Strategy in Practice
1. Introduction to the company and fashion industry in the UK
Burberry belongs to the top ten valuable fashion brands worldwide with £2,344 million revenue in the year 2021 (Burberryplc.com, 2021). Also, the Deloitte recognized the company among the top 100 Global Powers of Luxury Goods in 2020 (Deloitte.com, 2020). The British luxury fashion house offer clothes, footwear, leather goods, fashion accessories, cosmetics and eyewear. The business operates worldwide and currently there are 9,892 employees from different regions working with the company.
The UK fashion industry is one of the major contributors to the country’s GDP and it provides employment to 800,000 people as well. Currently, the industry value is £62.2 billion and is dominated by the brands like Hermes, Gucci, Armani and NEXT Plc. Recently the industry is experiencing high demand for ethical or environment friendly clothing. UK sources the textile fabrics and clothing from mostly Europe, China, and India. The improved foreign investment (£579.0 billion) position enabled the start-up companies such as JW Anderson and Christopher Kane showing potential for further industry growth (Ons.gov.uk, 2020). The annual expenditure on clothing has also increased in recent years (See figure 1)
Figure: 1 Revenue in the apparel market in the UK
(Source: Statista.com, 2021)
The purpose of this report is to analyze the external and internal business contexts, to understand the current strategic position of Burberry, a UK-based fashion brand and to recommend some strategies to ensure growth in the future.
Section 1: Strategic Position of the organization
2. External Analysis
This section analyses the macro-environmental or external issues affecting Burberry using the PESTEL and the Porter’s Five Forces framework:
a. PESTEL framework
Political factors (Threat)
Brexit has affected the overall sales and revenue of the UK fashion industry during FY20 and FY21 (see figure: 2).
The UK Fashion and Textile Association suggested 74% of the fashion businesses are experiencing a price hike since the Brexit has taken place (Drapersonline.com, 2021). In spite of the free trade deal with the EU, the VAT and Tariffs to be paid on products are complex causing businesses to reshape their business decisions significantly. Currently, businesses operating in the UK are to pay 20% VAT on the selling price (Gov.uk, 2021). Though clothes shipped to Europe are duty free, £13-£21 administration charge is payable by the EU consumers. Additionally, the EU local authorities are to pay local VAT that increases the overall price of the clothes. As a result, EU retailers are reducing the volume of clothes purchased imposing a threat for Burberry leading to piling up stocks. Losing a significant portion of revenue source can affect the overall profit of the company. It can either result in increased cost or losing a steady consumer base from EU. Moreover, products shipped or passed through UK are also subject to incur tariffs that cannot to be passed on to the consumers. Therefore, the businesses are required to spend more on a purchase and delivery than before.
Economic factors (Threat)
The rising inflation rate in the UK is also a significant threat for the company. The rate has increased from 0.83 to 2.19% in 2021 (Ons.gov.uk, 2020). It indicates that the cost of operation including product procurement, employee management, production and others will increase. As a result the price level of the final products will increase than the previous years. BBC.com (2021) reported that due to inflation, the cost of living has also risen by 5.1%. Therefore, customers are likely to reduce the volume of purchase and tend to focus on cheaper products. Burberry as a luxury fashion brand can experience issues in applying a low price strategy that may lead to significant loss. The Burberry has already experienced lower sales outcomes since the upsurge of the Covid-19 pandemic. Therefore, the future investment decisions are to be made considering its resource position.
Social factors (Opportunity)
The social restrictions, changes in the work environment, shift in gender roles, and the transformed social life hold some opportunity for Burberry post the Covid-19 pandemic. There is a global shift in fashion choices observed with the emerging social media trends influencing the purchase decisions of the consumers (McMaster et al., 2020). Burberry usually focuses on diversifying fashion inventory to capture a large portion of the affluent market base. In fact, the company has already set unique trends by introducing new, sustainable clothing such as the trench coats. Considering this brand image, the company can capture even a larger section of the market by producing “work from home” responsive clothes as a large segment of the employed people are working in their personal spaces. Burberry can also use the shift in gender roles as an opportunity by introducing clothes that can complement various types of household and office works and meet the needs of both the genders as role-based expectations are changing.
