Issues in Global Business Burberry 2012 - Case Study Example

? Issues in Global Business Burberry Executive Summary This study will try to throw some light on strategic buyback decision of Burberry Group plc. Burberry Group plc has recently bought back fragrance product license from Interparfums SA. The report will try to illustrate rationale behind the strategic buy back decision. This report will analyse the deal in terms of financial perspective. Strategic analysis in terms of Porter Five Force and SWOT has been done with an intention to understand impact of external environment on buyback decision of Burberry Group plc. Strategic theme analysis for the company will be important part of the report. Small portion of the study discusses the impact of Profit before Tax on strategic buyback decision of Burberry. The company needs to expand their global franchise operation in order to decrease value chain cost. The study will focus on globalization strategy of Burberry Group plc in terms of retail distribution network. Report shows that direct control strategy of the company will help them to push total market capitalization in near future. Hybrid matrix structure of Procter and Gamble has been recommended for future growth Burberry Group. Hybrid matrix diagram will help the company to set up strategic business units in Asia and Latin America. Table of Contents Table of Contents 3 Case Statement 4 Strategy Analysis 5 Financial Perspective 5 Leverage Control 6 International Growth Strategy 8 SWOT Analysis 8 Porter’s Five Forces Analysis 9 Strategic Theme 11 Conclusion 11 Recommendation 12 Reference 14 Burberry Burberry Group plc is a renowned global luxury brand. The company is headquartered at London, England. Burberry Group plc was established by Thomas Burberry in the year 1856. The brand specializes in offering apparel and leather goods. Burberry Group plc offers products through diversified distribution network complemented by retail channel, wholesale, licensing channel and digital platform. The company has achieved a total revenue growth of 7% in the year 2011. Burberry has created a digital platform named as “Burberry World Live” in order to enhance their web visibility. Intraday market capitalization of the London based company is $5.3 billion while they maintain a profit margin of 12.1 % on category sales (Yahoo Finance, 2012). Case Statement Burberry Group plc has recently announced that they will directly operate in beauty and fragrance category. The company has no plan to continue license relationship with their partner Interparfums SA. Fragrance and beauty has been categorized as fifth product division for Burberry Group. The other four categories are accessories, women apparel, men apparel and children apparel. Angela Ahrendts (Chief Executive Officer of Burberry Group plc) has stated that they took the decision of direct control in order to achieve greater control over product portfolio of fragrance and beauty category. The CEO believes that the company has significant opportunities to drive growth from fragrance and beauty products and the move will also leverage infrastructure & upward integration of value chain. Direct operation of the company for fragrance and beauty categories will start from 1 April 2013. Burberry Group took the decision for following strategic objectives. Achieving greater brand control Increase penetration in opening price point categories The company will pay all total Euro 181 million for ending license relationship and ?71m of total amount will be used for recognising exceptional items The London based company will earn a adjusted profit before tax or PBT in financial year 2013/14 and from FY 2014/15 the PBT will accelerate Retail and wholesale contribute 90% of total business for the company hence they will design diversified retail channels for their fifth product category (Burberry Group plc, 2012) Strategy Analysis Burberry has purchased the perfumes selling license from Interparfums SA by paying ?142m. Stock analysts believe that the company is pushing harder in the perfume and cosmetic segment in order to earn high PBT. Financial Perspective Stock analysts have pointed out that value of fragrance and beauty category of Burberry will decrease from ?25m to ?15m as a result of direct control. Presently category contribution by fragrance and beauty product line is very small in comparison to garment and accessory sales. The buyout is justified in terms of pre tax profit because the company has saved ?38 million pre tax profit with this deal. The fashion business is going through sporadic contractions due to various reasons such as weak trading, Euro zone crisis and slow financial recovery from economic recession of 2008 (Guthrie, 2012). Thomas Chauvet (Luxury Analyst at Citi group) has argued that the decision may back fire because the move of Burberry is not only potentially costly but a management distraction also. Analysts have pointed out that the timing of the deal was not perfect because currently the fashion industry is going through global slowdown. Industry report suggests that Burberry has planned to compete with market leaders like Dior and Chanel and hence they purchased the license in order to run own perfume business. Direct control move of Burberry can be copied by high profile competitors. These competitors are