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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