Energy prices of gas and electricity in the UK has been rising over the last two years. This is not only affecting consumers but also the manufacturing sectors and retailers. According to Energy Watch, it has been reported that in the manufacturing sectors there is an increase of 70% for gas and 60% for electricity. Some companies pay 50% for gas more than their competitors in France and Germany. In the retailers sectors the increase of energy has reached 40-50% (Energy Watch Organisation. (n.d.). To secure their competitive positions such companies either raise the prices of products or cut back producing or reduce staff to reduce costs. The other alternative is to shift production abroad to avoid the high energy bills.
Social factors
- Income distribution
-
Demographics: population in the UK has become older. Decline of people under 16 among the white. Women are slightly more than men (National Statistics 2001). (See figure 3).
- Lifestyle change: more women go out to work. More people work from home. Change in shopping patterns
- Education: getting more expensive
- Fashion hypes: High fashion is no longer for celebrities and the wealthy
Figure 3: Age and sex distribution in the UK (National Statistics)
The change of age structure, life-style and attitudes has effect on the market. Retailers need to address the segment of the large group to earn more money. It was observed (Sippo n.d.) that the age groups between 35 and 44 have the highest shares in the British population today with 7.7% (35-39) and 8.0% (40-44) of total population. But the older age groups of 45-49 also play a significant role. In future the younger consumer segment will decrease more and more.
People regardless of their age and financial power, are fashion conscious. They like to look trendy. Some young consumers get help from their wealthy parents but a large proportion of British consumers has become more price sensitive under the slogan ‘look good pay less’. There are also rich people who can afford luxury brands. The number of millionaires in the UK increased by more than 80% between 2001 (230,000) and 2004 (425.000) (Sippo n.d.).
Households get their income from different sources. Economic Social Research Council (ESRC) reported that in 2005-2006 the average gross annual pay for full time employee in the UK was £447 per week (£23,244 per year). This represents a growth of 3.7% on the previous year. More money is spent on communication, recreation, culture, and clothes and footware. Consumer spending has been rising in 2004- 2005, but according to a new governmental report consumer spending is showing signs of weakening in 2006. This is due to high interest rate and the burden of paying house mortgages. The graph below shows the low demand of consumers for 2006.
Figure 4: Household demand
Political factors
- Political stability
- Environmental regulations
- International political changes
The current political party in the UK has tough regulations on business. There are some regulations which concern the cleanliness of the environment and health of population. For example, the government has issued strict regulations for the different industrial sectors on how to handle manufacturing processes in a way that it does not harm the environment. Every kind of business (e.g. agriculture, chemical, clothing, food) has different regulations which deal with packaging, recycling, air pollution, noise pollution etc. The Treasury of the current political party also rejects the single currency. This has its negative side as it means lesser opportunities for businesses and high cost of exchanging foreign currency (BBC 2002). The changes in the global politics are also affecting industry such as the opening up of Central Europe, the disintegration of the Soviet Union and Yugoslavia. The formation of the European Union has enormous implications for companies operating in the European markets (Doole and Lowe 1999:22)
Technological factors
- New development of computers
- Speed of technology transfer
- Rates of technological obsolescence: very high which puts strains on corporation’s finances to change its technology
- Changes in internet
Technology has improved efficiency and has reduced the amount of manual labour in the clothing industry. There are many new products. EDI (electronic data interconnected) is an application useful for business to automate its functions (Hill and Jones 2006:212). It has many uses such are reducing order-entry expenses, extending business hours. It is faster and more efficient than manual processing. EDI also makes distribution and shipping information more efficient. There is also the bar code which makes sales fast and electronic counter which counts footfall levels to monitor effectiveness of marketing strategies (Denison and Kirkup (1997). IT is changing fast and for businesses to perform efficiently and competitively, it has to update their technology. Due to the Internet, the majority of clothing retailers were able to make their products available to a wider range of customers 24/7. Website is not only another way of selling but also it a way of knowing the customers.
