British luxury brand Burberry (BRBY.L) will end its partnership with French fragrance maker Interparfums (IPAR.PA) at the end of this year to pursue more profitable options in a beauty industry dominated by rivals such as Christian Dior (DIOR.PA) and Armani.
The maker of raincoats in distinctive camel, red and black check pattern said on Friday it had ended talks with the maker of Lanvin perfumes over new terms, paving the way for new possible partnerships or in-house initiatives.
Interparfums, which has an exclusive worldwide licence for Burberry’s fragrance and beauty products, had been in talks with the British firm since last December to create a new business including a possible joint venture.
“Burberry continues to pursue various strategic options to develop fully its fragrance and beauty business in the future,” the British group said in a statement.
On July 16, Burberry had served notice of its intention to terminate the licence agreement with effect from 31 December 2012 but talks had tentatively continued.
Analysts say Burberry aims to boost its fragrance and makeup business by developing new skincare and makeup products, strengthen control over its brand and enhance profits.
“We believe that Burberry management has great ambitions for the business in terms of potential size,” Citi analyst Thomas Chauvet said in a note.
Burberry said it would pay Interparfums approximately 181 million euros (141.27 million pounds) when the licence ends at the end of 2012, a figure that Chauvet estimates at around 250 million euros including inventories and tangible assets.
Interparfums, which will lose a licence worth around half its sales, said on Friday it expected preliminary full-year sales in 2013 of between 240 and 250 millions euros.
It is targeting sales of 420 million euros in 2012.
However, it said it would use the cash to fund an acquisition strategy that has already seen it bag Jimmy Choo, Montblanc, Boucheron, Balmain and Repetto in two years.
After years of externalisation, fashion houses such as Versace have bought back their licences to control costs, image and margins. But products such as perfume, make-up and eyewear require an expertise that clothing groups rarely have.
Licences are also an important source of revenue for manufacturers. The loss of the Giorgio Armani eyewear licence to eyewear giant Luxottica (LUX.MI) from 2013 prompted Italy’s smaller rival Safilo (SFLG.MI) to cut revenue targets and jobs.
Burberry is still a minor player in the fragrance business, which is estimated to be worth only about 2 percent of its sales.
Fashion rivals such as Dior, Armani and Chanel have a larger presence in the margin-enhancing prestige beauty industry, which includes makeup and skincare products.
Perfumes and cosmetics accounted for around 21 percent of the 191 billion euro global luxury market in 2011, according to estimates by consultancy Bain & Co and industry body Altagamma.
Alongside jewels and accessories – which appeal to shoppers of all ages and provide good margins for luxury makers – the non-apparel segment is expected to outperform luxury industry growth by 2014.
Analysts say Burberry should look for experienced skincare and makeup manufacturers such as Estee Lauder (EL.N), L’Oreal (OREP.PA) and Coty for eventual partnerships.
Developing the cosmetic business under its own roof would have initial costs for Burberry, Citi’s Chauvet said.
He estimated a dilution of around 4-5 percent to Burberry’s earnings per share in the first two years of the new business, assuming a lower initial revenue growth, and start-up costs estimated at 30 million euros.
Shares in Burberry were down 0.5 percent by 12:00 p.m., with the STOXX Europe 600 personal and household goods .SXQP index almost flat. Shares in Interparfums, which have gained 17 percent since the start of the year, were down 2 percent.