NEW YORK — How long can it last? And how do they do it?
Mention Coach to a fashion insider and those are invariably the questions that pop out. In the rush by American designers to develop huge accessories businesses, Coach is the lone star that is able to compete with the likes of Gucci, Prada and Louis Vuitton.
This story first appeared in the March 1, 2004 issue of WWD. Subscribe Today.
And analysts agree that Coach will continue to soar with no foreseeable halt to the momentum in sight.
But while Coach expands slowly on a global scale — from Tokyo to Topeka — it is both adopting some of the same strategies as European leather goods houses and diverging from them. Coach is increasingly focusing its efforts on its own stores to control its image and destiny, in common with its European competitors. But, unlike Gucci or Vuitton, it has no immediate plans to expand into ready-to-wear.
The formula clearly works for Lew Frankfort and Reed Krakoff, Coach’s chairman and chief executive officer and president and executive creative director, respectively. These days, the duo has every reason to sit back, relax and reap the benefits of their successful collaboration at Coach. There’s just one catch: the pair is far too passionate about the leather goods house and so they work nonstop on new business and product development ideas to continue fueling Coach’s roaring engine.
Frankfort and Krakoff have done with Coach what many other American accessories firms aspire to but few achieved: they oversaw a successful IPO in October 2000, managed quarterly double-digit gains since, broke the $1 billion barrier at seemingly supersonic speed and created a retail network that now counts more than 165 retail stores and 77 factory outlets in the U.S. Along the way, the pair created a brand that reaches across age and ethnic demographics and that is accessibly priced, but is viewed as a luxury good in the consumer’s mind.
And no lack of consumer confidence, retail slump or terrorist scare seems to be able to slow down the Coach momentum. Just last Monday, the company said it expects higher-than-anticipated earnings per share for the second half. For 2004, Coach expects sales and diluted EPS to be nearly $1.3 billion and $1.24, respectively, versus last year’s $1.27 billion in sales and EPS of $1.21.
Company executives are banking on another sellout fall collection, which will be presented later this month. Krakoff, who oversees every creative aspect of the company and is credited for much of the success the brand has experienced in the past few years, has designed a collection of bags, small leather goods and outerwear in jewel tones such as lilac, pink, fuchsia, emerald and red; fabrics such as vintage distressed and pebbled leathers, nubuck and tweed, and details like antiqued brass buckles, grommets and lacing.
All this begs the question: what are they doing right?
Sitting in Frankfort’s office high above West 34th Street, Frankfort and Krakoff said there’s no such thing as a secret recipe, just several high-quality ingredients and a little chef know-how.
“Reed and I often say that it’s a combination of logic and magic,” said Frankfort. “It’s a blend of understanding the consumer, being results-driven and at the same time anticipating when fashion is happening.”
Krakoff noted, “It’s a right brain-to-left brain approach. The model for Coach grows out of the relation between Lew and I…the relationship of creating, and a more strategic thinking that goes across any area.”
It quickly becomes obvious that the two executives have a strong rapport that goes beyond leather-goods parlay, though they couldn’t be more different. Frankfort is a knitted-vest kind of professorial type one could easily imagine crunching numbers with, while Krakoff is a little artsier, wearing a simple button-down shirt with worn jeans and loafers, as if he freshly stepped out of a painting studio.
Together, they have assembled a team to run Coach, including Keith Monda, president and chief operating officer, who joined Coach in 2000 from Timberland Co.; Michael Tucci, president, retail division in North America, who joined last year from Gap Inc. and replaced David DeMattei, and Kathy Nedorostek, president of U.S. wholesale, who joined last year from Natori Co., replacing Mary Wang.
Frankfort began his career at Coach in 1979 and recruited Krakoff from Tommy Hilfiger seven years ago in an effort to revive the successful-yet-staid brand. Coach, which was founded in 1941 as a family-run workshop in a Manhattan loft, was facing external pressure. In the early Nineties, Gucci was reinventing itself successfully and Prada was entering the U.S. market aggressively. On the lower end, accessories marketers were starting to copy these European designs, which made Coach executives sit up and notice.
“In those days, it was a very narrow concept,” said Krakoff. “It was a brand with a lot of potential, but in a very early stage.”
These days, Coach produces handbags, business cases, luggage and travel accessories, wallets, outerwear, gloves, scarves and fine jewelry. It also offers watches, footwear, home and office furniture and even limited-edition Vespas, which Krakoff designed for the launch of its sunglass collection with Marchon Eyewear this year.
