Taking the global economic crisis in its stride, luxury brand Coach sees rewards in expansion, especially into
WHEN LEW FRANKFORT started with Coach in 1979, the company was a stodgy manufacturer of leather briefcases based in Manhattan’s garment district. Since then, Frankfort has helped build it into America’s leading women’s accessories brand, with US$3.18 billion in sales last year. The global economic crash may have put a pinch on conspicuous consumption, but during a recent conversation at Coach’s flagship Hong Kong store, the CEO wasn’t gloomy. Frankfort said that aggressive expansion in Asia – Coach recently acquired a retail business in China – meant the company’s future was in the bag.
My first question is one that I seem to be asking everyone these days: how is this financial downturn affecting your business?
We actually saw the beginning of a decline in the fourth quarter of 2007 and we felt that the economic pressures were going to become greater. We decided there were two ways in which we would be able to get through this crisis and emerge stronger.
The first was to change some of our consumer-facing strategies, and the second was to lower our cost base. When consumers are reluctant to spend on discretionary goods, which are emotional purchases, we need to wow them, to give them products that are so compelling emotionally that they’re keen to purchase. What we decided to do was compress three years of product innovation into one year. The challenge we gave ourselves was to create an assortment of products in 2009 that would look like it was from 2011 for consumers who’d last entered a store in 2008.
The second aspect was to rebalance our assortment so that we would have much more compelling prices for the aspirational consumer in particular. So today our assortment is in the midst of being rebalanced so that the average price range is 10 to 15 percent lower than it was last year. And the combination of the two is working very well. Our business continues to be very profitable. We have very strong cash flow. We have no debt. Shortly we will be reporting results for this quarter that show our sales are equal to last year—though lower than it would have been if this economic tsunami hadn’t occurred.
You’ve been with Coach for 30 years, so you’ve seen downturns before. How does this compare to previous downturns you’ve been through?
This is unlike any downturn that we have experienced. In North America – which is our primary business, about 75 percent of our sales are in the US – the wealth destruction has eluded no family. Every family has been affected, and it has altered their psychology. It’s one thing to lose 40 to 50 percent of your wealth. It’s another thing to fear the loss of the remaining 50 or 60 percent. And until consumers realize that the credit markets are stabilizing and liquidity will be more available, that fear will continue.
However, consumers are inherently optimistic. And once they feel they’re no longer in danger of losing the rest of their wealth, they will resume spending – however, at lower levels than they are spending today. And I’m now referring to North America. In Asia, our business has been unaffected. We’re at an early stage of our development, so our market share is still very small. It’s only three or four percent today. We position ourselves as an alternative to the European luxury brands. Actually, the economic recession has played well to that positioning, because our price points on average are less than half our European competitors.
On the subject of consumer psychology: I recently read an interesting quote from Steve Sadove, CEO of Saks. He said that people’s idea of luxury was evolving, that this new sense of frugality was something that was going to last. How do you see luxury evolving? Is Coach going to be what people think of as a luxury brand?
First, I think the European luxury brands will always have an important role. However, their challenge will be to maintain their appeal the younger generations, which are becoming much more educated and more global in their perspective. These consumers are increasingly looking for innovative and relevant products that complement their lifestyles. And many do not place the same regard on inherited legacy. They want a product to earn its way. We’ve seen these changes since the beginning of this decade. The recession has not really been a catalyst for this. I don’t even thing it’s been an accelerant. It’s just the reality that consumers are cautious at all levels.
In January, you scaled back your plans for retail expansion in the US significantly. But at the same time you’ve made this new retail acquisition in Asia. Do you see Asia as the place where your growth is going to come from?
We see continued growth opportunities in North America. We have 25 percent market share. Until this recession, the category was growing at 10 to 15 percent per year. That’s because women have migrated from apparel to accessories in terms of updating their wardrobe. Accessories are playing a much larger role. We play into that through our monthly introduction of new products. We also see continued growth in Japan, but at a slower rate. But the single biggest growth opportunity for us over the next decade is greater China, where our brand is extremely well positioned to capitalize on the growth of middle class consumers. As I said, we only have a three to four percent market share today. Our sales are a modest US$50 million. We’re looking to open at least 50 more locations within the next five years, bringing our total to north of 75 locations. I was touring Shanghai yesterday and visiting neighboring cities, and I think we’re understating the opportunity in China. It feels as if it has no limitations.
What are the advantages of running your own retail business in China as opposed to having someone else manage it?
When you run your own business, whether it’s in China or elsewhere, you’re able to directly shape everything you do. No one understands a brand’s DNA better than the owner of the brand. And the level of passion, commitment, belief, training and so forth that a brand owner can consistently put into a business is very hard to match.
How are Chinese consumers different than those in North America?
There’s far more similarities than differences. Coach is a democratized luxury brand, meaning we have a broad set of attitudes in the way we express ourselves through products. We appeal to multiple generations, a cross section of consumers. We find here in China, like the United States, we have different types of consumers. For the first-time Chinese user of Coach, she tends to be more attracted to the logo product, like her American counterpart. For the more sophisticated mainland Chinese or Hong Kong consumer, she’ll be more interested in our leather bags without conspicuous branding. So there’s a lot of commonalities between consumers in Hong Kong, for example, and New York. The consumer in Hong Kong has more in common with the consumer in New York than she does with a consumer in mainland China or a consumer in the US Midwest. There are more similarities between the mainland Chinese consumer and the American consumer in the Midwest.
You mentioned that you have a small market share in greater China. You’re competing with some pretty well established European brands. What’s your strategy for breaking into this market?
