Good morning, everybody, welcome to Horseferry House. We are pleased today to have announced another set of strong financial results, thank you all for taking the time to join us to discuss them. This is a very exciting time in the evolution of our business, we're delighted to have this opportunity to share some further insights into our current and future performance drivers. With that in mind, I'll begin with a brief update on our recently completed management transition before sharing some highlights for the past year and some thoughts on future opportunities. I will hand over to Carol Fairweather, our CFO, who will take you through the numbers, after which John Smith, our Chief Operating Officer, will provide an update on beauty, Pascal Perrier, our Chief Executive Officer for the Asia Pacific, will give you an overview of our exciting plans for Japan.
We'll be happy to take your questions. First, a few words on the successful completion of our management transition. At the start of this month, I formally assumed my new role, completing a six-month transition period during which I've been able to put the right team and structure in place for the next phase of Burberry's evolution. The performance of the business in the second half is testament to how our teams responded during this period, remaining focused and executing brilliantly. The organization is now fully aligned across the three pillars I spoke about in November: design, product, and communication, the regions, and operations and finance. Across these three pillars, I have a broadly equal balance of reporting lines between the creative and the commercial. What I also have is an outstanding group of senior executives with an average tenure of more than eight years at Burberry.
They are charged with the day-to-day running of the business, allowing me to lead it effectively, to provide strategic direction, to monitor progress against our ambitious goals. I am confident that this is the right structure for this next phase, recognizing the realities of the breadth of my role and leveraging the deep expertise we have in every area accordingly. As you know, my new role is an unconventional one, my background is not that of a traditional CEO. As such, I will lead Burberry in my own way, always guided by a passion for what this unique brand stands for, by a desire to take the business from strength to strength, and by a tremendous pride in building its distinctive culture.
While you may notice changes in personal style and approach, there will be no fundamental change to our existing strategies, focused execution, or overall ambitions to realize the brand's potential across platforms and markets, to secure sustainable sector-leading growth, and to be a good company. It is this consistent vision that has driven our continued strong progress over the past 12 months. We are pleased today to report a 17% increase in revenue to just over GBP 2.3 billion, with adjusted profit before tax up by 8% to GBP 461 million, as we continue to balance growth with investment. We are particularly proud of the 12% increase in our comparable store sales, reflecting our ongoing focus on driving productivity and brand awareness through the retail channel, both on and offline.
I'd now like to take a few moments to reflect on three key drivers of this performance: brand momentum, menswear, and flagship markets, before considering the opportunities that lie ahead of us. First, brand momentum. We continued during the year to fuse the physical and digital to enhance the brand experience wherever the customer engages with us. For example, we further leveraged data and insight to create increasingly personalized customer experiences. This included the rollout of our Customer 1-to-1 app to all mainline stores, allowing sales staff to access customer purchase histories, search real-time stock availability, and arrange delivery globally. We also developed more integrated and emotive storytelling across our online and offline worlds. This included a heightened emphasis on outerwear, the increasing personalization of products and communications, and the innovative use of digital technology, including with partners such as Google, Apple, Instagram and WeChat.
This sustained focus on the brand experience is enabling us to ensure the consistency and elevate the quality of every customer interaction globally, while always reminding customers of who we are and what we stand for. Such, it represents not only continued improvement and innovation in systems and processes, but also our desire to connect consumers ever more closely to the products and experiences that define us and about which we are so passionate. Second, the continued growth of menswear. Further investment in design and marketing drove significant outperformance from this category in mainline stores during the full year, fueled by outerwear, tailoring, and accessories. June will mark the anniversary of the return of our menswear show to London after more than a decade in Milan. Reflecting not only the importance of our authentic British heritage to this category, but also our ambition for its future growth.
At about 30% of our total sales, we see compelling further potential as we look to build all dimensions of this underdeveloped category for the brand. Third, our ongoing commitment to optimizing the opportunities that exist in the 25 flagship markets that account for about 60% of our mainline retail sales. During the year, we strengthened our Burberry private client service for local customers, while developing further product merchandising and service initiatives aimed at the traveling luxury consumer. This included particular attention to the traveling Chinese, already a significant proportion of our global revenues, and likely to increase further as current outbound travel numbers are predicted to double to GBP 200 million by 2020. With 13 store openings, flagship markets represented half of our retail capital expenditure in the year. Shanghai was a particular focus, where four new openings included our largest store in Asia Pacific in the Kerry Centre.
We were delighted at the end of last month to mark its opening with a magnificent event that celebrated both Burberry's British heritage and its deep association with the Chinese market. A synchronized program of media activity supporting the event drove record levels of brand awareness and engagement in the region. The store's performance is ahead of expectations in its early weeks of operation. The Kerry activity continued our focus on leveraging key flagship openings to drive local and global brand interest, with Los Angeles and San Francisco in the autumn expected to be similar highlights for the year. A few words about the future. As I reiterated earlier, there will be no fundamental change to our core strategies moving forward.
It is the dynamic management of these strategies that has driven our outperformance in recent years, and we will continue to challenge ourselves to evolve them, ensuring they remain as responsive and relevant in the future as they have in the past. Tremendous opportunities lies ahead by channel, by region, and by product category. Notwithstanding the continued macroeconomic uncertainties that exist beyond our control, we have multiple levers that exist within it. I'd like to touch on the most significant of these, namely beauty, Japan, digital commerce, and under-penetrated markets. There's something that I think sits above and informs the success of them all: the potential that exists within our authentic British brand story. Burberry's unique story, formed of our iconic heritage together with the accomplishments of our more recent past, gives us that most precious of things, a true and clear identity.
It is my fierce determination that this 158-year provenance should sit at the heart of everything we do, the products we produce, the experiences we create, and what we stand for. It is the ultimate expression of our old young brand, which has creativity at its core. From the traditional crafts we foster through our weaving and manufacturing facilities in Yorkshire, to the most digitally progressive events and platforms that allow us to share the energy of the brand with audiences around the world. This year will see us intensify our focus in this area with a celebration of our heritage that will reconnect consumers with our iconic products through an integrated program of initiatives in design, marketing, and retail.
Early pilots of this program in over 30 stores have proved highly successful, and we are excited about its broader potential to drive revenue, productivity, and brand engagement over this year ahead. Beyond this, it will be an important focus for our broader sustainability efforts, including through a new research program to develop innovative and sustainable raw materials. Consistent with our aim to be not only a successful business, but also a good company. This notion of authenticity, of remaining true to what we stand for as a brand in everything we do, touches all of our future opportunities and will be central to unlocking their promise. Let me now briefly turn to beauty, on which you will hear more from John shortly.
Despite the complexities of the transition to direct operation, last year's establishment of beauty as our fifth product division recorded some significant early successes, including the Brit Rhythm launches, the opening of our Beauty Box retail concept pilot. Now, with the team fully established and operations refined, we are well-positioned to accelerate our unique vision of integrating fashion and beauty. As John will explain, we remain confident that our investment in beauty will be a key component of future growth, bringing a new dimension to our relationship with existing customers and connecting new audiences to the brand. We have exciting plans to realize this ambition in the months ahead, not least a major women's fragrance launch in September featuring Kate Moss and Cara Delevingne, linked to our wider heritage focus. Turning next to Japan, another area of sharp focus and great potential.
