Burberry’s latest revamp has faltered. Sales dropped 12 percent in the first three months of 2024. The British trench coat maker isn’t the only luxury player that’s struggling in a cooling luxury market, of course. Gucci’s sales fell 20 percent in the first quarter. But Burberry’s poor performance has ratcheted up the pressure on those piloting its long-awaited turnaround to deliver results.
CEO Jonathan Akeroyd and designer Daniel Lee may have made some executional errors along the way. But does Burberry have the right strategy to start with? What if the brand was to reconsider its approach, possibly under new ownership? Let’s consider two scenarios: sticking with “brand elevation,” the company’s current strategy, or shifting gears to become a “British Coach.”
A ‘British Coach’ strategy would double down on outlets, reduce costs, and increase exposure to off-price channels, leading to higher profits but lower multiples. A “brand elevation” strategy would follow the more traditional luxury playbook: slimming down off-price, spending on creativity and communication, continuing to upgrade distribution. A private equity buyer could undertake the grisly but arguably necessary measures to stabilise the Burberry brand away from the prying eyes of the public markets (e.g. cut outlet sales, build desirability before price hikes), and then sell for a luxury multiple when the brand has been uplifted. But our analysis suggests the returns from the “brand elevation” strategy are likely to be considerably lower than those from a “British Coach” approach.
Burberry has continued to underperform its peers, because it has yet to convince the market that its strategy to move upmarket will bear fruit. Burberry was a premium brand in the early 90s, but CEOs Rose Marie Bravo from 1997, Angela Ahrendts from 2005, Christopher Bailey from 2014, Marco Gobbetti from 2017, and Jonathan Akeroyd from 2022 have all tried to push its positioning higher. Significant investments were committed — including flagship stores across the world — and many sacrifices were endured: giving up profits from lucrative licences in Spain and in Japan, doing without sales to lower quality department stores in the US, and removing promotions from full-price stores.
A successful move upmarket would deliver strong business performance, but such a shift is easier said than done. The theoretical appeal of successfully playing in the high-end comes from higher gross margin coupled with higher retail space productivity, which would go hand in hand with increasing return on invested capital and shareholder return. There is obviously no prize for failing at this game, as Burberry’s recent profit, return on invested capital and shareholder return trajectories illustrate. Elevation would also be hard for private equity owners to execute: finding your Domenico De Sole and Tom Ford, à la Investcorp’s 1990s Gucci, is not straightforward.
Brand elevation at Burberry has always been tough, given its brand DNA and position in the off-price channel. The label is primarily known for its trench coats; its price points have, for years, been in the middle of the market; and, not so long ago, Burberry was hijacked by so-called “chavs” and at serious risk of brand trivialisation. To this day, Burberry continues to aggressively discount and sell significant product volumes via factory outlets. Convincing consumers that they need to spend more for its products would only be possible if Burberry became very hot. Despite a creative revamp, this is currently not the case and would likely occur only gradually, if at all.
The fact is, Burberry’s current efforts at brand elevation are not working. You cannot increase prices with one hand and continue to generate as much as £1 billion per year via outlets with the other. The move upmarket in leather goods — with the new collection previously priced 58 percent above legacy leather goods products — seems overly ambitious. The move to a more sophisticated aesthetics — knowing that aspirational consumers love the check pattern first and foremost — is not getting traction in the market. Indeed, the company has recently cut prices in some of Lee’s signature leather goods ranges and reduced the price gap with the legacy collection to around 48 percent.
The result is that Burberry is currently exposed to discounts and promotions like rarely before, as field research and recent company guidance and performance show. The stock market is braced for things to get worse before they get better — and media reports suggest the CEO and creative director may be replaced. Embracing discounts with an accessible luxury strategy would provide a lower multiple but likely higher profit and return on invested capital. It would also be a major volte-face for management.
There has been talk of Burberry being a takeover target for 25 years, but never a move. For European luxury groups, elevating Burberry is too expensive and would take too long. For private equity, valuation multiples have long been too high, but it’s harder to dismiss the possibility today, given where Burberry’s market cap has gone. But rather than sticking with a strategy that’s not working, could becoming a “British Coach” be the cure Burberry is looking for?
Luca Solca is head of luxury goods research at Bernstein.