Burberry Group PLC (LSE:BRBY) is at a fork in the road, with the left path leading to luxury and the other leading to the lesser premium segment.
So say analysts at UBS, who pointed out that while Burberry has firmly decided on a brand elevation strategy, taking the left path could come with a considerable sacrifice to sales.
On the chopping block? The high-end clothing industry’s contentious practice of 'outlet' sales, suggests the broker..
The outlet channel in the clothing sector refers to manufacturers and retailers selling their surplus, discontinued, or slightly defective merchandise at reduced prices.
Outlets, such as Bicester Village and counterparts outside Braintree and York, are a popular way for brands to clear out inventory from past seasons, overproduced items, or products that didn't sell as well as expected in the primary market.
Though all luxury labels sell via outlets, contention arises when a label pursues a ‘made-for-outlet’ (MFO) strategy (i.e. less-expensive merchandise made specifically to sell via outlets).
In Burberry’s case, MFO merchandise has become a big driver of sales.
In less than a decade, outlets as a percentage of Burberry’s total retail sales have increased by 60% (from 25% in 2015 to 40% today), according to industry analysts at UBS.
MFO merchandise today comprises up to 70% of these outlet sales, up from just 40% in 2015.
“Can Burberry successfully elevate its brand, and thus reach luxury peers' margins and their valuation, when its strategy more resembles that of the premium apparel names?” questioned UBS.
Perhaps not.
Data compiled by Bain & Altagamma suggests that outlets make up around 13% of the global luxury market. As stated above, Burberry is far above this average at 40% of sales.
UBS estimates that today, around 25% of Burberry’s total profit pool comes from outlets.
That’s a lot of profit at stake if Burberry wants to cut back on outlets as part of its brand elevation strategy.
That said, the outlet industry may be larger than currently estimated, since brands don’t like admitting to the practice given the negative connotations.
“Excessive presence in the outlet channel can be seen as a brand destroyer, posing a long-term threat to its perception, and as such its financial performance,” said UBS.
“Overexposure to the off-price channel, and especially production of MFO merchandise is still today one of the industry's ‘best-kept secrets’.”
Burberry has more to contend with than just brand destruction, with global luxury spend on the wane, especially in China, and chief creative officer Daniel Lee’s designs attracting mixed reviews.
UBS has the stock at a 'sell' rating with a 1,000p price target against a 1,313p price at publication.