Mulberry: the perils of lowering prices

The company must not succumb to profit-chasing through lower prices.

ImageMulberry Group plc

Mulberry Group plc’s latest profit warning comes with a promise to regain market share through lower-priced products. The company has had a rough period, losing two-thirds of its market value in the last two years. The blame has fallen squarely on Bruno Guillon, the company’s former CEO who stepped down in March. Mr. Guillon, previously at Hermès International SA, attempted to price Mulberry’s products further upmarket with broadly negative results.

As the company pledges to roll out less-expensive product lines, I am compelled to point out the significant risks to this strategy. Mulberry has emphasised its intention to offer lower-priced handbags and accessories while maintaining its most expensive lines unchanged. This strategy risks devaluing the brand, squeezing margins, and depressing long-term growth.

The best example of a cheapened brand is Coach, Inc. This company has chased profits by offering handbags and accessories across a broad range of consumer segments. Indeed, one can buy a Coach bag for as little as $100, and shoes can be had for even less. This strategy has made Coach a highly visible brand among high school girls and less-affluent young women. This demographic has driven plenty of growth, but the company’s margins have remained stagnant or shrunk in the last years (see Fig. 1).

 

Fig. 1 (Google Finance)

Fig. 1 (Google Finance)

Another factor tarnishing the Coach brand is the company’s distribution. Outlet stores make up over 20% of the company’s direct retail presence, and Coach products are sold in Macy’s, Zappo’s, and other relatively low-cost retailers. Pursuing the affordable luxury segment is a competitive struggle, and Coach has sacrificed the appeal of its flagship high-margin products in its thirst for growth. In the race to capture this market, Michael Kors and Kate Spade have fared demonstrably better. Just look at stock appreciation over the last two years (Fig. 2).

Figure 2 (Google Finance)

Figure 2 (Google Finance)

Mulberry’s situation isn’t too bad overall. Operating income soared in 2011 and 2012, and the 1.92% dip in revenue seen in 2013 was pretty minor. Cost of sales had the biggest impact on the bottom line, increasing by 6.42%. This can be attributed to the company’s high-end strategy under Guillon, which required more expensive storefronts in prime locations. I should note that working capital and net current assets have been increasing steadily despite the fluctuations in bottom-line performance.

One brand that has successfully offered products at a range of prices is Burberry Group plc. This retailer divides its offering into three segments: Burberry Brit at the lowest end, targeting a younger demographic; Burberry London, featuring traditional luxury formalwear; and Burberry Prorsum, which features the brand’s runway styles at the highest price point. This strategy has yielded margins above 20% for the last three years and growth has been very steady (Fig. 3).

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Source: Burberry Group plc

Mulberry is a relatively small company, and it may be unfair to compare it to these giants. That being said, the impression that the brand makes among global consumers as it becomes more well-known cannot be easily mended. I would advise Mulberry to lower prices enough to bring back antagonised customers, and no more. Expanding the company’s offering to low-cost segments could be done in the future through acquisitions (this would be infeasible under the company’s current size and cash position) Alternatively, the company could be an attractive acquisition target. Regardless, Mulberry should stay true to its identity. Cheapening the product may drive some growth in the short term, but value lies in the long-run success of the brand.