Drapers examines what Frasers Group’s stake in Mulberry means for the brand and Mike Ashley’s quest to create the “Harrods of the high street”.
Mike Ashley’s acquisition spree took a luxury turn last week, as Frasers Group snapped up a 12.5% stake in British handbag brand Mulberry. The purchase was announced as part of Frasers Group’s continued elevation strategy and effort to build “stronger relationships with premium third-party brands”.
However, industry observers are split over what the impact on Mulberry is likely to be, after a turbulent few years at the brand.
He wants to protect the supply chain of Mulberry [product] into Frasers, Flannels and Van Mildert
Frasers Group has been busy “elevating” for some time. In 2015 the business, then Sports Direct International, bought a 25% share in brand agency Four Marketing in 2015, which distributes premium brands including Stone Island, CP Company and Paul & Shark.
The group’s luxury fascia Flannels currently has 38 stores, including its £10m Oxford Street flagship, and intends to open a further 16 across the UK this year before turning its attention to key global cities. The brand mix ranges from classic luxury to contemporary to elevated streetwear, and includes Balmain, Burberry, Gucci, Off-White, Versace and Vetements.
In May last year, the group revealed plans to change 31 House of Fraser stores into a premium chain under the Frasers name over the next five years, starting with five in 2020. Then, following its half-year results in December, Sports Direct rebranded as Frasers Group to reflect its “changing profile” and “elevation strategy”.
Industry experts believe the move on Mulberry could be an effort by Ashley to improve trading relationships and secure it as a brand for Frasers.
“He wants to protect the supply chain of Mulberry [product] into Frasers, Flannels and Van Mildert,” says one brand consultant. “He wants to make sure he has continuity, or he wants to increase it.”
One financial expert agrees the acquisition will help to improve relationships after House of Fraser’s 2018 administration left Mulberry with £2.1m of unpaid debt.
“Mulberry is already a big customer of House of Fraser. However, it lost out in the administration,” he says. “It makes sense to try to build that relationship back up again, so they it has a close relationship with a luxury brand.
“As Mulberry is already a big channel in House of Fraser, all this does is build a better buying relationship and shows goodwill.”
With a better relationship, could come a better deal for Mulberry, believes one former luxury brand executive: “House of Fraser was a key distributor for [Mulberry] in its early days of growth. It still has good distribution and I’m sure Mulberry will get preferential positioning in store, whereas previously brands like Michael Kors have usurped it.”
I imagine Mulberry is the carrot to draw other up-market brands into Frasers
Premium high street retailer
The former CEO of one premium high street retailer speculates that the acquisition approach represents a “rethink” in Ashley’s luxury strategy: “When he bought House of Fraser, [our concessions] traded well with them online but really badly in stores,” she tells Drapers.
“We were at the top end pricewise and in stores we were surrounded by brands selling at much lower prices, which was never going to work for us.”
“Mr Ashley totally understood that we were struggling in there because of the brand mix and was clear he wanted House of Fraser to stock more elevated brands.”
However, she adds that the process has taken “longer than he expected”, and premium labels pulling out of House of Fraser has driven a “rethink of his strategy”.
“I imagine Mulberry is the carrot to draw other up-market brands into Frasers. Only then will he have created a luxury proposition,” she adds.
Mulberry got lost at some point over the last few years as it tried to move upmarket too much
Luca Solca, Bernstein analyst
Others have questioned Mulberry’s magnetism. The brand has had a turbulent decade, battling an unsuccessful decision to raise price-points in search of a more luxury positioning.
From 2012 to 2014 product prices rocketed 12% under Bruno Guillon, and as a result, the luxury brand faced unwelcome profit warnings.
“It got lost at some point over the last few years as it tried to move upmarket too much,” says Bernstein analyst Luca Solca. “That led to a number of profit warnings and – eventually – an appropriate U-turn [under by CEO Thierry Andretta].
“Since then, though, I have a feeling Mulberry has never made it back to centre stage and has remained in the shadows. I wonder if Mike Ashley – with the energy and passion he is known for – may contribute to rekindle the brand,” he adds.
Despite recent positive signs, in its most recent results, Mulberry’s loss before tax widened by 21% to £9.9m for the 26 weeks to 28 September. Mulberry blamed “challenging” UK market conditions as UK sales declined 4%.
One House of Fraser supplier agrees that Ashley could be a good influence on Mulberry.
“Given the state of retail, it’s a win-win for both [parties]. If you look at what has happened with [premium handbag brand] Radley recently, it has reinvented itself and seems to be doing well. With a slightly more aggressive, more commercial team within Mulberry, it could do similar.”
However, he adds: “The only concern with anything that Mike Ashley touches is that does it start to go further down through the lower-end fascias, which devalues the brand. If it starts to become a House of Fraser in-house brand, you have the danger of losing the premium feel.”
GlobalData analyst Chloe Collins agrees: “The move seems more damaging for Mulberry than Frasers Group. People still associate Mike Ashley with Sports Direct discounting, and I think Mulberry is a bit ambitious and stands out quite a lot now within its group.”
Nevertheless, Frasers Group has linked the acquisition to its elevation strategy – with no indication at this early stage that it will play a role in its lower end businesses.
Should Mulberry want to block any moves by Ashley, who previously demanded appointment to the Debenhams board with a 29.7% shareholding, it could implement a selective distribution system, explains Stephen Sidkin partner at law firm Fox Williams.
“You as a brand can restrict the doors through which you’re sold by creating a qualitative criteria for admission to the selective distribution system. You do that because you say that the position of the brand either as a high-price or a luxury brand is such that can only be sold in certain stores or online.”
Ashley is a minority shareholder holding 12.5% stake of Mulberry. If an individual or company accrues more than 29% of a publicly traded company they are required to make a bid for the business.
“While I wouldn’t rule out Mike Ashley lifting his interest further, a big luxury group could also make a move for Mulberry,” observes one industry expert.
“Consolidation in luxury is intensifying, although any prospective purchaser [of Mulberry] would have to convince the [Singaporean luxury retail dynasty] Ong family, which owns 56%, to sell. That may not be easy given that the value of its stake has fallen over recent years”
She adds: “In the event of any approach, Ashley not only stands to gain financially, but secures a seat at the table when it comes to this strategically important brand.”
Frasers Group and Mulberry declined to comment.
The Drapers Verdict
Frasers Group’s further foray into luxury comes as little surprise as the business attempts to elevate its offering and brand perception. Although he currently has a minority stake, the foothold gives Ashley the option for gaining more control of the brand over time, as he has with previous acquisitions.
The potential risks for Mulberry in being associated with a traditionally discount business, may yet be outweighed by the potential for the future.
The luxury handbag brand is in need of investment and could benefit from preferential treatment within Frasers and House of Fraser stores. Ashley’s expertise could also help the brand, who has had to turn to Asia to offset the difficult UK retail market, with its UK performance.
As Ashley’s plans for Frasers unfold, it looks likely that we may see more luxury acquisitions from the retail tycoon.