Development and Performance of Burberry Group Plc - Report Example

CONTENTS Introduction 3 analysis 4 Introduction to the PLC 4 Performance of the company 4 Financial ratios 7 Profitability ratios 7 Efficiency ratios8 Leverage ratio 9 Liquidity ratios 9 Strategic analysis 10 SWOT Analysis 10 Strengths 10 Weaknesses 11 Opportunities 11 Threats 12 PESTLE Analysis 12 Political 12 Economic Factors 13 Social Factors 13 Technological Factors 13 Environmental Factors 14 Legal Factors 14 Value Chain analysis 14 VRIN Analysis 15 Resource Based View 16 How the company has survived during recession 16 Conclusion and recommendations 17 References 19 Introduction This report analyzes Burberry Group PLC and how the company has performed. For this purpose, the performance of the company is analyzed. Financial ratios of the company are used for analyzing the performance as well. Pike, and Neale, (2009) stated that financial ratios are an important way to analyze how the company has performed. Therefore different financial ratios are used to evaluate how the company has performed in the last few years. SWOT analysis is another important tool that is used in this report to analyze the internal and external environment of the company. SWOT analysis is used to analyze the internal strengths and weaknesses of Burberry along with analyzing the external opportunities that are available for the company in the external market (Johnson, Scholes, and Whittington, 2008). Threats that could hurt the company’s performance in the years to come are also analyzed using SWOT analysis (Johnson, Scholes, and Whittington, 2008). Moreover, PESTLE analysis is also used to examine how the external factors that could impact the performance of the company (Thompson, & Martin, 2010). So, this report also uses PESTLE analysis to analyze the external environment of Burberry. Porter’s value chain analysis and VRIN are the other two strategic management tools used in this report to analyze the resources and capabilities of Burberry. The report also identifies and investigates the strategies used by the company during the recessionary period and how the recession influenced the performance of the company. The report at the end presents conclusion and recommendations. analysis Introduction to the PLC Burberry Group PLC is a luxurious global brand operating in a number of countries. The company is renowned and generates significant sales from different parts of the world (Burberry, 2013c; (Burberry, 2013a). Interbrands has rated the company as 77th most valuable brand in the world in the year 2013 (Passikoff, 2013; Interbrand, 2014). The company offers luxurious apparel and accessories and it is involved in wholesaling as well as retailing of products worldwide. The company has reported revenues of $1,998.7 million revenue in the year 2013 with a net profit of $259.2 million (Burberry, 2013a). Performance of the company The revenues of the company are generated from different geographical regions including Europe, America, Asia, etc. The following figure presents the revenue of the company from different geographic regions: Figure 1: Revenues from different regions (Burberry, 2013c) Among different channels used by Burberry to generate revenues, retail is the most important segment. The following figure presents the sales of the company from different channels: Figure 2: Revenues from different channels (Burberry, 2013c) Burberry is renowned for the products of women as well as men. However, the sales of accessories were the highest in the year 2013 for Burberry. The following figure shows how the company has generated revenues from different segments: Figure 3: Revenues from different segments (Burberry, 2013c) The performance of the company has been improving in the last few years. The brand has not only been able to expand its offerings to new markets, but the company has been successful in penetrating in different markets where it is already operating. Therefore it has allowed and benefited the company to increase its sales with the passage of time. The revenues of the company have been increasing in the last five years except for the year 2010 as presented in the figure below: Figure 4: Growth of the company (Burberry, 2013d) Financial ratios Financial ratios are important ways to analyze the financial performance of the company (McLaney, 2011). Financial ratios are divided into different categories and these categories are discussed below: Profitability ratios These ratios are focused on the profitability of the company (McLaney, 2009). Profitability ratios of Burberry are presented in the table below: Profitability 2009 2010 2011 2012 2013 Average Net Margin % -0.5 6.87 13.88 14.18 12.72 9.43 Return on Assets % -0.58 7.19 16.65 17.7 15.15 11.222 Return on Equity % -1.15 14.19 31.17 32.4 26.16 20.554 Return on Invested Capital % -2.87 13.58 30.62 32.08 25.88 19.858 Interest Coverage -0.3 45.04 58.98 102.67 95.78 60.434 Profitability ratios of Burberry reflect the performance of the company. it has been found that the performance of the company has been improving with the passage of time. All the profitability ratios are presenting similar trend that the company had incurred losses in the year 2009 when the economic crisis hit the global world economy. However, as the time passed by the company was able to improve its performance and therefore