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BoF Exclusive | How Burberry is Rebuilding Its Japan Business

On June 30, Burberry’s lucrative 35-year licensing deal with Sanyo Shokai came to a quiet close, enabling Burberry to take direct control of its Japanese business. How will the brand manage the transition and make up the shortfall?
Burberry store, Omotesando, Japan | Source: Courtesy
By
  • Imran Amed

TOKYO, Japan Earlier this month, when Burberry announced its first quarter results for 2015, analysts were downbeat on the company's performance in the critical Asia-Pacific region where comparable sales were down by low single-digit percentage points, driven by ongoing acute weakness in Hong Kong, a key market. But buried in the company's Q1 results was one bright spot of optimism in Asia. In a conference call with analysts, chief financial officer Carol Fairweather reported that Burberry saw "exceptional growth" in Japan, a market that, for many luxury brands, has taken a back seat to China.

The mention of Japan in Burberry’s latest quarterly results was both a tip of the hat and a subtle signal that the Japanese market was now firmly in the company’s sights. On June 30, a comprehensive licensing agreement with Sanyo Shokai Ltd drew to a close, ending the lucrative thirty-five year partnership five years early and opening a completely new chapter for Burberry, which is now taking direct control of its business in Japan.

Why a change in the Japan strategy?

"At Burberry we strive to deliver the purest articulation of our brand. This allows our customers to have a consistent and authentic experience of Burberry wherever they find us," Christopher Bailey, chief creative and chief executive officer, told BoF.

“If you apply this strategy across the business as we have, it means operating on an in-house basis to a large extent, allowing us to maintain focus and quality control across design, product development and, ultimately, retail,” he continued. “This has proved successful for us, most recently in beauty, and leads us to believe it is right to bring our Japanese license business to a close now, allowing us to roll out our global luxury product offering more widely across Japan.”

Until the end of last month, Burberry operated two distinctly non-luxury labels, Burberry Blue and Burberry Black, in Japan. These collections were completely separate from the global Burberry collections and sold at more accessible price points at odds with the core brand’s luxury positioning.

One of the last remaining trenchcoats from the discontinued Burberry Black collection is currently listed at 58,400 yen (about $470) on Japanese e-commerce site Rakuten, about 30 percent less expensive than an entry level trenchcoat retailing at 86,400 yen (about $700) in the Burberry Brit collection. Opening price points for Burberry Heritage trenchcoats, manufactured at its facilities in Yorkshire in the North of England, are 210,600 yen in Japan, or about $1,700.

“The Japanese positioning of Burberry under Sanyo Shokai and the global positioning were greatly out of sync,” said Michael Causton, partner at JapanConsuming, a market research and intelligence firm. “Japan’s positioning of Burberry as an upper-middle brand was anchored in the 1970s and 1980s, matching Burberry’s positioning back then in the UK. As Burberry evolved into a global luxury brand, Japan did not keep up.” Over the years, Burberry has made efforts to reposition its brand at home in the United Kingdom, and taken over direct operations of its businesses in China and Spain.

This mismatched positioning in Japan was also increasingly problematic due to the record number of tourists arriving in Japan each year. Since 2011, tourist arrivals in Japan have more than doubled and sales to tourists at department stores have risen by as much as three times. In some stores, tourists now account for as much as 40 percent of sales, according to Mr Causton.

Thus, Burberry’s historically different positioning in Japan may also have been detrimental to its luxury brand profile abroad, as the Burberry Black and Blue collections were now visible to a growing number of visitors from outside the country, especially the critical travelling Chinese consumer. According to the Japanese tourism agency, arrivals of travellers from Mainland China were up more than 80 percent last year, making them the country’s biggest-spending visitors.

Managing the transition

But while the rationale for the shift in strategy may be clear, unravelling such a partnership and setting up an entirely new operation in a market known for having the most discerning customers on the planet is not easy.

“To do business here, it’s a hell of a challenge,” said Pascal Perrier, Burberry’s chief executive officer of Asia Pacific, in an exclusive interview at the brand’s gleaming new flagship in Omotesando, a Tokyo neighbourhood brimming with luxury competitors.