As you will hear from Pascal, all business functions are currently engaged in laying the foundations to transform the brand in this, the second largest domestic luxury market in the world. With licenses expiring in 2015, preparations are well underway to assert Burberry's global luxury positioning forcefully in the future by opening freestanding stores and department store concessions in key locations and developing digital. We expect retail revenue of over GBP 100 million by 2017, and further benefits from an enhanced positioning with the traveling Japanese consumer globally. To facilitate this transformation, we have agreed with Sanyo Shokai an orderly transition of licensed Burberry product from Japan by September 2015. At the same time, we are pleased that they will continue their operation of the successful Blue Label and Black Label in Japan, but with no association to the Burberry brand.
This provides continued revenue from these successful labels, helping to mitigate the short-term financial impact of the transformation. Our plans for Japan demonstrate our ongoing commitment always to do what is best for the brand over the long term, and are the final piece of activity in a multi-year program to integrate legacy, regional, and product licenses back into the business. 2014-15 will also see intensified activity in digital commerce, which is already showing outstanding growth, albeit from a relatively small base. In addition to further investments in burberry.com, notably in mobile functionality, we will begin to unlock the potential that exists in third-party digital relationships, which we look at no differently from the bricks-and-mortar wholesale partners that are so important to us in the physical world.
Following the launch of Burberry Beauty on Amazon in the U.S. last year, we announced last month a collaboration with the Alibaba Group in China, opening a Burberry store on Tmall.com, the largest digital commerce platform in the market. The first collaboration of its kind in the luxury space, it offers tremendous reach while reflecting a shared commitment to offering Chinese consumers the best experience of the brand, including ensuring that only authentic Burberry product is made available on the site going forward. Both partnerships are consistent with our broader belief in the opportunities presented by digital commerce globally, always with the right partners and always executed in a way that protects and enhances our luxury positioning, as well as leveraging our digital competence. Brand development, including the acceleration of beauty and the Japan transition, offer exciting further potential in this context.
The final opportunity I'd like to highlight is our sustained investment in under-penetrated and emerging markets. The coming year will see us continue to maximize the opportunities presented by the rapid development of new centers of luxury consumption, as well as intensifying our focus on the travel retail channel that will only grow in relevance as travel trends accelerate to, from, and between these markets. We will also continue to challenge ourselves to operate more efficiently in all areas as we enter this next phase of our evolution, leveraging the significant infrastructure investments of recent years and realizing further productivity gains, not least in our retail stores. This is consistent with our aim to drive sustainable growth and profit for our stakeholders, investing to deliver further top-line growth while securing the ongoing margin progression that remains our goal.
While confident of the opportunities ahead, we do not underestimate the realities of delivering against them. Sector growth has moderated from the historic highs of the recent past, while the landscape has become ever more competitive. Meanwhile, shifts in consumer behavior from digital advances to changing travel patterns require agility and innovation in both thought and in action. I believe we have the clarity and the focus to deliver continued outperformance in a context that constantly presents both new challenges and new opportunities. I'd like to end with a comment on the importance of people, because the drivers of our future growth will not only be strategic and operational, but also human.
As I mentioned at the start, one of my proudest achievements in my 13 years at Burberry has been the culture that we have created, the close connectivity and shared passion that allows us to retain our entrepreneurial spirit as we grow the brightest and best talent we have at all levels, and the outstanding group of senior executives heading our three organizational pillars. I believe there is no more powerful foundation for future success than these united global teams, who I would like to thank profoundly. In this context, I would also like to highlight the role of our board, which continues to evolve to ensure we have the right skills and competencies for the future. Following the exciting appointments of Matthew Key and Jeremy Darroch during the year
We are also thrilled today to announce the appointment of a third new non-exec director, with Carolyn McCall joining the board in September. As CEO of easyJet since 2010, Carolyn has overseen a period of outstanding growth and innovation and brings brilliant skills and expertise to the board. We are delighted to have Carolyn join the team. With that, I will leave you with a short video summarizing some of Burberry's key achievements in the second half of the year. I hope these give you a sense not only of what is driving our performance today, but why we are so excited about our future.
They say I got a wanderin' eye. Stray is too far from the flock. Always goin' where the grass is greener. A skeleton key in through each lock. You can be my judge and my jury. Condemn me to the soil in the earth. Tie me to the inner forces. Place a bet on which part goes first. Here I slump at the end of somewhere. I'm the sling in a thousand-yard stare. Watchin' the boats with their families and friends. They won't come ashore if they have any sense. A wedding procession has moved from the church. Turned a good blessing into a bad curse. Let coyotes and crows pick at my eyes. To stop it from driftin' away with the tide.
Super excited to see this collection because I understand it's very much focused on the Bloomsbury Group and handcrafting and hand painting, like my coat.
Always goin' where the grass is greener. A skeleton key in through each lock. You can be my judge and my jury. Condemn me to the soil in the earth. Tie me to the inner forces. Place a bet on which part goes first. Well, here I slump at the end of somewhere. I'm the sling in a thousand-yard stare. Watchin' the boats with their families and friends. They won't come ashore if they have any sense. A wedding procession has moved from the church. Turned a good blessing into a bad curse. Let coyotes and crows pick at my eyes. To stop it from driftin' away with the tide. They say I got potential for violence. I could kill a man with my own bare hands. I can't focus on anything. Let alone have a murderous plan. I remember when I first saw you.
I couldn't move, I was paralyzed. I wondered if you'd be the only one. To put an end to my wanderin' eye. Well, here I slump at the end of somewhere. I'm in a sling in a thousand-yard stare. Watchin' the boats with their families and friends. They won't come ashore if they have any sense. A wedding procession has moved from the church. I turned a good blessing into a bad curse. Let coyotes and crows pick at my eyes. To stop it from driftin' away with the tide. There's no way that I can make it stop. I have fallen so far from the top. There's no doubt I'll never be like you. Stay in one place, live the life you chose.
Good morning. It gives me great pleasure to present the results for the financial year 2014, where we delivered record sales and profit. As Christopher referenced, the headline revenues were up 17% and adjusted
A net cash position up GBP 106 million at GBP 403 million, have proposed a 10% increase in the full-year dividend to GBP 0.32, have returned about GBP 130 million to shareholders in the year. As we've already reported our revenue last month, I will only briefly summarize our performance, there is more detail in the appendix of the presentation. We increased revenue by 17% to GBP 2.3 billion. Growth was led by retail, up 15% underlying, with comparable stores growth up 12%. We opened a net eight stores globally, digital performed strongly. Core wholesale, excluding beauty, was up 2% underlying, with the first half of the year down 7%, an increase of 11% in the second half, where the Americas and travel retail outperformed. In our first year of direct operation, beauty delivered GBP 144 million of wholesale revenue, in line with guidance.
