Sep 19, 2012
Burberry ends BPI perfume licence talks -sources
Sep 19, 2012
PARIS - Talks have ended between Burberry and Beaute Prestige International (BPI) about a partnership to make and distribute the UK fashion brand's perfumes, two industry sources with direct knowledge of the matter told Reuters on Wednesday.
Negotiations collapsed because Burberry wanted to bring the fragrance business in-house to consolidate its sales and use BPI, the perfume unit of Japan's Shiseido, mainly as a distributor, one of the sources said.
Burberry is now seen as likely to press ahead with the move in-house, implying new costs. Depending on how the transition is managed, it could also lead to lost perfume income in the short term, analysts said.
"BPI was in talks with Burberry for a long time but what BPI could bring them was not what they wanted, so the talks ended," the first industry source said, adding that BPI's strength lied in its vast travel retail distribution network.
Ending talks with BPI raises questions as to whether Burberry will be able to revamp its distribution and find a manufacturer for its perfumes before a licence agreement with Interparfums ends on Dec. 31.
Burberry, which issued a profit warning last week, said in July it would buy back its perfume licence from Interparfums for approximately 181 million euros ($236 million) after failing to reach an agreement with the Paris-listed perfume maker.
Citi analysts said in a note that the figure could reach 250 million euros including inventories and tangible assets.
Like Interparfums, which holds licence deals with brands such as Lanvin and Balmain, BPI handles every stage of the perfume business, from design to communication and distribution.
BPI holds licence agreements with fashion brands Issey Miyake, Narciso Rodriguez and Elie Saab. It will lose its licence with Jean-Paul Gaultier in 2016 following Puig's acquisition of the French fashion brand last year.
BPI and Interparfums declined to comment on talks with Burberry, which did not wish to comment on its perfume business.
The second industry source said Burberry would likely take perfume in-house as part of a strategy to buy back licences worldwide to better control the brand's image and distribution.
Under the licence model, brands receive royalty fees, usually a percentage of sales, while the partners pocket the remaining revenue.
If Burberry brings the perfume business in-house, it will be able to consolidate the sales in its accounts - estimated this year to be around 210 million euros - but it will also have to take on extra costs such as advertising.
"Taking the business in-house would mean a change in business model which would lead to a transition period and potentially even a temporary loss of income," one London-based analyst said.
One of the industry sources said Burberry had a large amount of control already under its licence deal with Interparfums, from designing the fragrance to the communications strategy, and that it now wanted to take its involvement a step further.
Perfumes are generally manufactured by external companies.
"When we talk about handling the business internally, we mean that the company handles the product development, the distribution and the marketing," said Claudia d'Arpizio, of consultancy Bain & Co. "Launching a new fragrance is a very difficult exercise."
Controlling communication and the budget is key in the perfume business as advertising and promotional costs can reach up to 40 percent of sales, particularly if the face of the brand is a celebrity. Burberry uses actress Emma Watson for its coats.
Burberry introduced a new perfume last year called Body for which it had its biggest ever global fragrance launch.
The company has big ambitions for Body and perfume overall, analysts say, as it aims to narrow the gap with arch-rivals Dior and Chanel, which run their perfume businesses internally. Burberry is also keen to grow its skin care and make-up lines.
If perfume is taken in-house, Citi estimated a dilution of around 4-5 percent to Burberry's earnings per share the first two years of the new business, assuming lower initial revenue growth and start-up costs of 30 million euros.
Perfume is usually the main entry point for luxury brands. If most consumers cannot afford Burberry's 1,500-euro trench coats lined with its distinctive camel, red and black check pattern, they can afford a bottle of Burberry perfume.
Operating margins for perfume can reach around 15 percent, higher than for apparel, usually under 10 percent.
Perfumes and cosmetics accounted for 21 percent of the 191 billion-euro global luxury market in 2011, according to estimates by Bain & Co and industry body Altagamma. ($1 = 0.7660 euros) (Editing by James Regan)
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