BURPBERRY: SOME HICCUPS

Recent developments and travails at Burberry raised a number of thoughts and questions in my mind about the role of the CEO is shaping and developing the direction of a company or organisation.

First by way of background are some details about Burberry.

The company was established in the UK in the middle of the nineteenth century and over the years and decades became established as the traditional face of luxury UK fashion. With its eponymous trench coats and distinctive styling. It opened its first store in central London in 1891. In more recent times it has become a global retailers with a number of different routes to market such as branded stores, franchises and concessions in many of the main cities.

It also benefits from a Royal Warrant issued by the Queen. This is an extremely important marketing tool as it reinforces the concept of luxury and has the official approval of a critical organisation which influences and shapes some people’s perspective of aspiration and exclusivity.

In the past couple of decades Burberry had experience a number of “highs and lows”. In the latter case it bore the brunt of much fun and humour as it attracted the attention of counterfeit operators who sold the traditional check garments for very low prices on market stalls. Many of the so-called “chav” celebrities were also to be seen wearing Burberry. This issue was addressed over a period of time by reducing the check appearance on many of the items and focusing instead on factors such as quality, style and positioning.

The growth experienced in economies such as China sparked off a very large demand for luxury items and brands in general. Burberry, with its long-established and traditional image and heritage benefited from this surge in interest in luxury. This heritage factor has consistently been reinforced by the consistent use of actresses and actors over the decades to promote the brand. These included Humphrey Bogart, Pierce Brosnan, to more recent people such as Emma Watson and Carla Delevinge.

It was not just China which provided the surge in growth of sales for Burberry: the Gulf region, Russia, India, Brazil and other fast-growing economies also developed a healthy appetite for luxury in general and Burberry in particular. The Asia-Pacific region in particular generated over 40% of overall sales. In 2013-14, an overall growth rate of 18 per cent was generated. This dropped to a decline in sales of two percent in 2015.

The decline in growth of these economies caused a major hiccup in performance and overall profitability and forced Burberry to reconsider its overall strategic direction. Luxury tourists to centres such as Hong Kong and Singapore are in decline and this “cash cow” has dried up to a large extent. It is not all doom and gloom however as Japan is holding up well in this luxury centre and Burberry is performing satisfactorily there.

Notwithstanding the overall decline in sales from China, Burberry still remains confident that the sheer size of the “middle-class” market there will continue to generate new customers.

Burberry had introduced some changes to its overall strategy. We will focus on the managerial ones but briefly will consider the other changes in direction.

It has embarked on an overall cost-cutting exercise to generate savings of around £100 million. This revolves around reduced staffing, a reduction in the number of sku’s carried – rumoured to be around 20 per cent and a focus on more localised products. It also plans to improve the overall store experience for shoppers.

From my perspective the changes at the top raise some interesting issues about the overall role, importance and influence that individuals can play in shaping or in this case possibly re-shaping the future direction of an organisation.

I would suggest that when we look at a retailer such as Burberry, with its focus on fashion and luxury it becomes even more challenging and interesting. Why?

Well fashion immediately raises issues about the attitudes and perceptions of the target market to the product offering. Fashion can be ephemeral: it does not have the long-lasting impact that other more traditional brand tend to have. Although it can be argued that this is not the case with Burberry, which has lasted since the middle of the nineteenth century. The creative and design challenges are arguably difficult to address with full confidence. Can you teach creativity? In the fashion retail sector it is critical to attract the right people to run the business. However someone who has a proven track record of running a traditional business may lack the necessary empathy or “feel” for what constitutes fashion and what is appropriate for a well-established luxury brand.

Let’s briefly consider how Burberry has addressed this issue.

In July 2016 Burberry replaced Christopher Bailey with Marco Gobbetti, who was previously the CEO of the French luxury brand, Celine. Bailey moves to the position of President and retains his position as the Chief Creative Officer of the company. Both of them will report directly to John Peace: the Chairman.

Arguably the decline cannot be attributed directly to the work of Bailey. The macro-economic vagaries of key markets would have happened anyway. However as is the case most notably with football managers, the “buck stops with them”. Fashion retailing, like sports is a “results business” and someone has to carry the can for poor performance.

In this revamped organisational change, Bailey will be allowed to continue with his focus and expertise on issues such as brand development and overall creative design. Gobbetti will focus on the overall issue of strategy and corporate culture. Gobbetti has proved himself as someone who has delivered in luxury fashion with the overall performance of Celine during an eight year period with them. He brings his overall expertise in strategy development to Burberry and arguably frees up Bailey to concentrate on what he has been good at; namely design and creativity.

It can be argued this merging of talents should generate a synergy that ultimately can lead to improved performance in sales and profitability across Burberry. The old adage of “2+2=5” applies. Or does it?

The cynic in me suggests otherwise. We would appear to have two strong personalities coming together with particular views about the way the business should run. Bailey has had a lot of success up to the recession in key markets and the overall drop in sales and profitability. Has he been “shoved upstairs”, like a successful football manager that a club is reluctant to get rid of? Creative people tend to have big egos and are difficult to work with.

Companies like Burberry come under pressure from shareholders when profits fall. To some extent, personnel changes are inevitable, like the case of football management.

When Peace made Bailey chief executive in 2013, he provide him with a very generous remuneration package which was subsequently heavily criticised by shareholders. Part of it included a retention bonus to be spread out over2015 – 2018, irrespective of how the company performed. The new deal predictably has been reduced and is heavily performance-driven.

