May 25, 2007
Burberry Follows 80/20 Rule to Growth
It didn’t take but a single trip through one of her company stores to cause Burberry CEO Angela Ahrendts to question why the retailer carried so much merchandise.
According to The Wall Street Journal, Ms. Ahrendts asked for a report following a store tour so she could get a handle on the contribution all those items were making to the company’s top and bottom lines. What she discovered was that 20 percent of the items in stores generated 80 percent of its sales.
Following the report, Ms. Ahrendts led an effort to reduce the number of items carried by the chain. Today, the merchants stocks some 4,200 items compared to the 6,000 before Ms. Ahrendts’ research project.
“What was needed at this time was focus,” Ms. Ahrendts told the Journal. “We needed to simplify on the inside to compete in the complex environment on the outside.”
Ms. Ahrendts has also sought to make Burberry’s more nimble. Instead of stocking two big collections a year, she has opted for five smaller ones to refresh store stock with new items more frequently.
One area of concern for Burberry, according to the Journal, is an underdeveloped accessories business. The retailer currently generates about 25 percent of sales from accessories putting it at a lower level than many of its luxury retail competitors. With higher margins than clothing, accessories represent a major opportunity for Burberry to improve its fiscal standing.
With increased efficiency, Ms. Ahrendts is turning her attention to reinvesting dollars into new store openings. In the past, Burberry has sought to open flagship stores in major cities but now is looking for opportunities in secondary markets such as Tampa, Florida.
Discussion Questions: Do you see any danger that Angela Ahrendts’ focus on improved efficiency will endanger the perception the retailer has developed in recent years as a fashion leader? Is the 80/20 rule any more or less important to a luxury retailer than to those merchants selling goods at more moderate price points?
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I checked and unfortunately there are no Puts on their stock…Drat! A 30% reduction in SKU count for the sake of efficiency?! Hopefully, they are baking in a MINIMUM 15% reduction in sales to go along with that SKU count reduction. Selection is one of the predominant drivers of consumer satisfaction–very close to quality and value. It is the law of gravity in retailing: reduce consumer choice and you reduce your sales. That’s not to say that they shouldn’t strive for efficiency. The first place they should look, however, is to change around their merchandise portfolio. Second, there are probably 10% of their items that are true “dogs”; they can go. Generally though, I see way too many instances of executives that are in love with the 80/20 rule, and in the process, sacrifice sales and profits for the sake of efficiency.
Burberry better be careful. It’s very easy to get seduced by easy money on key fobs, scarves, t-shirts and the like but you can end up driving the label into the ground. Always have respect for the label! If you don’t, you can end up like Pierre Cardin or Gucci. If it wasn’t for Tom Ford who rescued Gucci in the late 90s, it would still be a logo languishing on cheap Chinese made t-shirts at flea markets “2 fer 10 bucks.” In England Burberry has already gotten a reputation of being the favorite of the chavs; i.e. crude unsophisticated football hooligans. If Burberry thinks they will make a fast buck and move production to China but keep the high prices can we say “Pierre Cardin” or better yet “Oleg Casini”? I echo what M. Jericho Banks has said.
In assortment studies that I have seen, manufacturers and retailers have been able to significantly reduce SKUs and increase sales. However, there is no one right assortment for all stores in a particular chain and there are some slow moving items that, if absent, will cause consumers to go to another store to do their shopping. While the 80/20 rule works, in general, it is the specifics of the application that spell success or disaster. Which items do consumers want to see in which stores? You may not need 6000 SKUs, but determining which SKUs are important in which stores is the key to success.
I would ask the other 80/20 rule from the customers perspective–if I were to learn from my top customers that each had a foundational purchase that was unique (and a slow mover) and was the reason why they came to the store (and while there bought the other things) then I may consider ways to handle that outcome via the web channel.
As mentioned earlier it is a rule–not to be taken in isolation. Actually, it is really an analytic that tells retailers the perspective their customers have of the assortment. Too often, the 80/20 is done from a sales perspective and typically dollars. Understanding that retailers put dollars in the bank, conversely consumer’s purchase units. Therefore, 80/20 needs to be looked at from both a dollars and a units perspective.
