Lew Frankfort is clearly a man on a mission.
A 32-year veteran of Coach Inc., the chairman and chief executive officer has catapulted the firm into a $4.2 billion powerhouse and shows no signs of slowing down. Frankfort, 65, summed up Coach’s 70-year-history in four distinct chapters:
■ Begun as a small family-run leather goods manufacturer making wallets, billfolds and belts in 1941, Miles Cahn joined the company five years later and started sowing the seeds for growth, and in 1962 started producing women’s handbags and other accessories.
■ In 1985, it became a division of Sara Lee Corp.
■ Coach was spun off into a publicly held company in 2000.
■ Today it operates as a global brand with sales of more than $4 billion.
Over the years, the company has grown far beyond its founders’ dreams.
For years, Coach was primarily a maker of sturdy leather handbags and durable attaché cases. When Frankfort joined the house in 1979 as vice president of business development, the brand was generating $6 million in sales. In 1996, Frankfort brought on board Reed Krakoff, whose background included top design positions at Tommy Hilfiger and Ralph Lauren, and charged him with revitalizing the Coach brand.
“We focused first on femininity. Our marketing and our product became more feminine. We focused on fashion without losing equity in the underlying business. Lastly, we added a layer of fun to put a smile on people’s faces and not to take ourselves too seriously,” said Frankfort.
The company went public in 2000 at $16 a share and has since grown explosively. A darling of Wall Street, the stock currently trades on the New York Stock Exchange for around $59.
The stock split three times since going public, in 2002, 2003 and 2005, all on a 2-for-1 basis. According to Coach, a dollar invested in the company at the time of the initial public offering would be worth $29.58 today. By comparison, a dollar invested in the broader market over the same time would be worth 84 cents today.
“It was a decade of rapid growth through product diversification, broader distribution, very strong growth in Japan and other international markets,” said Frankfort. Now the company is ready to tackle the European market, and views China and men’s accessories as the businesses’ huge growth drivers. This month, it opened its first European flagship, on New Bond Street in London.
The New Bond Street store isn’t Coach’s first stab at Europe, however. In the Eighties, it actually opened a shop in London, but a number of factors — including poor brand awareness, no local partner and an unfavorable dollar-to-pound exchange rate — forced it to close. The company pulled out and decided to focus on Japan.
(For more on Coach’s international business, see pages 32 and 34.)
When asked if Coach wasn’t late in putting down stakes in Europe, Frankfort gave several reasons for waiting until now.
“The European market has been challenging in women’s accessories for a very long time, because there’s no growth. It’s been very crowded. There’s intense competition among country brands and pan-European brands, and consumers tend to be fairly brand loyal, so we’ve decided that we’d focus on opportunities in markets in which we’d be able to insinuate ourselves as a successful alternative to the European brands,” said Frankfort.
Its current European expansion is via a 50-50 joint venture with the British men’s wear brand Hackett, which is owned by Pepe Jeans SL.
In recent months, the company has opened stores in Spain, Paris, Portugal and Singapore, in addition to the London store.
Over the next six months, Coach plans to roll out more stores in Europe, including Ireland. It will also open stores in Vietnam and Brazil. Its current roster includes freestanding stores in 22 countries around the world.
Distinguishing itself from European designer brands like Prada, Louis Vuitton and Gucci appears to be a common refrain in Frankfort’s conversation and has served as a strategic way to build Coach’s identity and business.
“In North America, the international brands have a small presence,” he explained. “We were able to grow our business and be a catalyst to help the category grow. In Japan — which was a very different story — where the market, particularly in the last 10 years, has fallen, we were successful by [presenting] ourselves as an alternative to European luxury brands. We found ourselves directly taking business from all the European brands in Asia.”
Known for its craftsmanship, Coach appears to be enjoying its status as an “accessible luxury” brand no matter the state of the economy. “We’re in a place where we’re aspirational for a large group of our consumers, we are classic for consumers looking for well-made bags that will endure for years, and we also feel we’re stylish for consumers looking for products that are relevant for the season,” said Frankfort.
Today, Coach’s products span a range of categories — from handbags and women’s and men’s accessories to footwear, business cases, jewelry, eyewear, travel bags, fragrance and watches.
