LONDON, United Kingdom — Despite interest in Riccardo Tisci's designs, Burberry's turnaround isn't going to be easy. Chief Executive Marco Gobbetti's strategy for rebooting the British heritage brand relies heavily on high-spending Chinese customers, but the country's economy is slowing and clashes between pro-democracy protestors and police have devastated retail in the key market of Hong Kong, eating into sales momentum.

The brand announced Thursday that adjusted operating profit fell 4 percent to £187 million ($240 million), with the protests in Hong Kong prompting Burberry to write down the value of its shops in the region by £14 million. While sales in China rose by a mid-teen percentage in the first half, Hong Kong experienced a double-digit decline.

Growth in Chinese consumers globally at Burberry was "slightly slower" in the second quarter than in the first quarter, Chief Operating and Financial Officer Julie Brown said on a call to analysts.

“[Hong Kong] is going through a very tough moment. We don’t think the problem in the very near future is going to improve,” Chief Executive Marco Gobbetti said in an interview with BoF. “From what we see there has been some repatriation in China... so there is some business lost.”

Hong Kong typically accounts for 8 percent of Burberry's revenues, but this has fallen to 5 percent in the past six months and more pressure is expected in the coming quarter. The company said it is renegotiating rents with landlords, focusing on serving local customers rather than tourists and intermittently closing stores to protect staff in the Special Administrative Region, Brown said. Gobbetti would not be drawn on possible store closures.

[Hong Kong] is going through a very tough moment. We don't think the problem in the very near future is going to improve.

Burberry is midway through the second year of its new strategy of re-energising and elevating the brand. Chief Creative Officer Riccardo Tisci has given the brand a creative overhaul that coincides with a smaller, more upmarket wholesale offering, a refurbished store network and a digital and social-media-led marketing approach.

Keeping Chinese shoppers — who Gobbetti describes as "the most savvy and educated and fashionable customers" — interested and engaged is key to his strategy. The brand said Thursday that it is entering into a new partnership with technology powerhouse Tencent to develop social retail in China. The social-media inspired store in the southern tech hub of Shenzhen, where "engaged consumers and communities" can share and shop comes alongside the brand's 'B Bounce' video game, released in October, and a festive campaign with young Chinese actress and brand ambassador Zhou Dongyu.

But there are no guarantees Burberry’s moves to cater for Chinese customers will yield the desired results. “I notice that despite a lot of effort spent on Chinese consumers and in China on social media, the Chinese nationality was marginally down in the second quarter which was a little bit funny,” said Bernstein luxury analyst Luca Solca. “The impression I get is the Chinese retailers are expecting further softening in macro-economic backdrop and in discretionary spend,” he added.

Indeed, China’s gross domestic product is growing at the slowest pace in three decades with US-China trade wars escalating tensions and Beijing unwilling to offer stimulus measures like interest rate cuts.

Another key pillar in Gobbetti’s turnaround plan is increasing its leather goods segment, where sales declined by 5 percent, despite Tisci and former–Dior accessories designer Sabrina Bonesi’s new collection of TB monogram handbags, Lola shoulder bag and streetwear inspired bum-bags and backpacks.

“We’re seeing vast improvements [in new styles],” Brown said on an analysts’ call. “But the old styles are still a reasonable proportion of the business.”

I think we've connected very well with new generation but we have to be cautious of macro environments.

The turnaround of handbags will take longer than other products, Gobbetti told analysts, as the new shapes become “future icons” for the house and as they build scale. “I think we’re starting to see a bit of traction, I think we’re starting to turn a corner, we still have some headwind of exiting older lines.”

For Solca, “leather goods is the most important trigger point for the relaunch of the brand to work and we need to observe that very carefully.”

Gobbetti is upbeat for the future. “In front of us, we have something very exciting, we see good momentum, the company is re-energised inside, the competition is very strong, it’s a great stimulus for us to compete with,” he said.

“I think we’ve connected very well with new generation but we have to be cautious of macro environments. Hong Kong has clearly been a focus and we have to be very careful.”

Editor's Note: This article was revised on November 15, 2019. An earlier version of this article stated that spending in China rose by a mid-single digit percentage in the first half, but was "slightly slower" in the second quarter. That is incorrect. Burberry sales in China rose by a mid-teen percentage in the first half.

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