Commentary

Coach Bids For 20-Somethings With $2.4 Billion Kate Spade Buy

As part of its ongoing strategy to stay relevant to a new class of consumers, Coach is paying $2.4 billion in cash for Kate Spade — a brand favored by Millennials that it had reportedly been pursuing for months. 

The acquisition is “the latest in a series of purchases by the company, which aims to build a luxury group in the vein of European groups like LVMH Moët Hennessy Louis Vuitton and Kering, with two major differences: an identifiably American aesthetic and price,” observe Elizabeth Paton, Vanessa Friedman and Rachel Abrams for the New York Times.

“Sales of handbags are lagging as women have traded down to smaller, less expensive purses and aggressive discounting both in stores and online has pressured profits. The proposed merger would combine two big U.S. players, creating a company with $5.9 billion in annual sales and 1,300 retail stores and outlets around the world,” report Suzanne Kapner and Joshua Jamerson for the Wall Street Journal.

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With Kate Spade “known for its whimsical designs and colorful patterns,” the Washington Post’s Abha Bhattarai writes that “the deal would bring together two New York-based brands that have competed in recent years to win over younger customers and build a global presence.”

“‘I think Coach is buying a customers' list … that helps penetrate a larger audience,’ Nomura Instinet analyst Simeon Siegel told CNBC's ‘Power Lunch’ in an interview Monday. ‘[It's] buying a status,’” writesCNBC’s Lauren Thomas. “Instead of focusing on one brand, Coach is creating a ‘house of modern luxury brands,’ which will be operated entirely independent of each other, Siegel said.”

Indeed, “The acquisition of Kate Spade is an important step in Coach’s evolution as a customer-focused, multibrand organization,” CEO Victor Luis says in the release announcing the deal. 

“Coach’s handbags sell for $285 to $3,000, while Kate Spade’s retail for $100 to $500. (Louis Vuitton’s are priced from $970 to $15,800.) The two companies also offer a combination of men’s wear, ready-to-wear fashion, accessories, fragrances and homeware,” the NYT reports. 

“The handbag market has slowed to about 2% annual growth from as much as 15% growth six years ago, Customer Growth Partners analyst Craig Johnson tells the WSJ’s Kapner and Jamerson. “Coach has responded by targeting a slightly older and wealthier client with higher-priced bags, creating a gap for younger 20-something shoppers that it can fill with Kate Spade, Mr. Johnson said.”

CEO Luis is crafting an empire out of filling gaps.

“Coach executives have spent three years trying to persuade customers to think beyond its ubiquitous logo bags and outlet stores. To that end, Coach introduced its 1941 luxury label, acquired shoemaker Stuart Weitzman, added more stores abroad and stopped offering as many discounts. The changes seem to be working: After years of stalled growth, profits and sales are up,” the WaPo’s Bhattarai points out. “Now executives say they would like to make similar changes at Kate Spade — where 60% of sales come from Millennials — to turn it into a larger, more global brand.”

“Kate Spade executives said they see big opportunities to tap into the Coach brand's expert supply network in leather goods as well as Stuart Weitzman's established supply network in footwear to cut back on costs. Coach also plans to expand Kate Spade's distribution in Asia and Europe, taking advantage of its strong overseas network,” write the AP’s Anne D'Innocenzio and Michelle Chapman.

“Coach said it will borrow some of the strategies it used for its own brand and will scale back on Kate Spade's wholesale accounts and its flash sales business that hurt the image of the brand. But Coach executives said the Kate Spade brand is still healthy,” they continue.

“The company's argument for making purchases is that its global reach and strong management — widely recognized by the industry and Wall Street analysts alike — would optimize the performance of smaller brands while complementing Coach's offerings,” writes Phil Wahba for Fortune. “The idea is also to shield Coach Inc. from the ups and downs of its namesake brand, which only two years ago saw comparable sales fall more than 20% in North America. Long the U.S. handbag leader, Coach lost its top spot to Michael Kors a few years ago.”

Coach last month named Joshua Schulman brand president and CEO of the Coach brand, reporting to Luis. Schulman, who has been president of Bergdorf Goodman and Neiman Marcus Group International, begins his new position on June 5, Vicki Young reports for WWD.

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