Handbags account for 63 percent of the business; accessories are 27 percent and all other products account for 10 percent, according to the company’s latest 10-K. While the bulk of the merchandise is produced by Coach, there are several key licensees: Footwear is licensed to Jimlar Corp., fragrance is licensed to the Estée Lauder Cos. Inc. and Movado holds the watch license. Marchon currently produces eyewear, but Luxottica last year picked up the license and will begin making and distributing Coach eyewear as of January. (See story, page 36).
Coach learned early on that it was important to control its own destiny by opening and operating its own stores, and today they represent the lion’s share of the business.
Coach-operated stores in North America, Japan, Hong Kong, Macau and Mainland China, as well as the Internet and the Coach catalogue, accounted for about 87 percent of the brand’s total net sales in fiscal 2011, or about $3.62 billion, with North American stores and the Internet, Coach Japan and Coach China contributing roughly 64 percent, 18 percent, and 5 percent, respectively, to total net sales.
The Indirect segment, consisting of U.S. wholesale and Coach international businesses, generated about 13 percent of total net sales in fiscal 2011, with U.S. wholesale and Coach International accounting for about 7 percent and 5 percent of total net sales, respectively. The Indirect segment also includes royalties earned on licensed merchandise.
Today, Coach is sold in about 970 wholesale locations in the U.S. and Canada. Its key wholesale customers are Macy’s (including Bloomingdale’s), Dillard’s, Nordstrom, Lord & Taylor, Carson’s and Saks Fifth Avenue.
Frankfort still sees growth opportunities in department stores as well as freestanding stores.
“We have a very healthy, successful, developed business in department stores in North America. We believe the growth opportunity does lie in freestanding stores, on the men’s side in major metropolitan markets and on the women’s side in secondary markets where we have no stores or are undeveloped. We have 75 to 100 [additional] cities that we believe can support a Coach store today,” said Frankfort.
He sees growth opportunities within its existing accounts, noting his Macy’s business is larger than any Coach-owned distribution channel, including the company’s own Web site.
For years, Coach refused to allow stores to mark down its products and instead would accept [store] returns for discontinued merchandise. That practice ended more than 10 years ago. Today, the company has one price, 365 days a year, in its own stores. In department stores, Coach authorizes markdowns only when products are discontinued from its full-price stores.
Frankfort, who is clearly a numbers guy, easily rattles statistics and market research results off the top of his head. He is known to run a tight ship and be extremely demanding but, at the same time, is a passionate and inspiring leader.
Interestingly, Frankfort didn’t set out to become a ceo of a large public company. In fact, after graduating from Hunter College and Columbia Business School, he first took a job at an investment bank. But he decided he wanted more meaningful work and joined the administration of Mayor John V. Lindsay. He rose to become a commissioner overseeing the city’s day-care and Head Start programs. He decided to leave the public sector because he was looking to join an organization “that was concerned with accountability and the bottom line, which I found was not the case in the public sector,” he said.
“I really came into Coach through a side door. I wasn’t looking for a position, but I met a very close friend, who was also a friend of the founder [Cahn], when I was guest lecturing in a management class at Columbia. He asked me, ‘What do you do for an encore?’ after the success in the city job. I said, ‘I don’t know, but I’d like to make a move to the private sector.’ He said he had a friend who ran a very small leather goods company who was 60 years old and looking for a protégé since none of his children were interested.”
Cahn did not return calls for comment.
When Frankfort joined Coach, it was a small family-run business that had a very loyal, almost cultish following, with its well-made unlined leather bags, and was generating around $6 million in sales. In 1985, the company became part of Sara Lee.
“I became responsible for the business, and we grew up under Sara Lee. Our sales grew substantially, from $20 million to well over $500 million,” he said. “But more importantly, we learned how to plan and run a business with rigor and discipline, with very strong business controls. We also learned the value of using consumer insights to help understand the consumer, the category and the economy. Third, we were able to interpret practices from the packaged-goods models to the fashion business. This would allow us to have a high predictability of success as we introduced collections by segmenting consumers, understanding their attitudes and their wants, and ensuring that we have a product that met their requirements.”