Nonetheless, it really becomes more than this. Really, it is about diminishing returns. That is the productivity of the 80% of the items that are generating 20%. At some point, these items become very unproductive and the return is minimal to none existent thus a diminishing return. At this point retailers need to then consider looking at the 80/20 rule from other perspectives such as margin return (profit) as well as space return.
Again, an analytic to help plan the appropriate strategy (Space/Assortment, etc.) but it is a step in helping to gain knowledge and understanding of the consumer. The 80/20 tells us the consumer vote. What is learned from the 80/20 rule from all aspects besides dollar sales that helps derive the appropriate strategy.
The elephant in the room is that the Burberry brand has been co-opted (hijacked?) by the hip-hop culture. This is neither bad nor good because it’s revenue-neutral–dollars are dollars. But it’s dumb not to acknowledge this considerable current influence on the brand. For example, try finding a recent hip-hop video without a Burberry brand reference somewhere.
So, next steps. Hip-hop means fashion, and fashion is fleeting. (When is the last time you saw the FUBU brand?) Burberry has never been about “fleeting.” Rather, it has been about durability and dependability. This calls for a two-phased plan from Ms. Ahrendt: Enjoy, encourage, and profit from your “fashion burst” while preparing for a future that is “burstless.” Back to basics.
Sure–make the items in store turn faster. But, don’t forget about the rule of the “long tail.”
I believe that making all items available online, and/or through a kiosk in-store, is the way to retain the 80% of sales that are contained in that long tail. Millennial consumers are getting trained to purchase this way.
Speaking from the supermarket, one can fairly ask why stores carry 40,000 skus when the typical household only buys 300 different skus in a year? The reality is that people just flat don’t believe “The Paradox of Choice,” and insist on jamming the store with confusing, unhelpful, unwanted merchandise.
Stew Leonard’s probably has the highest per store sales in the industry, and close to the lowest skus. Tell me why he needs a “long tail.” Get honest with the economics of why all those 40,000 products are really on the shelf in the supermarket, and maybe Burberry will be successful with slaughtering the sacred cow in fashion retailing.
This doesn’t mean there is no place for the long tail, but shoving it in the face of shoppers is shoving them out the door, to the internet, where the long tail is kept in the backroom, and the merchant rushes to offer just those few items the shopper is really interested in.
Burberry is a fashion basic merchant. Consumers who shop there don’t mind looking like the other consumers who shop there…in fact, they definitively want to look like other Burberry consumers. The traditional styling of Burberry has created a distinctive look (not true of all items, but in general, I think, accurate). Identifying with that look is an aspect of choosing to purchase the brand. What does that have to do with 80/20?
A forward trend fashion merchant executing rapid new product introduction should not experience an 80/20 result. A fashion basic merchant, with a distinctive style signature, can almost certainly expect to see a skewed result, much closer to 80/20 than 1:1. However, the fringe merchandise, if executed properly, has value above and beyond its relative turn or net gross margin. Elements of “new,” “fresh” and “different” have to turn up at Burberry. They keep the assortment and the mini-shops worth repeat shopping. Are those elements worth 80% of the inventory? Absolutely not.
Angela Ahrendts is a superb merchant, not a numbers geek. Evidently, Burberry can benefit from a breed of merchants who actually pay attention to the numbers. The only downside to evaluating her inventory in this manner would be if she failed to take into consideration assortment breadth, supporting products, strategic investments and other fundamental assortment management practices. I doubt she will fail to include these in the process.
In the world of luxury goods, less is more, therefore the strategy of trimming their line makes profitable sense. This is a strategy more companies should use to help build their brand equity by making it more exclusive.
When a retailer carries 6000 SKUs and strategically drops 30% of the worst performers, they will become more efficient and focused. However, if Burberry re-initiated the same analysis with the lower SKU count, I would bet they would still find something similar to the 80/20 scenario.
I would imagine that they are testing to find their optimal SKU level and then working to make those products as efficient as possible. In their environment, the execution of the right products is more important than the actual numbers.
I do not see any danger that Angela Ahrendts’ focus on improved efficiency will endanger the perception the retailer has developed in recent years as a fashion leader. On the contrary, by reducing the number of items and focusing on important items, Ms. Ahrendt will improve Burberry’s fashion image.
