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Can Burberry Get Back on Track?

In recent years, Burberry has struggled to maintain its growth trajectory. Now, the company is betting on newly installed chief executive Marco Gobbetti and Christopher Bailey’s renewed focus on his design duties to reignite Britain’s biggest luxury fashion house.
The Burberry car coat campaign | Source: © Courtesy of Burberry / Alasdair McLellan
By
  • Sarah Shannon
BoF PROFESSIONAL

LONDON, United KingdomBurberry has certainly come a long way.

Starting in 1997, after a period of brand dilution during which the company's signature check was adopted by working class "chavs" and pasted on everything from baseball caps to cake tins, American businesswoman Rose Marie Bravo began cleaning up the Burberry business, buying back licences and transforming the British stalwart — best known for its classic, durable trench coats — into a credible luxury house. The power duo of chief executive Angela Ahrendts and creative director (later chief creative officer) Christopher Bailey went even further, pushing its position through a double-barrelled focus on British heritage and digital innovation aimed at a millennial audience.

By 2011, the company was a new star of the global luxury industry, generating £1.5 billion in revenue, a 27 percent increase over the previous year, significantly outperforming leading French luxury conglomerate LVMH over the same period.

But after Ahrendts decamped to run Apple’s retail programme in 2014, Bailey stepped into the highly unusual dual role of chief creative officer and chief executive officer. In hindsight, this was a mistake. The new position undermined Bailey's ability to focus on the product, which began to lose its appeal with consumers. Some observers say this was compounded by the company’s programme of brand purification, which became a creative straitjacket. Others say the focus on digital innovation distracted Bailey from his core design duties.

Over the last three years, Burberry has struggled to maintain momentum, with the company's sales growth seriously lagging its luxury peers. Overall retail revenues declined by 2 percent in 2016, with a small first-quarter increase of 3 percent. Compare that to Kering, who reported first-quarter sales increased by 31.2 percent amid a huge revival at Gucci, while LVMH reported a 13 percent gain.

While Burberry’s UK sales have been buoyed by tourists taking advantage of a weak pound, in Asia-Pacific revenues were flat last year as Chinese tourists avoided Hong Kong, a key market for the British megabrand. The Americas, meanwhile, has proven to be Burberry’s worst performing region, with double-digit sales declines due, in no small part, to its exposure to the troubled American department store sector.

This year, ex-Céline chief executive Marco Gobbetti took the reins at Burberry. On his first day on the job in July as chief executive, Gobbetti flew to the US. "I think that probably tells you how important he sees that market," Julie Brown, chief financial officer said earlier this year.

Gobbetti’s arrival should allow Bailey to focus on his design duties in the new role of chief creative officer and president. But according to sources within the company, Bailey may only have a few seasons to prove himself.

“I think it all very much depends on how effective Christopher Bailey will manage to be,” says Luca Solca, head of the luxury goods sector at Exane BNP Paribas. “Burberry seems somewhat déjà vu and in more of the same mode — can Bailey shake that and be bolder in his creative approach? If yes, I believe the new CEO will be happy to make the most of the new impetus that would follow that. If not, Gobbetti would need to find new energy to reignite the brand and prevent further loss of market share.”

Come Saturday, all eyes will be on Burberry at London Fashion Week as Bailey presents his first collection since the leadership transition took place. As for Gobbetti, the new chief has yet to lay out a comprehensive vision for the business and internal sources cite uncertainty in the organisation, saying some Burberry employees feel the company is currently “on hold” until he outlines his plans.

And yet there are signs of a new approach brewing.

Creative Reboot

Bailey doesn’t seem shy of resuscitating Burberry’s red, black and tan check, once feared for its association with working class “chavs” and football hooligans, as part of a creative reboot designed to regain the brand’s cool factor. In a recent British Vogue interview, Bailey joked he had never met Danniella Westbrook, the former “Eastenders” actress who famously decked herself and young daughter in top-to-toe Burberry check.