During the final years under Sara Lee, the company encountered intensified competition from Gucci, which had emerged from bankruptcy, and continued pressure from brands like Louis Vuitton, as well as new brands like Kate Spade and Nine West on the mass side, which had introduced bags and small leather goods imitating the European legacy brands, explained Frankfort.
Coach found itself at a crossroads.
“We needed to reinvent ourselves, both to rejuvenate the brand and transform our supply chain, and we reorganized the business. We recruited Reed Krakoff in late 1996 and Keith Monda as executive vice president and chief operating officer in 1998 [Jerry Stritzke, president and current chief operating officer, was appointed in March 2008, when Monda retired], and we migrated from a company that was a manufacturer of leather goods to a marketer of modern lifestyle accessories.”
The thinking at the time was that it would be better for Coach to become independent from Sara Lee.
“It was during that transformation that it became clear we’d be able to be more successful independent of Sara Lee, and we became a public company in the fall of 2000. That led to a decade in which our brand grew rapidly,” he said.
The company was generating $600 million in sales when it went public, and ended the decade with sales of $3.61 billion at the end of fiscal 2010.
Marketing has been instrumental in contributing to Coach’s success. The company’s initiatives range from direct marketing activities to national, regional and local advertising.
In fiscal 2011, consumer contacts rose 52 percent to more than 625 million, driven primarily by increased e-mail communications. Total expenses related to consumer communications in fiscal 2011 increased to $75 million, up from $61 million a year earlier, accounting for less than 2 percent of net sales. During fiscal 2011, Coach sent about 480 million e-mails to customers, as well as distributed one million catalogues in Coach stores in Japan, Hong Kong, Macau and Mainland China. Its database consists of about 19 million active households in North America and 4.2 million active households in Japan.
The company has had an aggressive Asian strategy for more than 20 years. Coach entered Japan in 1988 through a distribution agreement with Mitsukoshi. In 2001, it established a joint venture with Sumitomo Corp., in order to exercise greater control over the brand. It acquired the existing distributors and expanded the number of locations and retail square footage.
In 2005, Coach completed the purchase of Sumitomo’s 50 percent interest in Coach Japan. Today, Coach is the number-two brand in the Japanese market, with a 17 percent market share behind Louis Vuitton, said Frankfort. Coach has 170 stores in Japan, including in-store shops that are managed by Coach.
“Our preference when we enter a market is to do it with a local partner who knows their way around and who has an infrastructure. As the business develops, we make a judgment as to whether it makes more sense to run the business ourselves, depending on the size of the operation,” he said.
Coach also owns its Chinese operation. In fiscal 2009, the company acquired its retail businesses in Hong Kong, Macau and Mainland China from the former distributor, the ImagineX group. These acquisitions provided Coach with greater control over the brand in China, enabling the company to raise brand awareness and expand market share with the Chinese consumer.
Frankfort said the company has been making strides in building consumer awareness of the Coach brand in China.“First, we’ve had a strong presence in Hong Kong for a long time. Mainlanders visit Hong Kong, which helps build awareness. Our awareness [in China] two years ago was 4 to 6 percent. Today, it’s in the high teens,” said Frankfort.
“We’ve been in all the major East Asian countries. Business continues to grow very rapidly in key Asian markets such as Taiwan and Korea. We expect it will pass the Japanese business in the next three to five years,” he said.
The way Coach hopes to raise its profile in China is by opening freestanding stores and in-store shops, as well as via advertising.
In addition, as part of the company’s 70th anniversary campaign, it hired Gwyneth Paltrow as an ambassador. She is featured in Coach’s marketing and will visit Shanghai in November. Paltrow also appears in the company’s ads in Europe and Asia, and participated in opening festivities for the New Bond Street store in London this month.
Frankfort believes that the Chinese consumer has similar characteristics to consumers worldwide.
“Today, she’s looking less for legacy labels and more for products and services that are innovative, relevant and offer good value. All of our research tells us she’s here to stay with Coach, assuming we continue to meet her needs and her wants. Post-purchase satisfaction is over 90 percent,” he said.
He pointed out that the Chinese consumer is attracted “to the product, the New York spirit of the Coach brand that’s behind it, and the high service levels and the very compelling price points.
