Burberry's Shift in Strategy

By Helen Reid

LONDON (Reuters) – Burberry (LON:BRBY) is implementing changes in its stores, including scarf bars, new lines of puffer jackets, and a focus on its classic products instead of new fashions to rejuvenate its brand.

The British luxury retailer is moving away from leather goods, which had been a priority for the past two years since Daniel Lee's appointment as creative director, and returning to outerwear, especially the trench coats for which it is renowned.

Burberry's turnaround plan caused shares to rise by as much as 20% on Thursday, as investors responded positively to new CEO Joshua Schulman's strategy to return to core strengths and recognize that previous price increases had been excessive.

> “There is a pent-up demand for the Burberry that people know and love, and we're seeing this sentiment shift happen globally now with some of the new campaign imagery and the messaging,” Schulman stated.

The retailer intends to change its store layout to prioritize scarves and trench coats over bags and shoes, featuring “scarf bars” to boost sales of cashmere scarves priced between $450 and $1,050. Schulman expressed a desire for a “candy store” approach to scarves, which are currently mostly stored out of sight.

The focus on quilted, down, and puffer jackets, as well as wool and cashmere coats, could enhance Burberry's legitimacy in outerwear, according to Schulman.

“They can actually do a lot more in outerwear than they have done, just by branching out into other parts of outerwear rather than just trenches,” remarked Anna Farmbrough, portfolio manager at Ninety One, a holder of Burberry shares.

Farmbrough pointed out that a specialism in fewer product categories is more advantageous than attempting to master multiple categories, which can dilute profit margins.

The scarf bars may enhance store productivity, measured by sales per square meter, where Burberry has lagged behind luxury competitors. Schulman noted Burberry's pricing power in outerwear, highlighting leather trench coats priced at around $9,000 as top sellers in the revamped East 57th Street store in New York, which also features a scarf bar.

However, expanding into puffer jackets means entering direct competition with brands like Italy's Moncler, which was reported to be eyeing a bid for Burberry, though sources close to the matter denied it, and Schulman did not comment on speculation.

Currently, outerwear and scarves contribute about 40-50% of Burberry's revenues, but this alone may not significantly impact the brand turnaround, according to Morningstar analyst Jelena Sokolova.

> “We've long highlighted that Burberry's disadvantage is a relatively small contribution from products where its brand is the strongest, but we view the renewed focus on them as positive,” Sokolova said.

Design Risk

Burberry's strategic shift is accompanied by a reevaluation of its design team's operations. Schulman stated that Lee's creative team will now work more closely with marketing and merchandising.

> “The design function was relatively independent and much more siloed than it is in better-performing luxury businesses, so an immediate priority for me was to bring the teams together,” Schulman explained.

This approach addresses investor concerns regarding the risks tied to the creative director's unique style and vision.

Burberry aims to move away from seasonal runway fashion products, which have been described as catering to a “niche aesthetic” serving a limited segment of luxury consumers.

Farmbrough concluded, “Focusing back on the brand, and how you build the core strength of the brand, seems like a much safer strategy.”