For Coach Inc., China may be the promised land for future expansion opportunities, but the company will forever be ensconced as an iconic New York fashion brand, regardless of the markets it enters.
What keeps Coach ahead of the competition and the darling of Wall Street are its laser focus on the core assortment targeting the North American consumer; the brand’s value proposition, and a business operation keyed to a long-term view.
Coach still makes its samples at its 34th Street corporate headquarters, a nod to its New York roots. Yet the brand itself, under the leadership of chairman and chief executive officer Lew Frankfort and president and executive creative director Reed Krakoff, has evolved over the years into a fashionable yet classic and fun accessories collection. That’s compared with its former image as a solid and sturdy, if somewhat stodgy, business-focused product line. The company went public on Oct. 6, 2000.
The Coach brand image today is certainly not what Krakoff envisioned when he first started at the company 14 years ago.
“I couldn’t imagine that Coach would be where it is today. When we were figuring out what the brand could be, it wasn’t something I could verbalize 14 years ago, although the recognition of the opportunities was there,” said Krakoff.
He said that the global collection features the core assortment of the North American consumer as the largest set, and that other extensions are subsets that “fit into” the core.
Those subsets include men’s — a huge growth vehicle in Asia and an important counterpart to its women’s business there, as well as a growing U.S. operation — and the Poppy collection, which started conceptually as what Coach didn’t have in its assortment that was “spontaneous, playful and joyful,” according to Krakoff.
“Poppy came from [the idea of] what can we be to keep consumers coming back to the store to see what’s new,” he explained.
Having many moving parts on one’s creative plate is a scenario Krakoff describes as both “exciting and dangerous at the same time,” although in the case of Coach, it’s a testament to the ability to “adjust the elasticity of what a brand can be.”
Krakoff disclosed that his “eureka” moment at Coach came 18 months after he started at the company when the Hamptons collection was launched.
“That was when everything came into focus. We had a clear path and everyone got it. There was no longer any need to ask ‘What is Coach?’ After that we just built one collection on top of another,” Krakoff said.
Now the firm’s next expansion push, representing a huge opportunity to grow the brand, is in China. The target Chinese consumer is the middle class, with annual income of $40,000 and growing 30 percent a year.
“The Chinese consumer sees Coach as a New York fashion brand steeped in heritage and rooted in authentic value. New York is a city that everyone loves around the world,” Frankfort said.
Although the big push may be in China, Coach is also expanding in Europe. Frankfort said the firm will open a store on Bond Street in London in spring 2011, following agreements to sell in Printemps in France. Although Frankfort said Coach also does well in Europe, he emphasized that the key is in understanding the local needs, and Coach ensures that by working with local partners.
“We are an authentic New York fashion brand that resonates with consumers wherever she travels,” the ceo said.
The numbers back him up. Coach had a blowout first quarter, posting a 34.1 percent jump in profits to $188.9 million on a sales gain of 19.7 percent to $911.7 million for the three months ended Oct. 2. The quarter was boosted by a 27 percent jump to $136 million for shipments to U.S. department stores and the international wholesale channel. The results were boosted by sales in its Chinese operation, its fastest growing business. Direct-to-consumer sales increased 19 percent to $775 million, while North American comparable-store sales rose 8.5 percent. Its men’s business, though only 3 percent to 4 percent of Coach’s global sales so far, has the potential to be 20 percent to 25 percent of the firm’s total Asian and European businesses. In the U.S., it could be 15 percent of total domestic sales.
Frankfort was also one of the first to point out that the slowdown of 2008 was a “consumer-led recession.”
According to Frankfort, “Long before the recession hit, we realized that consumers were globally changing [and that] we needed to adapt.”
He added that the current consumer shopping patterns are the “new normal. We are not going back to the 2007 spending levels. Companies have to adapt.”
According to Frankfort, who also coined the phrase “accessible luxury” that has become synonymous with the Coach brand, that meant being more relevant to the consumer and changing the pricing of the product to appeal to a broader range of consumers. This was done not by discounting but by developing products specifically to retail at a lower price point, but with the same quality and design signature of more expensive Coach products.
According to Frankfort, the company didn’t roll back prices, although opening price points are roughly 10 percent lower than they were compared with 2007 prices.
“This was not only a phenomenon in the U.S. but globally, in the Middle East and in Asia,” the ceo noted.
Krakoff said the company achieved those opening price targets by designing with the price points in mind.
“I want to know in the beginning what I need to get it done,” he said, explaining that if margins are the issue, then he wants to craft a solution so the designed product can solve the problem.
“It’s my sense of self-preservation. I find it both dynamic and exciting,” said Krakoff, who then hit the point home: “If it’s an ugly bag but there are good margins, that won’t help anyone.”
While Frankfort said that there’s a definite need to be commercial in focus, there’s also a built-in “checks and balances” system in the Coach business model, wherein an empowered group of business merchants reviews the season’s offerings and become “internal customers” as they edit the collection.
The firm’s emphasis on the long-term view for operations helps it keep its focus and not get too caught up with the vagaries of Wall Street’s oftentimes short-term focus on earnings’ hits or misses, a problem for some creative firms since so much depends on having the right fashion product season after season.
“Most investors are not concerned with the substance of the hows of a business. For a hedge fund, its focus is the next day. Asset-management firms have a long-term view of three months. We need to run the business for the long term, and it’s a mistake to try to meet every expectation,” said Frankfort.
Acknowledging Coach has good relationships with its investors because “we perform well,” Frankfort said, tongue-in-cheek, “Any activist investor who wants to buy our shares and join our board, you’re not welcome.”
Meanwhile, the firm is just starting to understand the full potential of social media, according to Krakoff, who said that blogging — some sites have 2 million visitors — has helped generate excitement and interest to the retail stores. The company recently hosted a competition in which the top bloggers designed their own dream bags. Still, the extent of social media is mostly focused on the informative approach, such as what features of a bag people like and don’t like.
Frankfort noted that the new media are a reflection of the times. With millions of visitors to its Internet site and 1 million Facebook fans, he concluded: “There are high expectations. This raises the game for us.”
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