Having dropped fragrance licensee Inter Parfums after lengthy negotiations, Burberry will take the business in-house and set up a new fifth product division to manage it – with new hires in the pipeline.

 

The UK luxury house – which will pay €181 million (US$ 230m) in cash to Inter Parfums on 31 December 2012 for the ending of the licence arrangement – will set up Burberry Beauty on 1 April next year, joining four existing divisions: accessories, women’s apparel, men’s apparel and children’s apparel.

 

Historically, Burberry had led all product design, packaging and marketing activities for fragrance and beauty with previous partners, but it will now also oversee product development, sourcing and logistics, and build distribution deals worldwide. To ensure it can adequately handle the new business the company will make “a number of key senior hires with extensive functional expertise in beauty”.

 

RECTIFYING UNDER-PENETRATION

Burberry believes it can capitalise on what it regards as “significant growth opportunities” in beauty due to the category’s opening price-point position compared with its fashion lines, and where the company says it is “under-penetrated compared to peers”.

 

In 2011, Burberry beauty products had sales of US$307.6 million for Inter Parfums, about half of the company’s $615.2 million turnover. Burberry clearly believes there is room to build these sales very swiftly. From its side, Inter Parfums has built up the Burberry fragrances and beauty business from US$6.5 million in 1995, a CAGR of +27%, with Burberry Body in autumn last year being its biggest ever product launch (see chart, left).

 

Nevertheless Burberry points to beauty sales at peer fashion houses such as Dior, Chanel, Armani and Dolce & Gabbana (A to D respectively, see image right) as an indication of Burberry’s potential to leverage this side of the business.

 

Angela Ahrendts (below), Chief Executive Officer at Burberry, says: “Our global teams are excited to partner with long-standing distributors, suppliers and customers to optimise these under-penetrated categories. One consistent brand expression, leveraged across all categories, will underpin future growth in the beauty division and our existing core business.”

 

Burberry expects to leverage beauty on the back of its core fashion business: “increased scale will further accelerate growth in revenue and profit over time” it says.  Commenting on the transition agreement with Inter Parfums, Burberry Senior Vice President Strategy and New Business Development, Matt McEvoy (below right), says that the handover has been extended by three months to the end of March to ensure a smooth process.

 

He adds: “The work of integration is well underway. Our team was in Cannes two weeks ago at the annual gathering of the fragrance and beauty trade, meeting with distributors in parallel with Inter Parfums, planning the marketing programme for 2013.”

 

Burberry has also appointed new staff: a Chief Supply Chain Officer from Nestlé, a new Head of Fragrance & Beauty Product Design and Development who headed make-up at a leading French beauty house and Head of Partner Marketing from Procter & Gamble with more than 10 years of experience in prestige fragrance.

 

INTERIM RESULTS: ASIAN TRAVEL EFFECTS

 

Burberry’s Wholesale division, under which all duty free and travel retail revenues are booked, produced fiscal half-year sales to September of £253.1 (US$403.4m) up +5% at constant exchange rates. However the division’s share of total revenue (£882.5m) slipped by 1% to 29%.

 

Growth was led by men’s accessories, small leather goods and men’s apparel, plus department stores and emerging markets in channel terms. However, Asia Pacific – which accounts for about 20% of the group’s wholesale revenue and is predominantly DF&TR-based – was cited with caution.  “Burberry worked dynamically with key partners to offset the impact of the slowdown in tourist footfall in the region,” says the company.

 

However the Retail division turned in growth of +10% to £577m, taking its share of total sales to 65%, while group adjusted profit-before-tax grew by +6% at constant exchange rates to £173m (up +7% reported).