Coach, Kors & Kate: The Handbag Wars
The North American handbag market, which achieved mid-to-high single-digit growth through most of this millennium, saw its 2015 rate cut by more than half to a flat-to-low single-digit pace. A variety of factors stalled growth, including reduced mall traffic, fewer international consumers shopping at full price and at flagship outlet destinations, smaller and less expensive bags, increased promotional activity online and in department stores, and more competition from new entrants. Midway into the year the slowdown appears to have found its base in the low single digits. Excluding any significant change in FX rates and a corresponding influx in international visitors who shop, minimal growth is the new normal for the category.
That said, 2016 is the year when the proverbial worm turns in the handbag market as Kors and Coach swap positions once again. We see Coach executing a brand and product elevation strategy with a modern luxury mantra and expect it to benefit from the heavy lifting of the past two years when it invested in store fleet, product design, and marketing amid double-digit comp declines. Kors is catching its breath after opening a slew of retail locations at breakneck speed (300+ in the past 27 months, including 94 stores in Greater China, which it assumed in a recent license transaction), and Kate is whimsically creating a lifestyle with the intent of achieving Ralph Lauren-like iconic status.
Meanwhile, there is activity among an expanding list of emerging and stalwart accessory brands. Rebecca Minkoff is growing nicely and capturing share of the accessible luxury handbag market. Tory Burch, with price points at the higher end of accessible luxury, is seeing its growth stall. Calvin Klein is opening accessory stores, and the big excitement in handbags is the newness Gucci has brought to the market, with detailing that is difficult to copy. Hurrah for Gucci! We see similar product detailing with the Coach 1941 line.
Racing to the Bottom of the Bag
The accessible luxury brands of Michael Kors, Kate Spade and Coach all mentioned in their investor calls the promotional activity in the department store channel in the second quarter of 2016. Each is attempting to mitigate exposure to this brand-eroding behavior with solutions. There is reduced channel exposure at Coach, with a 25 percent reduction in doors as well as reduced markdown allowances. At Kate, the brand will modulate its participation in department store promotional activity, reducing the number of sales to those periods when the value customer is shopping the department store, and, for the rest of the year, focusing on building a relationship with the full price customer. At Kors, no reduction in department stores doors is planned. Rather, there will be reduced shipments into the channel. Beginning in February 2017, Kors will not participate in any use of coupons or friends and family events at department stores. Idol was adamant about this, stating, “this industry has evolved over the past few years to accelerated promotional activity. And we know that. That’s the absolute wrong thing to do for a business over the long term. And so we have put in fairly significant plans, declines in certain areas of the business, one of them obviously being wholesale.” Didn’t he see the probability of this occurrence two years ago when Coach first started its repositioning strategy?
Coach’s financial and operating performance of the last two years shows that weaning consumers off promotions sets up public companies for 18 to 24 months of weak sales and earnings comparisons and risks losing the customer for good to competitors. This is the path Kors has in front of them. Idol clearly recognizes the need to halt discounting.
Double-Digit Product Shipments Accompanied by Revenue Declines
Regarding the June quarter, Idol said, “The amount of promotional activity from many of the people who carry our line was at its all-time high, and we have to compete to be able to move our inventories during that period. When you do that, it just lowers your average order value, and you just can’t keep up with [it], even though our transactions, our conversion was up double-digit. That is the cycle that we’re going to get ourselves out of come the spring season, and really rebalance the brand.”
Kors has multiple growth levers to pull as it navigates a return to more rational pricing for its handbags, including its European, Asian and men’s businesses, as well as wearables with the September launch of its ACCESS line. A focus on exclusive product will assist in pricing integrity and drive website and store traffic. A visit to the Michael Kors’ New York Bleecker Street retail lab store was telling. This shop will change themed merchandise monthly and when it launched as a lab in August, the theme was athletic footwear. About 90 percent of the space was dedicated to women, and included a smattering of athletic wear, sunglasses and watches. According to the sales associate, about 95 percent of the merchandise was exclusive. The average price point was about $175, excluding Michael Kors Collection merchandise. In September the store will house merchandise from the Michael Kors New York Fashion Week collection.
According to the most recent financials released in early August, Coach is stabilizing and picking up share while Kors is losing share. Kate is still the top dog in an early-growth stage, less profitable but perhaps with more potential. The Kate Spade brand aesthetic has personality, novelty and charm, but at this point, doesn’t seem destined to approach the distribution and penetration of the Ralph Lauren brand. True, it has enjoyed early success in home categories, but is it sustainable and not just the flavor of the week? Furniture seems a stretch and very expensive. On the other hand, the Kate Spade Madison Collection is a step in the right direction with minimalist appeal that could have a broader audience, though the price points here are lofty.
Looking Ahead
Of the three leading U.S. handbag brands, Kors is the most diversified in product and geographic mix. This is normally a good thing, but recent terrorist incidents in Europe and the Brexit vote have adversely impacted luxury sales in the region among local citizens. It also has cut tourism and sales to luxury tourists. In Europe, Kors is seeing department stores adopt some of the deleterious promotional practices of U.S. department stores as they struggle with weak store traffic. Moreover, Kors saw comps drop to the low double digits in its European retail locations. Coach however, enjoyed double-digit sales growth and positive comps in Europe (from a smaller base).
At Coach the promise of positive comps in North America in the final quarter of FY16 that ended June 30th was achieved, according to the Coach management team, noting its acumen in an increasingly difficult (read: promotional and value-focused) sales environment. It’s no surprise that it took a foreigner to recognize the wonder that is an American luxury brand and begin to weave the magic of design and storytelling at the House of Coach. Stuart Vevers has brought renewed rigor and passion to Coach product. His design spans all brand touchpoints and he has captured the imagination of a new modern luxury shopper with whimsical iconography along with impeccable design execution.
Inspired by Americana, Vevers’ has created coveted bags and RTW that leverages Coach’s tradition of tanned leather with added elements of embroidery, patchwork and applique in vogue and reminiscent of the 1970s. Early reads on the elevated Coach 1941 product have been positive, and the proportion of $400 handbag sales grew to 40 percent of the sales mix. By holiday 2016, all Coach retail will offer a range of 1941 handbags.
Those Outlets, Again
No discussion of the U.S. handbag market is complete without a comment on outlets. Sorry brand purists, but this is where the bulk of aspirational product is sold and it is a slippery slope, especially with e-commerce transparency. Kate Spade is increasing promotions to maintain outlet market share; at Coach, a higher average ticket supported the comp acceleration at outlet and full-price. Coach, Kors and Kate have all felt the decline in international visitors to A and A+ outlet centers. Moreover, the heavy discounting in department stores has reduced the potential savings of a trip to an outlet center. As Macy’s rationalizes its store fleet by clipping 100 or more locations from its fleet (and look for more constructive store rationalization strategies in 2017), rebalancing of the retail ecosystem may follow. Meanwhile, outlet channel expansion is slowing and outlet amenities and services are increasing. On the plus side, the expansion of Coach men’s product to all outlet locations in the June quarter was well received, notably backpacks and men’s novelty prints. Men’s products will be a major focus at Coach outlets, with plans for such to exceed 20 percent of outlet sales by the end of fiscal 2017.
While growing sales is no simple feat, products packed with emotional content counterbalance the value-seeking behavior of today’s consumer. Novelty is a winner too. Look for further market share gains driven by modest comp gains at Coach this holiday season as Kors addresses the problems of growing too fast and applies the brakes to the promotional pedal. Product category expansion will allow Kate Spade to engage more consumers, cross promote and reach a bigger pool of handbag shoppers. Let the season begin!