But more telling was the brand's tie-up with Gosha Rubchinskiy, the skater-inflected Russian fashion brand, which unveiled a surprise collaboration with Burberry at a rave and football-inspired Spring/Summer 2018 show held in June in St Petersburg. One of the show's key looks was composed of a short-sleeve shirt, shorts and cap — all in Burberry's check. It was an utterly different proposition to last season's Burberry ready-to-wear show, which referenced British sculptor Henry Moore.

The shift can also be felt in the brand’s advertising. Once glossy affairs featuring the children of celebrities and aristocrats, the new ads feature little-known artists, students and musicians hanging outside public housing estates and riding public buses. A source close to the company said the marketing team had been encouraged to use more underground photographers and stylists to deliver more on-trend visuals.

Leather Goods Offering

One underlying problem Gobbetti will need to consider is the weak leather goods offering. At core competitor Gucci, leather goods, which offer high margins, make up 55 percent of sales. At Burberry, on the other hand, accessories account for just 38 percent of revenues. But change is afoot here too. Tellingly, Sabrina Bonesi joined Burberry from Dior earlier this year, taking up the position of design director of leather goods and shoes, a clear statement that the brand intends to push further into the category in which Gobbetti also has deep experience. Burberry recently introduced a new DK88 handbag, a reference to the house code for the honey-coloured gabardine fabric.

US Department Stores

It’s not just Burberry’s product offering that needs to be overhauled. The Americas, which represents about a quarter of the business, is Burberry’s worst performing market: revenues declined in the region by 11 percent last year. Not only is shopper traffic down but the relative strength of the US dollar means luxury buyers are spending more abroad than at home.

The other issue is Burberry’s over-reliance on US department stores where sluggish foot traffic and heavy discounting are damaging both sales and brand integrity. Under Angela Ahrendts, the brand pushed into US department stores with three lines: the luxury Prorsum line, Burberry London and the lower-priced Burberry Brit line in order to extend its reach across several floors of stores. Burberry has since done away with these distinctions, brought its entire offering under one brand umbrella and cut product assortment by one-fifth, yet its reliance on big US department stores remains high. Wholesale accounts for 30 percent of sales in the Americas, versus about 20 percent across the business.

So bad is the US department store environment that some analysts argue Burberry should get out of wholesale entirely and focus on delivering a truly luxury experience in its own-brand stores.

“If Burberry was not listed, I could imagine Marco Gobbetti looking to withdraw from wholesale altogether in order to elevate the brand in a sustainable way over time,” says John Guy, managing director and co-head of luxury at Mainfirst Bank. “Clearly [because Burberry is] listed the impact on sales would be acute over the short term so this makes it harder to execute.”

Brand Perception

To be sure, the department store issue has also contributed to a general sentiment in the US, perhaps more than other geographies, that Burberry is an "affordable luxury" brand, more closely aligned to Coach than Dior, and therefore overly priced in the eyes of consumers.

But according to Mario Ortelli, head of the luxury goods sector at Sanford C. Bernstein, the problem of brand positioning extends beyond the US. In an “open letter” to Gobbetti calling on him to solve the brand’s unclear positioning, Ortelli wrote: “To drive sustainable growth and margin expansion going forward as a £2.8 billion brand, you must decide whether Burberry will elevate to become a true aspirational brand, or to expand the brand with an accessible offer and focus on profitability. Currently, you have elements of both – and this unclear brand positioning is limiting your brand momentum and pricing power.”

“Brand elevation will no doubt be a long journey with a fair bit of pain in the initial years; however, should you be successful, Burberry could become a stronger, more enduring brand. Lowering to an accessible luxury position and pursuing volume growth would boost sales, margins, and cash generation in the short term, but would come with the price of increasing your brand risk in the long term,” he continued.

Certainly, Ortelli and others believe if Burberry is able to successfully elevate to a true luxury brand it could have more more sustainable, long-term prospects. This will require reducing entry-level products, upgrading stores for a more luxurious feel, closing some non-exclusive locations and increasing the proportion of products made in high-cost countries. This will take time and be costly but “we believe Burberry can be successfully elevated,” Ortelli says.

Here, Gobbetti's experience at Céline where he worked with designer Phoebe Philo to maintain an image of exclusivity by closing stores and limiting access to "It" bags may also come in handy.

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