Burberry has entered into an agreement to purchase the stores and related assets in China operated by its Hong Kong-based master franchisee, Kwok Hang Holdings Ltd for £70 million in cash. The acquisition of franchise operated stores in China is in line with Burberry's strategy of unifying its brand worldwide. Furthermore, the purchase increases its exposure to retail and high growth luxury markets.

This acquisition will permit Burberry to leverage its brand and strategies in the high growth market of China. The deal involves 50 stores in 30 cities, building on a 20 year market presence in the country. Burberry will drive sales and open ten more stores, in addition to implementing digital marketing initiatives to reinforce the brand. The stores are located in 30 cities in China, including nine stores in Beijing and four in Shanghai, with approximately two-thirds in the global store design. Retail sales in these stores were approximately £75m in the year to December 2009, generating operating profit of approximately £14m for the franchisees based on their business model.

Rapid economic transformation and government efforts have made China a dominant player in the global textile and apparel trade. Chinese textile and apparel products now constitute an important segment of apparel and textile markets of various developed and developing economies. The country has gained a competitive edge on account of its favorable economic environment, government support, tariffs and tax incentives, SEZ culture, and low labor and raw material cost.

The changing retail industry landscape, coupled with rising purchasing power and increasing influence of Western culture, is also giving a new meaning to the domestic apparel market of China. The emergence of middle class, growing young population and rapid globalization of culture is fuelling the demand for branded apparel in the country. This is attracting the foreign and domestic players to tap the rising demand of branded (as well as mass) segment products.

Author: Paul Chapman, Analyst