described in the following section. Prada Prada’s scents are by Spain's Puig Gucci Gucci’s fragrances are made by Procter & Gamble The direct control strategy of Burberry has the capability to change dynamics of the industry. Purchasing license from Interparfums could reduce influence of specialist companies like Coty, L'Oreal and Interparfums. Citi has estimated that perfume move could dilute earnings for Burberry by 4-5 percent in FY 2013/14. Financial analysts have pointed out that Burberry has the opportunity to offset start up costs by achieving 20% operating margin in their fragrance and beauty segment. Leverage Control Currently perfume business of Burberry is generating annual 210 million Euros which is 8.7% of total revenue while the global cosmetic industry is valued at $95 billion and growing at a rate of 2.75%. In such situation direct control strategy of the company will help them to push the brand value to 300 million Euros within next four years. Euro monitor has pointed out that control over perfume will Burberry to cross sell other categories. Buyback decision for perfume license is not new thing for the company because in 2011 they bought back menswear licence with an intention to reduce license agreement in Japan. Industry dynamics are also supporting the buyback decision of Burberry Group plc. Dior bought back numerous licences during the period of 1990s with an intention to make LVMH as No.1 luxury group in the world. Christian Blanckaert (Professor of Paris ESCP business school) has pointed out that buyback move of Burberry Group plc will increase brand equity among customers. Many companies such as Yves Saint Laurent did the same thing in order to reposition their brand at higher dimension of luxury gamut. Yves Saint Laurent had more than 150 licenses across the globe during 1990’s but after series license buy back decisions they are left with two licenses (one with L'Oreal for cosmetics & perfumes and another one with Safilo for eyewear) Many companies suffered ill effect of buyback decisions. For example, Dolce & Gabbana (Italian fashion brand) bought back D&G clothing line license from Ittierre but they failed to maintain scalable profit margin (Wendlandt, 2012). Financial Analysts have predicted that revenue of the company will grow at more than 20% as an outcome of the buyback decision while the net income will grow at rate of 25%. (Source: Financial Times, 2012) (Source: Financial Times, 2012) Analysts have predicted optimistic result for 12 month price target as a result of direct control hence the deal is profitable from the view point of financial statistics. (Source: Financial Times, 2012) International Growth Strategy SWOT Analysis SWOT analysis is used in order to understand corporate strategy of any company (Rogoff and Bezos, 2007, pp. 43-45). SWOT analysis of Burberry can be done in the following manner: Strength Weakness The company has established strong brand equity among customers due to its extensive presence in the market. Licensing agreement of Burberry gives them the opportunity of good return on investment. Flexibility in product sourcing has increased the depth of portfolio for the company. Lower transactional expense has increased business scope for the company. Low vertical integration is area of concern for the company. Lack of control over vertical integration has decreased margin and value for Burberry. Market penetration rate is negligible for the company in developing countries. The company relies heavily on apparel segment which is risky due to propensity of fashion risk. Opportunities Threat The company has the opportunity to expand their retail distribution in emerging market. Burberry can enter in East European market with their latest perfume range. They can expand their distribution channel in South Asian market. Conflicting interest between Burberry shareholder and GUS can be termed as major threat for the company. The company faces threat from counterfeit products in developing countries while third party integration has not produced much success last year. (Source: Lallich and Pike, 2004) Porter’s Five Forces Analysis Porter’s Five Force analysis can be used to understand the impact of external environment on transnational strategy of Burberry (Merrill, 2008, pp. 50-53). Bargaining Power of Customers Luxury retailers such as Burberry can push their fragrance product portfolio by differentiating style and fashion statement. Psychological and demographic specification of perfumes will decrease buyer power significantly. It can be inferred that buyer power is moderate in terms of global context. Bargaining Power of Suppliers The company has taken the decision of buyback in order to decrease supplier power. Abundance of local supplier will further dilute supplier power. The company can use low cost suppliers of India and China to reduce overall cost of value chain hence it can be inferred that supplier power is low. Threat of New Entrant The Asia-Pacific perfume market is growing at a rate of more than 7% for last few years. The company will face competition from new entrants in Japan, South Korea, Australia and Taiwan due to low entry barrier. New entrants do not need to invest huge amount money to set independent fragrance and beauty products outlet hence it can be assumed that entry barrier is low for new players. Threat