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Burberry Shifts Its Entry Strategy in Japan

For nearly half a century, Burberry outlets in Japan have sold everything from golf bags to miniskirts and Burberry-clad Barbie dolls -- the result of a decades-old license agreement that left the British luxury brand's Japanese business in the hands of a local vendor. Now, Burberry Group PLC is taking sales in Japan, the world's second-largest luxury market, into its own hands. In June, Burberry ended a 45-year pact with its last Japanese licensee, Sanyo Shokai, one of its longest-running contracts. Over the next two months, the closure of Sanyo Shokai's shops will shrink Burberry's presence in Japan to about two dozen outlets from nearly 400 and replace moderately priced items created by the Japanese company with a high-end line of trench coats and scarves that costs up to 10 times more.

"The license has been suffering from overexposure," says Pascal Perrier, chief executive for Burberry in the Asia-Pacific region. "We will never do that again." Burberry's Japan move caps a decade-plus quest to regain control of its image after years of expansion in foreign markets and licensing agreements left a legacy of disparately branded and priced products, including baseball caps, dog clothes and Scotch whisky. License agreements gained popularity in the 1980s and 1990s because they gave brands a foothold in foreign markets where they didn't have distribution networks or local expertise -- along with royalties ranging from 2% to 10% of each sale. The pacts often gave licensees leeway to develop branded products for the local market. But the deals threatened to tarnish luxury names whose reputations depended on exclusivity.

In recent years, the move to take back licenses is being driven by an increase in the number of consumers buying luxury goods online and on trips abroad, making it more important for brands to control their images globally. "With the globalization of the luxury-goods market and the sophistication of consumers, brands have tried to close down their licenses," said Mario Ortelli, an analyst for Sanford C. Bernstein.

Mr. Perrier, Burberry's Asia chief executive, said he realizes relaunching the brand in Japan will hurt financially at the beginning, since the Sanyo Shokai deal generated about GBP 500 million ($800 million) in sales and GBP 50 million in royalties annually. But Mr. Perrier said he expects to replace three-quarters of that income in the next few years by selling higher-margin products. "We are able to say no to some revenue for the sake of the brand," he said.

Burberry's Blue Label and Black Label lines, created by Sanyo Shokai, appealed to young Japanese, with women's shirts priced as low as $70, compared with around $250 for a cotton blouse from the standard Burberry line. Critics say those more cheaply priced labels hurt the brand's image globally. Mr. Perrier seems to agree, stressing that Burberry should not be a mass premium brand. Instead, he said, it should be positioned as a luxury line and recognized in the class that includes Louis Vuitton. He said Burberry plans to offer only the highest-end products in Japan -- such as its $1,800 trench coat -- and operate only in the most exclusive locations. Stores will be spacious enough to display purses, scarves, accessories and other items, creating a "Burberry world."

Ending the contract with Sanyo Shokai means the group should lose about 300 stores operated by the Japanese concern. But Perrier also said the planned network of new stores will provide appropriate scale for the Japanese market. The group will not pursue a mass expansion to make Burberry stores ubiquitous, he said. The goal is to have 35 to 50 directly operated stores by 2018. Burberry began taking actions in line with its new plan in November. It relocated its flagship store in Tokyo's Omotesando area to make the store 60% larger, a move received positively by customers. In March, it plans to open stores in Osaka's Shinsaibashi and Tokyo's Shinjuku districts, and has blueprints for a new store in Tokyo's Ginza shopping district in the future. The group is also negotiating with department stores to sell its products on luxury-brand floors, with good responses so far, Mr. Perrier noted.

As Japanese consumers increasingly seek high-quality items, and more foreigners visit, Japan will continue to be a key market, Mr. Perrier said. While Burberry's main customers appear to be in their 40s, the group will also steer marketing toward potential buyers in their 20s and 30s, an age range sensitive to fashion. However, how many fans will remain is unclear. At a Burberry kiosk in a department store in Tokyo, one woman browsing the Burberry Blue Label line said she preferred that line because Burberry's originals feel too conservative.

(a) Consider Burberry's licensing arrangement with Sanyo Shokai in Japan. What are the main benefits of such an arrangement from the perspective of Burberry? Please apply relevant concepts and use evidence from the article in support of our explanation.

(b) What were the main problems with the licensing arrangement that prompted Burberry to shift to a new strategy in Japan? Which FDI theory/theories provide(s) the most appropriate explanation for this new strategy? Please use relevant concepts supplemented with appropriate evidence from the article in support of your answer.

(c) Evaluate the new strategy that Burberry is undertaking in Japan from the perspective of both short-term and long-term impact on Burberry's profitability, in Japan and globally. Please provide relevant explanation in support of your answer.