Markets and Risks
MarketsRisks
MARKETS
Markets in which Burberry operates
Burberry operates in the global luxury sector which, for Burberry's
relevant categories, is estimated to be an approximately
£145bn global market.
The luxury goods market has grown on average by 7% per annum during the last four years. During 2008, growth slowed and industry analysts expect the market to contract during 2009. Despite current headwinds associated with the global economic environment, the fundamental longterm drivers of growth in the luxury market remain:
- economic growth - the luxury market has generally grown at two to three times the rate of the global economy
- consumption associated with the rapid expansion of emerging economies including China and Russia
- growth in high net worth individuals (HNWIs) in both core and emerging markets; HNWIs are defined as consumers with financial assets (not including their primary residence) in excess of US$1m; they have a higher propensity to purchase luxury goods than other consumers
- increasing demand for luxury brands, as consumer aspirations develop, spend by working women increases and a greater number of men select luxury brands
- more international travel and tourism
- continuous product innovation by luxury brands creating demand for new products
The luxury goods market is made up of apparel, accessories including handbags and shoes, perfume and cosmetics and hard luxury, including watches and jewellery.

Competitive position
In the year to 31 March 2009, Burberry's reported sales were
£1,202m. Converting wholesale and licensing revenue to retail
sales value (how much the consumer spends on Burberry products),
the global sales under the Burberry brand are estimated to be
£3.5bn. Burberry is among the top ten global luxury
brands.
Burberry competes with a variety of luxury goods companies. Some are large international conglomerates, owning many luxury brands; others are focused on a single brand globally; while others are small, more localised operations. Burberry's relevant peer group differs by product category - womenswear, menswear, non-apparel and childrenswear.
Management remuneration is partially based on Burberry's performance relative to peers. A full list of the comparator group, which includes Hermès, LVMH, PPR and Richemont is provided on page 69 of this report.
RISKS
The management of the business and the execution of the Group's growth strategies are subject to a number of risks, the occurrence of any one of which may adversely affect the management of the Group and the execution of growth strategies.
The key business risks affecting the Group are set out below. The steps the Group takes to address these risks, where they are matters within its control, are also described. Such steps will mitigate but not eliminate these risks. Some of the risks relate to external factors which are beyond the Group's control. The order of the risks is in no way an indication of their relative importance, and each of the risks should be considered independently. If more than one of the events contemplated by the risks set out below occurs, it is possible that the combined overall effect of such events may be compounded.
Risks are formally reviewed by the Group Risk Committee, whose membership includes the Chief Executive Officer, Executive Vice President - Chief Financial Officer, Executive Vice President of Corporate Resources, Senior Vice President of Supply Chain, Senior Vice President Commercial Affairs and General Counsel and Director of Audit and Risk Assurance. At the invitation of the Committee, the Director of Intellectual Property, Head of Corporate Responsibility, Head of Risk Management and representatives from other assurance teams regularly attend meetings. The assessment of the Group's risks and the processes in place for management and mitigation of these risks are considered by the Audit Committee on a regular basis. Key business risks are also considered by the Audit Committee and are considered generally as part of the Group's strategic development and ongoing business review processes.
The global economic downturn has affected consumers'
purchases of discretionary luxury items which has adversely
affected Burberry's sales in certain markets
In common with all Burberry's competitors, the global economic
downturn has affected the level of consumer spending on
discretionary luxury items. During a recession, when disposable
income is lower, a global downturn will adversely affect Burberry's
sales in certain markets.
A significant proportion of the Group's sales are generated by customers (in particular Middle Eastern, Russian, Japanese, Chinese and other Asian customers) who purchase products while travelling either overseas or domestically. As a result, shifts in travel patterns or a decline in travel volumes could materially affect trading results.
During the year, the Group announced a global cost efficiency programme to underpin future profitability, the implementation of which is well advanced and is in line to provide the business with the planned benefits.
There is a risk of over-reliance on key trading
partners
In a number of key product categories Burberry is reliant on a
small number of suppliers. During the year, the Group continued to
strengthen its supply chain management team to enable the further
evolution and development of the manufacturing base and also to
mitigate the risk associated with over-reliance on a number of key
product suppliers. Where suitable alternatives exist, the Group has
reduced volumes with such suppliers and continues to look for
suitable additional alternatives where necessary.
The Group has a number of key customers whose business represents a substantial portion of sales. The Group dedicates resources to these customers and maintains close relationships with such customers to understand and respond to their needs.
The Group closely manages its relationships with key suppliers and customers which includes monitoring their financial and non-financial performance.
