Burberry, the 150-year-old global luxury company, recently entered into an agreement to acquire the stores and related assets in China, which were being operated by its long-standing franchisees.
This transaction is in line with Burberry’s strategy of unifying the brand around the world, while at the same time increasing its exposure to retail and to high-growth luxury markets. The purchase price is approximately £70m in cash, subject to completion adjustments. The transaction is expected to add up to £20m to group operating profit in the financial year 2011/12.
Burberry has terminated its franchise arrangement for China and entered into an agreement to acquire certain retail assets from its Hong Kong-based master franchisee, Kwok Hang Holdings Ltd. The majority of this is payable on completion, which is expected in autumn 2010. As part of these arrangements, an existing franchisee will hold a 15% economic interest in the business.
Angela Ahrendts, Chief Executive Officer, commented, “The acquisition of Burberry`s store operations in mainland China will allow us to further leverage our proven brand and business strategies in this high-growth luxury region. With a solid foundation of 50 stores across 30 cities, operational expertise and strong brand momentum, this is an optimal time for Burberry to integrate this business. Looking forward, we will accelerate growth by further capitalising on nearly 20 years of market presence and our high brand awareness in China. We plan to drive productivity in existing stores and open new stores, while rapidly implementing our digital marketing initiatives to further reinforce the brand in this exciting market.”
Under the agreement, Burberry expects to acquire the assets and inventory of 50 stores in China. These were previously operated under a master franchise arrangement and reported as wholesale revenue for Burberry. The stores are located in 30 cities in China, including nine stores in Beijing and four in Shanghai, with approximately two-thirds in the global store design. Retail sales in these stores were approximately GBP75m in the year to December 2009, generating operating profit of approximately GBP14m for the franchisees based on their historical business model.
The operational management of these Chinese stores will be assumed by Burberry`s Asia Pacific team and will be led by a recently recruited Senior Executive, who has worked in the luxury industry in China for ten years. Burberry plans to open about 10 stores in China in the current financial year, while applying global marketing, retail, merchandising and IT disciplines to drive store productivity.