of new entrant is high for Burberry. Threat of Substitutes Online sales channel can be termed as substitute for brick and mortar retail sales channel. The company has already introduced web platform for online sales in order to decrease strength of substitute products hence it can be inferred that threat of substitute is low for Burberry. Competitive Rivalry The company will face intense competition from high profile brands such as Dior, Chanel, Prada and Gucci. Prada and Gucci can adopt license buyback strategy of Burberry in near future with an intention to increase market penetration. Dior and Chanel are two market leaders in beauty segment hence Burberry will face a hypercompetitive market environment. It can be inferred from the above discussion that competitive rivalry is high for the industry. Strategic Theme Strategic theme for Burberry is complemented by various issues such as leveraging franchise, product diversification in fragrance and perfume segment, accelerating retail led growth, increase penetration in under penetrated market and increasing operational excellence. Leveraging Franchise The company needs to expand their franchise operation in Asia Pacific region in order to decrease value chain cost. Retail market in China and Japan contributes 33% of total revenue for Burberry hence the company has the opportunity to push fragrance and beauty products in those markets. India and Middle East retail market contributes 6% to total revenue of the company. Burberry can launch low priced cosmetics product in South and South East Asian market in order to increase penetration. They can invest capital on developing series of franchises in emerging markets. Product Diversification Burberry needs to adopt focus strategy in order to increase market opportunity for their cosmetic division (Zoephel, 2008, pp. 2-12). They need to invest money on research and development in order to achieve product diversification. Burberry is known for premier quality products hence they can introduce perfumes in up market manner. The company needs to adopt focused differentiation strategy in order to enter in Latin American and Asian market. Conclusion Burberry needs to put an emphasis on customer service in order increase retail led growth. They need to bank on consistency and productivity with the purpose of enhancing customer connectivity. They should use online plat form for connecting with customers and solve their issues on a regular basis. Specialized sales and service program can enhance customer engagement for the company. The company has recently introduced customized online sales and service program in China in order to deliver exceptional service quality to customers. Burberry needs to expand retail footprint in order to push the strategic license buyback decision. They need to focus on cluster investment complemented by average GDP and net worth local populations. This strategy will provide some sort of insulation to the company against global economic volatility. Stock analysts have predicted that the company needs to increase at least 19% of average selling space in order to open large scale retail format store in USA. Strategic renovation of retail outlet can help the company to push their fragrance and beauty category. Recommendation Burberry can adopt hybrid product structure of P&G in order to increase market penetration in developing countries. The company needs to follow Front Back Hybrid Matrix to attain sustainable future growth. Burberry needs to change product system in accordance with local market demand but offer more diversified product portfolio to customers. Strategic business units of the company need to work under the supervision of GBU or Global Business Units. Front Back Hybrid Matrix model can be understood with the help of following diagram. Strategic Business Units of Procter & Gamble (Source: Dyer, Dalzell, and Olegario, 2008, p. 295) Reference Burberry Group plc., 2012. Interim Results for the Six months Ended 30 September 2012. [pdf] Available at: [Accessed 20 November 2012]. Dyer, D., Dalzell, F. and Olegario, R., 2008. Rising Tide: Lessons from 165 years of Brand Building at Procter & Gamble. Harvard: Harvard Business Press. Financial Times., 2012. Burberry Group PLC. [online] Available at:< http://markets.ft.com/Research/Markets/Tearsheets/Forecasts?s=BRBY:LSE> [Accessed 20 November 2012]. Guthrie, J., 2012. Burberry’s ambition makes deal a musk-have. [online] Available at:< http://www.ft.com/intl/cms/s/0/066c642e-28d5-11e2-b92c-00144feabdc0.html#axzz2CkegIYgI> [Accessed 20 November 2012]. Lallich, A. and Pike, N., 2004. Burberry Group Rich Picking? [pdf] Available at: [Accessed 20 November 2012]. Merrill, P., 2008. Innovation Generation: Creating an Innovation Process and an Innovative Culture. Milwaukee: ASQ Quality Press. Rogoff, E. G. and Bezos, J., 2007. Bankable Business Plans. 2nd ed. California: Rowhouse Publishing. Wendlandt, A., 2012. Analysis: Burberry Smells a Chance in Fragrance Business. [online] Available at:< http://www.reuters.com/article/2012/10/15/us-burberry-licence-idUSBRE89E06L20121015> [Accessed 20 November 2012]. Yahoo Finance., 2012. Key Statistics. [online] Available at: [Accessed 20 November 2012]. Zoephel, M., 2008. Michael Porter's Competitive Advantage Theory: Focus Strategy for SMEs. Munich: GRIN Verlag. Read More