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What’s the first thing you think of when you hear the word “luxurious”? I think of the sort of rap video you’d see on MTV Jamz in 1999 with free-flowing champagne, a Rolls Royce, and a woman with a diamond-encrusted bikini; a platinum toilet surrounded by Jonathan Adler candles in a bathroom in the bar that sells $100 martinis made with peacock tears in order to use it.
What about the word accessible? I immediately think of using the bathroom at Starbucks without paying for a beverage and then suddenly finding both lipstick and a tampon in my bra. Convenient, but not exactly luxurious.
These words, then, do not go together, which means accessible luxury is a paradox. But with price points that aren’t dirt cheap but also aren’t sky-high, coupled with a desire for sales growth (which means people have to buy the product; it can’t exist in a fancy, gold-plated vacuum), brands like Michael Kors, Coach, and Kate Spade must somehow toe the line of being both, which inevitably means walking on a tightrope. And in the currently volatile retail environment, an already-difficult task becomes even harder.
As Gabriella Santaniello, an analyst and founder of the retail consulting company A Line Partners, explains, luxury implies that a product is scarce, and therefore inaccessible, so “if you become too accessible, like Kors [now] or Coach years ago,” you’re bound to lose customers. “That’s just a difficult position to be in.”
On the heels of news of Michael Kors shuttering stores and Coach’s acquisition of Kate Spade, this raises some questions: What does it mean for this sector as a whole? Is it forever doomed? Currently in trouble? Dying? Or does being a mid-priced luxury retailer in this day and age just come with the mandate of adapting rapidly, and holding your breath while your sales dip?
Michael Kors is a prime example of an accessible luxury brand that seems — at least on the surface — troubled, and whose woes highlight the difficulty of trying to expand and grow sales while retaining a luxurious image. In its most recent quarter, total revenue decreased by 11.2 percent, with total revenue in the Americas, specifically, dropping by 18 percent. Sure, retail sales were up 0.5 percent, but that, the brand conceded in a press release, was because it had opened 159 stores since the fourth quarter of fiscal 2016. And all that might be for naught, because notably, it announced it would be shuttering 100 to 125 stores in the next two years. CEO John D. Idol admitted on the company’s fourth quarter earnings conference call that the brand’s digital sales were stronger, in part as shoppers began moving to shop online.
The rapid ascension of digital, though, proves troubling for a brand that knows that it needs to count on its physical stores to relay its image to shoppers. As Idol said on the conference call, stores, not online, are ultimately where consumers’ powerful purchasing decisions are made. “Stores will continue to serve as the destination for consumers looking for [the] experience of the Michael Kors brand firsthand, make luxury fashion purchases, as well as to showcase our innovative designs and engage consumers through service and clienteling,” he said.
He also conceded that the “company needs to take steps to accelerate the level of luxury fashion innovation and our accessories assortment, and further enhance our store experience in order to better engage and excite consumers.”
The good news is that the company isn’t sitting idly by as this happens; it revealed a long-haul plan on its earnings call called Runway 2020, which includes the aforementioned store closures, revamping roughly 100 of its stores, and scaling back on sales, which the brand has already begun to do. In other words, by reducing its footprint, it could potentially salvage its level of luxury — the very thing it undid with overexpansion.
“My feeling on Michael Kors was that it had way over-expanded,” Paula Rosenblum, an analyst at RSR Research, says. “To a rather absurd point, really. In fact, when I think about the category on the whole, I do worry about the commoditization of luxury, and that goes beyond accessible luxury to luxury/luxury. I somehow feel like luxury also implies scarcity, and it’s hard to see companies with so many doors as ‘scarce.’”
In fact, Rosenblum thinks that department stores aren’t even at fault here — it’s just the sheer number of places to get these sorts of goods is problematic. “I think Macy’s etc. are not really the cause of [Kors’s] problems,” she says. “[It’s] just another symptom of too many places to buy the product.”
Overexpansion is something that not just Michael Kors has been guilty of — it’s a problem that runs rampant in this category.
“This is a perennial problem with the accessible luxury sector as it is easy to become slightly too mass-market in a bid to chase sales,” Neil Saunders, managing director of GlobalData retail, explains. “Michael Kors and Coach were both guilty of this, although both are now rebuilding their brand equity — Coach is more advanced in this task.”