A substantial proportion of the Group's revenue and
profits is reliant upon business in Japan and key global
licensees
A significant source of profit is derived from the royalties
received from licensees, specifically the Group's licensees in
Japan, and the fragrance licensee InterParfums S.A. Burberry relies
upon licensees, among other things, to maintain operational and
financial control over their businesses. Should these licensees
fail to effectively manage their operations the Group's income from
royalties would decline. Failure to manage these key relationships
effectively could have a material impact on the sales,
profitability and reputation of the Group.
To minimise the risks in Japan, Burberry has its own offices and operations in Tokyo and closely monitors its relationships with licensees. The Group regularly implements royalty reviews and audits of licensees, but cannot guarantee that they will reveal any non-compliance with the terms of the relevant licence.
In key emerging markets, including China and the Middle
East, Burberry is largely dependent upon third-party operators with
the associated lack of direct control and
transparency
In key emerging markets, Burberry operates through third-party
franchisees. In particular, a third-party retail operation has been
developed in China. The Group largely depends upon the expertise of
these franchisees given its relative lack of experience in this
region. During the year, the Group has strengthened its resources
internally, and where appropriate has its own staff based within
these operations who work closely with franchisees to further
develop operational models to enable greater control and
visibility.
During the year, the Group established a company in the Middle East with its longstanding franchisee to enable both parties to capitalise on further opportunities in certain parts of the Middle East.
Burberry could suffer if its supply chain is unable to
produce and deliver goods at a competitive price, on time and to
its specification
Burberry continues to evolve its sourcing strategy, refining its
selection of suppliers to maintain and enhance product quality
whilst improving sourcing efficiency. During the year, the Group
announced a global cost efficiency programme which included the
restructuring of its Spanish operations and consolidation of its UK
manufacturing operations; the implementation of these initiatives
is well advanced. These initiatives may adversely affect
relationships with existing suppliers during the transition period.
If Burberry's suppliers failed to ship products on time, or quality
is substandard, this could result in the Group missing delivery
dates to its customers, potentially resulting in cancelled orders
or price reductions. Further, such a failure could affect wholesale
customers' confidence which could adversely affect subsequent
seasons' sales. The Group continues to rationalise its distribution
network to minimise unnecessary costs and to improve delivery
timeliness and accuracy.
During the year, the Group established a global planning function to further improve inventory management processes and effective product flow, facilitated by improved reporting and visibility provided by SAP. Further opportunities exist to improve inventory management processes and these will help ensure that the Group continues to produce merchandise of the right quality, in accordance with its ethical policy and delivered in accordance with its requirements.
The inability to anticipate and respond to changes in
consumer demand and product category trends on a timely basis could
adversely impact sales
The Group's business depends, in part, on the ability to shape,
stimulate and anticipate consumer demand by producing innovative,
fashionable and functional products. Categories are cyclical, so it
is critical the Group builds responsive product teams to exploit
trending categories, launch new categories and balance core apparel
and non-apparel categories. The Burberry Check and outerwear are
both an integral part of the brand's success. The Group has evolved
its design calendar to enable increased product refreshment and
replenishment so as to be more responsive to fashion and consumer
trends and to respond more efficiently to changing circumstances
and to reduce the risks associated with placing excessive capacity
with key product suppliers.
Burberry continues to protect its classic core market by adding innovation to further stimulate sales to current customers, while attracting new customers to the brand. The Group balances and plans all categories and brand icons through a strict product hierarchy. To continue brand momentum, and to protect market share in apparel and non-apparel categories, the Group features outerwear and the Burberry Check icons as part of seasonal marketing initiatives.
Burberry's operating results are subject to seasonal
fluctuations and vary based on the weather
In recent years, the world has seen more unpredictable global
weather patterns. Burberry's business, particularly with respect to
apparel, broadly operates on a seasonal basis (Spring/Summer and
Autumn/Winter) and the Group has experienced, and expects to
continue to experience, substantial seasonal fluctuations in sales
and operating results. In particular, results vary based on the
weather because of the large proportion of outerwear products
Burberry offers and the effect of the weather on retail markets
generally. As a result of these fluctuations, comparisons of sales
and operating results between different periods within a single
financial year are not necessarily meaningful. In addition, these
comparisons cannot be relied on as indicators of the Group's future
performance.
The cumulative change and significant growth within the
business places a significant pressure on resources
The combination of the continued development of the Group's IT
infrastructure, the development of the global supply chain and the
implementation of the global cost efficiency programme combine to
exert significant pressure on the business. Governance processes
have been put in place for each major programme to monitor and
manage the progress of these initiatives and these are supplemented
by monthly operational meetings with senior management to review
operational performance. The senior management team has been
strengthened to further support these key initiatives and external
consultants are used to supplement internal skills where
required.
