COACH and Kate Spade have long been the affordable luxury brands of choice for the aspirational shopper. From Coach’s embossed logo and leather handbags to Kate Spade’s kitschy, colorful accessories, their products lured buyers who wanted a taste of fashion without the sharpest edges—or the highest cost. But in recent years, those customers have gravitated to brands at more extreme ends of the style spectrum, toggling between e-commerce giants, like Amazon, fast-fashion brands like H&M and Zara, and luxury houses like Gucci.
Now, Coach has decided that its best path to growth is spending $2.4 billion for Kate Spade, hoping that expanding its portfolio of brands will help carve new territory in the crowded market. Its acquisition of Kate Spade, announced on Monday, confirms months of speculation on Wall Street, and 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 Moet Hennessy Louis Vuitton and Kering, with two major differences: an identifiably American aesthetic and price.
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 menswear, ready-to-wear fashion, accessories, fragrances and homeware.
“THE acquisition of Kate Spade is an important step in Coach’s evolution as a customer-focused, multibrand organization,” Victor Luis, chief executive of Coach, said in a statement on Monday.
“We believe Coach’s extensive experience in opening and operating specialty retail stores globally, and brand building in international markets, can unlock Kate Spade’s largely untapped global growth potential,” he added.
Coach, which offered $18.50 a share in cash for Kate Spade, a premium of 9 percent on the closing price on Friday, said it expected to generate about $50 million in savings from the deal within three years.
The company grew out of a wallet manufacturer in 1961 to produce handbags used by all manner of women, from full-time mothers to professional women. But it has fallen on harder times in recent years, struggling against heightened competition, its own discounting of products and a bloated store network.
Those difficulties mirror the challenges facing the retail sector in North America and beyond. While outlet stores have become more popular in recent years—Coach operates several hundred—department stores cannot attract the crowds they once did, and traffic to malls has slowed as people hunt for bargains online.
With its ubiquitous presence in shopping malls and department stores across the country, Coach has not been spared.
THIS month the company, which pioneered the sale of luxury handbags at relatively affordable prices, announced that department-store revenue had fallen 40 percent in the most recent quarter, a sign of how heavy discounts, falling foot traffic and other troubles have seeped into the brand.
“Coach stuff was just so ubiquitous, and the brand had become a bit devalued, and no one wanted to pay full price for it,” said Neil Saunders, a retail analyst with GlobalData Retail, a research firm. The constant discounting had diluted the brand’s luxury appeal, and the company, under the direction of Luis, looked for ways to cut back on the discounts—including closing a significant number of its locations within department stores, known as “shop-in-shops”.
“If you want to be a premium brand, you can’t really be too strongly associated with some of the mainstream department stores like Macy’s,” Saunders said.
Kate Spade has also relied on heavy promotions. But the company has been busy remaking itself into a lifestyle brand, one that could benefit from Coach’s broad distribution channels. As of July, Coach operated 228 retail locations and 204 outlets, along with 552 Coach-operated shop-in-shops, according to the company’s most recent annual report.
THE Kate Spade acquisition is the latest step in an ambitious turnaround plan that Luis has been leading.
In 2014 he hired a new creative director, Stuart Vevers, who transformed the brand into a celebration of cool—a Route 66-inspired strain of Americana intended to appeal to millennials. (A coming handbag collaboration with the pop star and actress Selena Gomez also will not hurt.)
Luis also closed or renovated underperforming stores, reexamined Coach’s pricing strategy and began a crusade to persuade customers to once again pay full price for its wares. But crucial to his strategy was the ambition to build a multibrand luxury conglomerate.
Coach bought the American footwear brand Stuart Weitzman in 2015. Analysts have speculated about whether Coach would buy Burberry, Britain’s biggest luxury brand by sales. And just this month, Coach was tipped as the favorite to buy Jimmy Choo, the British accessories label, when it was put up for sale just three years after being listed on the London stock market.
Image credits: Alex Wroblewski /The New York Times