The very first thing Marco Gobbetti did to put his stamp on Burberry as its new chief exec was to announce he intended to establish the retailer “firmly in luxury” in a strategy announcement in November. Part of that strategy will mean price rises for certain products whose positioning will move upmarket too. As a consequence of intended changes to its wholesale and outlet network and increased capital expenditure to refresh its retail stores and improve its products, Burberry said it expects revenues and operating margin to remain flat for the next two financial years.
Result? Investors were spooked with shares crashing nearly 10 per cent on the day in Burberry’s biggest fall for five years. In similar fashion, the British brand’s shares dropped more than nine per cent yesterday after it revealed UK sales dropped in the last three months of last year.
The strategy was only announced nine weeks ago and will take several years to implement. But while Burberry blamed the unfashionable sales in the third quarter on tourists buying fewer luxury goods, some analysts warned Gobbetti’s vision – to go beyond the £1,400 trench coat and focus on making expensive leather goods including handbags – could prove to be an expensive mistake.
Indeed, Mulberry tried the same strategy in 2014 when it whacked up prices to become a “global luxury house”. However, it was forced to revert to more affordable luxury goods in 2016 after it failed to bag sales.
One premium brand that has perhaps learnt from Mulberry’s mistakes is Hugo Boss. Earlier this week, the fashion stalwart reported that currency-adjusted group sales grew five per cent in the fourth quarter to €735m (£650m), representing something of a bounceback from a string of profit warnings and falling revenues in its core markets. Slashing prices, closing loss-making stores and appealing to a younger customer base did the trick for the German brand.
A key takeaway from Mulberry’s missteps and Hugo Boss’ bullish performance for Burberry is that premiumisation does not necessarily mean profit – you can’t build your brand equity via higher price tags that puts off many customers.
With Gobbetti, Burberry should be in capable hands. After all, the man who replaced Christopher Bailey in July last year has spent more than two decades in various senior roles at fashion brands like Bottega Veneta, Givenchy and Celine.
The retail veteran needs to emulate former boss Angela Ahrendts who channeled Bailey’s creative talents and took Burberry from a label that had become associated with baseball caps worn in nightclubs to one of Britain’s most iconic brands.
That said, Gobbetti does not have the luxury to fall out of fashion with investors in his quest for making Burberry a super-luxe brand.