Burberry Business Model Analysis - Report Example

Business model A business model is a business strategy, which describes the rationale of the way an entity delivers, creates and captures value including cultural, social, and economic among other forms of value. The following is the description of the Burberry business model for the last 5 years. These strategies have helped the company maintain a leading position especially in the luxury clothing market. 2008/2009: At the start of the 2008 financial year, the business was prepared for the projected contraction in consumer spending. This forced the management to shift to defense-conserving cash, elimination of costs and reduction of capital expenditure. Therefore, the company continued to invest in both business and brand including infrastructure, people, product development and stores (Burberry, 2008/09). 2009-2010 The year 2009 marked the entry into the weakest and the most constrained consumer spending settings for the past several decades. With this in mind, the management orchestrated defensive measures including working capital management and expense cut down. Alternatively, in order to keep in line with the professed opportunities and goals, the management maintained its investment in business development and strength of the brand. In particular, the operational, strategic and financial performance was strong. All together, the management established a clear competitive position among luxury brands in the digital arena (Burberry, 2009/10). 2010-2011 During this year, the company realized historic improvements in revenue, margin and profits. This was achieved amid efforts to maintain a lasting effective business and brand model. At the same time, the retail became the primary route channel of distribution. The management also attempted to improve the company’s operational capability through initiatives such as development of an integrated supply chain. 2011-2012 During this financial year, the management focused on executing and refining the company’s five core strategies. The brand continued to gain superiority in the market, backed by a forward thinking digital marketing. The persuasive product positioning was maintained through the ongoing design innovation. The retail continued to expand and the brand continued with its leading presence especially in the upcoming luxury markets. Across the operating functions, efficiency continued to improve hence producing excellent progress and powerful competitive edge in the midst of the competitive industry (Burberry, 2011/12). Summary Income Statement Financials Total revenue growth 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 +15% 18% +7% +1% +24% 24% Table 1: Revenue growth Figure 1: Revenue growth chart Average annual revenue growth rate for the past 5 years = 2006/2007 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Gross margin 58.5% 52.1% 59.7% 61.0% 64.9% 68.1% Gross Margin growth -10.9% 14.6% 2.2% 6.4% 4.9% Table 2: Gross margin Growth 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Annual operating margin (after Exceptional items) 206.2 180.8 219.9 301.1 376.9 Table 3: Annual operating margin (after Exceptional items) Table 4: Interest cover Comments over the income statement indicators The total revenue growth declined drastically from year 2007 to 2008 with the worst situation experienced in 2009. Nevertheless, the revenue growth was regained in 2010 and maintained in 2011. Ideally, the company seems to have recovered from a recession and now its performance is favorable. Despite the volatile growth within the five years, Burberry still managed an average revenue growth rate of +19%, with a major boost realized in the last two years. Since 2008, the gross margin growth seems to resonate with revenue growth, but recently the gross margin growth has reduced while the revenue growth maintained, meaning that the cost of sales is on the rise. The operating margin has increased since 2008, indicating that the management has been very efficient in controlling operating expenses. This also means that the gross profit has increased continuously while the indirect costs have been managed efficiently. The increase in gross profit can be attributed to the remarkable growth in revenue and gross margin since 2009. The poor performance between 2008 and 2009 is understandable since it was as a result of global financial crisis, a situation that has since been recovered from and the management now seems to be maintaining the company’s profitability on a very attractive trend, which if maintained will catapult the company towards a substantial growth in the future. Critically explore and explain why Revenue has behaved as it has done so over the past 5 years. In April 2008, paying attention to a state of economic slow-down, Burberry continued to execute its strategic plans in consistence with the past two years. These measures ensured good results in the first half of the period ended September 2008, when the group constant exchange rate revenue shoot up by 13 per cent. The accomplishments of the strategic move result in an increase in revenue by 7% (currency adjusted) at the end of full year financial results, which was contributed more by conforming to the external