Burberry is dependent on the strength of its trademarks
and other intellectual property rights
Burberry's trademarks and other proprietary rights are
fundamentally important to the success and competitive position of
the business. Unauthorised use of the ‘Burberry’ name,
the Burberry Check and the Prorsum horse logo as well as the
distribution of counterfeit products damage the Burberry brand
image and profits. If a third-party registers one of the Group's
trademarks, or similar trademarks, in a country where the Group
does not currently trade, this would create a barrier to commencing
trade under those marks in that country. In addition, if a
third-party publishes harmful material using our trademarks,
Burberry's brand image could suffer.
The Group has a dedicated team operating internationally to register and protect its trademarks and other intellectual property rights. Where infringements are identified, the Group resolves these through a mixture of criminal and civil legal action and negotiated settlement.
Nevertheless, it is not possible to guarantee that the actions taken to establish and protect the Group's trademarks and other proprietary rights will be adequate to prevent imitation of Burberry's products by others. Trademarks and intellectual property rights, while subject to international treaties, are largely driven by national law and the protection of intellectual property rights varies from one jurisdiction to another. The Group cannot therefore necessarily be as effective in all jurisdictions in addressing counterfeit products. In many territories the Group is dependent upon the vigilance and responsiveness of law enforcement bodies whose priorities may differ from the Group's. They are also subject to budgetary constraints and prioritise their actions accordingly. Whilst the Group works closely with customs and other law enforcement bodies, ultimately the Group cannot direct their actions.
Burberry may be unable to control its wholesale and
licence distribution channels satisfactorily
The Group relies upon the ability to control its distribution
networks and licensees to ensure that products are sold in
environments consistent with the Group's luxury image. An action by
any significant wholesale customer or licensee, such as presenting
Burberry products in a manner inconsistent with our preferred
positioning, would be damaging to our brand image. If, due to
regulatory, legal or other constraints, the Group is in any way
unable to control its wholesale distribution networks and
licensees, the Burberry brand image, and therefore results and
profitability, may be adversely affected.
If Burberry loses key management or is unable to attract
and retain the talent required for its business, its operating
results could suffer
Burberry's performance depends largely on its senior managers and
design teams. The resignation of key individuals and the inability
to recruit people with the right experience and skills to
facilitate future business growth could adversely impact Burberry's
results. To mitigate these issues the Remuneration Committee
regularly benchmarks the Group's incentive schemes against the
market and considers the framework in place to recruit, incentivise
and retain key individuals. In addition, there is an ongoing
recruitment and succession planning programme overseen by the
Executive Vice President of Corporate Resources and Chief Executive
Officer to ensure that the Group strengthens and develops its
senior management team by identifying, developing and nurturing
high potential talent.
Burberry faces increasingly intense
competition
Competition in the luxury goods sector has intensified in recent
years and Burberry is faced with increasing competition in many of
our product categories and markets. The Group competes with
international luxury goods groups who control a number of luxury
brands and may have greater financial resources and bargaining
power with suppliers, wholesale accounts and landlords. If Burberry
is unable to compete successfully, operating results and growth may
be adversely impacted.
Burberry is exposed to foreign currency
fluctuations
Burberry derives a significant percentage of its profits from its
Japanese licensing arrangements. As a consequence, the Group is
exposed to a significant risk associated with the Yen to Sterling
exchange rate.
In addition, the Group is continuing to expand its operations in the United States and Europe as part of its strategy to accelerate retail expansion in key underpenetrated markets. As the Group's presence in the United States and Europe increases, it is exposed to an increased risk associated with the US Dollar to Sterling exchange rate and Euro to Sterling exchange rate.
The Group manages a significant proportion of the foreign currency exposures by the use of forward exchange contracts. Currency fluctuations affecting the Yen, Euro, US Dollar and other currencies will nevertheless affect results and profitability.
The Group relies upon its licensees, suppliers,
franchisees, distributors and agents to comply with relevant
legislation
The Group expects its licensees, suppliers, franchisees,
distributors and agents to comply with employment and other laws
relating to their country of operation and to operate to good
ethical standards. The Group, however, is unable to guarantee that
this is the case, although it is improving its processes to gain
assurance that its licensees, suppliers, franchisees, distributors
and agents comply with its terms and conditions and relevant local
legislation and good practice.
Major incident
A significant incident such as a natural catastrophe, global
pandemic or terrorist attack affecting one or more of the Group's
key locations could significantly impact the operation of our
businesses. In such circumstances, the uninterrupted operation of
the business cannot be ensured, particularly in the short term.
Business continuity plans are in place to mitigate but not
eliminate the operational risks.