Technological factors (Opportunity)
The technological infrastructure in the UK is developed and is supporting the digital marketing, communication and operations in many contexts. From designing clothes to live streaming fashion shows, technology is an essential factor influencing the UK fashion industry positively. Though the small businesses are facing a hard time to adapt to the financial demand for installing pioneering technological tools, large companies have already indulged in experimenting with product and process innovation adding up to the operational efficiency to exploit this opportunity. Technology is helping to manage numerous organisational duties such as cutting and sewing fabric, creating Virtual Reality (VI) mirrors, using algorithms (Artificial Intelligence) to identify trends, automated packaging, moving and others (Gazzola et al., 2020). For instance, Burberry can exploit this opportunity to produce wearable techs and Virtual fashion. It can also collaborate with Facebook and other similar entities to develop metaverse based business models. Therefore, to capture the emerging digital market prospects, using more efficient data gathering tools and proactive approach towards scalability will improve the profit margin of the business.
Environmental factors (Threat)
To conduct fashion businesses in UK, companies have to comply with the legislative guidelines enforced by the government across the industry. In this context, House of Commons in the Parliament of the United Kingdom has developed a Environmental Audit Committee in 2018 to investigate the environmental impacts of the garment industries and take legitimate action based on data (UK Parliament Committees, 2020). The fashion businesses have been largely dependent on the natural resources for production and operation. Considering the limited resources, the UK fashion industry is emphasising on the green technologies such as for fibre innovation, Blockchain technology, water and energy usage efficiency, reducing plastic and packaging wastes and integrating sustainable design. (Burrell, 2020) reports that the fashion industry brings the seasonal calendar depending on the rising trends. The fast fashion results in disposing of or piling up a huge waste. On the other hand, Burberry has been said to destroy clothes of about £90 million within a five years span to prevent them from being sold cheaply or stolen (BBC.com, 2018). In addition, the Financial Times Stock Exchange (FTSE) 100 company reported that Burberry has also disposed of mostly perfumes and other products worth £10 million together after coming into a deal with the US-based Coty. These incidents can affect the reputation as well as the purchase decisions of environmentally concerned buyers posing a threat to the company’s profit.
Legal factors (threat)
Legal factors are inevitable to business situation as it guides the company’s approach towards stakeholders, environment and the society. For instance, Burberry has to comply with the modern slavery Act 2015 guidelines to offer a better working life and environment for the workers of the company. In addition, the company can also work collaboratively with the government through the Waste Prevention Programme for England, Resources and Waste Strategy and so on. Similarly, the Extended Producer Responsibility scheme is also applicable that demands the industry to contribute to the recycling costs, better design and labelling (Theiet.org, 2020). This can further require an additional investment on the sustainability program of Burberry. As the company has already invested on its climate positive strategy by 2040 with a detailed planning, the new guidelines can put pressure to shift a portion of operational expenses.
b. Five forces analysis
Bargaining Power of Buyers (Moderate)
There are several small and medium sized brands along with larger players like NEXT Plc and Marks and Spencer that offer sustainable clothing and accessories. They are also using technological equipments such as 3D printers, reaching a large section of the consumers even outside the UK, and addressing the labour risks by Fairtrade International adoption. Therefore, consumers are offered various options along with low switching cost that are increasing their bargaining power. However, the value proposition of Burberry is cherished widely by the consumers even across the borders. The products are highly differentiated and seek premium prices based on the heritage and uniqueness which requires highly eligible designing personnel and a huge resource investment that cannot be imitated by the small and medium sized companies (Burberrycareers.com, 2021).
Bargaining Power of Suppliers (Low)
The Bargaining power of the suppliers is low considering the number of good quality material providers in the industry. Burberry has tied up with multiple suppliers including JOHNSTONS OF ELGIN and VII Fold (Listthe.com, 2020). These suppliers engage with Burberry for product engineering, manufacturing and souring raw materials that fulfil the target customers’ need. As a global company it can easily shift to one supplier to the other when they cannot agree on price or other requirements. Therefore, the bargaining power of the suppliers of Burberry is low.
Rivalry among the Existing Competitors (High)
The key competitors of Burberry fashion are Gucci, Armani, Hermes, Sainsbury’s, Next Plc., and Walmart and specially John Lewis Partnership, which is reported as the most sales generator of 2020 mostly focus on the quality offerings usually at a lower price. However, Burberry emphasises on quality though it cannot reach the wider consumer base. Unlike Burberry, the competitors adopted the ‘just in time’ production, for preventing the stock piling and being eventually destroyed. It greatly affects the profitability of Burberry as the UK people are concerned about the environmental impacts of the companies they are buying from as a result of the effective governmental measures and campaigning.
