Burberry takes control in Japan

Jun 15

As expected Burberry will cancel its main licenses in Japan next year. Headlines quoted plans to quadruple sales in Japan but the actual sales referred to were Burberry’s existing direct operations in Japan, not licensees. There is nevertheless a clear intention to invest heavily in growing the Japanese market, especially retail investment. Sanyo Shokai is at last moving on, licensing a new label from UK brand Mackintosh called Mackintosh London, which it hopes to open in many current Burberry concessions, but competition for this space will be stiff.

Burberry has confirmed the cancellation of its main apparel license in Japan with Sanyo Shokai from June 2015, alongside plans to quadruple direct retail sales in just two years. Sanyo has held licenses to the brand since 1970, and imported the brand’s trademark raincoats from 1965. The rights to Burberry London for men’s, women’s and childrenswear will transfer to Burberry UK and Burberry Japan. Mitsui, which had been Burberry’s master licensee, is expected to have an ongoing role in peripheral licenses alongside Burberry. Many licenses such as bags, childrenswear and golf have already been cancelled and others are in the process of being reviewed as Burberry works to rebuild its brand in Japan to match the higher luxury positioning globally.

Sanyo Shokai will continue to manufacture and distribute the Burberry Blue and Black Label sub-brands which have been sold in Japan since 1996 and 1998 respectively, but will not be able to use the Burberry name. From Autumn 2015 the brands will be sold as Blue Label and Black Label only and with just a three year contract, not to mention significant hurdles in trying to register the trademarks. Even then Sanyo will not be able to use the Burberry check. Sanyo Shokai also currently produces shirts for export to Burberry at a factory in Hyogo but this business may well also come to an end.

From 2015 A/W collections onwards, Burberry will distribute Burberry apparel directly in Japan. It will not takeover existing concessions, instead investing heavily in a new retail network. It will look to open three new flagship stores in Tokyo and one in Osaka in the next year, adding to the 14 stores already operated by the UK firm (four stand alone and 10 concessions), with as many as 20 more department store concessions. Burberry is negotiating for larger street level concessions to merchandise its full line and affirm the global brand positioning which is markedly higher than set by Sanyo until now. Burberry will launch a new online store and open online shops within other portals. The UK firm also announced expansion of its fledgling cosmetics store, Burberry Beauty Box in Asia next year including concessions in airports.

Burberry had direct retail sales of some ¥4 billion in the Japanese market in 2013, but hopes to quadruple this to ¥17 billion by the end of FY2016 ending March. Although headlines in the press talked of a quadrupling of Burberry sales in Japan by 2017, Burberry itself made it clear its target was £100 million (¥17 billion), a reference to direct sales.

Burberry’s global license income amounted to some ¥18.5 billion in FY2013, of which around 60% came from Japanese licenses. While Japanese retail sales of Burberry merchandise are estimated to be around ¥60-70 billion, Japanese licensed income makes up a mere 3% of Burberry’s ¥350 billion in turnover. Replacing some licenses with direct retail sales should have a significant impact on Burberry’s turnover.

On the other hand, as much as half of Sanyo’s sales of ¥106 billion, and more than half its operating profit, derive from Burberry merchandise. Sanyo Shokai is at last working hard to make up for the loss, working with Mitsui on brands such as Paul Stuart, as well as its own brands like Epoca, Loveless and To Be Chic. Through organic growth and investment in M&A, Sanyo is hoping to grow sales back to ¥100 billion through 2018.

Nevertheless Sanyo has known for years that Burberry would cancel and yet still has not delivered a break-through brand to replace it.

While Sanyo’s recent efforts have been impressive, especially in cutting costs and raising profits (see Chart and JC1405), it turns out that Sanyo is pinning almost all its hopes on a brand that hasn’t even been launched yet. This is Mackintosh London, a license which will start from Autumn 2015. Sanyo already licenses Mackintosh Philosophy and it will now have rights for apparel and accessories for Mackintosh London, with a roll out of sublicenses later. Sanyo will use its factories in Aomori and Fukushima that currently produce Burberry apparel to make Mackintosh London clothing.

Sanyo is also hoping to replace many current Burberry concessions with the Mackintosh brand with a similar positioning to its Burberry merchandise – i.e. lower than the positioning of Burberry globally. Much will depend on the willingness of department stores to let Sanyo hold onto such valuable real estate, something that is by no means guaranteed given that competitors are keen to grab these same corners.

Sanyo is hoping a new focus on Paul Stuart, Epoca and Mackintosh London will be enough toconvince department stores. It expects the bulk of future turnover to come from these three brands. Mackintosh London alone is expected to contribute ¥30 billion to Sanyo Shokai’s turnover through 2018 and Paul Stuart ¥20 billion. If it does succeed, the good news is that both Paul Stuart and Mackintosh are unlikely to cancel the licenses later; Paul Stuart is owned outright by Mitsui and Yagi Tsusho controls UK brand Mackintosh.

Sanyo’s sales will still fall even if these brands take off. In FY2015 Sanyo is forecasting overall sales will only fall to ¥96 billion compared to sales of ¥106 billion in FY2013, but then fall further to ¥85 billion in 2016 when it will also post a loss, before hopefully rising to ¥100 billion again over the two years ending FY2018.

Sanyo Shokai and Mitsui will not be the only firms hit by the loss of Burberry. As well as other licensees, department stores will also take time to adjust. While Burberry will invest in new concessions, these will likely only be in the premier league of stores in major cities. Regional department stores aren’t suited to Burberry’s higher luxury positioning, and it is these stores in particular that have gained consistent and regular income from Burberry in the past. In total there are believed to be some 300 Burberry branded corners and concessions in Japanese department stores. Their only hope now is that Sanyo’s upcoming Mackintosh London and Paul Stuart collections will succeed in winning over the same customer base.