Few prints are as emblematic as the Burberry check. For more than a century, the black, white, red, and tan plaid has represented a certain level of British sophistication and, more practically, a defense against even the worst wet weather.
But earlier this summer, the cracks in fashion powerhouse Burberry's foundations became very apparent. In July, after reports that it was cutting hundreds of jobs, Burberry said sales had fallen 21% year-over-year in the first quarter and that it would suspend its dividend. On the heels of earnings, the company also announced it was ousting its CEO, Jonathan Akeroyd.
The market has not responded kindly. Burberry's stock is down 24% since the news and 49% so far this year.
It's a strong about-face for the brand and has left many wondering what exactly went wrong.
The answer is a combination of too-high prices and too-high fashion.
Burberry has shifted away from its bestsellers, like the classic trench, into avante-garde looks that don't appeal to a broad market. It's also pitted itself against bigger, more established luxe players — with limited success.
"They tried to be a major fashion player because fashion was back in fashion," Jelena Sokolova, a senior equity analyst at Morningstar, told Business Insider. "It was the same with boosting leather goods. Neither of these things, I would say, are extremely strongly in the brand DNA."
Take handbags. Being an exclusive fashion name means playing in the competitive world of overpriced bags, one of the most high-margin items a luxury house can sell. But Burberry hasn't been able to keep up with the likes of Louis Vuitton or Gucci.
What's left is a confused brand with little direction and too many discounts and outlet stores.
But things aren't hopeless at Burberry, which did not respond to a request for comment from Business Insider. A strategy that focuses on the brand's core products — its outerwear — and eschews a bloated price structure in favor of more broad appeal could help turn the company around.
From technical fabric to a golden age
Like many legacy brands — Hermès, Louis Vuitton — Burberry was created for practicality, not for fashion's sake. Thomas Burberry, the founder, invented a proprietary fabric in 1879 with the goal of protecting customers from the notoriously poor British weather.
The fabric was about performance, and the company's history boasts about explorers in the early 20th century wearing the gear to the Arctic Circle or on long-distance hot air balloon rides.
It wasn't until 100 years later, in the early 21st century, that the brand really became a force in fashion.
From 2001 to 2018, designer Christopher Bailey ran Burberry and turned it into a global name. While focusing its design on Burberry's heritage and its classic plaid, he also modernized the business, making runway collections available right after the show and building an online presence. It may not have been very high-fashion, but it worked.
"When things were good, the brand was outperforming the industry," Sokolova said.
Trying to be a 'major fashion player'
But every golden age comes to an end, and after Bailey was also named Burberry CEO in 2014, the brand started to decline.
The company had begun to lag behind its peers, and a move to bring in new leadership in 2018 was lauded by industry watchers who had just seen Gucci transform under Alessandro Michele.
"We believe this is a necessary move to make Burberry exciting again," Luca Solca, then the head of luxury goods at Exane BNP Paribas, wrote in a note, The New York Times reported in 2017, when it was announced Bailey would be leaving. "Creative directors — like all artists (painters, composers, singers) — tend to produce variations on a theme. Most brands that have gone through a revival had to first find new creative resources.''
Part of that revival was an attempt to go upmarket — both in terms of look and price.
Burberry looks designed by Ricardo Tisci, who followed Bailey as creative director, leaned away from the traditional.
"I wanted to celebrate the amazing brain of England," Tisci told Vogue in 2019. "The beauty, the avant-garde, the real individualism."
But Burberry's sweet spot was never the avante garde but classic trench coats, a lesson Tisci's successor and Burberry's current designer, Daniel Lee, would learn when he leaned too heavily into leather goods.
Over the past couple of years, Burberry has tried to become a player in the luxury handbag market, a high-profit opportunity, to little avail. The company started churning out bags that matched the prices of those from leather goods houses like Louis Vuitton, charging 58% more than its legacy leather goods products.
It was a move that Solca, now at Bernstein, called "overambitious" in a June note. And customers weren't buying it — or the bags.
"They have been trying to boost their leather goods business, but of course it's a very uphill battle," Morningstar's Sokolova said. "They pushed the pricing where the brand didn't feel legitimate. I've heard from some people, with a $2,500 bag, you might as well just go for Louis Vuitton, you wouldn't buy Burberry."
Designer Lee has also added to the brand's muddled image. He adopted a new signature color and a new logo, leaving consumers who wanted classic Burberry just as confused as they were with Tisci.