Licensing, excluding the GBP 27 million royalty income from fragrance in 2013, was up 2% underlying as expected, with Japan unchanged, eyewear and watches combined up double-digit percentage. We saw double-digit growth in all regions and in our three major product divisions. Turning to profit. Operating profit grew by 8% in the year to GBP 460 million. The key drivers of this growth were a GBP 45 million increase from the core retail wholesale business, demonstrating operating leverage with revenue growth of 11% and profit growth of 14%, a first-time contribution from beauty of GBP 11 million, while core licensing delivered a GBP 6 million increase in profit. These growth drivers were partly offset by the absence of GBP 27 million from fragrance royalty income we had in 2013 and a GBP 3 million negative impact from FX. Let's look at the retail wholesale number in greater detail.
This chart shows the movement in the retail wholesale margin. You will remember last year we delivered a normalized margin of 17.1%, excluding the benefit of a lower performance-related pay charge. Including this benefit, the reported margin was 17.8%. This year, the core business, excluding beauty, delivered a solid 40-basis point improvement in margin to 18.2%. This was more than offset by beauty, where as flagged short-term supply chain issues impacted the gross margin, we increased marketing spend to support the earlier launch of the Brit Rhythm for Women fragrance, which left us with a 17.5% reported retail wholesale margin. Please remember that as we are running beauty as our fifth product division, we will not be reporting its profits separately going forward following this transition year. Turning to the gross margin.
There was progress around 40 basis points in the core business to 71%, reflecting small gains from net price increases and the channel shift to retail. This was offset by the dilutive impact of beauty in this transitional year to give reported gross margin of 70.2%. Our operating expenses, excluding beauty, were held flat as a percentage of revenue at 52.8%. About half of the increase in GBP millions came from general inflation and new space, with the balance from volume-related costs and increase in investment in areas such as marketing, digital, creative media, and customer service, which drove the revenue growth. The performance-related pay charge was broadly unchanged year on year, as the 8% PBT growth did not meet our stretching internal targets.
Before I turn to licensing, let me just remind you of what we said in April about the impact of foreign exchange on our reported numbers, and update this to reflect current exchange rates. As you're aware, sterling has appreciated significantly in recent months against our major currencies, and if exchange rates remain at current levels, there will be a material impact, adverse impact, on reported retail wholesale profit in financial year 2015. We estimate that, as an indication, rebasing financial year 2014 retail wholesale profit for current exchange rates would reduce reported profit by around GBP 40 million and reduce the retail wholesale operating margin to around 16.3% compared to 17.5%, with the impact broadly evenly split between gross margin and OpEx. This FX impact would, of course, be bigger in financial year 2015 as we continue to grow the business.
As we said in the statement this morning, in the current year, we will continue to invest across the business in areas such as flagship markets, customer service, digital, and people, which means we may not necessarily see the retail wholesale margin progression this year. As Christopher said, our aim is absolutely unchanged, continuing to invest to deliver sustainable revenue and profit growth in pound millions while securing ongoing margin progression. Turning to licensing, profit for the year was GBP 67 million. As you can see from the slide, the change from last year related predominantly to the loss of GBP 27 million of revenue from the terminated fragrance license, a GBP 4.7 million negative impact from FX, largely reflecting the movement in the effective yen rate from 127 to 137 to the pound, partly offset by growth in the remaining licenses and lower allocated costs.
FX will have a further impact in 2015, reducing reported licensing revenue by about GBP 10 million, working off an effective yen rate of about 164 to the pound. Working down the income statement, we had GBP 0.7 million of finance income in the year. For the current year, we'd expect it to be about the same. The adjusting items of GBP 17 million comprises of two things, the GBP 15 million amortization of the fragrance and beauty intangible, and a GBP 2 million charge relating to the China put option. This year, the tax charge was GBP 112 million. Our effective tax rate on adjusted PBT was 24.7%, which compares to 25.8% last year. We expect the tax rate on adjusted profit for 2015 to be about 23% as U.K. corporation tax reduces again.
Finally, the movement in the non-controlling interest of GBP 5 million is primarily a result of us having taken effective full ownership of the retail operation in Japan from the end of March 2013 in preparation for the expiry of the apparel license in June 2015. Our business remains strongly cash generative, with GBP 536 million of cash flow from operations up 3% from the GBP 523 million last year. Depreciation rose to GBP 124 million, and we expect a charge of around GBP 140 million in 2015. Inventories were tightly controlled, up 11% at constant FX, excluding beauty, compared to retail sales growth of 15%, demonstrating the payback for our investment in planning teams and processes. This contributed to an outflow on net working capital and other items of GBP 74 million in the year, as shown here.
Translating that operating cash flow to net cash, capital expenditure was GBP 154 million, which I will talk about shortly. Tax, dividends, and other outflows totaled GBP 276 million. We finished the year with net cash of GBP 403 million. Looking at our net cash position, please remember fixed operating lease rentals in 2014 totaled GBP 157 million, which if capitalized, would add significant debt onto the balance sheet. As you know, the board keeps our capital structure under review and feels that our net cash position is currently appropriate given the growth and investment plans ahead. Capital expenditure this year was GBP 154 million, below our guidance of GBP 200 million, reflecting the phasing of new projects and some later timing on payments for existing projects. Retail represented the majority of the spend, with about half of that spend focused on flagship markets such as Shanghai.
Looking forward to 2015, we expect capital spend of about GBP 200 million, again focused on retail, with key projects including Rodeo Drive in Los Angeles, Omotesando in Tokyo, and the refurbishment of our San Francisco store. Remember that all of our retail store projects are reviewed against a number of measures, including our IRR hurdle rate of 25%. The slide in your pack highlights our usual guidance for 2015. To close, we are pleased with the momentum in the brand and the business. We finished the year with a strong financial position, and you would have seen today the board's intention is to progressively move over the next three years to a 50% dividend payout ratio, signaling our confidence in the underlying business. Clearly, in 2014, 2015, if rates remain at their current levels, FX will be a material headwind.
The strategies that Christopher and the team are executing are unchanged and will underpin our goal of driving long-term profitable growth, always doing what is best for the brand whilst retaining tight financial discipline. Thank you, and I will now hand over to John to give you an update on beauty.
Thank you, Carol. I am delighted this morning to talk to you about beauty, our fifth product division, one year after we took direct control. This is now an area of focus for me as COO, as it is a key driver of our growth. This morning, I want to briefly remind you of our vision for beauty and the strategic rationale for buying the license, summarize the progress in the first year, talk about why we feel confident we can outperform the luxury fragrance market in the future, and share some of our current test initiatives in makeup as we begin to plan the build-out of a full beauty business. A year on, our vision is to be a top 10 luxury player with a distinctive British positioning driven digitally and appealing to the millennial consumer, and with a business comprising three axes.