Not only does overexpansion make a brand more accessible (and thereby less luxurious), but it also makes it harder to sell the products at such high prices, another surefire way to decrease luxury… and to hurt a business’s bottom line. “At some point, that starts to exert downward pricing pressures, and that may not fit into the company’s rent/lease structures, and suddenly there’s a problem,” Rosenblum explains. That’s even harder when there’s already pressure to put items on sale: Idol conceded on an earnings call that a “highly promotional environment” remained a challenge for the brand.
One brand in this category that has been explicitly wary of expansion, though, is Tory Burch, which remains a private, not public, company, meaning it’s not subject to the same demands as a public brand. In fact, at a retail conference I attended back in fall 2015, Burch herself confirmed her plans to stay private and not “grow just for growth’s sake.”
But also potentially troubling for this category is the off-price and outlet business, and a key component of maintaining luxury is to be able to sell products at full price. A 2016 report from the NPD Group revealed that out of two-thirds of all consumers, off-price apparel shoppers account for 75 percent of all apparel retail. (What kind of consumer doesn’t love T.J. Maxx, or to that end, a good sale?) But no matter how much you love a good sale, a retailer can only use them so much — and as Idol said, “our primary focus as a company is to sell full-price merchandise and present Michael Kors in the best and most appropriate exciting environment for our consumer.” Again: full-price merchandise.
That proves to be a difficult task when younger consumers aren’t jumping to fork over lots of money for a handbag, which tends to be an easy entry point for this category. A 2016 NPD study in partnership with fashion technology company Stylitics compared the way millennials feel about buying a bag to buying a car, explaining how they do ample research before making a purchase. The report noted that the brand of the bag didn’t matter to these consumers as much as the actual attributes of the bag.
Which leads to another issue facing these brands: In order to get people to pay full price (and, in turn, to grow sales), they have to sell something that’s really good and innovative, and not just count on the sheer magnitude of the brand. But even though it’s exacerbated in this category, that’s a lesson that’s true for anybody in retail: don’t rely on overexpansion to pull in sales; you need to convince people to buy the product. “This can apply to anyone, the Gap or Lululemon — you can’t have too many stores, and you have to work on your product,” says Santaniello. “It has to be compelling product. You can’t just get the growth from adding square footage. It’s about improving the product so the customer will pay for it.”
And, in Michael Kors’s case, “they lack innovation. I think they have a lot of work to do on their product,” says Santaniello. Coach, on the other hand, she says, has done a solid job on zeroing in on its heritage roots and elevating its product.
But that’s come with aggressive work. Coach revamped its stores, cut back on promotions and sales, pulled out of some department stores, and scaled back its wholesale business — all to control its image and price point, and thereby reclaim its more luxurious status, a feat that’s come with a bit of a price — a 4 percent decrease in net sales on a reported basis in its most recent quarter.
“Coach has worked hard over the past few years to reposition [itself with a] higher price point and higher quality,” Santaniello says.
Which, despite that visible hiccup, is why it could be a good thing that Coach swept up Kate Spade in a cool $2.4 billion deal following a rough first quarter for Kate Spade. (Bloomberg reported it was the company’s first same-store sales decline since 2009.) Coach appears to recognize the track to retain a brand’s luxury.
“Coach will bring its experience of reinvigorating its own brand to some aspects of Kate Spade’s operation which, over recent quarters, have become too reliant on discounting and promotions,” Saunders said. “There will be reasonable scope for synergistic savings which, in addition to the sales benefits, will help Coach to generate a good return on investment.”
And, interestingly enough, Runway 2020 sounds a hell of a lot like Coach’s recent plan.
Closing stores, excising promotions, and pulling out of department stores aren’t evident of brands being on the precipice of disaster — it’s their way of taking back the luxury.
“As a result of paring back in department stores, a lot of brands are taking more control via their own stores,” Saunders says. “This is becoming a more important channel and also a more important way of controlling the sales and marketing message.”
What seems apparent, then, is that all these brands are just navigating the continuum of accessibility and luxury, or figuring out how to grow sales without sacrificing the company’s image, amid other headwinds already facing retail. As Saunders says, “the situation is fluid.” And fluidity doesn’t mean the end is nigh — it just means things aren’t permanently perfect. But is anything?