It will be interesting to see how the new management structure might work. Will we see some synergy or will we encounter ongoing battles between the individuals? Let’s wait and see (hic)

 

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I DON’T BELIEVE IN IF ANYMORE

Roger Whittaker: a well-known singer and songwriter of the 1960’s and 70’s penned a song called “I don’t believe in if anymore”. I have taken the title and misinterpreted it somewhat to capture my feelings and thoughts about the recent decision of the UK population to vote to leave the European Union.

Since the referendum results came out in late-June, the media has been more than pre-occupied with the views of all sorts of experts, gurus, commentators and so on, about its impact on the future of the UK. The usual suspects: politicians, economists, business consultants and prophets have been to the fore in this regard.

What about the impact of Brexit on the retail sector? I will try to capture some views in the following paragraphs, albeit with a sardonic and cynical perspective; grounded in decades of experience of listening to such “experts” on various subject matter.

Much of the commentary since the referendum has been based around the word “if”. If certain things happen e.g. a severe decline in the value of sterling, continuing uncertainty and the challenges of “doing a deal” with the EU, then certain things may (or may not) happen. The usual jargon and clichés are used by such writers and commentators. The simple answer is that we don’t know what might happen. Much of the contributions reflect biases and prejudices that are not necessarily objective and indeed in many cases are doing damage to the well-being of the economy.

The facts are as follows. Politicians, business-people and consumers, for the most part, dislike any change to the way in which they do business and operate in their every-day lives and transactions. For most of us, the natural reaction is to reject or turn our backs against transformative processes or decisions. This is evidenced in the commentary that appears almost daily in the general and social media.

Irrespective of the “rights or wrongs” arising from the decision to leave the EU (and it is not my intention to declare any personal views here), it is TOO EARLY to make any definitive statement about where the retail sector will be in the sort, medium or long-term. This should be the default position at the beginning of any discussion on the impact of Brexit.

In February 2016, the Centre for Retail Research presented a reasonably objective view of the likely impact of Brexit. (www.http://retailresearch.org/brexit.php). It is worth reading to gain a reasonably clear insight into the ley issues that may or may not play a significant impact on the retail sector.

I highlight a few observations in the next couple of paragraphs.

The issue of tariffs comes to the fore in much of the discussion. Clearly when the UK leaves the EU it is likely to have to deal with various tariffs imposed by countries in the context of international trade. However in the forty to fifty years since the advent of the EU, international tariffs in general have fallen to as low as 5 to 6 per cent in nearly all cases. In this period, we have seen a move to market liberalisation and a greater emphasis on creating a positive climate for foreign trade globally. Previously closed economies such as India and China have opened up considerably in the last ten to fifteen years. In this context, tariffs, while still around, possibly are less likely to present such insurmountable barriers as was the case in the past.

Free movement of labour is a key issue in any negotiation with the EU. It is one of the essential pillars behind the rationale for a European Union. All we can say at this stage is that much will depend on the tenor of the negotiations that will take place over the next couple of years. It is likely to be used as a key bargaining chip by the UK government negotiators. For key markets such as the automotive industry, German car manufacturers are likely to press for a favourable negotiation to allow them to have continued access to the lucrative UK market. Again, we don’t know what may happen here.

Early indications suggest that it will be impossible to prevent free movement of labour. This was acknowledged by many of the “leave” advocates shortly after the results of the referendum. People can still come in and out of the UK, albeit without the necessary benefits such as permanent residency rights that currently exist for EU people. It is also likely that deals will be struck with various countries. Again it is too difficult to make any predictions.

The decline of sterling has already happened in light of the referendum result. This is totally unsurprising. The stock markets hate uncertainty and react accordingly. Over the first two weeks since the vote took place, the value of sterling has declined by about 10 per cent in relation to the dollar. It may go further and will certainly fluctuate at key points in the negotiation process in the next couple of years.

The Centre for Retail Research notes that sterling has probably been over-valued in the past couple of years anyway and that any readjustment downwards leading to a lower exchange rate may not necessarily be a bad thing.

If the pound continues to devalue it can be argued that it will make the UK an attractive place for visitors to shop and boost the retail sector over the longer-term. Again we don’t really know the extent of the lowering in value of the pound and too much speculation is dangerous.

In terms of legal protection for retail workers, it is unlikely that we shall witness major changes. Retailers are probably going to stick with the established legislation that is already in place. In terms of EU directives and standards, again it is unlikely that retailers will deviate substantially from existing legislation – particularly if they wish to continue to do business with established customers in EU-base locations.

With regard to the VAT tax, it is likely to remain in any post-EU situation. It is a critical source of revenue of the UK government. While it will no longer be tied to any attempts by the EU to harmonise such as tax, it is likely that it will not deviate significantly from other European countries. If pressed, I might argue that it may go up slightly on certain product categories because the general UK VAT rates are among the lowest within the EU community.

Enough of this speculation!!! I am beginning to create “what if” situations and doing precisely what I claimed at the beginning that I would not do!!

In summary it is dangerous and stupid to engage in too much speculation. Much will depend on the nature and tenor of the negotiations that will take place in the coming months and possibly years. There will certainly be “give and take” and “horse-trading”. Both sides (UK government and the EU) have strengths and weaknesses. Retailers will adjust and adapt to situations that emerge. We will still survive. Let’s kick that word “if” to touch!