Burberry announced a big overhaul of its business on Wednesday in an effort to try and “outperform” the struggling luxury market.
The iconic British luxury brand is cutting £100 million ($144 million) of annualised costs by “reducing complexity, simplifying processes and eliminating duplication.” At the same time, it will invest £10 million ($14.4 million) this year and £25 million ($36.1 million) each year after that in “retail, digital and enhancing critical capabilities.”
Burberry announced the changes as it laid bare just how bad the luxury market is in its full-year results. The figures show:
- Revenue down 1% to £2.5 billion ($3.6 billion);
- Comparable sales down 1%;
- Pre-tax profit down 7% to £415.6 million ($600 million);
- Performance related pay down £65 million ($93.8 million) as the business missed its targets.
Burberry says the figures “reflected a difficult period for the luxury sector as a whole as demand slowed in many markets for both cyclical and structural reasons.”
The luxury market has been growing around 7% a year since 2010, mainly due to demand from Chinese consumers, but this is expected to slow to “low single-digit percentage” per year, Burberry says. Sales fell by 9% in Hong Kong, which accounts for 9% of Burberry’s global sales revenue.
It’s not just Burberry that is struggling. Globally, luxury sales are slowing, in part reflecting the slowing growth of China’s economy but also a huge anti-corruption and anti-extravagance campaign led by President Xi Jinping that has led to a decline in “gifting.”
Bain & Company’s 2014 China Luxury Market Study, which was released at the beginning of last year, showed that China’s luxury-goods industry accounted for 29% of the global market.
Burberry warns the market is likely to “remain subdued” and says profits for the year ahead are set “to be towards the bottom of the range of analysts’ expectations” — never something investors want to hear.
CEO and chief creative Christopher Bailey says in the statement:
While we expect the challenging environment for the luxury sector to continue in the near term, we are firmly committed to making the changes needed to drive Burberry’s future outperformance, underpinned by strong brand and business fundamentals.
We continue to see significant opportunities ahead of us and have put ambitious plans in place to increase future revenue, enhance productivity and create a more efficient organisation. In addition, the capital allocation framework announced today prioritises the investment needs of the business and regular dividend payments to our shareholders, while balancing capital efficiency and flexibility.
To try and overcome this Burberry is planning to encourage loyalty to its brand through a strong social media and e-commerce presence and investing in training for retail staff.
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