Fragrance for image building, makeup for customer recruitment, and skincare for driving loyalty. This slide is a reminder of the strategic rationale. We're under-penetrated compared to our peers in what are large luxury markets. Beauty as product at the opening price point gives us the opportunity to appeal to the first-time luxury consumer. We can differentiate ourselves from other players by full alignment with our luxury apparel and accessories business. Finally, gain synergies from leveraging our existing infrastructure. Our first year of direct control was really about stepping into Inter Parfums' shoes and taking direct responsibility for relationships with suppliers and distributors. Step 1 was creating an in-house integrated business as our fifth product division. As you know, this was more complex and challenging than had been expected, that transition period is now over with the whole organization energized behind the task.
Our step 2, we're now looking forward to building the foundations for future growth. Crucial to success in beauty was our ability to create a strong team quickly. By the year-end, we had about 140 people across central functions such as supply chain, product development, and marketing, and in the regions to ensure execution in the field with a good mix of internal and external hires from leaders in luxury beauty, including Dior, Chanel, Estée Lauder, L'Oréal, and P&G. Secondly, we built an entire supply chain, contracting with 130 suppliers, gaining regulatory compliance in over 80 countries, establishing distribution capacity in France, that now we are fully in stock across fragrance and makeup, fulfilling 98% of all orders since November 2013, while at the same time sourcing over 100 new products to support future growth.
Thirdly, we secured a network of around 100 distributors for the first 12 months. Our regions are now evolving this by signing longer-term agreements and consolidating with preferred partners. Our top 15 distributors account for about three-quarters of revenue. Our product focus during the year was, of course, fragrance, which is currently 98% of revenue. During the year, we launched Brit Rhythm for Men and for Women, leveraging the best of Burberry, being digitally led, linked to music for their inspiration, with innovative use of social media and digital screens in flagship markets and fully aligned with Brit Rhythm fashion capsules. All of this summarized in the men's and women's TV campaigns, which I'd now like to share with you.
Burberry Brit Rhythm, the new fragrances for men and women.
Turning to future growth in fragrance. We've already guided for about 25% growth at constant FX in 2015, following the year of transition. For 2016 and 2017, we're targeting mid-teens revenue growth purely from fragrance, while looking to improve the quality of sales by balancing the rationalization of legacy fragrances with growth of new ones. This growth rate is much faster than the market. Why do we believe we can do this? First, we are massively under-penetrated here. The prestige fragrance market is worth about GBP 20 billion at retail value, and we have a very small share of that. If you look at the U.K. as an example, we are currently ranked about number 30. Achieving our goal of being top 10 would triple our sales in this, our home market.
We will continue to elevate the image of our fragrance offer and build the product range around our key pillars. In the coming year, as we gradually rationalize legacy fragrances, we will launch product extensions for the new Brit pillar. I'm very excited about the major women's launch in September, capitalizing on our brand heritage and on the trench with Kate and Cara being the faces of the campaign. Outperformance will also come from growing both traditional and non-traditional distribution channels. Remember, we are currently 95% wholesale and only 5% retail. Let me give you four quick examples. First, we are intensifying efforts to sell direct to the end consumer in our own retail stores and on burberry.com, with about 50% growth in the second half of 2014 and digital outperforming, albeit from a very small base now.
Second, we are leveraging our existing relationships with luxury retailers to accelerate growth online and offline. An example was the Bloomingdale's takeover, where our team in the U.S. was able to deliver such a strong share of voice for the launch of Brit Rhythm for Men. Thirdly, we are targeting travel retail. Beauty is a GBP 10 billion market here, which has grown double digit over the last three years. Fragrance represents over half the sales, but we have less than a 1% share. There is clear potential to gain higher profile and larger permanent spaces for our brand. Fourthly, we believe there is huge potential in the digital space for fragrance.
Highlighting our desire to take a lead here, we have begun a major push online via third-party digital e-tailers and retailers, starting with Amazon U.S. on their luxury beauty platform, ensuring that customers can only buy genuine Burberry fragrance on their site. Tmall demonstrating synergy with fashion on China's largest online retail platform. A commercial relationship with these companies provides access to a significantly greater number of customers in a transactional environment. Allows us to test new distribution, payment, and delivery models, allows a repositioning of our content and brand imagery, while affording an opportunity to tackle counterfeit and gray market activity, otherwise a significant issue in this space. With fragrance on a good growth trajectory, we can turn our attention to building out a full beauty offer.
With the acceleration of makeup and preparing for the launch of skincare, again, all fully aligned with apparel and accessories. As this slide shows, these prestige markets combined are worth about GBP 60 billion. A prize worth pursuing, given we have no share in two of the three segments. These other categories are, of course, not without their challenges. We recognize that makeup is a structurally lower margin business than fragrance, especially while we're subscale, and that both will require more capital investment in physical points of sale, depending on the route to market. Which is why we will spend this year testing and proving models and concepts to ensure we get good returns on this investment over time. Here are some of our initiatives for 2014-2015. In makeup, we are reformulating, upgrading, and expanding our product portfolio.
By the end of the year, we will have nearly doubled the number of SKUs to about 300 compared to where we started the year and be much closer to luxury peers. In skincare, which requires a very different skill set, we continue to explore opportunities in partnership with experts in the field, looking to launch in late 2015. We will continue to build awareness of our makeup offer by aligning it fully with apparel and accessories and being imaginative digitally. Witness the innovative collaboration with Google that delivered Burberry Kisses, or the prominence that beauty was given at the recent launch event in Shanghai, or how beauty now plays an integral part of our runway shows.
Whether the beauty booth, where personalized images taken by models backstage were shared in real time with our 3.1 million Twitter followers, or next season's nail collections being available through Runway Made to Order. We're also testing concepts to elevate the distribution of beauty. In December, we opened our first Burberry Beauty Box in Covent Garden, London. We've used it to show distributors and partners our vision for how we will present beauty to customers differently, and the feedback has been outstanding. Let me show you a short video which describes this.
When the cold shakes my bones. It's the rug that warms my soul. It's the textile to the skin. The sensation alone feels like home. Home. Home.
As you saw there, the Burberry Beauty Box is differentiated from peers as it combines Burberry makeup, fragrance, and accessories while blurring physical and digital experiences. This year, we will continue to test the concept to evaluate the potential for standalone beauty stores, particularly in flagship markets and also travel retail. A second Burberry Beauty Box store is planned in Asia in 2015. We use Burberry Beauty Box as inspiration when designing our new beauty concept counters for use in our own stores and by our partners, with the investment varying by type of door. The concept was launched to our partners in April, we will spend this year formulating rollout plans to new and existing locations, building on our existing base of approaching 100 counters. As with fragrance, we will scale non-traditional channels, with Net-a-Porter being an early example of our online presence for makeup.
As Christopher said, we remain confident that our investment in beauty will be a key component of future growth. This first year of transition has been complex, today, our fragrance business is in great shape and poised for mid-teens annual revenue growth from 2016. The focus this year is on building out the full beauty offer, developing makeup, and preparing for skincare, planning for the physical and digital rollout of beauty the Burberry way, moving as quickly as possible to capitalize on this opportunity while generating good returns on our investment. Our pay-as-you-go approach in action. Thank you for your attention. Let me now please hand over to Pascal, who will talk through our exciting plans for transforming Japan. Pascal.
