Burberry shares have taken their biggest plummet in over five years last Thursday after investors didn’t feel confident about the new strategy Burberry was making to propel the brand into a “firmly luxury fashion” business.
Marco Gobbetti, the official chief executive since July, told Burberry investors that the brand would “sharpen” its brand and elevate profit margins to match those of Gucci and Hermes. They would do this by selling more expensive leather goods, such as their $1,708 Bridle handbags.
The city has been unsettled by the multi-million spending being done by the new look Burberry. Burberry said that it is expecting to spend between $197 million to $211 million next year and could also spend up to $276 million during their “medium term”.
The company has reaffirmed that it is still going ahead with their cost-cutting plan to save around $150 million over the next five years, but the majority of those savings will end up going towards its huge investment program that will take at least two years to make a “sustainable” return. The Burberry shares have since decreased on this news, going down by 198p, or 10p, to $23.57.
Gobbetti, who joined the Burberry team from Celine, has announced that Burberry would “re-energize’ its business by remodeling stores to “enhance our luxury services” and getting rid of some of their “non-luxury” wholesale and retail locations. Burberry has said it will face a $20 million loss that will come from store closures without saying exactly how many stores are getting shut down.
The new strategy has scared some shareholders away who have seen a similar shift happening in rival brand Mulberry who made a fatal move to increase the prices of their handbags, which ended with cutting off the majority of their customers and preventing the brand from growing.
Lucas Solca, head luxury analyst at Exane BNP Paribas said, “metamorphosis isn’t necessarily straightforward” because Burberry’s reputation didn’t come from high-end goods but rather their trench coats. Mr Gobbetti stated that Burberry’s “evolution” was coming from a “position of strength”.
“We are already playing in the luxury space, this is not a movement upwards because the brand is already not that accessible… Our trench coats are £2,000, our leather handbags are not $400 (£305), they are $1,000 (£762)” said Gobbetti before also saying that their rivals could charge 50pc more for a regular polo shirt.
Burberry’s new shift in a different direction came just a week after Christopher Baily, their last creative director, announced he would be leaving the brand after 17 years of working alongside the fashion company.
Gobbetti said the search to replace Bailey would “impact the phasing” of his new strategy. Some analysts have questioned how Burberry could announce a new brand identity while they are still missing a long-term creative director could lead the way for the new shift.
Phoebe Philo, Celine’s designer, is still speculated to be the front-runner for the prestigious role. ““I think finding someone with the same creative vision as Christopher Bailey is impossible but it will be a question of finding someone with the creative vision for Burberry’s next decade,” said Gobbetti.
Burberrys; new strategy was announced alongside a first-half result which showed a 26pc rise in pre-tax profits to $168 million and a 4pc increase in sales to $1.7 billion.
