Popularity can be a blessing and a curse. British retailer Burberry (BBRYF) transformed itself from a fusty, upper-crust maker of raincoats into a trendy luxury brand in the early part of the decade by plastering its trademark plaid on everything from miniskirts to bikinis. Sales went through the roof, and an initial public offering in July, 2002, raised $440 million.
But the first indication the mania was reaching a tipping point came after a well-known British soap star appeared with her baby clad head-to-toe in matching "Burberry check" outfits in 2002, provoking widespread media ridicule. The tan, black, white, and red plaid pattern also became a staple of counterfeit garments, which were widely adopted by a downmarket demographic.
Reporting lackluster holiday sales in 2004, the company said counterfeiting and the image problem associated with the omnipresence of the plaid pattern "…had not been helpful." Experts fretted that Burberry's hot streak was coming to an end.
"Up the Price Ladder"
Fast forward to 2007 and the pendulum seems to have swung back in favor of the company whose trench coats have been worn by everyone from Humphrey Bogart in Casablanca to Audrey Hepburn in Breakfast at Tiffany's.
By making the plaid more subtle (it's now used mainly in linings and discreet areas of garments) and putting greater emphasis on higher-margin accessories and top-of-the-range fashion, Chief Executive Angela Ahrendts, who took over from fellow American Rose Marie Bravo last July, is ensuring the company maintains its cachet with consumers—and investors.
Shares in the London-based company have soared 51% in the last year alone, after more than doubling since its July, 2002, initial public offering. "They're ticking all the right boxes at the moment," said Andrew Wade, a retail analyst at brokerage Seymour Pierce in London. "They've done well in moving the customers up the price ladder."
Pattern of Overexposure
None of this would have been possible, of course, without Bravo, a feisty New Yorker and former president of Saks Fifth Avenue, who took the helm in 1997. She's credited with making the iconic British label hip by bringing the plaid pattern to a wider audience and drafting Kate Moss and other supermodels to appear in ad campaigns.
But Bravo, who took on the newly created role of vice-chairman last July, also recognized that Burberry had to be more than just a one-trick pony. The company had to evolve after its success left it threatened with overexposure. The check pattern "became a proxy logo and a millstone around their neck," said Rita Clifton, chairman of Interbrand in London. "Overuse meant it started to lose its exclusivity. They got it out of balance for a while."
To address the problem, Burberry toned down the plaid, more clearly delineated its three clothing lines, and began branching out into accessories. The result?
When Bravo took over in 1997, Burberry had annual sales of about £250 million ($497 million). Now they're more than three times higher: On Apr. 17, when the company provides a trading update, analysts expect it to report revenues of £845 million ($1.7 billion) for the fiscal year ended Mar. 31. This is up a solid 17% from the previous year.
The task of keeping Burberry on a roll has now fallen to Ahrendts, a former Liz Claiborne (LIZ) executive. An Indiana native, Ahrendts has accelerated the company's push into more profitable areas such as handbags and perfumes and extended the cutting-edge Prorsum fashion collection. A testament to the success of this strategy is Burberry's "Beaton"—the latest in the company's line of designer handbags that has a waiting list almost as large as its £1,095 ($2,175) price tag.
Ahrendts also is forging ahead with the company's £50 million ($99.5 million) "Atlas" program to boost efficiency and overhaul back-office systems. Such steps are crucial to help management predict sales more accurately. Burberry also wants to move merchandise into stores faster, which should improve the quality of the collections and boost revenues, Citigroup (C) analyst Constanza Mardones wrote in a note to investors.
In her nine months as CEO, Ahrendts has won plaudits for her efforts in this direction. Stores now receive deliveries every 10 weeks instead of twice a year. To boost revenue per unit, Burberry is reducing reliance on department store concessions and wholesalers, instead placing more weight on its own stores, which account for 70% of revenues.
Expanding Without Diminishing
The company has already pulled some revenues in-house by buying up its franchised outlets in Taiwan and taking over its women's wear business in Spain from El Corte Ingles department store. In the third quarter ending Dec. 31, sales rocketed 22% to £206 million ($410 million), from £168 million ($334 million). Those moves should have the additional effect of giving Burberry better control of customer service and presentation of merchandise—important aspects of the brand experience, notes Interbrand's Clifton.
Such control will be crucial as Burberry moves to expand abroad without diminishing its cachet. The company already has opened stores in the Ukraine, Austria, and Spain, and is planning new outlets in Prague, Tampa, and Los Angeles. Ahrendts has even talked of opening more stores in the U.S. midwest. Though those plans have yet to materialize, they've caused some controversy among the fashion pack who fear dilution of the brand.
The challenge for Burberry, says Clifton, will be to "keep building the brand and maintain a balance between cachet and accessibility." And, of course, to keep the plaid in check.
For a slide show of Burberry fashions, click here