Perrier recounts the story of an older Japanese client who came to Burberry, wanting to return a handbag. “She said, ‘This product is defective,’ and we looked at it and said, ‘Where is the defect?’ ‘It’s on the strap, look at the strap!’ she said.” On closer inspection, there was a single point of stitching that was not the same length as the others, leading to one very dissatisfied customer. “That product passes everywhere else; Korea, China, New York, but not in Japan. So this is very inspiring, because [we] will have to elevate ourselves — elevate the entire organisation to meet the customer’s expectations in Japan.”

Burberry store, Omotesando, Tokyo | Photo: BoF

The transition to a directly-operated presence began back in 2009 when Burberry opened its first directly-operated freestanding store and began to offer its global collections (Burberry Prorsum, London and Brit) in the Japanese market alongside the Black and Blue labels. “So, we have been doing business in Japan, not in the best of the environments, because we were doing this alongside the licensed products, so it was basically one brand and two voices. Yet, we’ve been learning, building capabilities and growing,” explained Mr Perrier.

Over the next few months, by September 30, 2015, the Burberry Blue and Black labels will be completely phased out and Burberry's global collections will be made available in five existing standalone stores and 13 concessions now directly controlled and operated by Burberry. The company will also take over ten childrenswear concessions from Sanyo that already distribute the global collection.

“There are about 500 stores, combined between Burberry London, men’s, women’s, the Blue label, that have to basically disappear,” explained Perrier. “It cannot happen overnight. The peak in the transition will occur between July 20th and August 20th. In terms of inventory management, Sanyo is allowed to sell their own inventory in their own outlet network until June 2016. Past that date, they’ll have to destroy it. Their inventory situation in fact is very healthy, so we do not expect big problems here.”

Burberry has also had to think about the impact of these changes for Japanese consumers, who are accustomed to buying Burberry in hundreds of stores dotted around Japan’s main cities at relatively accessible price points.

“We have a lot of plans and activities around communication of the brand. Part of it will be targeted to the consumer, because it’s quite a trauma when you think about it. I like to say that we go from the status of ‘hard to miss’ to ‘hard to find.’ But that is good — this is what we want! We want to be visible with brand statements like our stores, but we don’t want to be on every shelf of every department store,” Perrier said.

One unexpected benefit of the 35-year licensing partnership with Sanyo Shokai is that it has resulted in exceptionally high awareness of the Burberry brand in Japan. “It’s very interesting because Burberry is, in terms of brand awareness in Japan, the most well-known [luxury] brand,” said Perrier. “I think it’s because of the size and the seriousness of the brand. And this awareness is also very positive, because it says, ‘Burberry is a very good brand, in terms of quality. It is just too classical.’”

“We were initially thinking, a long time ago, that because it’s licensed, the [brand] image is very, very bad. In fact, we are so lucky. It is not bad. It just needs to be more focused,” he added.

So, alongside several new flagship stores opening in key cities, the company has taken out a series of advertisements in the main Japanese newspapers, focusing on Burberry’s heritage, with images of the Castleford factory where the top-of-the-line Heritage trenchcoats are crafted, reinforcing the brand's luxury positioning.

A Japanese advertisment for Burberry Heritage | Source: Courtesy

A lifeline for Sanyo Shokai

But the Burberry transition also has implications for Sanyo Shokai, whose president, Masahiko Sugiura, has said it will take five years for the company to make up for the lost Burberry business. According to Nikkei, Burberry makes up about 50 percent of Sanyo Shokai’s revenues.

“It is significant that a few days after Burberry’s license ended, Sanyo announced that it would refit some 260 of those corners and concessions with a new licensed brand called Mackintosh London,” said JapanConsuming’s Michael Causton. “Many regional department stores were and are extremely worried about the loss of Burberry because they knew that Burberry UK would not want to locate the brand in their stores because they are too downmarket and dreary, and Burberry has been one of their few consistent strong sellers. Mackintosh London is meant to replace it.”