Thank you, John. In Japanese, this means good morning and welcome. Indeed, I'm delighted to talk to you today about our plans for transforming our business in Japan. In his introduction, Christopher talked about always doing what is right for the brand, Japan is certainly the best illustration of this. I'm personally very excited about this business opportunity. Prior to taking the role of Chief Executive of LVMH Pacific at Burberry in 2007, I worked in the luxury industry in Japan for more than 10 years. I have a clear vision and understanding of what Burberry can achieve in this fascinating market over time. This morning, I'll take you through the outstanding opportunity Burberry has now to develop in the second largest luxury market in the world.
The exit process of the existing licensed product, the opportunity for a new Blue Label, Black Label license, very importantly, our plans to grow our luxury business. Today, Burberry is among the largest and best-known apparel brands in Japan. As you know, this business is run under license and is positioned very differently from our global collection anywhere else in the world. More premium than luxury, at lower price points. With the expiry of the licenses in June 2015, Burberry now has an opportunity to build a fast-growing luxury business in Japan, focused and built around the trench coat, our Britishness, and our digital engagement. The strategic rationale for the move to the global collection is compelling, with four reasons. First, Japan is the last remaining market for us to integrate and align with our global brand strategies.
Second, as I mentioned before, Japan is the world's second largest luxury market. When you include Japanese consumers shopping abroad, Japan represents 13% of the world's luxury market. Our peers generate about 10% of their global revenues in Japan, while we are scarcely playing there. We also see strong growing inbound tourism to Japan, especially the Chinese customer. The third reason is that the Japanese luxury market is growing once again, which we see in our small own retail operations, while our licensed income from Japan is flat. The last reason is that by doing direct, we will elevate our brand to the level of our luxury peers locally while taking the whole retail margin rather than just a small proportion through royalties. We will be able to generate good profits from a business aligned with luxury standards. Let me remind you of our presence under license in Japan today.
The Sanyo Shokai license for Burberry apparel has been in existence for about 35 years. It represents about 80% of our royalty income from Japan, with estimated retail sales of over GBP 500 million, over 500 points of sales. The apparel is split in two, in three areas. The local London collection, targeting more mature consumers, the children's wear, and the Blue Label and Black Label brands, targeting a much younger consumer group. These two labels representing about half of the apparel royalty income. The remaining 15% is coming from other licenses covering hosiery, handkerchiefs, and umbrellas. All these licenses will expire at the end of June 2015. What will happen to our licensed income? In fiscal 2013/2014, licensing revenue from Japan was GBP 62 million.
As Carol said earlier, we are expecting it to remain broadly unchanged at constant exchange rates this year, with about GBP 10 million negative impact from Forex. The license ends in June 2015. We have developed with Sanyo to ensure an orderly exiting of the local products from the market. By the end of September 2015, all the London collection concessions will be closed. Inventory clearance will be carefully managed, mainly through the outlet channel of Sanyo Shokai, and clearance will be finished by June 2016. In terms of royalty, in financial year 2015/2016, we will receive about GBP 18 million at current exchange rate relating to the remaining term of the license and the transition period.
Because the Blue Label and Black Label brands are about half of the business, because they are addressing a different younger customer base, not a luxury customer, we considered options to maintain these businesses. Indeed, we know that Blue Label and Black Label are very successful lines in the Japanese market contemporary apparel, that there is a strong appeal for these labels, especially around the Japan-specific fit, styling, and assortments. That the consumer proposition is more associated with the terms black and blue and understood as distinct from the Burberry brand. Finally, these brands are not seen as part of the luxury market. These brands are also an important profit contributor to Sanyo Shokai and the department stores.
We have worked with Sanyo Shokai to migrate these brands into a new license agreement, which will allow them to continue with no Burberry association, leaving the market completely free of Burberry-branded licensed products. Let me share with you what details we can disclose at this stage. The Blue and Black Label brands will be supported by a new non-Burberry association for Japan, with a phased migration starting from fall/winter 2014, completed with the removal of the Burberry brand a year later. We will own all the intellectual property rights of Blue and Black Labels, in return for which we will receive a royalty income under a three-year license effectively starting September 2015. The royalty will be based on sales with a minimum of around GBP 10 million at current exchange rates for the first 12 months.
With this arrangement, we will capitalize on the proven brand equity of the Blue and Black Labels, preserving a successful business for consumers, Sanyo department stores, and generating a valuable stream for Burberry without compromising the integrity of our global brand in Japan. To conclude on licenses, these actions that I just described will result in the exit of all licensed Burberry branded product from primary distribution by September 2015. Let me share with you our plans to engage the core luxury customer in Japan with our global collection. Consistent with our strategy of retail-led growth, we will be active both offline and online. In Japan, the department stores are dominant with about 80% share of the luxury market concentrated in the hands of a few large national names.
This is reflected in the store counts of our luxury peers, having between 40 to 60 stores each, heavily weighted towards department stores and including some flagship stores in key cities to support the brand positioning. Mindful of the experience of other luxury peers who have taken back their licenses in Japan in the past, we have been thoughtfully preparing this transformation for many years. We did set up our own retail operations about five years ago to build our brand and dedicated capabilities to understand the specificities of the Japanese luxury market. We have the full infrastructure in place to support our growth plans, from the team on the ground to SAP going live by the end of this September. We have a small retail footprint with four standalone stores and 10 concessions in department stores selling the global collection.
This business has been performing very well, posting some of the strongest comparable sales growth of all of our markets in the last two years, demonstrating the appeal of the brand to the core Japanese luxury customer. For completeness, we have also a small wholesale business selling scarves and ties to Japanese department stores. Combined, retail and wholesale generated revenues of about GBP 25 million, about 1% of our global revenue, and was breakeven in terms of profit. First, we are securing exceptional real estate in key luxury wards for freestanding stores. Strong brand statements, including flagship stores aligned with our peers, will signal our brand repositioning to consumer and department stores ahead of the license expiry. In 2013, we opened a new store in Roppongi Hills, Tokyo.
This year, we are relocating and expanding our Omotesando store in Tokyo, and within our three-year plan time horizon, we will have a flagship store opening in Osaka 2015, and a location secured in the high traffic area of Shinjuku in Tokyo for later that year. We are actively looking for a flagship location in Ginza, Tokyo. Secondly, on top of free real estate, we are also gaining traction with key department stores to expand the number of concessions in this key channel, with a handful of openings this year, while expecting about 10 new openings in both 2016 and 2017. In 2015, we will assume the operations for the children's wear concessions run by Sanyo Shokai, which are already selling our global children's wear collection since fall/winter 2012. As in other geographies, digital is also expected to play an important role in Japan.
