Fashion group will exercise an option to pay €181m (£144m) to licensee Interparfums to get full control from next April – does this deal make sense?
Burberry could have taken back the licence to make its own perfumes for free on the last day of 2017. Instead, it will exercise an option to pay €181m (£144m) to licensee Interparfums to get full control from next April. Does this deal, causing an ugly accounting scar in Burberry’s half-year numbers, make sense?
At face value, the fashion group will have to sell an awful lot more of the smelly stuff to justify that outlay. Indeed, in the first year of control there won’t be any benefit whatsover in financial terms: the expected operating profit of £25m will merely replace lost licence revenue of the same amount.
From the second year, however, life should get better. Wednesday’s statement was short on hard forecasts and long on vague ideas like the “halo effect” on brand but Burberry watchers have learned not to be too dismissive of the latter.
The revitalisation of the brand over the past decade has relied in part on wresting control from licensees and distributors and managing more in-house. In a world of big advertising budgets, there should be significant advantages in running perfumes directly. In short, by 2017, the Burberry perfume business ought to be much more valuable than the one that would have arrived for free. Despite the accounting hit, this looks a smart piece of business.