A successful retail brand can usually rely on walking human billboards to increase awareness of its products. Need proof? Take a look at consumers in any major metropolitan region, where pricey logos adorn shoes, handbags and even tech products.
It’s not a perfect yardstick, however: A lot of consumers are sporting bags with the well-known ‘C’ logo of Coach Inc., the nation’s largest luxury handbag maker – but the New York company’s profits have come under pressure and its share price has tumbled by 36 percent over the past twelve months. In the year ended June 28, net income tumbled 25 percent to $781.3 million, or $2.79 a diluted share, from $1.03 billion, or $3.61 a share.
Coach, which sells into the middle tier of the high end of the handbag market, is trying to transition its product line into a “lifestyle brand,” or ready-to-wear products associated with a high-fashion, modern luxury culture. But the retailer has hit turbulence during what the company calls its “transition period.”
There’s a risk that Coach, in trying to change its image, could undo years of work establishing its niche in the fashion accessories category, where it enjoys strong brand loyalty with consumers.
“If Coach extends the brand beyond what consumers understand it to be, the company could damage its core image or create confusion in consumers’ minds,” Morningstar Inc. Analyst Paul Swinand said in a recent research note.
Coach is serious about its rebranding effort. In mid-2013, the company hired Stuart Vevers as executive creative director. Vevers, who had formerly been a top creative executive at an array of luxury fashion houses, was brought in to help Coach address its brand challenges, and add greater fashion relevance to its image.
Coach Inc. unveiled Vever’s Spring 2015 collection at New York Fashion Week in September, where the company showed off trench coats, jackets, dresses, sweaters, shoes and other accessories.
While the company’s new designs “ hold promise,” Morningstar’s Swinand noted, there’s no guarantee that the new products and looks will gain acceptance from the public.
The new strategy is being carried out by a new management team. Early this year, Chairman and Chief Executive Officer Lew Frankfort ceded the CEO post to company president Victor Luis.
CEO Luis remains confident about his plan to reinvigorate “long-term sustainable growth,” but acknowledged it will take time to trickle down to the bottom line, according to a company statement.
He also addressed tackling brand challenges, as part of his broad re-building strategy, by bringing “greater fashion relevance” across three categories: product, stores and marketing.
As part of this new strategy, Coach is trying to get away from the promotional pricing that customers have grown to expect. Coach typically luxury handbags at a $200-$300 price point, but also usually deeply discounts purses at its North American full-price stores twice a year. It also operates a number of factory outlet stores, where it frequently used coupon promotions. Its products were also often on sale in department stores like Macy’s and Dillard’s; Coach also hosted third-party “flash sites,” putting limited quantities of products on sale for a short time.
But Coach Inc. is tossing discounts out, and customers can expect fewer promotions as part of the transition period.
“Basically what they’re trying to do is get away from being so promotional and discounting in wholesales,” said Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis. Yarbrough added that the cutbacks would also reach the company’s outlet stores, reducing promotion from almost three times a week to only one.
“If you’re going to be a luxury brand,” said Yarbrough, “you can’t constantly be on sales.”
By eliminating discounted items on the shelves, Coach Inc. looks to its “re-vamped brand” as a key factor to making consumers pay a higher price point for their products. It hopes that by re-establishing the brand it will succeed at reaching this notion of being a high-fashion luxury accessories and lifestyle retailer. The company also increased marketing campaigns with high-fashion publications. Coach Inc. wants to get back in Wall Street’s good graces not only by getting its current customer base to pay more, but also by grabbing more high-end consumers who don’t mind paying full price.
Coach’s design team is also refurbishing over 300 chain-store locations, replacing old case lines, which are the department stores’ clear-glass cabinets that store the accessories. The company will change the cabinets from closed to open cases, where consumers would be able to touch and feel the product.
Coach Inc.’s global business segment, which represents a third of its business, has also slowed down. Revenue in Japan fell 7 percent and sales in its China sector took a hit since it had to close a few locations during the Hong Kong protests, slowing growth 10 percent last quarter. The company pegged the slowing tourist population in the region as “the biggest impact.” It will close 70 underperforming stores after the 2014 holiday season, which represents below a tenth of its overall reported store locations.
A recent handbag market survey initiated by analyst Amy Noblin at Chicago equity research firm William Blair stated that Coach remains the “most owned brand” by 60 percent of the respondents. It was also the leader in brand recognition, by a 91 percent margin. Other competitors included Ralph Lauren Inc., Vera Bradley Inc., Michael Kors Inc., Kate Spade Inc. and Dooney & Bourke Inc. at a 65 percent brand familiarity rate. Over 2,000 women, up to 55 years with a household income up to $150,000 were surveyed for the report.
Before the holiday shopping season, Coach Inc. will open flagship stores with the “re-vamped” luxury brand concept in mind. Stores set to open are in Shinjuku, Tokyo, New York City and Beverly Hills. By 2015, a total of 60 stores will follow, offering the new products.
Coach Inc.’s turnaround effort, in the end, depends on the company winning over more consumers who can afford its higher ticket price for the sake of brand loyalty.