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2012-06-19

Burberry in China
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What's next for the luxury brand in China?

In 2010, Burberry Group said it would buy out its Chinese franchises in a £70m deal that will see it take direct control of its 50 stores on the mainland. Angela Ahrendts, chief executive of Burberry said the Burberry brand had more global momentum than ever in its history. It had the product innovation and supply chain to handle the fastest-growing luxury market. “Regardless of the market dynamics going on, other dynamics are in place to make this the optimum time to do [this deal],” she said.

Burberry will pay £70m from cash resources to end its franchise agreement and buy back the retail properties from Kwok Hang Holdings, its Hong Kong-based master franchisee. The stores are valued at £30m, and produced sales of about £75m last year, bringing the group’s existing franchisees annual operating profit of £14m.

Buying in the franchise is expected to add £20m to operating profit in the 2011-12 year. The China stores are spread across 30 cities in the mainland, including nine in Beijing and four in Shanghai. Burberry has directly-owned stores elsewhere in the region, including 19 in Taiwan, 13 in Hong Kong and one in Macao.

Ms. Ahrendts said another 10 stores were expected to be opened in China this year. “In the next couple of years we could have up to 100 stores in that market,” she said. She added that Burberry was particularly excited about China because a large part of the country had a cold climate. “We are an outerwear company. The opportunity to leverage that category is huge.” In addition, unlike in Japan, the Chinese luxury market was largely dominated by male shoppers.

From the beginning of this year to March 31, Burberry revealed a 24pc rise in sales to £1.9bn and a 24pc jump in pre-tax profits to £366m. Angela Ahrendts hailed the period as “another successful year”, adding: “An intense focus by our global teams on business, brand and culture in recent years has resulted in a strong foundation across channels, regions and products.”

Burberry saw menswear as a particular highlight, with new initiatives such as tailoring increasing underlying growth in this area by 26pc. This represented 24pc of retail/wholesale revenue. Sales of non-clothing items for men jumped by more than 50pc, with growth seen in “large leather goods, small leather goods and soft accessories”.

Jaana Jätyri, chief executive of fashion trend forecaster Trendstop.com, said: “Another bumper set of results for Burberry, which has perfected democratic luxury brand positioning. While positioned above the struggling high street, it is more affordable and more accessible to aspirational buyers – democratic luxury is in high demand.” However, as budget-conscious shoppers keep a close eye on spending, Ms. Ahrendts said she remained “vigilant” about the current retail environment.

Burberry revealed that its retail/wholesale operating margin will be lower in the six months to September than in the same period last year, but expects this to recover in the second half. The company opened 23 mainline stores and 25 concessions during the year, closing 10 and 16 respectively. It expects to open a net 15 stores in 2012/13. Growth in China, where Burberry has 63 stores, was “well over 20pc”. However, it took a £10.2m charge on a put option linked to the 2010 Chinese acquisitions.

getchee Take

In 2010, Burberry made a 70 million pound purchase of its franchise business worth only 30 million pounds. That said a lot about Burberry’s confidence for growth in the Chinese market. At the time of purchase, Burberry had 50 stores in China. They now have 63 stores. From Burberry financial report, in 2010, Asia Pacific revenue was 282.7 million pounds. In 2012 (year to March), AP region reported 652.5 million pounds, their most profitable region.

How will they further capture the male market in China? Will Burberry reach their goal for 100 stores within the next few years? Will Burberry continue to open stores by the coast, or will they expand more in tier 3 cities like Chengdu and Wuhan?