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Burberry Plans Big China Push

Burberry purchases its retail operations in China for 70 million pounds, or $107.8 million at current exchange, in cash.

LONDON — Burberry is preparing a vigorous move on the Chinese market after sealing a deal to purchase its retail operations there for 70 million pounds, or $107.8 million at current exchange, in cash.

This story first appeared in the July 19, 2010 issue of WWD.  Subscribe Today.

“This is the biggest deal we’ll do this year, and we’ve been in heavy dialogue about it for the past six months,” Angela Ahrendts, Burberry’s chief executive officer, said in an interview.

“Over the past 18 months, we have acquired control of our operations in the world’s four biggest emerging markets: the Middle East, India, Brazil and now China,” she said, adding that 10 new stores are in the pipeline for China this year. “And we are motoring ahead in all of them.”

Ahrendts said she will travel to China next month to walk the floors of the brand’s stores — Burberry has 50 units across 30 cities — and learn about the needs of the market and how to integrate the Chinese operations into the larger Burberry structure.

Ahrendts plans to double the number of Burberry stores in China to 100 in the medium term.

Burberry said Friday that it purchased the 50 stores from its long-standing Hong Kong-based franchisee Kwok Hang Holdings Ltd., and expects the transaction to add as much as 20 million pounds, or $30.8 million, to group operating profit in the 2011-12 fiscal year.

Slightly less than half of Burberry’s stores are in Beijing and Shanghai. Retail sales in all 50 units totaled about 75 million pounds, or $115.5 million, in the year to December 2009. Those sales were previously reported as wholesale revenue.

Burberry said that as part of the deal an unidentified “existing franchisee” would continue to hold a 15 percent stake in the Chinese business. In addition to the 50 stores in China, Burberry has direct control over 13 stores in Hong Kong, one in Macau and 19 in Taiwan.

Over the last 18 months, Burberry has moved swiftly to take control over its regional licensed or franchised businesses and transform them into directly operated ones. It has formed joint ventures in India, the Middle East and Japan, and this year set up its own direct operations in Brazil.

Ahrendts said all of the Chinese stores sell Burberry’s global collection, and about two-thirds already have been fitted with Burberry’s sleek new store concept. She said Burberry’s Asia Pacific team will run the Chinese business and tap into the brand’s supply chain, IT and merchandising resources, as well as its digital-marketing strategies.

London-based Evolution Securities praised the deal. “This will give [Burberry] full control of the brand’s delivery to consumers in one of the fastest-growing luxury markets,” the firm said. “The deal financials look excellent.”

Last week, Burberry reported in its first-quarter statement that sales in the Asia-Pacific region rose 43 percent at actual exchange rates and 30 percent on a constant-currency basis. Worldwide, sales rose 30.6 percent to 282 million pounds, or $434.3 million, in the three months ended June 30.

Ahrendts said men’s wear and outerwear are big drivers of growth in China, and much potential lies with children’s wear — despite the country’s one-child-per-family policy.

“There is so much money — spent by parents and multiple grandparents — on these only children,” said Ahrendts, adding that Burberry is mulling standalone children’s wear stores in the country.

Ahrendts said that so far her biggest challenge in China was uncertainty. “I’ve been told that no matter what sort of risk analysis you do for China, something you don’t expect will always happen,” she said. “There’s nothing about the business that’s keeping me up at night, but the market is moving so rapidly, I’m sure something will happen.”