conditions rather than internal measures. During the 2009/10 financial year, the company achieved a revenue growth of 1%, which was as a result of the contracting luxury market. This was also congruent with the company’s focus on profitability over revenue growth, whereby the company has historically pursued strong revenue growth without watering down profitability. Aligned to the strategies, the companies intensified attractive nonapparel categories, which accounted for 40% of the wholesale/retail revenue in 2010/11 compared to 29% in 2005/06. Also, the company implemented a number of initiatives including SAP implementation and development of an integrated supply chain throughout its businesses. This substantially helped upgrade the operational capability. These together with investment in expertise and infrastructure led to a record revenue growth. These results reflect the most recent strategic efforts as well as a 5-years struggle of a dedicated team. Europe, which represents approximately 40% of the company’s wholesale revenue, registered a more moderate growth considering that the company continued to rationalize non brand-enhancing and small specialty accounts and to pay attention to key departments’ stores customers. In 2011/2012, the major product division was non-apparel, which generated 39% of the wholesale/retail revenue and which accounted for 22% growth (Burberry, 2011/12). This category is strengthened by a vigorous replenishment plan; hence it played a very big role in the remarkable total revenue growth in the year. Critically explore and explain why other key aspects of the Income Statement have behaved as they have done so over the past 5 years. The onset of the true economic crisis started in mid-September. As a result, Burberry resulted in urgent and new priorities, while the core strategies remained in effect. Some of the tactical strategies that were adjusted related to capital investment, inventory management and the expense structure, with the aim of reducing cost of operating the business in preparation for hard time ahead. This led to the establishment of a £50m cost efficient program throughout the world. This program aimed at strengthening profitability come 2009/10. As a result of the economic crisis, the company’s adjusted retail and wholesale operating margin in 2008/09 was 9.8%, with the strain on gross margin compensated partly by tight management of unrestricted expenses (Burberry, 2008/09). During 2009/10 the company focused on maintaining strong revenue growth and at the same time maintaining profitability. During this financial year, the consumer environment was highly constrained by a troubled gross margin and expense structure, which adversely affected the income. In order to moderate its growth in the near-term, right from the start of the year, the management focused on profitability over revenue growth. To boost the gross margin, the merchant group continued to cut down assortment sizes across different types. This led to a consolidated collection hence improving sourcing efficiencies, improved sell-through rates, and more consistent in-store presentation. The company also amended mark-down rules to take advantage of the less seasonal components of the collections. During the 2010/2011 the gross margin improved by 390 basis points, driven by augmented full price sell-through, which was as a result of the strategies implemented during the previous year. The 2009/10 improvement on the basis points reflected the changes from wholesale to retail. In 2012/13, the company intends to continue investing in new ventures such as marketing, new stores and IT, which are expected to spur growth. While phasing of investment and revenue was hoped to result to wholesale/retail operating margin being lower towards 2012 than in the same period the previous year, the company hoped to make improvements in retail/wholesale operating margin during 2012/13. Comparing Burberry with Harriburton (a comparator company) Halliburton Company is one of the largest oilfield services companies in the world. It operates in more than 70 countries throughout the world and owns hundreds of affiliates, branches and subsidiaries across the world. Hallingburton’s specifically deals with technical products and services for natural gas and petroleum production and exploration (Williams, 2013) Comparison of Gross Margin 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Burberry 52.1% 59.7% 61.0% 64.9% 68.1% Harriburton 23.14% 14.96% 17.96% 20.21% 17.25% The gross margin is a measurement used to assess an entity’s manufacturing and distribution efficiency in the course of the production process. This metric shows the percentage of revenue that remains after subtracting cost of goods sold. Burberry enjoys an average gross margin of 61.16% for the five years while Harriburton recorded 18.7% for the same period. This shows that is operating efficiently than Burberry, though they are in different industries. This also indicates that Burberry is in a better position to make decent profits that Harriburton. However, to achieve this, the management of Burberry must consistently control the overhead costs, which is actually part of its business strategy for the last five years. In analyzing