the financial ratios particularly the profitability ratios were improved. The company was not able to continue its same growth rate of profitability in the year 2013 as the profitability of the company declined slightly in the year 2013 in comparison to 2012. Efficiency ratios Efficiency ratios show how efficient the company has been during the time period in using its assets and generating revenues (Khan, 1993). The efficiency ratios of the company are presented below: Efficiency 2009 2010 2011 2012 2013 Average Days Sales Outstanding 42.96 36.77 21.99 18.08 18.69 27.698 Days Inventory 180.97 184.91 153.99 182.73 217.05 183.93 Payables Period 39.96 50.33 54.91 66.88 77.69 57.954 In the last five years, the efficiency of the company has improved. For instance, Days sales outstanding ratio of the company is showing a declining trend in the last five years which is a positive sign. The payables period has been increasing in the last five years which is another positive sign of the company as the company is taking more time to pay its expenses. However, the ratio of Days inventory is showing fluctuations. Overall the performance and efficiency of the company has improved from 2009 to 2012, however in the year 2013 it has slightly deteriorated. Leverage ratio Leverage ratios analyze the capital structure of the company (Besley, & Brigham, 2007). Leverage ratios of the company are presented in the table below: Leverage Ratios 2009 2010 2011 2012 2013 Average Debt to equity 51.68 47.04 46.23 44.65 39.71 45.862 Interest Coverage -0.3 45.04 58.98 102.67 95.78 60.434 Debt to equity ratio of the company has decreased showing that the company has started financing more from equity. Moreover, this has resulted in reducing the risk of the company. The interest coverage ratio of the company shows the ability of the company to pay off its interest expense. The ability of the company has significantly improved as the company had losses in the year 2009 when the economy was hit by recession. However, as the economy has improved, the company has also been able to improve its position and now the company is in a stable position to pay off its expenses. Liquidity ratios Liquidity ratios are helpful in analyzing the liquidity position of the company (Gitman, 2003). These ratios are presented in the table below: Liquidity 2009 2010 2011 2012 2013 Average Current Ratio 1.36 1.53 1.63 1.72 1.72 1.592 Quick Ratio 0.79 1.15 1.1 1.14 1 1.036 The liquidity position of the company is showing a similar trend as the previous ratios. The liquidity position of Burberry is increasing with the passage of time as the current ratio of Burberry has increased from 1.36 to 1.72. Quick ratio of the company has improved from 2009 to 2012. However in the year 2013 it has slightly decreased. Strategic analysis SWOT Analysis Strengths There are number of strengths of Burberry that has helped the company to dominate in the apparel market for so long. One of the major strengths of the company is its distribution channel (Moore and Birtwistle, 2004). These distribution channels play a significant role in generating sufficient revenues for the company from mainly four regions as presented in figure 1. Rich history of Burberry is another important strength that has helped the company in building trust among the consumers (Burberry, 2013b). This rich history has allowed the company to be successful in different markets internationally. The quality of the products offered by Burberry is able to attract the consumers. The designs of the company offered are able to engage the consumers and catch their attention. This is one of the reasons why the company has been awarded different awards. Another important strength of the company is the British Royal Warrants certification. This certification has helped the company in gaining competitive advantage. According to Brand Finance (2012), this certification is helpful for the company in improving the revenues by 5% approximately in different markets particularly the Asian market. The company is managed by senior managers that have helped the company in its success over the years (MacDonald, 2011). Using of supermodels including celebrity endorsement are other important strengths of the company (Brand Burberry Blog, 2011). Weaknesses One of the weaknesses of Burberry is that the company has not been able to distinguish its brand image against other luxurious brands. Pearson and Wiggins (2009) stated that the company although has a vast distribution channel but, still there are several markets where the company is not been able to capitalize and penetrate properly. Other major weakness of Burberry is the low vertical integration. Moreover, Mascarenhas et al. (2012), said that the company is relying heavily on the apparel sector for generating revenues which is a risky sector. Opportunities One of the major opportunities that Burberry has is to penetrate in different markets. Moreover, the company can enter in different growing and hard to reach markets through licensing as it could help the company in increasing the revenues (Burberry, 2013a). The growing online sales of clothing provide another important opportunity for the company. Angela Ahrendts, CEO of Burberry when joined in 2006 started focusing on sales from online arena. Today, the company ships its products to more than 100 countries and therefore the