Burberry’s new chief executive, Marco Gobbetti, has revealed plans to take the British luxury brand more upmarket as part of a shake-up that comes with a hefty price tag of its own.
The company’s shares fell 10% – wiping nearly £850m off its value – as investors took fright at Gobbetti’s ambition to turn Burberry into a super-luxe brand, like Gucci and Dior, which have higher prices and profit margins. To get there it will spend millions of pounds turning its stores into temples of luxury and stop selling its trench coats and handbags through some department stores, denting sales in the short-term.
Gobbetti spelled out his vision nine days after Christopher Bailey, the group’s president and design chief, unexpectedly announced his departure after 17 years with the brand. “I played no part in it and am sad to see him go,” said Gobbetti of Bailey’s departure. “The process has started but it will take some time to find the right creative leader for Burberry for the next decade. Don’t expect any announcements very, very soon.”
Bailey transformed Burberry from a small UK company into a global fashion brand, building its digital presence by streaming its fashion shows live and redesigning its flagship stores. He became chief executive in 2014 but luxury goods veteran Gobbetti was hired as a co-chief executive two years later after investors became anxious about the design supremo also running the business.
In July Gobbetti replaced Christopher Bailey and became sole chief executive. Bailey was named president instead and his sudden decision to quit was a surprise to most fashion-watchers.
In Thursday’s strategy update Gobbetti, who previously ran Céline, said he would close some outlets in department stores, starting in the US, before moving on to the European operation. “We must sharpen our brand position, we must move up to plant ourselves firmly in luxury,” explained Gobbetti, who said the luxury market was changing and that shoppers wanted more “fashion and newness”.
Gobbetti gave the example of simple polo shirts, which are priced at £145 to £275 each. They needed to be priced about 50% higher to match other luxury players, he said. Other products, such as Burberry’s famous trenchcoats, which cost around £1,200, were already at the right level, he said.
Burberry said it was too early to give numbers for affected outlets and jobs. To help fund the transformation Gobbetti said the company would cut its running costs by £120m a year but those savings would be ploughed into the investment programme. RBC analyst Rogerio Fujimori said the plan would require a “lot of time and patience” from investors.”. The shares closed down 198p at £17.87.
The company refused to comment on speculation that British fashion designer Phoebe Philo, who is creative director at French house Céline, is the front runner to replace Bailey. Burberry trades on its 161-year British heritage but the Italian businessman said it was not essential that the candidate came from this country as there were plenty of examples of US and European brands with creative directors from elsewhere.
Gobbetti’s plan was unveiled as Burberry posted half-year profits. Like-for-like retail sales were up 4% in the six months to September, ahead of analysts’ forecast of 3% growth, with the UK growing in double digits. Pre-tax profits also came in ahead of expectations at £128m. Overall, revenues rose 9% to £1.3bn. Rainwear has boosted sales in the past six months, with the car coat and the tropical gabardine particularly popular.
China posted the strongest growth while UK sales slowed in the latest quarter compared with last year. After the Brexit vote in June 2016, sterling fell sharply and there was an influx of tourists who bought Burberry coats and bags.
Steve Clayton, manager of a Hargreaves Lansdown fund that holds a 3.8% stake in Burberry, said: “Mr Gobbetti wants to take Burberry out of all but the most exclusive stores, starting in the US wholesale channel, and then more widely. It’s a textbook luxury brand repositioning, which should leave Burberry jostling up against the world’s most exclusive names, with the margins to match. But this will take time and in the near term, sales growth will be held back and the group must invest more to achieve its goals.”
Clayton thinks the move upmarket makes sense. “True luxury brands command immense pricing power and generate fabulous margins and cash flows. They sell to wealthy consumers and just like their customers, are more resistant to downturns. As Mr Gobbetti puts it, ‘we will play in the most rewarding, enduring segment of the market’. That’s a prize worth paying for.”
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