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Coach’s New Universe: Set to Launch Beauty With Estee Lauder Cos.

Coach has inked a deal with Estee Lauder's BeautyBank unit for the two firms to jointly develop a fragrance and lifestyle brand.

NEW YORK — Coach has a brand new bag — a deal with the Estée Lauder Cos. to enter the beauty business.

The American leather goods firm has inked a deal with Lauder’s BeautyBank division, which will involve the two companies jointly developing a fragrance and other beauty products. The first — a women’s fragrance — is due to launch exclusively in Coach stores and on its Web site in the spring.

The agreement marries two classic American companies and also takes Lauder’s BeautyBank division into more upscale waters. BeautyBank, founded as a “brand incubator” in the words of president and chief executive officer of the Estée Lauder Cos. William Lauder in October 2003, currently sells four lines — American Beauty, Flirt, Good Skin and Daisy Fuentes Beauty — exclusively at Kohl’s Department Stores.

Coach, founded in 1941, continues to enjoy rapid growth as the hottest American leather goods house of the last decade. In August, the company reported that, for the year, net income jumped 37.8 percent to $494.3 million, or $1.27 a diluted share, from $358.6 million, or 92 cents, in the prior year. Sales gained 23.4 percent to $2.11 billion from $1.71 billion. By yearend, the company is expected to reach $2.5 billion in sales, and Coach will open at least 30 new retail stores this year in North America, according to a spokeswoman.

Fragrance is seen as a way to “add another layer of mystique to the brand,” said Lew Frankfort, Coach’s chairman and ceo, in an interview at Coach’s worldwide offices here. “Also, in the numerous market surveys we’ve done over the last several years, fragrance is the most-requested addition to the Coach brand. We see fragrance as an anchor; it speaks to women of all generations.”

Frankfort and Reed Krakoff, president and executive creative director, are widely credited with engineering an about-face of Coach’s image in the Nineties, changing its public perception as a conservative leather goods firm to a more fashion-forward, desirable brand. Krakoff, who joined Coach in 1996, heads design, while Frankfort, who began his career at Coach in 1979 and oversaw its transition to a public company in October 2000, has long guided its financial side. Over the past several years, Frankfort and Krakoff have expanded Coach’s reach into a host of product categories — including eyewear, watches and jewelry — and introduced higher price points, soaring to $5,450 for an alligator satchel and putting handbag competitors such as LVMH Moët Hennessy Louis Vuitton and Prada squarely in its sights. A 10,000-square-foot flagship opened at 595 Madison Avenue here last fall, making the location Coach’s largest anywhere in the world.

And Coach will leverage the power of those numbers squarely behind this fragrance: Marketing to the company’s database of more than 10 million customers is planned, among other efforts. “In the next year, 45 million consumers will visit our stores,” said Frankfort. “Also in the next year, we will get more than 50 million unique Internet users to our Web site. Our very best consumers visit our stores every three to four weeks. We have a strong relationship with our consumers.” In fact, according to Frankfort, the average Coach consumer owns eight of the company’s handbags.

So why didn’t Coach enter the fragrance category years ago?

“We’ve actually considered doing a fragrance for close to 10 years, but we needed to make a connection between our core — handbags — and then move out to related categories such as scarves, watches, jewelry and shoes,” said Krakoff. “We want the fragrance to be another layer, which will add femininity to the brand. It took a while to build that bridge. Also, we wanted to do the fragrance with the right partner — one of our strengths is we know what we don’t know.”

Jane Hudis, president of BeautyBank, shakes off any implications that Coach should have gotten into the game earlier, when the brand was first starting to sizzle. “Coach is one of the hottest global brands today,” she said. “They have built an incredibly loyal consumer base who repeatedly asks for fragrance. We think the timing is perfect.”

Lauder agreed. “Strategically, an alliance between the Estée Lauder Cos. and Coach makes perfect sense,” said Lauder. “We both have great connections to our consumers, and we both have high expectations for this partnership.” Lauder demurred when asked for a dollar figure, but he has said publicly in the past that Lauder wouldn’t take on new projects unless they had the potential to do $100 million or more a year. To do these types of numbers, however, it’s likely that the fragrance would need to move into broader distribution, such as Coach’s department store distribution, and that additional beauty items would need to be added.

Certainly, Lauder has learned lessons from the company’s short-lived association with handbag designer Kate Spade. After signing a deal in 1999, the two released a fragrance and ancillary products in 2002. Lauder quietly returned the license to Spade last year. But Lauder feels that the comparison is somewhat of an apples-and-oranges argument. “It is an entirely different scenario,” he maintained. “Coach has its own distribution network of more than 200 freestanding U.S. stores.” Spade’s distribution, then and now, is more heavily weighted in the specialty and department store market, rather than company-owned freestanding stores.

Clearly, however, Frankfort is confident that Coach’s prospects are bright for the foreseeable future, pointing out on Monday that Coach has a 25 percent market share of the U.S. leather goods market, with its nearest competitor not even half that. At launch — a firm date has not yet been set, although executives said it would likely be out in March or April — the fragrance will be available in Coach’s 220 retail stores in the U.S., as well as coach.com. “We have a loyal consumer who will buy the fragrance, but we also believe that the fragrance will bring in customers who are not already buying Coach,” said Krakoff.

While Coach is in about 900 U.S. department and specialty stores, just 12 percent of the company’s worldwide sales are done by U.S. department stores. “They are very important to us,” said Frankfort, “but we felt it made the most sense to go into our own stores, at least at first — it gives us more control over marketing and presentation.” Coach operates in 18 countries outside the U.S., with Asia — especially Japan — very lucrative markets for the company, said Frankfort, adding that Coach will “pilot” — do a soft launch of the fragrance in selected Asian doors — to get a market read before formally launching in Asia.

Hudis isn’t ruling out other Coach beauty opportunities, either. “No categories are off limits under the terms of this deal,” she said, implying that other beauty launches are in the offing.

“We have imaginative people who are instructed to push the envelope,” said Lauder, adding that additional non-Kohl’s-related projects are also in development. “We see BeautyBank as a growth engine for alternative [retailing] opportunities.”