4.2. Competitive analysis (Micro level)
This section will examine how the PEST factors affect the competitive forces. Porter suggests that market competition is a function of five major forces (Morden 1999, Campbell et al 2002). These forces determine industry attractiveness and long-run industry profitability. The diagram below illustrates these forces:
Figure 5: Porter's five forces
(Campbell et al 2002: 134)
- industry rivalry:
The rivalry in the luxury clothing industry is very intense because the market is large and fragmentary. It is also considered one of the fastest growing segments in the global market (Johnson and Moore 2001:338). The major competitors are Louis Vuitton, Gucci, Chanel, Prada, and Armani. Louis Vuitton is a member of LVMH which is the world leading luxury product group. It possesses 60 prestigious brands such as Fendi, Donna Karan, Christian Dior and others. A recent report (Business Week Online 2006) ranked the 100 global brands that have a value greater than $1 billion. The ranking was based on being global and deriving 20% or more of sales from international market. The ranking of luxury goods came as follows:
Table 1: Top 100 global brands in 2006
In 2005 Burberry has no ranking among the high brands companies but it ranked 98 in 2006 which is caused by beefing up its accessories line and expanding its retail profile in the U.S. It is interesting to see Zara doing better than Burberry. This is because it provides high fashion at low prices as the report says.
Table 2: Burberry financial report for 2006
(Source: /p.14)
Table 3: Louis Vuitton financial report for 2006
(Source: )
Table 4: Gucci financial report for 2006
(Source: p.8)
From these tables it can be concluded that Burberry has less profit and as a result less market share than the other competitors.
- the bargaining power of buyers
The power of buyers in the UK is strong. This is related to the large size of the clothing retailers and their competitive prices. Some people who can afford luxury goods and who like to own unique goods would buy from the genuine products especially if they are differentiated by their high standard and brand name. But others do not mind to buy counterfeits. The problem with Burberry is that consumers in the UK lost their confidence in its products after it has been made available for the common people. The other issue related to the power of buyers is that they are very keen on buying products in the sale. They are accustomed to bargain prices and so when the products of the new season are displayed in Burberry customers never bother to buy them until they are reduced.
- the bargaining power of suppliers
Burberry Groups are designing, sourcing, manufacturing and distributing apparel and accessories through its own retail stores and via its wholesale customers. It also licenses third parties to manufacture and distribute products using the 'Burberry' brand. It operates in the United Kingdom, France, Germany, Italy, Switzerland, in the United States, Australia, Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan. Burberry depends on local manufacturers. They buy raw materials and design the garments in factories. Although the company has control over its products the factories facilities and machineries require large capital (Jarnow et al 1987:145). Burberry over relies on a small number of supplier for certain products. In order to have more bargaining power, it tries to search for other alternatives.
d. the threat of new entrants
New entrants in the clothing industry can raise the level of competition and in this way it reduces its attractiveness. The threat of new entrants largely depends on the barriers facing the industry. In some industry it is hard but in others such as clothing and restaurants is easy. Nguyen (n.a) states that apparel and footwear industry is very competitive because of the low barriers of entry. It is fairly easy for clothing companies to enter the industry but most companies find it hard to stay alive and continue because this industry tend to have shorter cycles, price deflation, outsourcing and following demographics. Therefore, it can be said that Burberry is facing threats from new entries such as counterfeits which is spreading in many parts of the world. There are emerging markets in Eastern Europe and the former Soviet Union. In the past such markets were controlled but not they all became free markets and they are considered to be large producers and consumers of fakes (Vithlani (1998:27). Counterfeits of luxury products are also found in East Asia including China. As they are exporting genuine luxury goods they are also exporting counterfeits.
e. the threat of substitutes
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on buyer’s willingness to substitute. In the current situation of high inflation it seems that consumers are willing to buy products which are cheap. Nowadays as the demand for luxury goods is increasing, the availability of counterfeit products is increasing. In a recent research on this matter it was found that counterfeit goods are popular among low income shoppers as well as wealthy British consumers. One can find imitations of brands in the open market in the weekend or through ebay. 12% of the UK has bought an item of fake clothing, footwear, leather goods, watches or jewellery in the past 12 months. Also 48% of the UK has bought items which resemble designer brands.