The result is a series of contradictions: a British heritage brand known for its trench coats trying to become a high-end maison, and a label with increasingly expensive products that has had to turn to outlets and steep discounts when those products didn't move.
"Burberry was trying to expand into categories and price points where it did not have sufficient brand desirability or heritage," Adam Cochrane, an analyst at Deutsche Bank Research, told BI over email. "The combination of higher price points and more sales via outlet channels was always hard to reconcile, and the company never managed to navigate this well."
Even chairman Gerry Murphy admitted things had "moved a bit too far, too fast with the new aesthetic" during the July earnings call.
"Convincing consumers that they need to spend more for its products would only be possible if Burberry became very hot and very desirable," Solca wrote in his June note. "This is currently not the case, and most likely will only change gradually."
In the luxury trenches
Not all of Burberry's problems are of its own making; the entire luxury sector is facing challenges.
"If the general sentiment is weak, the brands that have the weaker momentum, they get discarded first," Sokolova said. "They get the most hurt in a downturn."
With inflation squeezing aspirational shoppers, it's natural that if they are going to splurge, they will do it on a brand that's considered a good investment. Those are more likely to be iconic styles that have been in fashion for years — a Louis Vuitton Neverfull, say, or Chanel Flap bag — than a style from Burberry, a brand not known for its bags.
"It's been a tougher market where customers are more cautious, more conservative, not just about price but on style," Murphy said during the July call.
There's also China, a difficult market for the entire sector right now. Consumer sentiment in the region has fallen, and shoppers are choosing to take their money to Japan, where the yen has been weak.
And Burberry is doing even worse than its peers there, which partially reflects Chinese customers' shift "to brands which have been able to better reflect heritage and desirability," Cochrane said.
Burberry's comparable store sales in Mainland China fell 21% during the first quarter. Luxury bellwether LVMH's revenue in the Asia-except-Japan region dropped 13% in the first half of the year.
"It is difficult to reposition a brand in a challenging macro environment, and Burberry's high exposure to the slowdown in China does not help," Anne-Laure Bismuth, a director of luxury and sporting goods research at HSBC, told BI.
In the region, shoppers associate the brand with discounts, Bernstein research found, meaning its offerings are far from the investment pieces or "wear for five year" items that people typically want during tough economic times.
Check, please!
Industry onlookers seem to agree Burberry is at a crossroads and can go one of two directions, with one being substantially easier. The brand can continue its price hikes and attempt to go high fashion — plus close most of its 56 discount outlets, Bismuth said — or it can go back to basics and stop trying to compete with the Louis Vuittons and Guccis of the world.
The first would come with "the consequence of impairing its earnings significantly for at least three to five years," Bismuth said; most analysts BI spoke to see going back to basics as a more surefire way for Burberry to succeed.
Part of a strategy of shrinking away from being a very upmarket high-fashion brand would be to lean into what works — namely, the trench.
While Burberry was built as an outerwear brand, outerwear currently only makes up 30% of its revenue, and trench coats make up just about 10%, Sokolova said. Apparel, one of the slowest growing parts of luxury, makes up about 60%.
"I wish that they would focus on their iconic products," Sokolova said. "From an advertising and product perspective, that should be the focus to revitalize the brand."
Outerwear makes up more than 70% of the revenue of Moncler, she said, a brand known for its winterwear. Moncler has outperformed Burberry year-to-date; by leaning on what it knows works — it doesn't even make handbags — the company has been less exposed to the squeezes facing the luxury sector.
Just like Hermès needs the Birkin and the Kelly, Burberry needs the trench and the scarf, and even the brand admits it has strayed too far from its heritage. In a July memo, the company said it would "emphasise more of the timeless, classic attributes that Burberry is known for" and "a broader everyday luxury offer."
Part of this would also mean reducing those sky-high prices of recent years, but in reality, the company was already offering steep discounts and selling at outlets.
It looks like management agrees that highbrow is not the way to go, given the new CEO, Joshua Schulman, is a veteran of Coach and Jimmy Choo, two upmarket brands that have iconic collections yet aren't exactly uber-luxury.
Making Burberry a British Coach or Michael Kors "would possibly generate higher cash flows and profits," Solca wrote in a November 2021 note.
Perhaps there is a way for Burberry to weather the storm after all.