeeerrrr
Burberry’s retail operations have been the key driver of the company’s
phenomenal growth over the last decade. In 2001 the company had 54 Directly
Operated Stores (“DOS”), consisting of 1 flagship, 30 mainline stores, 6
concessions and 17 outlet stores. In 2011 that number has risen to a staggering
417 DOS, consisting of 174 mainline stores (including flagships), 199 concessions
and 44 outlets. This outstanding transformation was achieved partly through the
conversion of franchise/wholesale operations to direct retail, notably in Spain,
Korea, Taiwan and most recently China, as well as through investment in new
retail locations, mainly in the USA and in European fashion destinations. Own
retail is now the company’s principal distribution channel, in line with other
leading luxury brands.
In addition to growing its retail operations, Burberry has become a better retailer:
sales densities have improved from a paltry £597/sq.ft. in 2001 to close to £1,000
in 2011. This has been driven by improvements in product mix/merchandising
and in replenishment. Nevertheless this is still a relatively modest performance
for a luxury retailer; the company admits that work needs to be done to improve
the retail experience and has announced a major flagship refurbishment
programme for the current financial year.
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Burberry has evolved from being a predominantly Japanese and Spanish business
with operations in the UK to a truly global brand with a balanced geographic
portfolio. One of its key strategic initiatives has been to invest in under-penetrated
markets, which included developed markets such as the USA and
emerging markets such as China, India and the Middle East. The company’s
store presence in China (50 stores as at July 2010) now matches its luxury peers
and it plans to double its presence in this key market over the next 10 years. The
USA still represents a great opportunity for Burberry as does the Middle East and
India, where the brand still has an embryonic presence.
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Burberry has invested considerable amounts of money and time in overhauling its
operations, supply chain and IT systems. Measures ranged from consolidating its
headquarters into one user-friendly building in London, bringing all the corporate
teams under the same roof for the first time; streamlining its numerous IT
networks to a single global network, rolling out SAP worldwide (China still to
come), and consolidating its suppliers and logistics centres. The impact of this
S A V I G N Y P A R T N E R S L L P

4. investment can be felt in all business areas: live sales data from the stores allows
the company to react quickly by replenishing stock that sells well; housing the
merchandising and design teams under the same roof allows for a more
collaborative process between the two functions; streamlined supply chain allows
both for cost savings and faster time to market. As a result, Burberry is second
to none in modern retail practices, with the introduction of flash collections and a
synchronised monthly flow of new products and floorsets across its store
portfolio and website.
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Burberry’s transformation from a licensed brand to a vertically integrated luxury
goods company did not come cheap. A lot of investment was required: in
overheads, to create the right infrastructure, and in capital expenditure to either
gain control of retail assets, licenses (although most licenses were allowed to
lapse rather than were bought out) or roll out DOS. This is not unlike coming off
drugs: licensing income is often ultimately bad for a luxury brand but weaning off
it is both difficult and painful, as one has to shut off a steady stream of effortless
income. According to publicly available information, we have identified nearly
£830 million spent by Burberry to turn its business around in the period 2001-
2011, excluding a goodwill write-off of £116 million in 2009 for the closure of the
Spanish business (the total amount is probably closer to £1 billion, taking into
account unidentified overhead costs). This has proved to be a worthwhile
investment: over this period Burberry’s revenue has increased by £1 billion, its
operating profit has more than quadrupled and its market capitalisation has
increased by £4.7 billion. Unlike other celebrated transformation stories, such as
Gucci, this was done under the scrutiny of public ownership, was managed almost
entirely out of the company’s annual cash flow and, with the exception of 2009,
whilst still growing profits.
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5. Is the current valuation sss ttthhheee cccuuurrrrrreeennnttt vvvaaallluuuaaatttiiiooonnn jjjjuuuussssttttiiiiffffiiiieeeedddd????
Burberry’s management team deserve praise for having got the brand so far.
Operations, brand architecture and communication are best-in-class. Major
improvements have been made in the product mix, and the company now has a
balanced geographic and retail/wholesale portfolio. The company is undoubtedly
a luxury goods business. At 16.5x EBITDA, its current rating is only slightly above
the industry average of 14.9x but significantly above LVMH’s EV/EBITDA multiple
of 12.6x. Undoubtedly Burberry’s growth has well outpaced that of the sector as a
whole over the last decade, as the company was getting back licenses and
developing retail. This took considerable skill, effort and investment, but in our
opinion the low hanging fruit have already been picked. The path ahead is beset
with challenges and today there is less justification to Burberry trading at such a
premium to industry benchmark LVMH (which is currently firing on all cylinders);
unless one factors in a takeover premium. As the recent Bulgari acquisition
shows, large luxury assets are sufficiently rare to justify paying over the odds.
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