Our own site has been live in Japanese since 2011, and although small, it is performing well at 40% on last year. Further proof of the global appeal of our global collection to the Japanese luxury customer. We have seen excellent engagement with our Runway Made to Order, Japan representing around 10% of global orders to date. We will integrate digital technology with the physical stores as we do globally. Finally, we are exploring opportunities with third-party digital partners. We are also actively working on the significant opportunity for beauty in Japan, which is the second largest beauty market globally. We look forward to sharing our plans at an appropriate stage for beauty. As we build our business offline and online, we will communicate the change to the core luxury customer by investing more in marketing.
We will do this in the same way we have successfully repositioned our image and turned around our brand in China using the tools illustrated on this slide. Always centered around the trench coat, our icon, and our heritage with key brand moments, such as the Kerry Centre launch, with innovative use of social media and outdoor sites, supplemented by extensive PR. This will be replicated in Japan, phased appropriately as the store base grows, and we already started elevating our brand's image. For example, using out-of-home in flagship cities and building our PR presence. With the appropriate retail presence supported by our globally consistent marketing, we will be effectively relaunching the brand in Japan. Looking out to fiscal year 2017, our three-year planning cycle, we expect retail revenues to be over GBP 100 million with incremental profit of about GBP 25 million.
Over the longer term, we will move to our vision of having a highly profitable business, which could represent about 10% of our global revenues, in line with our peers, with an appropriate mix of offline and online retail, apparel, accessories, and beauty, serving the Japanese consumer both at home and abroad. Now it's time to say arigatou gozaimasu, which in Japanese means thank you very much. The transformation and growth of our brand in Japan is a very exciting opportunity for us. I will now hand you back to Christopher. Thank you again.
I do not speak Japanese. Thank you very much, Pascal, for that overview, which conveys the significant opportunity we see in Japan and the great progress that the teams have already made in laying the foundations to capture that potential in the months and the years ahead. In conclusion, we have completed another strong year and begin this new phase energized by the opportunities ahead, not least in the areas of beauty and Japan, as highlighted today. With great brand momentum and a focused vision for the future, we are looking ahead with confidence. Thank you all very much for listening. Now I'll ask Carol, John, and Pascal to join me to take any questions that you may have.
Who's got the mic?
Where's the mic?
Mic.
Okay. Hi there.
Hello. Good morning from Mario. Two question if I may. The first one is about the brand positioning of Burberry. You mentioned that the brand is having a great brand momentum, and from what I've seen, you're trying to elevate the brand. What is the target positioning that you are aiming from the brand, and how will arrive there? Cutting down more enterprise point product, opening new stores? Do you not feel the risk to alienate some of the accessible or the aspirational consumer. The second question is about EBIT margin. What is your long-term target for the EBIT margin? Because we have seen that in these years was more or less flattish and stable. Thank you.
I will answer the first question, and then I'll pass to Carol of elevating the brand globally. We are doing that in many different ways. We have a pricing pyramid that remains very strong. Heritage that we talked about earlier will continue to go across the pricing strategy. We have opening price points, and beauty is a very good example of how we see our luxury business expanding, making sure that we keep the brand momentum, but it gives an entry for a young luxury consumer. Digital is also something that we've put a lot of focus on. It does talk to a younger millennial consumer, still a luxury consumer, and we've always chosen our digital partners, whether it be Tmall, whether it be Amazon, whether it be everything that we do on burberry.com, to talk to that consumer. It's not about taking away entry points.
In fact, beauty, I think, talks to that. It is about elevating. Let me Carol.
In terms of EBIT margin, as we said this morning, over the last three years, we have delivered EBIT margin expansion. As Christopher referenced, it's absolutely one of our key priorities to continue to do that, balancing investment in the business to make sure that we drive profitable or long-term sustainable revenue growth and profit growth in GBP millions, whilst continuing to grow the margin over time. Always doing what's right for the brand in terms of investment to drive that long-term growth. We haven't put a number on it. We know that there's absolutely opportunity to go for, and we're absolutely very focused on driving that. We'll continue to look to do that over the next years. We haven't put a number on it.
I think that we're very focused as a management team in terms of that's where we need to go. Productivity, efficiencies, there's lots to go for, but we haven't actually put a number on what the end goal will be. Hi there. We're just getting you a mic.
John Guy.
Hi, John.
Hello. Thanks. It's John Guy from Berenberg. A few questions, please. First of all, staying with the OpEx and also the retail wholesale gross margin, when you look at the performance from FY 2011 to 2014, you've had about a 340 basis point increase in your OpEx as a percentage of sales. You've had about a 530 basis point increase in your retail wholesale gross margin. When we think about the evolution over the course of the next three years, a little bit of dilution running through within the beauty business, albeit coming from a very low base, so a strong opportunity. When we think about the investment in infrastructure and digital and also quite a step change in terms of what's happening within Japan, how does that relationship evolve over the course of the next three years between the OpEx and the gross margin?
Especially, I guess, within the context of maybe driving up your ASPs by anywhere between 8%-9% consistently over the last five years. That's my first sort of part questions, I suppose.
Yeah.
Secondly, with regards to Japan, we're talking about right-sizing the business and potentially getting to a range of about 45-50 stores. Your predecessor talked about 50-75 stores. Are you just effectively looking at the moment at the basic footprint of around eight to nine flagships, if you like, and about 40 or so concessions? Is there room to maybe take that further? Also, what is the mix likely to be in Japan? Maybe a question for Pascal. Certainly, looking at some of the flagship stores, we've seen Prorsum as a percentage of sales be particularly high in some of your newer flagship stores, maybe in excess of 25%-30%, so well ahead of the group average. Maybe you could talk about that.
Finally, just with regards to your working capital and cash, a very strong result this year, especially with over GBP 60 million of inventory in Beauty. You've talked about a progressive payout ratio increasing to 50%. Is it too early to talk about buybacks in addition? I mean, there's a lot going on, but is that something that we could also potentially look forward to? Thank you.
Okay. I'll take the first one.
Okay, part one.
Okay.
Carol will take.
I mean, absolutely. We've driven that EBIT margin expansion through gross margin, and as you said, OpEx has gone up. That largely reflects a lot of the shift in the business model from what was much more of a wholesale business to a retail business. A lot of that is in there in terms of the way the margin has shaped. I've talked over the last year about the fact that we have made good progression in gross margin, and we now begin to see that moderating, which is why I believe the expansion will come over time from OpEx. Continuing to balance that level of investment to drive the comp sales growth we posted last year of 12% was an outperformance, but is absolutely driven by the investment we've made in digital, in customer, in flagship markets.
For us, it's a combination of balancing that top-line sustainable growth with profit in GBP million whilst looking to drive that margin forward. Moderating on gross margin, I would say, going forward, looking to get OpEx expansion or expansion from the margin from OpEx saving as we drive efficiencies over time, continue to invest to drive that top-line quality sales growth.
In terms of Japan, Pascal will add more detail, but our strategy remains that we are looking for the right locations, the right locations for both our own standalone flagship stores, as well as the right partners in wholesale. Pascal has very strong relationships in Japan, having worked there for over 10 years, and has an incredibly strong team in the region building those relationships with the right partners. We are also looking digitally and have started to build up some very significant relationships with digital partners in Japan. It's a 3-tier approach, as well as a very strong digital, social strategy that we've got in the region. Pascal, do you want to go into more detail?