Halliburton’s gross margin, it is clear that there was a drastic fall in 2009, a time when Burberry registered a slight increase. After the crisis, the margin recovered in 2011. All through Burberry reported positive growth. Perhaps, the difference implies that the two companies were affected differently by the global economic crisis because they are in different industries, and oil/gas industries were hard hit compared to other industries. Comparison of Annual operating margin (- growth) 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Burberry 20.2 -12.3% 21.6% 36.9% 25.2% Harriburton -20% -38% +23.2% +14% -16.1% Operating margin measures the percentage of revenue that remains after paying for variable costs. To be able to pay for its fixed costs, a healthy operating margin is critical. Since 2009, Burberry has recorded positive gains in operating margin while Harriburton recorded a negative gain in 2011. This shows that Harriburton is operating less favorably compared with Burberry as it is earning more per dollar of sales. This is the reason why Burberry has been very aggressive in reducing operating costs for the past five years. Notably, the variation in operating margins between the two companies can be attributed to differences in industries, whereby Harriburton, which is in oil and gas industry is likely to incur higher operating expenses that Burberry. Cash Flow Statement over the last 5 years Net cash inflow from operations before capital expenditure 2008 2009 2010 2011 2012 Net Cash inflow 105.7 242.0 425.6 366.4 482.5 Net cash inflow from operations adjusted for capital expenditure 2008 (£ million) 2009 (£ million) 2010 (£ million) 2011 (£ million) 2012 (£ million) Cash inflow 85.5 152.2 355.7 258.0 329.4 Growth - 77.7% 133.7% -27.5% 27.7% Critically summarize the key features of the Cash Flow The groups’ cash inflow from the operations and after adjusting for capital expenditure appears to have grown drastically in year 2010, but this trend was reversed in 2011 when the growth rate reduced by 27.5%. Recently, there is some optimism as the growth is on a positive trend again, having recovered from a severe cash flow reduction in 2011, which was partially contributed by heavy capital expenditure. As explained earlier, the management focused on profitability over revenue growth. Therefore, in 2011, the management invested heavily in capital expenditure and managed to realize a growth in gross margin. The increased capital expenditure of 2011 can, therefore, be understood as a strategy towards boosting profitability. High capital expenditure was also incurred in 2012 when the company managed to generate growth in gross margin. Furthermore, the heavy capital expenditure incurred during these periods is also going to fund new initiatives that the company is implementing with the aim of spurring growth and profitability especially in those categories that are highly profitable. In 2008, when the company recorded poor cash inflow, large amount of the proceeds were realized from the sale of property. This was an attempt to improve the company’s efficiency and hence spur profitability which is the central focus. Executive summary The study is reviewing Burberry for the years 2008 to 2012. For the income statement, a review will be made on the total revenue, gross margin and operating margin. The revenue growth declined from 2008 through 2009 but recovered from 2010. The results on the gross margin are mixed with very poor results recorded in 2008 and 2009. The operating margin declined after 2008, but has since been on a positive trend. The cash inflow before adjustment for capital expenditure has been increasing since 2008 except 2011 when there was a slight decline. Very heavy capital expenditure was incurred in 2011 and a large amount of proceeds generated from the sale of property in 2008. Apparently, Burberry appears to be operating very profitably despite challenges emanating from a decline in consumption as a result of the economic crisis. The management has resulted in concerted efforts to reduce costs of operations and at the same time invested heavily on highly profitable categories. This has seen the company record 24% growth in revenue for the past two years, which combined with good cost control programs and unique designs, has earned the company a competitive edge in the luxurious clothing industry. References Burberry, 2007/08. Annual report (Online) Available from: < http:// burberry_2007- 08_annualreport.pdf> [Accessed 13 January 2012]. Burberry, 2008/09. Annual report (Online) Available from: < http:// burberry_2008- 09_annualreport.pdf> [Accessed 13 January 2012]. Burberry, 2009/10. Annual report (Online) Available from: < http:// burberry_2009- 10_annualreport.pdf> [Accessed 13 January 2012]. Burberry, 2010/11. Annual report (Online) Available from: < http:// burberry_2010- 11_annualreport.pdf> [Accessed 13 January 2012]. Burberry, 2011/12. Annual report (Online) Available from: < http:// burberry_2011- 12_annualreport.pdf> [Accessed 13 January 2012]. Williams, J., 2013. Bottom of FormHalliburton: Profitability Analysis (Online) Available from: http://seekingalpha.com/article/1099591-halliburton-profitability-analysis> [ Accessed 13 January 2012]. Read More