Threats of New Entrants (Moderate)
New entrants in the market bring alternatives through innovation and unique value proposition according to constantly changing the market demands. Entrepreneurial approaches are influencing the industry starting from the product designing and marketing and retailing. For instance, TALA a new brand with niche market focuses on the Gymwear. The slow fashion approach with vegan friendly clothes makes compatible with the emerging needs of environment-friendly clothing. In addition, HireStreet UK is disrupting the yearly expenditure of £500 on disposable fashion, instead, came up with an offer to provide new outfit every week within an expenditure of £100 (Koffman, 2020). The increased options and alternatives eventually can reduce the relevance of Burberry to a certain section of consumers; hence, it is a threat for the company.
Threats of Substitute Products or Services (High)
The high street brands like Zara and small brands like Riley Studio with gender free, sustainable fashion wardrobe are transforming the process of designing and producing apparels through innovation can come up with substitutes. Therefore, the threat of substitutes will be high in the context of Burberry. It is due to its inflexible pricing system and poor performance in online apparel selling market.
3. Internal Analysis
The discussion below presents a view of Burberry’s internal resources and capabilities through value chain analysis and the VRIO analysis:
- Highly skilled craftspeople (Strength)
The Burberry owned manufacturing locations in the Italy and UK as well as the global supply chain appoints highly skills professionals that make products especially for crafting unique designs that set trends. There are more than 7000 designers are working with their respective leaders across the manufacturing sites who are trained with advanced technological tools such as virtual designing system. They design unique fashion based on collaborative information sharing and following transparent processes to come up with new designs (Burberryplc.com, 2020). The Walpole Awards 2019 recognised Burberry as the ‘most dedicated to making the world a better place’ and provided the Luxury with a Heart award.
- Supply chain (Strength)
The company also closely collaborates and monitors the production with its suppliers to ensure that the fashions meet standard. It sources the finest materials from the global suppliers focusing on a circular business model (Burberryplc.com, 2020). This way the company manages emission, waste produced from the production processes, recycle, and reuse those materials to reduce their environmental impact.
- Marketing innovation (Strength)
Burberry effectively redesigned its marketing approaches based on the emerging digital trends. it has already extended its luxury leadership through social media. The country specific accounts created on Twitter and Facebook allowed the company to reach a large section of the world population that inspires new generation fashion and style. It has also adopted live-streaming technology to held fashion shows and made products instantly purchasable.
- Burberry Trademark (Strength)
Trademarks like Burberry Goddess, Burberry Glow, Checks and others are significant elements of the company’s intellectual property. These trademarks help differentiating the product identify among the other market players. As strength, these factors help the company to influence the purchase decisions. However, the company has also been criticised for the infrangibility of its check trademarks leading the company to compromise its value.
- Dedicated manufacturing sites (Strength)
The manufacturing sites in the UK and Italy for clothing production are distinguished from the ones in France and Spain for perfumery to dedicate adequate and effective resources to different units. It helps the company to maintain the quality standard so that every consumer can differentiate the work of Burberry with others.
- Exotic collections (Weakness)
The raw materials Burberry use to make the products is fur using a ‘responsible’ souring model. Until 2018, a significant portion of the company’s production was dependent on fur from fox, mink, rabbits and Asiatic racoons. Moreover, it had to limit its international trade and souring from endangered species. This lack of sustainable approach towards sourcing is required to be reassessed to shift the focus of sourcing.
|Suppliers’ competencies are evaluated based on a risk based assessment before procurement to align with the company standards (Modern Slavery Act 2015).
|Prototype cloud and the Blockchain tool are used to trace and screen products and materials in their fashion supply chain
|Employees are provided introductory training that are aligned with modern slavery, human rights and labour rights to identify possible risks and cases of abusing those rights
|The digital reach of the company is high
|Inbound logistics: Storing market information, distributing them along with resources, focus on quality
|Operations: Circular business model guiding operation- Designing, testing, machining, assembling and packing, recycling and reusing waste materials
|Outbound logistics: Warehousing, order monitoring, transporting and delivering to stores
|Marketing and sales: Digital marketing, Attracting affluent consumers, cultural and environmental conscious advertising and Selling
|Service: Focus on customisation, trend selection, exploitation of eWOM and after sales support
|Resources or capabilities
|HR management and training
|Circular business model
|customised quality production and after sales
|Committed and vigilant workforce
The two distinctive competencies identified are quality focused production and digital innovation as most important.