growing online sales and ecommerce activities could be another important opportunity for Burberry to increase revenues from a new segment. There are other opportunities available in the external environment for Burberry to capitalize. For instance, Burberry Beauty a cosmetic line introduced by the company has significant potential in the market to grow (Burberry, 2013a). Threats The economic crisis had a major influence on the company’s sales and profitability. Therefore such economic crunch can influence the sales and profits of the company and if these economic threats remain for a longer period of time, then it could hurt the company again. The prices of raw materials and labour have been increasing and this is another important threat faced by the companies in the apparel industry. Different competitors are investing heavily on advertisements to attract the consumers in the apparel industry. Therefore it is another threat for Burberry. PESTLE Analysis Political Because policies related to migration and social mobility vary from one country to another and therefore these policies influence the company and its operations. So it is important for Burberry to understand and consider these laws and policies in different regions (New Media Trend Watch, 2013). As the company operates in different countries, therefore it is significant for the management to understand the labour laws and other important laws such as the laws related to exports, imports, tariffs etc as these could impact the operations of the company (Suttle, 2011). Economic Factors The economic crisis had a significant impact on the sales and profitability of the company. Therefore as the economy is improving, the company has been able to report an increase in the sales and profits of the company. Inflation rate is another important economic factor that could have an impact on the purchasing power of the consumers. The inflation rate in United Kingdom and other European countries have increased and this has resulted in a negative impact on the consumers in the industry. Social Factors One of the major social factors that could influence the company in the next few years is the aging population in United Kingdom. It has been found by Rutherford (2012), that there are more than 10.3 million people aging more than 65 years. Moreover, the life expectancy is estimated to increase to more than 80 years. Therefore this could influence the company as the company is mainly targeting the youth and people of middle age. Technological Factors Technological advancement such as introduction of software for inventory management, and others have helped businesses in the retail industry to manage their operations in a better way (Alexander, 1997). The increasing ecommerce activities have provided the opportunity to Burberry to capitalize and offer its products in different markets. The company already has started to ship products to more than 100 countries. Social media has provided a new platform for businesses to increase their sales. The use of social media marketing has increased significantly in the past few years and this trend is expected to continue in the next few years (New Media Trend Watch, 2013). Sorescu et al., (2011) stated that retailers particularly in the apparel industry need to integrate different technologies such as digital technology that could be critical for their success. Environmental Factors Over the last few years, different companies including Burberry have started to shift their production facilities to developing countries such as China, Bangladesh, and India to mitigate the issues of increasing cost. However, these countries heavily rely on energy consumption so it could damage the environment. Legal Factors Burberry is operating in the Europe and therefore the company has to follow the trading laws implemented by EU. Therefore these laws can influence the company and its operations. Value Chain analysis According to Porter, businesses can add value in different activities that are common for different organizations. These activities are divided into primary and support activities. Primary activities include, inbound logistics, operations, outbound logistics, marketing and sales and services. On the other hand, there are support activities and these activities include; human resource, technology, procurement, and firm infrastructure (Porter, 2001) The logistics of the company are very strong and this has allowed Burberry to gain competitive advantage as well as to provide products to different stores across the world. The company also ships its products to more than 100 countries and this is another evident of the strong logistics support. Operations of the company are managed smoothly and it also provides the company in adding value for the customers. The company has a strong marketing department and the company uses the strategies of celebrity endorsement to promote the brand. Participation in different fashion events is another important marketing strategy used by the company. These strategies are helpful in adding value for the consumers. The company also offers quality services to the consumers to delight the consumers and exceed their expectations. According to Porter (2001), support activities such as HR, infrastructure, procurement and technological development are also critical in adding value and in supporting the