Triple Trouble for Burberry

Burberry COVID-19 Blues

Burberry, best known for its iconic trench coats and signature plaids, predicts a significant decline in revenue in the second half of its fiscal year. In the aftermath of the coronavirus pandemic, the brand, like most other luxury fashion labels, has experienced a devastating decrease in footfall in both its UK and international stores. Lockdowns in Europe have forced the closure of many Burberry stores while sales in the Spring 2020 quarter were down by as much as 45%.

Financial Impact

Burberry is heavily reliant on in-store sales and international tourism. In the six months to September 2020, sales had dropped 31% to £878 million compared to the same period last year. Pre-tax profits plunged 62% to £73 million. The brand’s share price dropped to £11,59 on 20 March 2020, marking a record-breaking low of almost 4 years.

The Blues Continue

Besides being jinxed by COVID-19, Burberry also faces challenges from Brexit and the UK government’s decision to scrap VAT relief for foreign tourists. About 66% of UK sales are made to overseas visitors who may well shop in other European cities after 31 December this year. Julie Brown, Burberry CFO said:

“Burberry may still pick up consumers overseas but the UK might lose the business, which is important also to hotels and restaurants.”

Brown also believes that if the UK departs the EU with no deal, then the brand is expected to incur additional duty costs in the  “low tens of millions.”

The Short-term Sacrifice 

Part of Burberry’s strategy to weather the storm is to reduce markdowns on its bags and clothes. Clearance sales will feature fewer products, start later and be for a shorter period of time. While this will mean sacrificing income in the short-term, the label is hedging its bets that retaining brand image will boost profits in the future. A spokesperson for the company said:

“With the brand resonating and attracting new and younger consumers, we have taken the decision to reduce markdowns. This will be a revenue headwind [the second half of this financial year] but will serve the long-term interest of the brand.”

 Not All Gloom and Doom

Burberry has reported increased demand from consumers in the United States, South Korea and China. By leveraging this new customer base, the company sees its strategy as an “opportunity to strengthen the brand.” So despite the virus, Brexit, and scrapping tax-free shopping, maybe there is light at the end of Burberry’s tunnel…