Yes. Thank you, Christopher. Yes. As far as Japan is concerned and the store network is concerned, it is first and foremost about the quality. We consider us as newcomers in this market. Although we have been there learning, building capabilities over the last five years, nevertheless, we will have to show our face under a certain angle, big brand statements with flagship stores where Japanese customers, and then partnership with department stores. The number we quote in the presentation is our vision for 2017, directionally aligned with peers. We might be missing some doors compared to big players there. The point we need to keep in mind is that the key challenge for us in Japan will be to unlock department stores, and it takes time. This is a country where these things take time. We have hired a new GM, who is going to join us next month.
He is super seasoned and has expertise in relationship with department store. We do not want to do anything short term, anything stupid. We are there for the long term. We want to do our brand statements. We will never accept a secondary space from a department store just to be there. The other thing we need to consider when it comes to the merchandising mix, yes, the
We are not going to convert the premium Japanese customer into luxury customer. We are going to target directly at the luxury Japanese customer. For that reason, in the short term, we might have a more elevated merchandising mix than anywhere else in the world. Over time, we expect this to be fairly aligned.
In terms of working capital, your last question, John, in terms of last year, we were pleased because inventory on our core fashion business only grew 10% compared to the 15% retail sales growth. We have got GBP 400 million worth of cash on the balance sheet. Don't forget the GBP 160 million worth of lease commitment, which, in effect, if you put that on the balance sheet, is a form of debt. I think the board felt that moving to a 50% dividend payout ratio over the next three years demonstrates our confidence in the underlying business. At the moment, we do feel it's appropriate to carry that cash on the balance sheet, given the fact that we have growth and investment plans ahead. Nothing new to talk about in that space today.
Thank you.
Good morning. It's Will Hutchings from Goldman Sachs. I've got two questions. They both are about growth. The first is like for like. You talk about driving sustainable growth. I think the 12% like for like you've done recently is pretty exceptional. I wonder if you could help us understand what's the sustainable like for like, and what are the drivers of how strong it's been recently, just to understand how it may change over the next couple of years.
Regarding digital as well, you talk about digital a lot, and it sounds incredibly exciting with all of the way that you brand your products. I wonder if there's any way that you can help us understand what it actually does for revenue. Is it driving better conversion? Is it driving more customers into your store? Or is it that you're just driving the growth because of pure direct sales, e-commerce? Because presumably, it's a combination of those. Thank you.
Your first question about growth. Our strategy is to outperform. We can't give any numbers on the way that we aim to do that. We've got some very strong strategies that we've had in place for several years. We continue to develop those strategies, and we deal with them in a very dynamic way. Not dissimilar to what Pascal was just saying about the stores in Japan. We manage with them in a dynamic way to make sure that we are finding the right locations at the right time. If it's not the right location, then we won't go into them. What we're trying to do is to make sure that the product strategies are in line with the growth. For example, menswear, we talked about the building of menswear as a product category.
The menswear business is currently 30% of our total, remains a huge focus, as well as non-apparel in menswear, which has now become, I think, 20% of our total non-apparel business. We continue to try to outperform in all those different areas. Carol, I wonder if you want to-
In terms of digital, I don't know if you want to take that one, but in terms of how we measure that.
Yeah, digital. The brand's been known, as you know, for being innovative in digital for a long time. Three years on the run for the L2 Digital IQ Index, the brand's been number one. Anytime you look at the brand, touch it, feel it, read about it, digital comes over as a key source of inspiration. It's a key piece of innovation about everything that the company stands for. That's the place to start, really, in thinking about the role that online plays in what the company does. Obviously, the centerpiece of our strategy is burberry.com. It's the thing that matters most. It's where we want to drive traffic. It's where we make increasingly high number of sales. It's a very important and growing channel.
We don't pull out the sales specifically on burberry.com because increasingly, the experience that customers have is an online-offline journey which weaves in and out of one and into the other. It might start at home on a desktop looking at our site, let's say, and then may end up with somebody going into a store thinking about buying, touching the product, talking to a sales associate. The actual decision to purchase may happen in a purely offline environment in the store, or it might happen in the store in an online environment because the sales associates have iPads with them. Increasingly, we are selling through sales associates with an iPad, helping customers work out what they want, and if we don't happen to have the right size or fit or color, we can order it directly from burberry.com in store.
The fact that the whole thing is weaved and interweaved means that we don't want to pull out burberry.com as a separate channel, although, of course, it is the centerpiece of the strategy. The only other thing I'd say, a key trend for the moment for us is the world of third-party digital is increasingly important. We've started this year with relationships with Net-a-Porter, with Amazon U.S., as I already mentioned, and just recently with Tmall. Very, very important indeed, because those relationships are, or those companies rather, are a growing source of online transactions for our customers. It's important for us to make sure that our brand presence, the way that Burberry product looks on those sites, has got to be as good as it is on burberry.com.
Indeed, if I could encourage you to have a look at our page on Tmall, you would see that actually much of the effort has been to make sure that the experience the customer gets is that high-level, beautiful brand imagery that you would get on burberry.com. Essentially, these relationships do three things: They drive reach
They drive reputation and they drive revenue. We want to do all three and work with as many third-party partners that we can get that kind of relationship with.
Julian Easthope .
Thank you very much. It is Julian Easthope from Barclays. I have got three questions as well, although the first one comes in two parts.
That sounds like four.
Starting off, its first part is about Japan. It is more of a technicality, this. When the contract comes to an end on the 30th of June, presumably Sanyo Shokai will have a ton of stock left in the stores. Will they be given a period to discount and basically disrupt the brand for a further period of time? Within the margins of the current license contracts, I noticed on the perfumes that you had a central head office allocation that was removed. Does this mean that the ongoing license will still have an 85% gross or EBIT margin moving forward? That central overhead, does it disappear or is it reallocated back to the other divisions? That is the first question. In terms of management incentives, you get paid basically on pre-tax profit growth, generally 10%-15% on a three-year compound basis.
Now last year, obviously, you were affected by the perfume contract, this year by currency and next year by Japan. The chances of you being incentivized by the current structure is quite difficult because you'll have 3 years, presumably, where you will not be able to achieve your incentives. I just wondered whether or not those are kind of outdated now and they're under review. The last question, as I look at the board now, it's massively changed over the last two years. You have presumably had a board meeting yesterday or thereabouts from the departure of Angela. I just wondered how the board meeting's going, how it's different and how the decision-making process has changed through all the changes. I see your chairman's there as well. Thank you.
Pascal, do you want-
Yeah.
Sorry, do you want to go into the first about the rest of the stock?
Yes. As I said earlier, we've been really working very thoughtfully with Sanyo to manage the orderly exit of all the apparel license product in Japan. Sanyo has a network of outlets and the sale and the clearance of those products will be contained to these outlet stores. By the end of June 2016, it will be finished. Please note also that we have a word to say on how they dispose of inventory even in their own outlets. All this is very tightly controlled. We spend an enormous amount of time to plan with Sanyo and they have the very good understanding what they have to do. We feel very comfortable with that.