This fiscal year, the company expects a 13.5 percent decline in revenues, a relatively modest drop because it only reflects six months of trading without the Burberry license. A higher drop, of up to twenty percent, can be expected in 2016, leaving the company with an urgent need to find further replacement revenues.

In a surprise move, Burberry also agreed to continue working on a licensed product for Sanyo Shokai under the Blue and Black labels, but now under a new brand called Crestbridge. Perrier says this was not connected to the negotiation to terminate the partnership in 2009 and will continue for three years, generating only a few million pounds of revenue.

“We did a lot of surveys and the brand equity was in Black and Blue, not in Burberry,” he said, “So we said, okay, it’s a business and what if we just had a label transformation, keeping Black and Blue, which we own, and then remove the Burberry IP.”

Some market experts have mixed views as to the workability of Sanyo’s catch-up strategy. “I would think the fact that Mackintosh London will immediately have 260 corners and concessions will help to some extent, but there will be a fall out,” concludes Michael Causton. “Mackintosh London is a reasonable replacement brand, but Crestbridge without the Burberry name is a struggle. Sanyo Shokai’s record with new brands is patchy and mid-ranked department store brands overall are struggling. A much higher fall [in sales] in 2016 is not unlikely.”

Will Burberry's strategy work?

As for Burberry, Bailey and Perrier remain sanguine about the brand’s long-term potential in Japan, even if it means absorbing a revenue and profit shortfall.

“In the short term this means there will be some income loss from the license coming to an end, but this is more than outweighed by the long-term creative and commercial brand potential that can be achieved through a consistent global luxury product offering available to our Japanese customers wherever they choose to shop with us,” explained Bailey.

Luca Solca, head of luxury goods at Exane BNP Paribas agreed, but said it will require a significant financial sacrifice and patience on the part of Burberry and its shareholders. “You give up 60 to 70 million pounds in royalties, you commit significant capital, and, if all goes well, after five years you make half of the profit you used to make,” he said. “It will take a lot of money and quite some time, but I think they can do it. They have been effective in other areas too, when it came to repositioning the brand higher.”

Burberry store, Osaka, Japan | Source: Courtesy

Burberry had originally estimated that the new directly operated Japan business would generate 100 million pounds (about $155 million) in revenue by 2017, but this was revised down in April due to challenges in securing the right retail space, particularly in department stores, where securing high quality space is especially challenging. “We only go, in terms of real estate, for the best,” said Mr Perrier. “So, if it’s not available, we wait. If it’s not what we want, we wait.”

For now, existing brand awareness and high-quality retail outlets will help to soften the blow. “Burberry’s graduated approach to delinking from Sanyo means it already has a strong base. It has some 18 stores in Japan under direct management and lots of local partners for peripheral product, such as its new cosmetics deal with Shiseido. Eighteen stores doesn’t sound like many compared to 300 before, but many of the latter were shoddy corners in shoddier department stores. Newer stores like the upcoming Shinjuku flagship are glittering brand temples,” said Causton.

Perrier said the company's longer-term target of generating about 10 percent of overall revenues from Japan remains unchanged and that, over the long run, Burberry will aim for about eight standalone stores and 30 to 35 concessions in department stores, in line with core luxury peers such as Louis Vuitton and Gucci.

But it seems that in a global luxury market with growing tourism and market transparency, protecting brand equity must come before profits. While Solca agrees this is a prudent long-term choice for Burberry, he projects this will require a sustained haircut for Burberry in terms of profits generated from Japan.

“Assuming Burberry builds a position to match rivals in Japan, it would still find itself with an EBIT (earnings before interest and tax) shortfall in 2019 of about 30 million pounds (about $46.5 million) versus its position today.”

Editor’s Note: This article was revised on 29 May, 2015. An earlier version of this article misstated that opening price points for Burberry Heritage trenchcoats are 86,400 yen in Japan (about $1,700). They are not. Opening price points for Burberry Heritage trenchcoats are 210,600 yen in Japan (about $1,700).

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