“The products are innovative. We introduce new products monthly. People have a lot of choices. We’re very service- minded. We look to build lasting relationships with consumers. Even though we’re a large business and our sales are large, we approach each consumer individually and truly value building a relationship with trust and confidence, knowing it can last a lifetime,” he continued.
As the company grows, it is broadening its manufacturing base beyond China to lower-cost countries.
“We are diversifying our production to other Asian countries to meet our incremental expected demand over the next four to five years,” he said. “Our intention is to maintain the current level of production in China. Our overall costs will be lower than they would have been had we remained in China primarily.” At its peak, China represented close to 95 percent of Coach’s production; last year it was 85 percent, and this year will be 75 percent, he said.
Expanding the men’s accessories business is another key initiative at Coach. In China, men’s accessories represents just over 45 percent of sales. In North America, men’s accessories account for only 10 to 15 percent of the business.
“Men’s accessories are much more promotionally driven in North America,” said Frankfort, noting “men tend to be more stylish and brand conscious in Asia and Europe than their counterparts in North America.” The company’s strategy is to develop a more robust men’s accessories business in North America through freestanding Coach men’s stores, dual-gender stores and dedicated men’s factory stores.
“We’re enthusiastic about our potential and feel the opportunities continue to be balanced,” he said. Men’s products range from travel, weekend and messenger bags to money pieces, belts and outerwear. Overall, men’s accounts for 5.5 percent of Coach’s business, and Frankfort believes it can be much bigger. While he doesn’t believe men’s can equal or surpass women’s merchandise, he feels it can be a larger percentage than it currently is. (See story, page 20.)
In 2009, Coach introduced Poppy, a less expensive, more playful line of handbags, accessories, footwear, T-shirts and jewelry that is aimed at a younger consumer. Frankfort said the collection “is doing very well,” and that although there are Poppy locations within department stores in Japan, there are no plans in the U.S. for separate Poppy stores. Poppy is sold worldwide in Coach stores and in department and specialty stores that carry Coach, as well as on coach.com.
Poppy’s average retail prices are between $198 and $398, whereas Coach ranges from $198 to $798. Certain limited edition Coach bags can go as high as $1,200, such as the Chelsea Flagship embossed python.
“Generally, we find that when we put the entire proposition together, we become a single stop for a woman’s accessory needs. We’re able to serve multiple generations with a diversity of attitudes with a broad product offering,” he added. “We like to think of ourselves as the equivalent of a mid-20th-century handbag boutique store before department stores came of age.”
Aside from that reference, Frankfort doesn’t appear to wax nostalgic for the days when retailing was simpler.
“It’s interesting that we are very forward-minded. When we reach a new milestone, it becomes a base and we move forward. The way we run our business is a combination of magic and logic. The magic is the touch and feel of great design and brand positioning, and the logic is a rigor and discipline of using knowledge to help make informed decisions.”
The people on the creative side use a great deal of logic, and the people on the business side use a great deal of magic, he said.
Asked whether he considers himself to be left brain or right brain, he said, “I would say I’m both. Reed [Krakoff] is both as well. Most of our senior leaders are very nimble and adaptive,” he said.
As for how he manages such a diverse group of people, Frankfort said it depends on the situation.
“My leadership style is situational. It varies based upon the person and the circumstances. I vary my style consciously based upon the person’s willingness and capability to handle a particular situation,” he said.
As for inspiring his staff, he stated, “I have a fervent belief in the brand and confidence that we’re offering consumers accessible luxury products that are innovative and relevant at a good price. Standing behind a product, you can build lasting franchises. I motivate people by consistently conveying a vision, belief and set of principles by which we operate and live.”
While he thinks about acquisitions all the time, he said he hasn’t made any because there are so many opportunities at the company. He said he’s pleased with the way the Reed Krakoff business is going. The division is celebrating the first anniversary of its Madison Avenue store.
Clearly proud of the company’s accomplishments, Frankfort pointed out that the last decade showed “incredible growth for accessories. Obviously, we were a major beneficiary of that and a catalyst. In the last decade, everyone wanted to participate in the success of Coach in the accessories market,” he said.
Looking ahead, he added, “I think consumers are guarded. I’m confident that as they make choices, they will continue to choose accessories as a growing portion of their wardrobe. I’m expecting the category to continue to grow.”