“A brand can’t turn around with one thing,” said Krakoff. “We have added eyewear, shoes, scarves, kids’ accessories. Each has allowed us to evolve and change, which keeps it fresh. You really need to deliver a consistent message, from product to public relations to consumer relations and the Internet.”
Industry observers ascribe the company’s success to its product and business structure. “Coach is very well managed, and the product offering is strong,” Paula Kalandiak, analyst at Wells Fargo Securities LLC, said. “The price point is accessible to a broad range of customers, the styling continues to improve and evolve and there are new product offerings on a regular basis. It’s a very fragmented market, and within its price category, Coach has probably the best name recognition.”
Margaret Mager, specialty retail analyst at Goldman Sachs, concurred. “They have good brand equity with a brand that resonates with the consumer,” she said. “The consumer aspires to Coach, whereas another brand in that price range would not be as aspirational. You get the styling of a luxury brand at less than half the price.”
Analysts at SG Cowen wrote in a research note last Monday that the raised forecasts “highlight the competitive advantages of Coach’s business model, which continue to underpin our view of the company as a core holding in the consumer space.” That business model includes “accessible luxury positioning, extensive use of merchandise pretesting programs and short lead times.”
Coach spends more than $2 million on market research a year, and it has a database for communication and research to obtain knowledge about how the consumer thinks about Coach and how she goes about making her buying decision.
“We are a very consumer-centric business, and we try to understand the focus of our consumer,” said Frankfort.
Kalandiak at Wells Fargo explained that consumer research is how Coach sets itself apart from much of the competition.
“They put a lot of consumer testing into their product, which is not very common in the fashion business,” she said. “From a very early point in the design process, they are getting input from their customers as to how they like a new style, and they compare the new style to an existing handbag that’s already available. If they know the sell-through rate on a bag that’s been in the store for a few months, and the customers like the new bag even better than the existing bag, they can gauge the success of the new style.”
Beyond consumer research, Coach in recent years has also expanded its manufacturing base to make its supply chain more flexible and shorten lead times from product conception to delivery on the retail floor.
“We used to be a manufacturer making all our products ourselves. Today we are a marketer making product in 16 countries, so we have a much more flexible supply chain,” said Frankfort. This represents the opposite of the strategies adopted by Gucci, Louis Vuitton, Prada and Hermès, all of which prefer to own their own factories to produce their leather goods.
The lion’s share of Coach’s success comes from the growing network of stand-alone stores in the U.S. and Japan. Over the past five years, the company exited a number of underperforming locations in department stores in order to concentrate on performing locations, including larger departments in stores that turn more product.
In Coach’s last fiscal year, which ended last June, 59 percent of business was direct-to-consumer, including U.S. retail stores, factory outlets and other direct sales, such as Internet and catalogue sales. The remaining 41 percent was due to indirect sales acquired from Japan (18 percent of total sales); other international business, primarily throughout Asia and duty-free outlets (6 percent); U.S. department stores (11 percent), and other indirect sales, including corporate gifting and licensing revenues (6 percent). According to a company spokeswoman, the two fastest-growing channels are U.S. retail stores and Coach Japan. (In 2001, Coach formed a joint venture with trading company Sumitomo Corp. and created Coach Japan Inc. to aggressively expand Coach in the Japanese market.)
At the end of its last quarter in December, there were 165 Coach retail stores and 77 factory stores in the U.S., 99 units in Japan and 123 international locations that were run by wholesale distributors, excluding Japan. Over the next few years, the company expects to annually open 20 retail stores and two to four factory stores in the U.S. In Japan, the plan is to open approximately 10 new locations a year.
“They basically follow a luxury model,” said Mager at Goldman Sachs. “The best luxury brands control their distribution, and that’s been a high priority for Coach and a driver of their company for the past 10 years. They’re not really expanding their department store doors, because they can’t control the selling environment. Their key strategy is to build their own retail stores, where they can control everything from how the product is placed to how the salesperson interacts with the customer.”
Frankfort said, “We believe our stores shape the image of Coach. They set a standard, and we try and replicate that in our department stores and better specialty stores.”
As for any ambitions in rtw, Frankfort said: “It would be off strategy to dilute our strength. Part of our success is our single communication, that we are focused on being a business that is understandable to our consumers.”
But where can Coach go from here?
“We talk a lot about growing existing product categories,” said Krakoff. “For example, we are working on a new collection of more tailored [looks] and more evening bags. We have seen encouraging results.”