Figure 6: % of UK population that have bought a genuine luxury/designer or fake product in the past 12 months
(Source: )
The report found that Burberry was the brand most often bought in counterfeit form. The next most popular fakes were rip-offs of Gucci, Louis Vuitton, and Yves Saint Lauren products. Walpole, the trade body for the British luxury industry, whose members were presented with the research findings, welcomed the report and said it offered valuable insight for the industry. Vithlani (1998) reported that in the past counterfeit luxury shirts fade colour but now they are as good as the genuine products. It is assumed that they are made by the same manufacturer and sold for less than half the price.
On the basis of the external factors (macro and micro levels), threats and opportunities for Burberry can be identified:
4.3. Value chain analysis of Burberry
Value chain is defined as the activities of the organisation that bring a product or service to the final consumer. The activities within the chain can be classified into primary activities and support activities. For adopting a business strategy it is important to analyse a range of activities in the organisation to help determine which type of competitive advantage to pursue and how to pursue it. It also helps in recognising the best route for profit maximization. Below is the analysis of Burberry’s value chain using Porter’s framework in figure 5 (Campbell et al 2002: 44):
Figure 7: Value chain framework
Primary activities:
Inbound logistics:
- The company is careful in handling of products to ensure that incoming material are not damaged and are easily accessed when necessary.
- Burberry distributes products in major markets globally through its retail, wholesale and licensing channels. Earings from retail are 43%, from wholesale 46% and from licence 11%.
Operations:
The £60 million Project Atlas is launched to enhance the Group’s operating efficiency and effectiveness. This project will address the primary functional areas of the company including the supply chain and general corporate and administrative services. It is expected that this project will reduce cost and improve sales and margins.
Outbound logistics:
Burberry maintains a sourcing network consistent with the high quality requirement of its products and brand. The majority of these resources are located in Europe, consistent with the types of products produced, quality standards and speed requirements. Resources based in Asia and the Americas are used for selected products.
Marketing and sales:
- Promotion of its good image.
- Creating an advertising campaign which communicates key brand values and presents a range of the collection’s products.
- Using all means of advertising: print, outdoor and electronic media in all Burberry markets.
- Four annual fashion shows and other public relations activities are designed to generate interest among consumers.
- Great capabilities in developing new products which attracts young and old.
Services:
- Providing good quality products which are unique.
- Using Customer Relationship Management (CRM) system that tracks individual customers spending and provide individualised service and after sales care. Complained system
- Reward system for stores performance.
Support activities:
Procurement:
Purchasing high-quality materials to assist operations
Technology development:
- Sophisticated market analysis to enable segmentation, targeting and positioning for differentiation.
- Investing in new technology to reduce cost and to bring efficiency to the workplace and to protect and sustain competitive advantage.
- Incorporating internet marketing of goods.
- Customer Relationship Management (CRM).
Infrastructure:
- Project Atlas to improve operational effectiveness.
-
Programme to increase frequency of new products flow to stores and wholesale customers.
Human resource management:
- Burberry provides a working environment for employees to achieve excellence. Individuals’ ideas are considered.
- Employees are rewarded according to their contributions.
- Any problem at work is solved.
- Managers attend training workshops.
- New employees are assisted through a free programme.
- Successful top management such as Christopher Bailey, Bravo and Ahrendts
- Good communication between the different divisions of the Company
- Management is proactive especially when it comes to growth.
