Photo: Coach
Will selling in fewer stores help Coach sell more handbags?
Coach has a department store problem — more specifically, a department store discounting problem. That’s the major reason the luxury handbag and accessories company has given for cutting by 25 percent the number of department store locations where its products are sold.
“While we understand that consumers may use department stores for trial and shopping across brands, the high level of promotional impressions created negatively impact our long-term brand health, while generating confusion across channels,” Coach CEO Victor Luis told analysts (via SeekingAlpha) on the company’s fourth quarter earnings call.
Mr. Luis said Coach would cut the total store count where its products would be sold by more than 250. He also said Coach would reduce its markdown allowances “given the high level of promotions” in the department store channel. The brand’s products are sold in Belk, Bloomingdale’s, Dillards, Lord & Taylor, Nordstrom, Macy’s and other department stores.
Coach has been engaged in a brand resuscitation effort under Mr. Luis. The company posted its first quarterly same-store sales gain in three years in North America during the last quarter.
A number of reports have pointed out that Coach is not the only luxury brand where management has concluded that a less-is-more approach is the way to go.
“We will be actively decreasing our exposure to the wholesale channel (products sold to retailers) by reducing inventory levels to focus on a higher level of full price sell-throughs and a lower level of markdowns,” said Michael Kors CEO John Idol on his company’s fourth quarter earnings call in June (via SeekingAlpha). “While this strategy is expected to result in a meaningful decrease in wholesale net sales in fiscal 2017, we believe that it is the right strategy for the overall health of our business long-term as we protect our margins and brand equity.”
- Coach’s CEO Victor Luis on Q4 2016 Results (Earnings Call Transcript) – SeekingAlpha
- Michael Kors Holdings’ (KORS) CEO John Idol on Q4 2016 Results (Earnings Call Transcript) – SeekingAlpha
- Coach CEO to Department Stores: We Are Taking Back Our Brand – TheStreet
- Coach pulls back inventory in department stores due to deep discounting – MarketWatch
Discussion Questions
DISCUSSION QUESTIONS: Will reducing availability help Coach and Michael Kors protect their luxury brand images with consumers? Will this strategy lead to increases in full-price sales for these and other luxury brands?
Poll
BrainTrust
Ori Marom
Founder and CEO, Segmentis
Adrian Weidmann
Managing Director, StoreStream Metrics, LLC
Scarcity can create demand (as long as the product is worth the demand). Getting Coach products away from retailers who discount will help get them back to their “exclusive” reputation.
The more pronounced problem here is with Michael Kors, since millions of women are walking around with Michael Kors bags that they purchased at T.J. Maxx. To imbue a brand with the aura of luxury, a company must have exclusivity. Both Coach and Michael Kors are making a good move to reduce the number of outlets selling their products, but results won’t be immediate.
Brands like Coach and Kors couldn’t grow fast enough, partly by over-distribution to department stores and partly by over-expansion of their own stores. Investors were happy while the category was hot, but the brands have been compromised at the same time that the demand for designer handbags is cooling off.
A strategy of deliberate scarcity makes sense in the short run (despite the volume hit), in order to rein in discounting and drive better sell-throughs. But the underlying issue remains: How to reignite consumers’ interest in near-luxury handbags when they aren’t all that interested in visiting department stores at all.
The price pressures on luxury products is not an outcome of selling at specific department stores but of selling such products online. The cost of not selling online, on the other hand, has become prohibitive even for high luxury brands. This situation is quite new for most of them.
I believe that Coach and Michael Kors cannot improve their margins simply by withdrawing from popular department stores. Rather they need an entirely new supply model for contracting with their physical retailers. We can think of innovative supply models that can provide better support for prices and margins than the obsolete ones currently used.
The move to selling to department stores was a good one for both Coach and Michael Kors. Now it appears to be biting them in the butts as the brand image is losing its prestige. Too many of anything, except seeing many of the same brand of cars on the road, can reduce their image. Pulling back might be a little too late, but it is the right thing to do. One person’s opinion.
