UK luxury brands in risk of going from riches to rags

“Heritage” features large in the marketing mythology of the world’s ritziest brands, signalling such virtues as longevity and timeless craftsmanship. “Heritage,” says Clive Black, retail specialist at brokers Shore Capital, is an invaluable aid to brand recognition, “and a huge challenge for those that don’t have it”.

But it is also a double-edged sword in an industry that sets out to test tradition and celebrates season-to-season mutability. Looking back can be a difficult way to move forward. 

Few luxury goods companies cling harder to their heritage than Burberry and Mulberry, the UK’s only two listed makers of deluxe clothing and leatherwear. The former makes much of the legacy of Thomas Burberry, who designed a light, breathable, rainproof fabric that was used by explorer Sir Ernest Shackleton and British soldiers in the trenches in the first world war. Mulberry — smaller but the UK’s largest maker of top-notch bags and belts — talks of its roots in stereotypical British pursuits of hunting, shooting and fishing. 

Both are struggling with losses and thinning margins, having tried to push into lucrative new markets and alienating customers with big price rises. Both are entering a period of brutal change under new managements whose first task must be to leave the past behind.

During the heyday of British chic, about 15 years ago, the brogueish and outdoorsy charms of Le Style Anglais and Mulberry’s Alexa satchel were all the rage. Mulberry’s shares were close to £25 then. The group’s price was more than 60 times earnings and its market value was £1.5bn. It is now a stock market titch, valued at about £80mn.

Last month, even as Mulberry’s new chief executive Andrea Baldo lyricised the group as “a beloved brand with a proud heritage”, he announced an emergency £10mn cash call from Mulberry’s two biggest shareholders — the Ong family of Singapore and Frasers group, the retail empire of Mike Ashley, which own 93 per cent between them. 

Mulberry, it seemed, lost £34mn before tax in the year to March, against pre-tax profits of £13.2mn the year before. Baldo made clear that the cash is needed urgently if the group is to keep its Somerset factories going and its stores open. Revenues so far this year are down nearly a fifth on last year, the company said.

Frasers group, owning about 37 per cent of the shares, responded with a 130p-a-share bid, raising it to 150p-a-share. The Ong family, owning 56 per cent, has rejected both. For the moment the Ongs are backing Baldo: he outlined plans to reposition the brand, ditch the company’s (expensive) strategy to expand its overseas store estate and retrench to the core UK market, which represents nearly 60 per cent of sales. 

Frasers — said to be aggrieved that Mulberry has largely stopped distributing its kit through Frasers’ department stores — is dismissive. It is clear, it says, “there is no current commercial plan, turnaround or otherwise”; and that £10mn will not be enough. Mulberry will have to go back to shareholders cap in hand unless, Frasers adds cryptically, “there is very real change”. Mulberry’s board is caught between the two sides. Other shareholders can only watch from the outside as the battle unfolds.

In essence [Burberry] has failed in its ambition to turn its check and trenchcoat into the ultimate in swank on the Rue du Faubourg Saint-Honoré,

Mulberry’s riches-to-rags tale should resonate with Burberry investors. 

In essence, Mulberry forfeited customers’ love more than a decade ago when it began raising prices without convincing shoppers its bags were worth it. It has never recovered. Sales growth has stagnated and costs have risen as Mulberry tried fruitlessly to expand overseas and control its distribution channels. 

The rather bigger Burberry has expanded more successfully. Only a tenth of its sales are UK-based. Yet it too has had to learn that high prices alone do not earn brands places at the high table of fashion. 

In essence it has failed in its ambition to turn its check and trenchcoat into the ultimate in swank on the Rue du Faubourg Saint-Honoré, ranking alongside the likes of Gucci or Chanel. 

In particular, it has failed to win over aspirational Chinese buyers who have largely driven the growth of the fashion industry for the past two decades. That is all the more painful since the personal luxury goods market has more than doubled in value since 2010, according to consultants Bain.

The group’s abiding mistake, say onlookers, was to turn off customers — as Mulberry did — by yanking up prices of products, notably handbags, to protect juicy margins just as consumers across Asia, the US and Europe began tightening belts. The rich might still shell out £8,000 for a Chanel clutch but not £1,700 for a Burberry “snip” tote or trenchcoat.

Burberry’s shares are half what they were in 2011 and the market value of the group has more than halved to £2.25bn. In July, Burberry admitted it expected to make a first-half loss and suspended its dividend. Last month, the group was relegated from the FTSE 100 Index of top UK companies. 

Burberry wasn’t the only company that didn’t see what was coming. Fashionistas aplenty assumed, after the post-Covid shopping bonanza, that the wealthy would just keep on shopping. It was a shock when they didn’t. Kering, which owns Gucci, said in July for instance that operating income could decline by up to 30 per cent in the second half of this year. 

UBS analysts worry the downturn will last a while yet. Key data points, UBS says, are not encouraging for a quick recovery: Swiss watch exports, tax-free shopping receipts and consumer confidence everywhere are down. “The industry seems to be entering its own specific cycle,” says UBS. High prices and little product innovation has led to consumer “fatigue”. “Some players may need to restore [the perception of] value for money.” That will be a challenge for groups maintaining plush store estates. Burberry more than most.

“It is hard to tell what the CEO change [at Burberry] can bring”, say analysts at BNP Paribas Exane. They note the futility of “persistent attempts in recent years to reignite sales growth and improve profitability”. BNP reckons ebit margins are down to 2.2 per cent. The only upside risk would be a bid, it adds, but “we don’t see any prospective buyers”. 

Certainly, the shares at a little above 600p are hardly a steal at nearly 300 times BNP’s forecast earnings to March 2025, dropping to 27 times in 2026. That assumes the company restores adjusted earnings before interest, tax and amortisation to about £150mn (against £418mn in 2024). 

To do so may involve more than streamlining costs and recalibrating prices. As Black from Shore Capital says: “Brands have to evolve.”

The group mutters about being more inclusive and re-engaging with core customers. But it balks at suggestions that the brand will become more affordable and its latest catwalk was full of Burberry tartans and trenches. The danger, if Burberry doesn’t reimagine its heritage more drastically, is that someone else will — much as Mike Ashley is reimagining Mulberry.