Burberry sales plummet, new turnaround plan focuses on heritage and innovation

Burberry delivered a strategy update along with its half-year results on Thursday and while we’d normally lead with the numbers, it’s the update that’s more interesting.

Ok, let’s not ignore the numbers — revenue fell 22%, but more of that later. So what about strategy?

The company said its new plan means “greater alignment between commercial and creative teams and consistently putting the customer at the heart of everything Burberry does… underpinned by continued focus on productivity, simplification and financial discipline.

“We recognise there is much to be done in the short term, and we are acting with urgency. We are confident we can get back to generating £3 billion in annual revenue over time, while rebuilding margins and driving strong cash generation”.

CEO Joel Schulman said that his first few months “have reaffirmed my belief that Burberry is an extraordinary luxury brand, quintessentially British, equal parts heritage and innovation. Burberry’s original purpose to design clothing that protects people from the weather is more relevant than ever. Our recent underperformance has stemmed from… inconsistent brand execution and a lack of focus on our core outerwear category and our core customer segments. Today, we are acting with urgency. 

“We have a powerful brand with broad appeal among luxury customers, authority in the outerwear and scarf categories which have remained resilient through this period, and a strong presence in all key luxury markets.”

So he’s announced ‘Burberry Forward’, “a strategic plan to reignite brand desire, improve performance and drive long-term value creation. Our focus is on reconnecting our brand with its original purpose and leveraging our strengths with a disciplined approach and a range of products to attract a broad base of luxury customers.”

He clearly thinks the strategy under the last two CEOs was way off the mark. “Over the past several years, we moved too far from our core with disappointing results. Our brand expression was focused on being modern at the expense of celebrating our heritage. We introduced new brand codes and signifiers that were unfamiliar to our customers. Our product was weighted to seasonal fashion with a niche aesthetic obscuring our more timeless core collections. As we pursued brand elevation, our pricing particularly in leather goods did not always align with our category authority. Consequently, Burberry’s offer was skewed to a narrow base of luxury customers.”

Move away from ultra-luxury?

That last statement is an interesting one given the criticism that the company has received for narrowing its focus towards ultra-luxury.

He thinks “Burberry has all the attributes to be a high-performing luxury brand. We have the most opportunity where we have the most authenticity. We have an inspirational founder who created practical and stylish solutions for his era. An original purpose linked to a product that still resonates today. Authority in a core category. Quality that confers status and identity. Iconic brand codes. Relevance to a broad range of luxury customers and global brand awareness that is bigger than our business.

“Today’s luxury customer craves authenticity. As the only British luxury brand with such strong foundations, we have a competitive advantage. We will leverage our strengths and broad universal appeal to reclaim market share.”

So buckle up as there’s a lot to digest in this bit: the new framework focuses on “Timeless British Luxury”; the juxtaposions of “heritage and innovation across all customer touchpoints”; the balancing of seasonal fashion messages with campaigns celebrating outerwear authority; capturing “British wit and style and balanc[ing] recognisable London imagery with British countryside”; leading with authority in outerwear and earning authority in other categories; aligning pricing with category authority; celebrating iconic brand codes with recognisable brand signifiers; rebalancing the offer “with fewer, bigger investments”; aligning distribution with product and customer strategy; increasing store productivity through core category amplification; ‘optimising’ the brand presence in wholesale and outlet; improving e-commerce functionality and rebalancing the product assortment and styling; and leveraging data-driven decision-making “to complement creativity and intuition”. Phew.

Immediate actions on product and marketing since its new CEO arrived have included the launch of campaigns “to reset brand in the eyes of customers”; the evolution of its visual merchandising to accentuate outerwear and scarves in stores with the global rollout of Scarf Bars in the 57th Street flagship in New York; updated styling online “to appeal to a broad range of luxury customers”; and the launch of its Virtual Scarf Try On.

As far as its people are concerned, it has appointed new leaders across Marketing, Product Merchandising and Planning, and the Americas and introduced new ways of working “to achieve creative and commercial alchemy”.

And it has launched a cost savings programme to unlock annualised savings of around £40 million while accelerating its plan “to address inventory overhang and restore scarcity”.

What does all that boil down to? It suggests no creative flights of fancy without a solid link to commerciality. It also seems to suggest a back to basics approach that focuses on what the brand does best, with action taken to avoid the large amounts of product that was ending up at outlet store prices to make shoppers feel like they’re truly buying something special when they pay full price.

But there’s also a suggestion that we could see more materials innovation and it will be interesting to see how far the company takes its heavier focus on outerwear. Will we see it at some point competing in the same kind of categories as brands like Moncler and Golden Goose?

There’s nothing concrete suggesting that the company will be scaling back some of its prices to a more premium level, which is what some speculated might happen. But the wording of the statement does indicate that the move towards ultra luxury hasn’t worked and the company isn’t necessarily now going after the same customer as those who might buy, say, Louis Vuitton or Hermès.

Outlook and results

Of course, there’s no certainty that this will do the trick for the brand and it will take time anyway. Therefore its outlook for the rest of the year ahead remains unclear. It said: “In the short term, with our all-important festive trading period ahead and an uncertain macroeconomic environment, it is too early to determine whether our second-half results will fully offset the first-half adjusted operating loss.”

So now let’s look at those results. In the 26 weeks to late September, we’ve already said that revenue was down 22%. That was on a reported basis with a 20% drop at constant exchange rates (CER). Revenue was £1.086 billion. Retail comparable store sales were down 20%.

The adjusted operating result swung from a £223 million profit a year ago to a loss of £41 million this time (including headwinds of a £33 million impairment charge) with the adjusted operating margin down from 15.9% to -3.8%. The reported operating loss was £53 million, down from that £223 million a year earlier.

See catwalk

The company said comparable store sales fell in every region. They were down 25% in all-important Asia Pacific, down 13% in EMEIA and down 21% in the Americas. That said, in EMEIA and the Americas, the falls were smaller in the second quarter. However, the news wasn’t all good because the negative numbers widened in Asia Pacific in Q2.

More specifically, mainland China comp sales fell 24% and globally the Chinese customer group declined in low double digits. South Korea declined 26% and Japan fell 2% while South Asia Pacific declined as much as 38%.

By product, outerwear and softs continued to perform better than the average in all key regions. Ready-to-wear performed in line with the group average in H1, with an improving trend from Q1 to Q2 for both men’s and women’s. Leather goods and shoes underperformed the group in H1. That’s a big blow for the company that had pinned most of its growth hopes on expanding in leather goods. Regular news of customers being unwilling to pay thousands for a bag when they might find that same bag at half price in an outlet store hasn’t been a good look for Burberry.

Looking at revenue by channel, Retail was down 21% during the half at £885 million while Wholesale fell 30% at £169 million and Licensing rose 3% to £32 million, driven by the continued strong performance in fragrance. Wholesale was impacted by weakening consumer demand and it expects the full year to be down around 35% as it continues the strategic review of its partners.

So what are we to make of all this? Clearly the company’s performance has been dire but its plan makes sense. Whether it’s enough to stop the rot is open to question as is how quickly it might achieve its goals. But there’s no denying that its new CEO is a seasoned strong performer and knows how to make premium and luxury brands a success. We’ll just have to watch this space.