Applying the well-known “80/20 rule” to Burberry’s business model is totally appropriate. The new management has weeded out the bottom 30% of SKUs which may have contributed a tiny fraction of Burberry’s sales and gross margin. There is still plenty of assortment left over, if you consider that 1200 SKUs were driving 80% of the company’s volume. Narrowing the SKU count allows Burberry to “own” its key items with even greater depth.
Angela Ahrendts has obviously been paying attention to “best of class” retailers. Speed to market (think Zara, H&M and more recently Kohl’s and Penney) and focused assortments (think Coach and Target) require a different mindset, and more attention paid to supply chain, than in the past. If Ahrendts makes this mindset part of Burberry’s culture–alongside its image of design and quality–it’s a win for her brand.
The 80-20 rule and profitability can go hand-in-hand with the integration of multiple channels, and the highly efficient logistics and distribution that engenders. That way you don’t lose sales (in fact, you increase them), while cutting costs and waste.
Don’t mean to be a Johnny-one-note (well, actually, I do), but I do believe multichannel integration to be the answer to a lot of questions and problems and challenges that retailers are and will be facing.
Explain to me how this “rule” applies to the Apple Store, or Zara for that matter? Angela Ahrendts’ plans I am sure were neither fully revealed to the Wall Street Journal and likely were neither fully understood or explained (as is the case in most news articles) so don’t short the stock yet. Stores do have lots of control over assortment, volume, margin and turn and that is what great merchants work on to improve daily…they make the rules and refuse to be bound by them.
The 80/20 rule is just that: a rule. It isn’t a strategy, or a suggestion, or one of many options that a company may choose to follow. It’s a rule. Companies must follow it. It should never be seen as a great revelation as this case seems to imply for Burberry.
Of course the specific number isn’t always 80/20. Furthermore, companies can tinker at the margin and make the product mix (and/or the customer base) a little more or less concentrated. But the basic principle holds in every market.
Companies need to learn these kinds of patterns more carefully and “resign” themselves to the fact that they have less control over their fate then they might otherwise think….
I’m no fashion maven (pretty obvious to anyone that’s ever met me) but it seems to me that in that world the “80/20” rule works in reverse. It is the minority of items that create the brand impression but probably don’t sell in volume (haute coture by definition for example). So, eliminating some “slow movers”–those items that “look good” but not on anyone who isn’t a model might be dangerous. On the other hand, maybe there just is too much inventory.
When a fashion brand is hot, there’s very little they can do wrong. Burberry stock was 200 pence in late 2002 and it’s 700 pence today. The gold standard for long-lived sustained growth fashion brands is Ralph Lauren. From $30 in 1997 it’s $92 today. Most fashion brands don’t keep growing that long, let alone last that long.
The 80/20 rule rings true in nearly all industries. It’s rather sad that it took this long for Burberry to figure that out. It’s simply common sense. Focus your effort on what sells!
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I checked and unfortunately there are no Puts on their stock…Drat! A 30% reduction in SKU count for the sake of efficiency?! Hopefully, they are baking in a MINIMUM 15% reduction in sales to go along with that SKU count reduction. Selection is one of the predominant drivers of consumer satisfaction–very close to quality and value. It is the law of gravity in retailing: reduce consumer choice and you reduce your sales. That’s not to say that they shouldn’t strive for efficiency. The first place they should look, however, is to change around their merchandise portfolio. Second, there are probably 10% of their items that are true “dogs”; they can go. Generally though, I see way too many instances of executives that are in love with the 80/20 rule, and in the process, sacrifice sales and profits for the sake of efficiency.
Burberry better be careful. It’s very easy to get seduced by easy money on key fobs, scarves, t-shirts and the like but you can end up driving the label into the ground. Always have respect for the label! If you don’t, you can end up like Pierre Cardin or Gucci. If it wasn’t for Tom Ford who rescued Gucci in the late 90s, it would still be a logo languishing on cheap Chinese made t-shirts at flea markets “2 fer 10 bucks.” In England Burberry has already gotten a reputation of being the favorite of the chavs; i.e. crude unsophisticated football hooligans. If Burberry thinks they will make a fast buck and move production to China but keep the high prices can we say “Pierre Cardin” or better yet “Oleg Casini”? I echo what M. Jericho Banks has said.
