Jimmy Choo

As the Brexit vote nears, one of the main fears has been the effect on the economy should Britain vote to leave the E.U.  One concern is the effect on British exports especially on one of Britain’s fastest growing sectors, Luxury Goods.

In a March report by the global management and consulting firm McKinsey and Company, they stated that Britain’s luxury goods industry is growing by 10% every year with impressive sales results despite slow GDP growth.

The International Monetary Fund calculates the United Kingdom’s 2015 exports from all sectors amounted to $460.1 billion USD in 2015 down almost 10% from the previous year and a total GDP of $2.660 trillion USD for 2015. Exports made for 17.3% of U.K. economic output. With the U.K having 64.1 million citizens this translates to $7,179 USD for each resident in the country. The British luxury sector provides 8% of total exports and is worth £32billion to the U.K. domestic economy.

Hard Times

Whilst the British brands help boost the domestic economy the major brands have attempted to keep their market share with the sluggish global economy especially over the past two years. The well known London brand Burberry reported last month that it was to overhaul its retail operations and product lines. Revenue is down about 1% to £2.5billion due in part to a slowdown of buying at their retail stores in Europe which are popular with many Asian tourists especially the Chinese. Demand for the company in Hong Kong has been down also. The plan for Burberry is to continue expanding with its trench coat and scarves collections and their popular and fast growing bags category. Burberry hopes to also increase its revenue with online sales, boosting productivity and is investing £60million over three years to get the plans started. Chief Operating Officer John Smith announced his departure and will be stepping down next year.

Burberry
Burberry

Like Burberry shoe designer Jimmy Choo has also had its share of market headwinds in the luxury goods market. After declines in Asia and a slowing tourism market, revenues grew 7.2% in 2015 with Asian revenues up 20.1%; this was helped by new store openings in China and Hong Kong. Sales in Japan were up 29% due to domestic and tourism demands from China. Its goals include new collections and cost management to keep its recovery going. European sales were sluggish in the last half of 2015 as tourism to Europe waned after the Paris terror attacks. The company is predicting to exceed expectations in 2016.

After declines in 2014, luxury handbag maker Mulberry has swung back to profit in the first half of 2015 as revenue rose and the group’s new strategy had begun to profit. UK retail sales went up 14% to £40million but international sales declined to £10.4million or 3%. Former chief executive Bruno Guillon left in March 2014 after his business plan to increase the price of Mulberry’s bags hurt sales.

Sharecast news quoted Chief executive officer Thierry Andretta at the time as saying: “Our strategy is beginning to deliver tangible results in line with our expectations. We look forward to Johnny Coca’s first Mulberry collection which will emphasise our Britishness and our heritage in leather, whilst delivering great quality within our targeted price range.

“We remain committed to our UK manufacturing base, which produces around 50% of our handbags.”

The Financial Times reported first half (H1) revenues: ‘Mulberry Group plc reported semi-annual 2016 revenues of £67.77m. This missed the £75.07m estimate of one analyst following the company. This was 4.74% above the prior year’s period result.’ Investors were advised to hold their positions with the company.

Mulberry Logo
Mulberry

Needed: More British Luxury

The Mckinsey report sees Britain and especially London as being ‘a natural’ for luxury goods product making because of its creative talent, customer base and reputation as a fashion capital.  It also helps that London is one of the world’s top global financial capitals along with wealthy residents. Compared to countries like France, Italy and Germany, the British luxury brands lag far behind in the number that reaches the £100million revenue category. The report stated that France has 55, Italy has 47, Germany 30, but Britain has only 16.

So what can be done to increase Britain’s number of brands and market share in the global luxury sector?

McKinsey evaluated 170 British luxury brand companies for their financial performance and determined that there are phases that brands go through to become global names and financially successful. The survey was not linked to just fashion but reviewed other luxury sub-sectors including automotive, art de la table, hotels and yachts.

Building a brand, McKinsey starts with a good home market performance which is critical for international recognition:

‘Despite all of the emphasis on international growth in recent years, our data indicates that international will never blossom if the brand’s home market performance falls anywhere short of strong.’

Additionally: ‘British brands we surveyed believe they will find most international growth opportunities in Europe, the Middle East and the US.’

Small companies typically have less than £20million turnover with hard charging entrepreneurs leading the firm. Many are startups founded in the home or a garage. To get to the next phase of product growth the report recommends developing and marketing an iconic product, build your product line in the domestic market, stay with a limited number of retail flagships that can showcase your brand and have an e-commerce presence.

Business owners interviewed for the McKinsey survey recommended working with associations connected with the luxury sector which provides outlets for ideas and product promotions. Interviewees also stated that these organizations be more active in working with firms trying to grow their businesses.

The need for investors is critical for startups and even for some established firms: ‘…to fund expensive projects such as store openings, or to offer expertise in terms of clarifying sources of competitive advantage and mapping out ways to bring in external talent to help the brand mature and increase sales. However, interviewees call for a greater degree of patience from the investment community – particularly in the early stages of brand building.’

The final aspect of brand building is comparing your product with those of another competitor:

‘They can study the areas where competitors are investing more or less, in order to find additional opportunities for growth. Lastly, companies need to determine when to seek external hires which can help them move from the entrepreneurial to the professionalised stage.’

There is no question Britain has the necessary expertise and talent for the luxury sector, but it’s important for organisations and others to encourage these entrepreneurs to take the risk and work towards success.

Article by Kevin Murphy: www.kevinmurphy.london

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