4.4 A new strategy at Burberry
Burberry was traditionally associated with the British colonial empire and was famous for its good quality rainwear. When GUS bought the company, it kept the brand’s reputation and did not invest in any new designs, infrastructure or marketing. It struggled financially and was described by financial analysts as “an outdated business with a fashion cachet of almost zero” (Moore and Birtwistle 2004).
The company has to find a new strategy and make a series of internal organisational changes. The important activities in an organisation are called core activities which are associated to core competences (Campbell et al 2002). In a fashion house such as Burberry, design activities are important in adding value and Burberry’s core competences are concentrated in this area as the previous analysis in section 4.3 showed. The main goal then was to update the brand image and give it a new and more exclusive look. The new CEO Rosie Marie Bravo made a three sided strategy to reposition the brand: strict control of the brand’s distribution and retail, an increase focus on design and product development, and updated brand management (Power and Hauge 2006).
The significant step was choosing licensing partners which have the capabilities of enhancing the image of Burberry. Many franchised stores opened in Istanbul, Warsaw, Sao Paolo, Jeddah and Riyadh. Burberry focused on product groups such as fragrance, motorcycle jackets, swimwear, dog accessories, bandanas, handbags, ipod cases, eyewear, watches and children’s wear. Some of the manufacturers chosen were Luxottica Group and Safilio Group who produce eyewear for Gucci, Dior, and Armani.
The new strategy also entailed reorganising the ‘shop front’ to reflect exclusivity. Burberry opened high profile ‘flagship stores’ in exclusive shopping areas around the world emulating other high brands. The purpose of these stores was not mainly to sell more products but rather to show that Burberry was a high brand just like Gucci and Versace.
Another change made was in the design of the products. The main R & D (Research and Development) of the company focused on creating contemporary designs.. This was achieved by the director Christopher Bailey who worked before with Gucci and Donna Karan. He developed a tiered system of brands. The top tier was the exclusive Prorsum line which was intended to be high fashion for the rich and lower tiers which take up and diffuse. He also developed a range of accessories such as bags, shoes and umbrellas. The quilted accessories which are envisaged by Christopher Bailey and the new CEO Angela Ahrendts were selling in their thousands (IHT 2006). Christopher Bailey made buying brands has a moral aim when he announced that 30% of coats’ sales would go for Breast Cancer research in the UK. Thus his creative ideas brought much success to Burberry and in 2005 he won the Designer of the year Award in the British Fashion Awards.
In addition, Bravo made changes to the brand to make it more appealing. The colours of the traditional check were enhanced with deeper hues, fabrics were modernised and apparel updated with stretch skirts and shorter trench coats and became less conservative with the production of checked bikinis. There was also a change of the logo and packaging and changing of the firm’s name from Burberry’s to Burberry.
In order to demonstrate the new face of Burberry, Bravo implemented an advertising campaign targeted at a younger audience. The campaigns featured young couples in traditional British heritage. The ads featured models such as Kate Moss, and Jerry Hall. The new ad was to emphasise the new look but at the same time preserving the traditional roots. This is to keep the consumer base and also to attract new customers. The result of this strategy was an increase in the operating profit by 21% in 2002 and rise in the sales by 10%.
As Burberry entered the new millennium, its financial results improved dramatically. Its new brand strategy began to pay off. Trading profits increased 103 percent over the previous year and sales rose by 11 percent. The table below shows the financial progress of Burberry over the years:
Table 5: Revenues: five year track record (£millions):
(Source: )
4.5. Problems facing Burberry
At this stage of success Burberry brand was facing problems. The brand was established originally for the elite and the affluent and not for popular culture. However, as its products have expanded aiming to bring it downmarket to attract more customers and increase the sales, Burberry’s high brand was devalued. Subcultures in two different countries and contexts embraced Burberry. In late 1990s the rap and hip hop culture in the US were obsessed by Burberry. In Britain football hooligans became interested in Burberry especially the baseball cap. In some towns such as Leicester some pubs started banning guests wearing the brand. Actress Daniella Westbrook and her daughter were pictured wearing Burberry check from head to toe and which made the media ridiculed them. Furthermore, Kate Moss was involved in a cocaine scandal. These circumstances destroyed the high prestigious image of Burberry. Luxury brands are associated with the core competences of creativity, exclusivity, authenticity, elegance, excellence, innovation and premium pricing (Prince 2005). These product attributes give the consumers the satisfaction of not only owning expensive items but the extra-added psychological benefits like esteem, prestige and a sense of a high status. As a result, the company has since discontinued many lines, including baseball caps and the new products appear with more solid colour than checked.
