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Investors fret work started by Marco Gobbetti to reinvigorate the luxury fashion brand will lose momentum when he leaves

Burberry launched its new Olympia handbag in May with an ad campaign that cast Kardashian clan star Kylie Jenner and British musician FKA twigs as modern Greek goddesses and opened 45 sleek pop-up stores from Shanghai to Houston.

The saddle-shaped bag that costs £1,150 to £1,890 is a symbol of what chief executive Marco Gobbetti has aimed for in his turnround of the British luxury goods company: injecting youth and glamour into the brand, moving it upmarket, and improving product quality.

But the surprise announcement on Monday that the Italian executive will leave for the top job at smaller Italian rival Salvatore Ferragamo by the end of the year has cast uncertainty over the group and left investors worried that the turnround will go unfinished. Burberry has shed roughly £1bn in market capitalisation since the news, or almost 10 per cent of its value.

“Marco’s efforts were bearing fruit but there is still a lot of work to do,” said Mario Ortelli, who advises luxury groups on strategy and mergers and acquisitions. “Elevating a brand the size of Burberry is like lifting an elephant.” 

One top 20 shareholder told the Financial Times that Gobbetti’s departure could disrupt the creative side, where Burberry’s star designer Riccardo Tisci has brought “buzziness” to the brand best known for trenchcoats and tartan. Gobbetti hired Tisci in 2018 and the pair are said to be close having previously worked together at Givenchy, prompting analysts to point the risk that he too could leave or not work as well with the next chief executive.

“Unplanned departures of CEOs are always disruptive but this is particularly challenging at Burberry where success and failure is inextricably linked to the chemistry and alignment between its commercial and creative leaders,” said the shareholder. 

“Uncertainty will remain until the new CEO is selected, in post and delivering.”

Tisci’s vision has been to give Burberry’s traditional Britishness a modern twist by incorporating elements of streetwear — all with the aim of appealing to young Chinese customers who drive most of the luxury sector’s growth. One of his first moves was to create a new logo featuring the founder Thomas Burberry’s initials, which was soon splashed all over clothes and bags, similar to the LV of Louis Vuitton.

Gobetti’s efforts to reposition Burberry were delayed by the coronavirus pandemic. But even before then, other steps he had taken, such as phasing out discounts and cutting reliance on department stores, had caused revenues to stagnate even as sector leaders were enjoying record high sales. Tisci’s designs have met with success among consumers in China, but at times struggled to stand out in the US or Europe. 

Burberry’s looming leadership change comes as the fallout from the pandemic has widened the gap between the haves and have-nots of the luxury industry. 

Demand for the biggest brands like LVMH’s Louis Vuitton and Dior and Hermès has rebounded strongly since late last year, helping them take market share even as the pandemic shut down the flow international tourism that underpins the sector. 

With affluent customers in the US and China splashing out at home instead, the top brands have grown rapidly again. Analysts predict that LVMH, Hermès, and Gucci-owner Kering will bring in more revenue this year than before the pandemic, according to Refinitiv data. 

In contrast, smaller brands like Burberry have struggled to regain momentum and some including Ferragamo and fellow Italian group Tod’s are forecast to take another year or two to recover, prompting some analysts to point to them as potential takeover targets.

Burberry has grown in line with the sector in recent quarters and is not losing share against the market overall, said HSBC analyst Erwan Rambourg of HSBC. But its pace of growth is slower than top brands like Dior and Louis Vuitton.

Revenue growth “remains muted at a crucial point in the turnround story”, wrote UBS analyst Zuzanna Pusz, adding that Burberry may need to “spend significantly more in order to reignite” sales as well as reset margins. 

Margins on Burberry’s earnings before interest and tax hovered around 16 per cent before the pandemic, compared with the high 20s for Kering and above 30 per cent for Hermès and LVMH’s fashion and leather goods division that is home to Louis Vuitton.

Some of the gap can be explained by product mix: Burberry relies more on sales of ready-to-wear clothing than its rivals which earn most of their revenues from higher-margin leather goods. That makes it more exposed to the whims of trends and vulnerable to discounting. 

“With fashion, there is complexity to manage, you need different sizes, deal with stock and outlets, and the wholesale component,” said HSBC’s Rambourg. “If something doesn’t sell you can’t just hold it and try again to sell it later as you can with a handbag or a wallet.”

Since he joined in 2017, Gobetti has made expanding in leather goods a key focus to boost growth and profits. Creative director Tisci has overhauled the brand’s handbags, totes, and clutches to focus on five key designs, including the Olympia. Burberry also improved product quality by bringing more manufacturing in-house after it took over one of its leather goods suppliers in Italy in 2018. 

During his tenure, Burberry’s share price has risen by roughly 25 per cent, outpacing a 3 per cent decline for the FTSE 100 but lagging sector leader the 200 per cent rise for LVMH.

But Burberry still has some way to go to be seen by consumers as a top-tier luxury brand given that its prices are often lower than competitors’, analysts say. More work is needed to clean up distribution, eliminate discounting, and improve product quality, while the designs need to appeal to new customers, especially in China.

Those tasks will fall to Burberry’s next leader. 

Burberry formally began the search on Monday. As part of its usual succession planning, the board had already identified potential candidates and aims to nominate a new CEO within the next six months, according to a person familiar with the matter.

Another top 20 shareholder told the FT that they did not anticipate any trouble recruiting. “Given the good fundamentals and momentum in the business, we would see Burberry as representing a highly attractive hand of cards for any incoming CEO,” the person said.