Burberry to bring perfume business in-house - sources

British luxury brand Burberry is expected to announce in its trading update on Thursday that it is bringing its perfume business in-house after its contract with Interparfums ends on Dec. 31, industry sources close to the matter said.

"Burberry believe that they can accelerate the growth of their perfume business better themselves," one of the sources said on Wednesday.

When Burberry announced an end to its contract with Interparfums in July, it said it would review its options, which included finding another partner to make and distribute its perfumes or integrating the whole business internally.

Burberry, which issued a profit warning in September, held talks with Beaute Prestige International (BPI), the perfume unit of Japan's Shiseido, but failed to come to a new agreement, sources told Reuters last month.

Part of the problem was that Burberry wanted to consolidate the sales and use BPI mainly as a distributor, the sources said at the time.

Burberry will be able to continue taking advantage of Interparfum's distribution partners, the first industry source said, and Interparfums will help the British brand ensure a smooth transition.

Another industry source confirmed that Burberry was preparing to announce that it wished to integrate the perfume business in its operations "because of the growth potential of that category of product".

Analysts said in notes this week they expected an update on the perfume operation in Burberry's half-year trading statement, which is expected to be published on Thursday before the market opens.

Burberry said in July it would buy back its perfume licence from Interparfums for approximately 181 million euros ($236 million) after failing to reach an agreement with the Paris-listed perfume maker.

Citi analysts said in a note that the figure could reach 250 million euros including inventories and tangible assets.

Under the licence model, brands receive royalty fees, usually a percentage of sales, while the partners pocket the remaining revenue.

If Burberry takes the perfume business in-house, it would lead to start-up costs which Citi estimated at around 30 million euros.

There might also be disruptions to the business for a year or two as Burberry would have to create a perfume team from scratch and renegotiate terms with suppliers which range from juice makers to bottle manufacturers.

"One does not create a perfume business in one day," one Paris-based luxury analyst said. "It took Dior and Chanel years to build theirs."

BIG AMBITIONS

Integrating the perfume business means Burberry will be able to consolidate its sales in its accounts, estimated this year to be around 210 million euros.

The company has big ambitions for its new fragrance "Body," launched last year and for its perfume business overall, analysts say, as it aims to narrow the gap with arch-rivals Christian Dior SA and Chanel, which run their perfume businesses internally.

Burberry, which is famous for its 1,500-euro trench coats lined with its distinctive camel, red and black check pattern, is also keen to develop skin care and make-up lines.

Perfume is usually the main entry point for luxury brands, which is why controlling the product's communication and marketing strategy is key.

Under its licence contract deal with Interparfums, Burberry already controlled many steps, from designing the fragrance to its marketing strategy, and now it wanted to take its involvement a step further, the first industry source said.

Burberry and Interparfums declined to comment.