While the answer is yes, the bigger problem is younger shoppers not willing to buy at full price. I expect Coach and others to beef up their own outlet channels to sell to the Millennial cost-conscious consumer. The discounts will continue, just more tightly controlled.
Thanks Bob, as you said what I was going to write. Simply put, outside of elitist celebrities, and ultra rich folks at a party in the Hamptons, these high-end purse companies are struggling for growth and profits that they were once used to. Not any more, as the newer generation of online, showrooming, app-loving, maniacal discount shoppers want DEALS, in everything they purchase. Coach can not escape or change how people shop today, and the consumers are not going to give up the discount search for high-end goods anytime soon, so happy hunting everyone, for that next big thing you can buy at a great deal.
Even with fancy math, you are facing serious headwinds attempting to sell more handbags and simultaneously increasing the brand’s luxury quotient by cutting the number of doors you sell through and reducing markdown allowances.
What you will clearly do is improve the brand’s exclusivity which protects margins and emphasizes what the brand stands for. It rewards those that have purchased the brand while it protects the future value and cache of these “investments” by well-heeled consumers. However, to think that such a move will also increase unit sales is a far less likely proposition — at least in the short- to medium-term.
Wow, how can any brand ignore the power of the Internet? Creating unique SKUs for each channel and then controlling their availability is the correct solution here. If Coach wants to increase its premium, then it should have their highest value products only available from select stores. If Coach wants to control its pricing then it simply controls how much of each product is made for each channel, and enforces availability to their best customers. Cutting stores is not a smart solution. One listing on Amazon will negate everything. When Coach is prepared to tell Amazon “No,” then they will have better control. Thinking that cutting stores will increase sales is old school, ignorant thinking.
Chiming in with others here, the answer is yes! The problem I see is, Coach has not really changed the formula much over the years. In other words, their products always seem to look mostly the same, to me anyway.
To be recognized and sought after, I would suggest they step up their designs to be just a bit more avant garde or fashion forward.
But that’s just my 2 cents.
There is always a balance of reach and focus. In this case, department stores provided the reach but diluted the value of brand given the discounts bins. Combined with studies showing Millennials are not as attracted to brand bags as their predecessors, Coach is smart to pull back on distribution to focus on brand identity and promise.
The goal, of course, isn’t reduced sales or increased prices per se, but rather greater profits. Since this is P x V (minus costs) it’s clearly a balancing act. And while I wish them well, I fear the ship has already sailed: once a brand ceases to be considered “luxury,” it’s hard to go back … you can’t simply undo the processes that lead to that condition.
What a customer pays for an item is what it’s worth. Now Coach and MK want to protect their image by making it harder to get and raise the price. Here’s a thought, make a statement with your product by setting higher standards for your company and design a high quality product that justifies the increased retail price and the status of owning one has. The customer should be able to pick up the bag and recognize the attention to detail, experience how luxurious the bag feels and how well it’s made. Take a look at Apple; they’re able to maintain a higher price point, sell through multiple types of retailers and still maintain their luxury status.
What a customer pays for an item is what it’s worth. Now Coach and MK want to protect their image by making it harder to get and raise the price. Here’s a thought, make a statement with your product by setting higher standards for your company and design a high quality product that justifies the increased retail price and the status of owning one has. The customer should be able to pick up the bag and recognize the attention to detail, experience how luxurious the bag feels and how well it’s made. Take a look at Apple; they’re able to maintain a higher price through multiple types of retailers and still maintains their luxury status.
I heard the following on CNBC this morning regarding the Coach earnings report: “If you’re a woman between 18 and 45, a new report says you own an average of 13 bags from seven different brands.”
I Googled for a source and found this.
I don’t have a handbag opinion other than this thought: Innovation is the new black (think black = solvency).