- Quality focused production
Burberry designs and produces apparels with a purpose of providing lasting and unique experience to its customers. The company invented gabardine fabric that is able to repel water. It is one of the fashion invention brought to the market by the company. The company offers personalisation services before and after an order is delivered (Chen et al., 2020). It is a one stop solution for the consumers for product purchasing and maintaining the same, thus it is valuable. In addition, customers receive special refreshing and repairing services on different kinds of clothes, handbags and accessories that only a few competitors are tapping which makes it a rare competency. In addition, the company follows a low-cost production system. It is backed by connected physical and digital channels where VR, AR, gaming are to change the process of presenting the product stories to the consumers. It also requires a huge investment and skilled effort that the Burberry workers are putting into their performance distinguishably (Demangeot, 2021). The integrated communication throughout the supply chain, real time designing and processing by tapping the technological progress, high-scale investment along with the after sales services make this competency inimitable as well.
- Digital Innovation
Burberry recently has offered NFT accessories like pool shoes, a jetpack and others by tying up with the Mythical Games and launched a non-fungible token (NFT) (Burberry.com, 2020). During the covid-19 pandemic, it has shifted its focus on digital transformation and created its new social retail store, which helped redefining the consumer experience and enable cloud-based business agility. Considering the social restrictions in visiting physical stores, the company connected consumers to the physical stores, products and product experience in personal environment through digital technology which is rare. For instance, it has collaborated with artists, and used video games to reach younger audience through its Summer Monogram collection program Burberry.com. (2020). In addition, the company also introduced Augmented Reality tool for shopping with special Google search technology enabling consumers to envision British fashion label’s which make it a valuable option for consumers. Again it is inimitable considering its geographic reach and temporal suitability that can be substituted only by restructuring the digital approaches.
Section 2: Strategic recommendation and evaluation
|Strengths Highly skilled craftspeople Supply chain Marketing innovation Burberry Trademark Dedicated manufacturing sites HR management and training Circular business model Customised quality production and after sales Committed and vigilant workforceDigital innovation
|Weaknesses Shift from exotic collection
|Opportunities Work from home/home responsive fashionChanging gender role based fashionTying up with social media giants to exploit metaverse
|Burberry is suggested to come into partnership with Facebook to redefine the metaverse fashion world as well as can bring responsive fashion among people working from home.
|Threats Price inflation resulting from BrexitHigh inflation rate Wounded reputation surrounding product destructionIncreased financial demand with EAC imposed guidelines
Considering the changes in social relationships, professional meeting set up and lifestyle at home, the world is significantly shifting towards a virtual belongingness with others. For instance, McMaster et al., (2020) observed that the virtual social platform is an emerging standard for people to remain connected with each other. Social media like Facebook played an important role in creating a social platform for individuals to remaining connected with the world during covid-19. It approaches to create a metaverse where individuals can enter in to a virtual world with their respective avatars and can meet others the same way. It is new experience where avatars will represent the social presence of a person along with their communication, fashion, food and others. Burberry in this context can develop a community approach using social media of fashion enthusiast so that the metaverse can increase its reach eventually contributing to the NFT leverage of Burberry and create distinctive identity of the fashion brand.
The strategy is also feasible as virtual social experiences are to be inevitable in the coming years. Therefore, responsive fashion will be an innovative approach to address the post Covid-19 customer needs following the changes in lifestyle. Its marketing innovation capabilities, highly skilled crafts people and digital strategic expertise will help reaching the young stars. The external factors or threats including the inflation and Brexit related barriers disrupted the EU business operations. Therefore, this opportunity can help Burberry to indulge into a new market development, where Virtual fashion experience will be a valuable proposition.
Risk: The Company may require focus more on the Long-term management of the current assets as the liquidity ratio has increased in 2020. However, the low gearing ratio is showing a low proportion of debt to equity which indicates that Burberry may not need to alter its financial management right now though it is required to be eventually managed based on the market uncertainty. On the other hand, the interest ratio shows that Burberry is able to meet the debt needs effectively in coming years.
Return: The return capital is higher than the previous year’s which indicates that Burberry will be able to invest on its new marketing and product innovation approaches effectively. As the company has a potential to enter the metaverse based fashion world, it is opportunity to thrive and achieve the same.
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1. Financial analysis
(a) Profitability Ratio:
Return on capital employed
b) Liquidity ratio:
(c) Gearing Ratio:
(d) Interest Ratio:
2. Balance Sheet