In assortment studies that I have seen, manufacturers and retailers have been able to significantly reduce SKUs and increase sales. However, there is no one right assortment for all stores in a particular chain and there are some slow moving items that, if absent, will cause consumers to go to another store to do their shopping. While the 80/20 rule works, in general, it is the specifics of the application that spell success or disaster. Which items do consumers want to see in which stores? You may not need 6000 SKUs, but determining which SKUs are important in which stores is the key to success.
I would ask the other 80/20 rule from the customers perspective–if I were to learn from my top customers that each had a foundational purchase that was unique (and a slow mover) and was the reason why they came to the store (and while there bought the other things) then I may consider ways to handle that outcome via the web channel.
As mentioned earlier it is a rule–not to be taken in isolation. Actually, it is really an analytic that tells retailers the perspective their customers have of the assortment. Too often, the 80/20 is done from a sales perspective and typically dollars. Understanding that retailers put dollars in the bank, conversely consumer’s purchase units. Therefore, 80/20 needs to be looked at from both a dollars and a units perspective.
Nonetheless, it really becomes more than this. Really, it is about diminishing returns. That is the productivity of the 80% of the items that are generating 20%. At some point, these items become very unproductive and the return is minimal to none existent thus a diminishing return. At this point retailers need to then consider looking at the 80/20 rule from other perspectives such as margin return (profit) as well as space return.
Again, an analytic to help plan the appropriate strategy (Space/Assortment, etc.) but it is a step in helping to gain knowledge and understanding of the consumer. The 80/20 tells us the consumer vote. What is learned from the 80/20 rule from all aspects besides dollar sales that helps derive the appropriate strategy.
The elephant in the room is that the Burberry brand has been co-opted (hijacked?) by the hip-hop culture. This is neither bad nor good because it’s revenue-neutral–dollars are dollars. But it’s dumb not to acknowledge this considerable current influence on the brand. For example, try finding a recent hip-hop video without a Burberry brand reference somewhere.
So, next steps. Hip-hop means fashion, and fashion is fleeting. (When is the last time you saw the FUBU brand?) Burberry has never been about “fleeting.” Rather, it has been about durability and dependability. This calls for a two-phased plan from Ms. Ahrendt: Enjoy, encourage, and profit from your “fashion burst” while preparing for a future that is “burstless.” Back to basics.
Sure–make the items in store turn faster. But, don’t forget about the rule of the “long tail.”
I believe that making all items available online, and/or through a kiosk in-store, is the way to retain the 80% of sales that are contained in that long tail. Millennial consumers are getting trained to purchase this way.
Speaking from the supermarket, one can fairly ask why stores carry 40,000 skus when the typical household only buys 300 different skus in a year? The reality is that people just flat don’t believe “The Paradox of Choice,” and insist on jamming the store with confusing, unhelpful, unwanted merchandise.
Stew Leonard’s probably has the highest per store sales in the industry, and close to the lowest skus. Tell me why he needs a “long tail.” Get honest with the economics of why all those 40,000 products are really on the shelf in the supermarket, and maybe Burberry will be successful with slaughtering the sacred cow in fashion retailing.
This doesn’t mean there is no place for the long tail, but shoving it in the face of shoppers is shoving them out the door, to the internet, where the long tail is kept in the backroom, and the merchant rushes to offer just those few items the shopper is really interested in.
Burberry is a fashion basic merchant. Consumers who shop there don’t mind looking like the other consumers who shop there…in fact, they definitively want to look like other Burberry consumers. The traditional styling of Burberry has created a distinctive look (not true of all items, but in general, I think, accurate). Identifying with that look is an aspect of choosing to purchase the brand. What does that have to do with 80/20?
A forward trend fashion merchant executing rapid new product introduction should not experience an 80/20 result. A fashion basic merchant, with a distinctive style signature, can almost certainly expect to see a skewed result, much closer to 80/20 than 1:1. However, the fringe merchandise, if executed properly, has value above and beyond its relative turn or net gross margin. Elements of “new,” “fresh” and “different” have to turn up at Burberry. They keep the assortment and the mini-shops worth repeat shopping. Are those elements worth 80% of the inventory? Absolutely not.