overall value chain of the company. Burberry hires and trains its employees so that they can be helpful in gaining competitive advantage and in adding value. The company has also invested a lot on technological advancement such as ERP and other software so that the productivity of the company can be increased and technological advancement is able to contribute in adding value. VRIN Analysis VRIN model is the abbreviation for valuable, rarity, imitable, and non-substitutable (David, 2007). Therefore this model is applied and the resources of Burberry are analyzed whether they are valuable, rarity, imitable and non-substitutable. V R I N Brand Image ✓ ✓ ✓ X Quality of Products and offerings ✓ X X X Understanding the Customer needs ✓ ✓ X X Technological Integration ✓ X X X Information systems ✓ ✓ X ✓ Rich History ✓ ✓ ✓ ✓ Presence in different international markets ✓ ✓ X ✓ Resource Based View RBV model identifies the resources that the company has and resources that can help the organization in gaining competitive advantage. VRIO model has identified that rich history of the company and this resource cannot be imitated by any competing firm. However the other resources or strengths of the company can be imitated or can be substituted. Therefore the company should use its rich history to brand and promote its product in the international market. How the company has survived during recession Recession has influenced different industries including the apparel and fashion industry. Many businesses struggled to continue their growth and achieve significant sales and profitability during the recessionary period. Although, recession inflected Burberry as the company had to cut off many jobs. The company cut job almost 540 jobs in different regions such as Castleford, Yorkshire, and Spain (Wilson, 2009). The sales of the company in December 2008 also reported a decline of 3%. Moreover, to overcome these challenges from the recessionary period, the company had to sell many products at discounted prices. According to the chief officer of the company, the retail stores were not able to attract similar number of consumers and this was one of the biggest challenges for the company to increase its revenues and profitability (Wilson, 2009). By the end of year 2009, the company had not only survived the recession but Burberry was able to increase its sales by using different celebrities to promote the brand. It also helped the company in increasing the share price as the ending share price of the company 565.5p. The starting share price of Burberry was only 28.5p. However, revenue from the wholesale segment was reduced by 23% during the recessionary particularly because of low consumer purchasing power (Finch, 2009). Burberry was able to increase its revenues during the recessionary, but still the management admitted that the company used different strategies to improve sales. However, many of these strategies were not as successful as they expected. The company had to sell out its old and unsold inventory stocks after the crisis in 2008. This strategy had a negative impact on the gross margin of the company (Barrett, 2011). Barrett (2011) reported that the company was able to increase the wholesale revenues in 2011 as the sales had reached a value of £248 million. This figure showed a 9% growth in 2011. Retail sales showed sales of approximately 45% as sales increased to £528 million (Barrett, 2011). Conclusion and recommendations Burberry is one of the most renowned luxurious brands in the world. The company has been able to survive and perform well after the recession. Recession although was able to hurt the company’s growth. However, the strategies used by the company were successful in making the firm grow and increase its sales even at a time when other competing firms were facing many challenges. Advancement in technology has changed how businesses operate. Retail industry has also significantly changed its processes and how they operate. In order to maintain its brand image and continue success, Burberry needs to integrate technology at every step of its value chain. Moreover, it is critical for Burberry to integrate and implement technology and every department should be able to easily communicate with other department and update them regarding the status of the orders and other important work. Although, Burberry has already implemented advanced technology that integrates different department however with the increasing competition, it is critical to have communication among different departments of the organization. In addition to this, suppliers should also be integrated so that the raw materials can be supplied whenever needed. The company needs to build on its strengths and develop resources that are valuable, rare, imitable and non-substitutable as it would help the company in gaining competitive advantage. References Alexander, N. (1997). International Retailing. Blackwell Publishers, Oxford. Barrett, C. (2011). Burberry plans for slump despite results. Financial Times, Available From http://www.ft.com/intl/cms/s/0/82a54208-f4a7-11e0-a286-00144feab49a.html?siteedition=intl#axzz2ymIegypL [Accessed 13 April, 2014] Besley, S., & Brigham, E. (2007). Essentials of Managerial Finance, 14 edn. USA: Thomson Higher Education. Bodie, Z., Kane, A., and Marcus, A. 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