In terms of the allocation of costs, Julian, it's an allocation effectively of central costs that we have to put against the licensing business where we can see that it relates to that licensing business. We will keep that under review. Clearly, some of those, the time that Pascal's been spending on the Sanyo relationship may or may not be less. We look at that allocation every year and broadly it's come out at around an 85% margin on the time that has been spent on the licensing business and what's the appropriate amount to allocate to that segment.
In terms of the board, yes, we've had quite a change, having some new wonderful additions. We just announced today Carolyn McCall. The structure of our board and the chairman is here and will answer questions afterwards, after the Q&A. The structure of the board remains the same. We have the same committees within the board, but we do have this new very dynamic team of people that are helping us to advise in specialist areas, including in media with Carolyn McCall and travel.
I think there was one on management incentives. That's a matter for the RemCo, obviously.
Yeah, sorry.
They set the targets. We've said today that we didn't achieve our stretching internal target. We talk about pay as you go and this year, in terms of beauty we talked about that when we updated the interims on that number. It's a matter for the RemCo to set those targets, but clearly it is to incentivize management and I think you can see today the management team is very excited about the growth opportunities ahead.
Thank you very much.
Hi, good morning. Hi there. Louise from Morgan Stanley.
Hi, Louise.
Quick question for you, Christopher, in terms of how you think about running the brand.
Yeah.
There's many different things that you're doing differently versus the traditional luxury peers, particularly the leading initiatives on digital is one example. What do you actually think about in terms of your peer group? Presumably you're not looking at the luxury or the traditional brands. Can you just give us a bit of flavor how you think of the brand going forward?
Yeah. We were born from outerwear, we were born in a very different way to all our other luxury peers. We have always said that we are an old young company, almost 160 years old. Digital has been at the center of everything that we do. We have stayed very true to that approach. It cuts across not only our customer interaction, but it's also within our internal teams and also with our suppliers that we work with. That is something that is a halo effect across the whole organization.
Increasingly work with across different areas and different industries. Music is a very important part of our DNA, we've built a world there, something very different to any of our peers. That helps us to talk to a millennial consumer that we've always said that is very different to our other luxury peers. If we can talk to that new, young, upcoming luxury consumer, we get ahead of the game, we can continue to build things like beauty.
Great. Thank you. Pascal, quick question on Japan before I hand over. Japan, you're obviously going to lose a lot of the local customers, as they're used to the local product. What can you tell us about the luxury customer and what you've seen with the non-apparel business in the last five years? When we think about Japan, is there much of a tourist business for Japan? How much would be ex-domestic sales? Thank you.
Thank you. Yes, definitely, we're going to target at the core luxury customer in Japan. Japan is the second luxury market in the world. USA is number one. The luxury market in Japan is about EUR 17 billion, and it's growing again. Last year, it is said that it has been growing at constant exchange rate of 12%, there is a new dynamic there. The customer is certainly more demanding, so it's going to allow us to elevate our standards of doing business, especially at retail globally. It's a customer that is very keen and very interested on newness. Now talking about the merchandising, yes, historically, Japan is very much geared towards non-apparel, so large leather, small leather. We started five years ago focusing at this.
Down the road, we have seen that there is also a great opportunity for our own apparel, particularly the trench coat. The way we see it, and this is in that sense that we will have a unique proposition in Japan, we will just come as a global brand, like we are everywhere else in the world, with apparel driven by the trench coat in particular, and then accessories. We will bring something definitely new to the market. Since Japanese customer is definitely interested in something new, we're very confident.
The tourist base for just in terms of Japan.
The tourist base is Chinese tourism. Inbound Japan is about 1.3 million last year. It's growing strong double digits, so we see a great opportunity here. Overall, Asian tourism in Japan has been growing 30% last year as well. Tourism is definitely an important opportunity. One more reason to align Japan with the rest of the world.
Thank you for taking my question. My question, Rogerio Fujimori from Credit Suisse. Carol, one question for you. Do you expect, given all the investments in beauty, Japan, flagship markets, and the comments from Christopher about increasing competition in luxury, your marketing-to-sales ratio to increase in the next two, three years? My second question on under-penetrated markets, which under-penetrated markets look particularly interesting in terms of pipeline of important retail projects in the next 24 months? Thank you.
Thanks.
In terms of marketing spend, yes, we will continue. We talk about investing to continue to drive that top-line revenue. Marketing spend per se, we've combined fashion and beauty now, so we've got a bigger GBP value of marketing. It's how we now use that really creatively to make sure we get a bigger bang for our buck. It's not just simply about old-fashioned marketing spend. It's about digital. It's about investing in stores. We look at marketing, one, as a percentage of sales. We can track that number. It's much broader than that now, particularly with digital innovation, with creative media. We will continue to invest in all the right ways to continue to drive that brand momentum. We don't specifically disclose that number as a percentage of sales, and that's not how we manage it.
We look at this pay-as-you-go approach, making sure we're getting returns on our investment decisions, be it in marketing, in flagship stores, in digital innovation. Expect investment to continue. We're not putting an absolute percentage on it.
In terms of under-penetrated markets, Japan is clearly our big focus this year and for the future. We continue to put a big focus on the Americas as well. We have Los Angeles opening in the autumn of this year, we're also doing a very big refurbishment in San Francisco. We continue to put the Americas under a microscope as well. I think we've got time for just one more question. Hi there.
Thank you. Good morning. It's Warwick Okines from Deutsche Bank. Two parts on my question, please.
Yeah.
As well as under-penetrated markets, Christopher, you talked about travel retail as an opportunity. Could you just give us
Yeah
thoughts about where the opportunity lies there? Then maybe one for Pascal. Could you talk about the Chinese market, mainland Chinese market? How has that market changed in the last year? Looking forward, what areas of self-help do you particularly identify that you have that will enable you to continue to outperform?
The first one, in terms of travel retail, we have just hired somebody who will take care of all our airport strategies. That's a very big part of our ongoing movement for traveling consumers, not only on a retail presence, but also the advertising and marketing that we can do as we get that traveling luxury consumer.
As far as China, indeed, we are very satisfied with our performance over there. You mentioned self-help. Yes, we have plenty of initiatives in mainland China that allow us to perform. Just for you to know, since we acquired this market back to September 2010, we bought about 50 stores. We closed 30 of them. All the new stores that we have opened are driving very strongly the like-for-like, and of course, are outperforming all the legacy stores. We continue to help ourself doing this. This is not only a revenue game. This is also to elevate our brand. The Kerry Centre launch is the perfect illustration of that. Also in China, we are awarded by Eltinge Tongji being the most innovative company digitally in the fashion luxury sector. We have a large number of initiatives to support our growth.
Thank you very much indeed, everyone, for joining us today. We really appreciate you taking the time out. We do have a lot of the senior team here who are around if you need to get any more detail. Thank you again.