Angela Ahrendts is a superb merchant, not a numbers geek. Evidently, Burberry can benefit from a breed of merchants who actually pay attention to the numbers. The only downside to evaluating her inventory in this manner would be if she failed to take into consideration assortment breadth, supporting products, strategic investments and other fundamental assortment management practices. I doubt she will fail to include these in the process.
In the world of luxury goods, less is more, therefore the strategy of trimming their line makes profitable sense. This is a strategy more companies should use to help build their brand equity by making it more exclusive.
When a retailer carries 6000 SKUs and strategically drops 30% of the worst performers, they will become more efficient and focused. However, if Burberry re-initiated the same analysis with the lower SKU count, I would bet they would still find something similar to the 80/20 scenario.
I would imagine that they are testing to find their optimal SKU level and then working to make those products as efficient as possible. In their environment, the execution of the right products is more important than the actual numbers.
I do not see any danger that Angela Ahrendts’ focus on improved efficiency will endanger the perception the retailer has developed in recent years as a fashion leader. On the contrary, by reducing the number of items and focusing on important items, Ms. Ahrendt will improve Burberry’s fashion image.
Applying the well-known “80/20 rule” to Burberry’s business model is totally appropriate. The new management has weeded out the bottom 30% of SKUs which may have contributed a tiny fraction of Burberry’s sales and gross margin. There is still plenty of assortment left over, if you consider that 1200 SKUs were driving 80% of the company’s volume. Narrowing the SKU count allows Burberry to “own” its key items with even greater depth.
Angela Ahrendts has obviously been paying attention to “best of class” retailers. Speed to market (think Zara, H&M and more recently Kohl’s and Penney) and focused assortments (think Coach and Target) require a different mindset, and more attention paid to supply chain, than in the past. If Ahrendts makes this mindset part of Burberry’s culture–alongside its image of design and quality–it’s a win for her brand.
The 80-20 rule and profitability can go hand-in-hand with the integration of multiple channels, and the highly efficient logistics and distribution that engenders. That way you don’t lose sales (in fact, you increase them), while cutting costs and waste.
Don’t mean to be a Johnny-one-note (well, actually, I do), but I do believe multichannel integration to be the answer to a lot of questions and problems and challenges that retailers are and will be facing.
Explain to me how this “rule” applies to the Apple Store, or Zara for that matter? Angela Ahrendts’ plans I am sure were neither fully revealed to the Wall Street Journal and likely were neither fully understood or explained (as is the case in most news articles) so don’t short the stock yet. Stores do have lots of control over assortment, volume, margin and turn and that is what great merchants work on to improve daily…they make the rules and refuse to be bound by them.
The 80/20 rule is just that: a rule. It isn’t a strategy, or a suggestion, or one of many options that a company may choose to follow. It’s a rule. Companies must follow it. It should never be seen as a great revelation as this case seems to imply for Burberry.
Of course the specific number isn’t always 80/20. Furthermore, companies can tinker at the margin and make the product mix (and/or the customer base) a little more or less concentrated. But the basic principle holds in every market.
Companies need to learn these kinds of patterns more carefully and “resign” themselves to the fact that they have less control over their fate then they might otherwise think….
I’m no fashion maven (pretty obvious to anyone that’s ever met me) but it seems to me that in that world the “80/20” rule works in reverse. It is the minority of items that create the brand impression but probably don’t sell in volume (haute coture by definition for example). So, eliminating some “slow movers”–those items that “look good” but not on anyone who isn’t a model might be dangerous. On the other hand, maybe there just is too much inventory.
When a fashion brand is hot, there’s very little they can do wrong. Burberry stock was 200 pence in late 2002 and it’s 700 pence today. The gold standard for long-lived sustained growth fashion brands is Ralph Lauren. From $30 in 1997 it’s $92 today. Most fashion brands don’t keep growing that long, let alone last that long.
The 80/20 rule rings true in nearly all industries. It’s rather sad that it took this long for Burberry to figure that out. It’s simply common sense. Focus your effort on what sells!