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Burberry Retreats on Beauty Strategy, Signs Deal with Coty

The move is a major reversal in strategy after Burberry took its beauty business in-house four years ago.
Model Iris Law in Burberry Beauty's 2017 campaign | Source: Burberry
By
  • Limei Hoang

LONDON, United Kingdom Burberry has announced a strategic partnership with Coty to help accelerate the growth and development of its beauty division, effective from October this year.

The news marks Burberry's second major strategy reversal since it announced former Celine chief executive Marco Gobbetti as its incoming CEO last year, having tasked Christopher Bailey with the dual responsibilities of CEO and chief creative officer in 2014.

The Coty deal comes just four years after Burberry ended its partnership with Interparfums and took its beauty business in-house. In that time, it has launched luxury fragrances like My Burberry and Mr Burberry and redeveloped its makeup line. The division reported £203 million ($254 million) in revenue for the previous financial year.

"We are in a very different position now to the position we were in four years ago," said Julie Brown, Burberry's chief operating and financial officer who joined the company on January 18. "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."

“We’ve repositioned the business and we feel now its stronger and more valuable than it was then,” added John Smith, an executive director at Burberry and former chief operating officer. “But at the same time, we are on our own, in a industry where there is lots of competition. By partnering with Coty with their sheer scale… we do feel that we will have a lot more force in the marketplace in terms of distribution and relationships with wholesalers, department stores and so on.”

The decision to once again license its beauty division to a partner is a welcome move said Luca Solca, head of luxury goods at Exane BNP Paribas. “Beauty is a business where you win on global reach and local scale and Burberry was a dwarf in a land of giants,” he told BoF.

“I think that they did what was best for the business, they have now signed a first class global leader as a licence partner and I expect that on the back of this, they will able, not only to develop the business much more but also to reduce fixed costs in the profit and loss, to increase royalty payments and also to reduce the net working capital they had tied up with the beauty business," Solca continued.

Beauty is a business where you win on global reach and local scale — Burberry was a dwarf in a land of giants.

"All of this is going to boost return on invested capital (ROIC) and frankly, the business reason to have beauty in-house in the first place was never really there. This is a very welcome development and one which is showing, I think, [how] a new CEO on board is opening up new opportunities to go back to some of the questionable choices that the company has made in the past.”

Gobbetti, who is currently Burberry's executive chairman for Asia Pacific and Middle East, will not assume his CEO role until July 4.

The deal with Coty comes as part of the company’s strategic review of its whole business said Smith, announced last year by Bailey, in which it set out a programme to actions to deliver at least £100 million of annualised cost savings by the end of the financial year 2019 and improve its operations.

Burberry said in a statement that it expected to receive cash payments of £130 million ($163 million) for the long-term exclusive global licence and related transfer of the beauty business, and £50 million ($62.5 million) for assets, which will total around £180 million ($225 million).

It also expects a one-off charge of around £30 million ($37.5 million) cash costs to be associated with the agreement, and will begin to receive ongoing royalty payments when the partnership commences.

In November, the company posted a £26.1 million writedown for value of its beauty licences and said it expected to generate lower than expected revenues up to December this year.

"We are delighted to partner with Coty, a world leader in luxury fragrance and makeup,” said Bailey. “Working with a global partner of their scale and expertise will help drive the next phase of Burberry Beauty's development and position this business for future growth.

“Further, the combination of the upfront payments and ongoing royalties is financially attractive and is expected to provide an accretive impact to our earnings from 2018/19," he added.

The partnership will see Burberry lead on the “creative elements” of the business, while Coty will use its industry expertise and global distribution, meaning the luxury goods company will handle any consumer-facing aspects of the brand including packaging and marketing while Coty uses its extensive global network to sell Burberry’s Beauty range.

“We are super excited and proud to team up with Burberry,” Edgar Huber, Coty Luxury president told BoF. “It’s a very unique positioning. Teaming up with Burberry is really a dream for us and it fits perfectly well in our portfolio because our strategy is to premiumise [sic] more and more the portfolio of Coty … To go even further in this direction is clearly the strategy I pursue for the Coty Luxury division.”

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