Saturday 16 February 2019

Samantha McCaughren: The downward trend behind Orla Kiely's handbag business

Worrying pattern: Orla Kiely
Worrying pattern: Orla Kiely
Samantha McCaughren

Samantha McCaughren

Not all broadcasters got the pronunciation of fashion designer Orla Kiely's name right when news of her retail business going into administration broke last week. Despite her brand's international recognition, many referred to her as 'Keely'.

It was understandable for Channel 4, but less so in Dublin 4 - growing up, her parents owned the landmark Kiely's pub in Donnybrook. When it was announced last April that the pub, no longer in her family's ownership, would close there was no inkling that the business owned by the next generation of the Kiely family was facing into any difficulty.

Indeed, until very recently, Orla Kiely and her husband Dermott Rowan were speaking at public events about their business, with Rowan warning at an EY entrepreneurs retreat in May that the internet was have a shocking affect on the high street in the UK. "Retail's changing and you've got to adapt with it," he told fellow business founders.

Looking at the company behind the brand, Kiely Rowan, it is clear it has been struggling with change. The most recent accounts are rosy enough: turnover was up almost 16pc to £8.3m although the after-tax profit was a very thin £74,000.

Go back a few years and you can see the pattern has been quite worrying, however.

Although luxury brands were in retreat during the recession, the Orla Kiely brand weathered the first few years well. Reporting accounts in 2011, the directors' ambitions were riding high with revenue growth of 20pc forecast thanks to growing demand in the US and Asia, and a presence in an increasing number of stores.

Their optimism was duly rewarded. Not quite living up to their target, revenue was up 19pc to £9.4m, although gross margins declined. That was the pinnacle of the business's success. The following year, turnover was down 3pc and gross margins declined further from 42pc to 39pc. It blamed a shift away from low margin discounting for falling revenues.

In 2014, sales were down 9.6pc as the business grappled with its growing retail and internet business. Gross margin improved but the company talked about cost reductions and keeping a tight grip on administrative expenses. In 2015, revenues fell a further 3pc and by 11.7pc in 2016.

There was a revenue bounce in 2017, the most recent figures, but the events of last week suggest that bounce came too late.

One strategy which may have given the brand a boost in the last couple of years was a wide range of licensing deals, which included some bizarre partnerships, such as Orla Kiely tents for Halfords in the UK. Her patterns were on everything from tea towels to soap. These deals provided an extra revenue stream, but generally just equate to a few percent of the sale price for the designer. The down side of these arrangements may be far steeper. If they weaken the appeal of a €200 handbag, they are very costly deals indeed.

Musgrave goes shopping

Ten years ago, Dunnes Stores and SuperValu owner Musgrave would have spent little time concerning themselves with the likes of Donnybrook Fair. It would have been seen as niche and elitist and holding an appeal limited to a certain type of customer in south Dublin.

Back in May, it was reported in these pages that Joe Doyle, owner of Donnybrook Fair, was playing down intense speculation that he was about to sell up to Dunnes. But, in fact, he came very close to doing a deal with the Irish chain led by Margaret Heffernan.

However, another Irish business was also chasing the retailer, Musgrave, which announced last Friday it had bought the chain of five Donnybrook Fair shops.

This battle between two of Ireland's biggest grocery retail tells its own story about the market here now.

Dunnes, Musgrave and Tesco each have a share of the market of roughly 22pc, while Aldi and Lidl have close to 12pc each. Those five players have a total share approaching 90pc, making it an extremely competitive market for all five.

Dunnes' old catchphrase - 'better value beats them all' - would get them nowhere now in terms of growing its market share. The value crown is very definitely being worn by the German discounters and no challenger is likely to unseat them.

So while Dunnes continues to offer value, it has noticeably moved into the higher end of the food business, acquiring James Whelan Butchers and having a tilt at Avoca, ultimately bought by Aramark.

But this is the first time Musgrave and Dunnes have gone head to head for an acquisition. What has emerged is two parallel strategies with both appreciating their growth opportunity in this very competitive space will require them attaching themselves to top-notch names.

Retail sources believe Musgrave will maintain the Donnybrook Fair brand and SuperValu around the country will begin to feature DF products in their chilled sections. While the five Donnybrook stores have a value, the real win will be the halo effect Donnybrook Fair gives SuperValu as it climbs up the value chain. Like Dunnes, it will not subsume DF into its own brand but offer it as a draw to its stores.

What was not long ago considered niche and elite is the new battleground for the two biggest Irish-owned grocery retailers.

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