Based on this analysis Burberry has the following weaknesses and strengths:
5. Discussion
The previous analysis shows that there are several environmental factors affecting Burberry. Overall it does not have a strong competitive position. Many big brands are outsourcing in China and attracting fresh and excited customers whereas Burberry is suffering the damage of its reputation. Firms with strong positive reputations attract better people. They are perceived as providing more value, which allows them to charge a premium. Their customers are more loyal and buy broader ranges of products. Because the market believes that such companies will deliver sustained earnings and future growth, they have higher price-earning, market value and lower costs of capital (Eccles et la 2007: 104). In this regard Burberry is in a serious position as people are not buying as much as before. Burberry is also feeling the pressure of high cost in the UK. The high tax, interest and rate exchange and inflation are affecting its profit. Since it owns two manufacturers in the UK, it seems to carry a big burden of expenses especially the high energy costs of machineries. If Burberry continues the strategy of manufacturing in the UK it will not make a good profit. As there is a sharp decline of the sale in the UK the sale might be raised if location of Burberry was to be transferred into another place where there is more demand.
Within the current situation Burberry’s aims are:
- Market penetration including sales by volume and value, market share by product category.
- customer growth by volume and profitability
- new product introductions
- company image including quality and added value service.
There are different strategies for Burberry to choose from. Ansoff identified four growth strategies. These are shown in the diagram below:
(Source: John et al 1997)
This model suggests that a business’ attempt to grow depends on whether it markets new or existing products in new or existing markets. The matrix identifies four strategies that organisations can follow. For example, when selling existing products to existing markets, organisations can look to improve their penetration of that market, and so gain a larger market share. Where a company introduces new products into its existing markets, this may give it competitive advantage over its rivals through product improvement. Market development involves taking existing products into completely new markets eg finding new markets overseas. Diversification, on the other hand, involves moving into new products and new markets at the same time. This may involve a complete shift away from core activities into some other form of related activity. It represents a step into less familiar, perhaps even unfamiliar territory.
Burberry had made use of these strategies. It used market penetration by strengthening the value of products through good advertising campaigns. It also used market development by selling its existing products into new markets such as China. It used product development by introducing new products into the existing market such as perfume, handbags and watches. Burberry used also diversification through the use of on-line business to support and enhance its traditional business. So it is used for:
- ordering products from home
- communication tool to promote their business
- keeping track of their business status.
Recently the factory of Burberry in Wales was closed with the future plan of moving production to China (Marketing Week 2007). The move to China is for economic reasons. This move is controversial. Some argue that Burberry has the right to be concerned about its situation. It is dead in the domestic luxury market in the UK. This is mainly caused by the football hooligans, Kate Moss facing drug-taking allegations and the spread of fake merchandise. Manufacturing Burberry goods in China has a good advantage. In the first place the cost will be low. A polo shirt costs £12 in the UK but £4 in the Far East (The Independent 2007). Secondly, the reputation of Burberry brand in China is very strong especially among the young consumers who search for British haute couture. Therefore, it seems that creating a market overseas is a sensible decision. However, others do not welcome this move. Many celebrities including Prince Charles, opposed to this move and believe that this move would destroy the pure British products. But according to the Independent (2007) many companies in Wales are closing down mainly for economic reasons.
6. Conclusions:
7. Recommendations:
References:
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about burberry position among other luxury
value analysis
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