It’s very similar to the strategy we deployed in Japan. We had a very modest-sized business at the beginning of the decade, with only two percent market share. Today, we have a 14 percent market share. Yet the market for imported brands didn’t grow. So our entire market share gain came at the expense of the European luxury brands. We position ourselves as an alternative to those brands. Our products are extremely well made out of excellent materials, but are often at a fraction of the price of our European competitors. So we are a conspicuous alternative in terms of our price and in the level of innovation we bring, because we offer new products monthly.
As conspicuous consumption takes a hit in this recession, are you going to move more toward being a lower cost alternative? Or are you going to try and split this where you’re also appealing to the high-end consumers who are maybe looking for a US$10,000 handbag?
It’s a very good question. Our global positioning as an accessible luxury brand remains intact, and it’s very fertile. Since we appeal to a very broad range of consumers, we find that we’re able to have products that are appropriate to consumers at different levels. With the recession, we’re just putting a greater emphasis [on that] by distorting some of the lower prices ranges within our collections. We’re a demand-driven company and all our systems are state of the art, so we adapt production and replenishment, even at the store level, to what sells. We have a dynamic planning model and it’s very helpful for us.
You mentioned China as a place you’re looking for a lot of growth. Are there other geographical areas you’re looking at? I’m thinking specifically of India and Latin America. How do you feel about those markets?
India one day will be a substantial market, but it’s not today. India is many years away. We’ve decided we would focus primarily on China and Southeast Asia, where the growth opportunity is substantial. We have a flourishing business in Korea, Thailand and other Southeast Asian countries. We also have a growing business in the Middle East, and we just recently entered Russia.
When you joined Coach, it was a very different company. Can you talk a little about how it evolved into what it is now?
We were a very small loft manufacturer of unlined leather bags and billfolds. Our bags were being made on 34th Street in Manhattan – one of hundreds of small companies in that area. And we sold to anyone who paid their bills. Sales were only US$6 million when I joined. I came to work for the founder, who had an idea an idea that if we could reach consumers directly without intermediaries, our business would flourish. I studied other business models in the world of luxury goods, and I decided that the best way for us to move forward would be to develop a multi-channel strategy and position ourselves as a premier brand between the mass brands and the European brands. So we began to open Coach stores and the catalog business. By the mid-1980s, we were a vibrant, multi-channel business. And I helped the founder sell the business to Sara Lee Corporation, which we were part of for 15 years.
How many Coach stores would it be ideal to have in the U.S.? At what point does it become oversaturated?
Thus far we actually have a relatively modest number of stores in America. We have about 325 locations today. And each one of our locations is profitable. We do considerable market analysis before we open a new store either in a new market or an additional store in a developing market. Most of our growth in North America is in new markets or underdeveloped markets. And we’re finding whether it’s in Anchorage, Alaska or Albany, New York or Baton Rouge, Louisiana, when we open stores in those markets, we’re strongly embraced by consumers: half the sales we generate in the first year in those stores come from consumers new to Coach. So part of our philosophy as an accessible luxury brand is to be available to target consumers wherever they choose to shop. That’s our philosophy. In the United States, we don’t have indigenous luxury brands. Americans shop high and low, and look for products that work for them. They don’t just buy products because of their heritage.
How do you keep the brand vibrant? Wouldn’t a Coach store in every shopping mall dilute the exclusivity of it?
We’re a consumer-centric company. We interview more than 60,000 consumers individually a year. So we do a substantial amount of quantitative research to measure attitudes toward the brand. And one of the things we look at consistently is a set of metrics to help understand the health of the brand. We look at consumer satisfaction with their most recent purchase, with their most recent store visit. We also look at their expressed intention to repurchase. And we look at their attitudes broken down on a 100 points scale toward the product, broken down by fashionability and function. We also ask pointedly whether they believe Coach is being overly distributed. We found consistently over the last couple of years that over 90 percent of customers says “No.”
What will the company look like 10 years from now?
Today, we’re only sold in about 25 countries. We aspire to be a global brand, where we’re sold in more than 50 countries, including Western Europe and Latin America. Our vision is to continue to focus primarily on accessories, where consumers are very brand loyal and we have great equity and knowledge. Third, we expect to occupy a larger share of the consumers’ wardrobe as accessories continue to grow in importance.
You’ve made some changes to the logo recently.
Yes, last October, we introduced a second logo platform. We have a very well known signature logo, which is recognizable worldwide. We wanted to relieve it of some of the burden it had to support such a large portion of our sales. So we introduced a more sophisticated, demure logo, which we refer to as Op Art. It was inspired by the Op Art movement of the 1960s – Andy Warhol and others, who took large geometric forms and exploded them. What we’re finding is that it’s appealing to a consumer who is either prepared to graduate from the more conspicuous signature logo, or a consumer who has chosen not to buy our signature logo. And it’s doing quite well.
It’s an interesting decision to change a logo so identified with a brand.
We’re not changing the logo. We’re reducing the burden or importance that that logo has in shaping the destiny of the business. So we have a leather business and we have had a signature logo business. Now we’ve created a third platform of an Op Art business, which means we’re less reliant on the signature logo business. And we’re able to more systematically flow product between collections based on the attitude of the collection and the consumer it’s targeting. It was actually long overdue. We’ve been contemplating for over five years introducing a new logo platform, and we finally felt we got it right.
As a CEO, you have a reputation for bringing a lot of analytical rigor to the fashion business. Is that rare in your industry?
I’m inherently a knowledge-driven person and I’m very curious. To the extent we can use information and knowledge to shape fashion decisions, we do. That has become embedded in our culture. So we do substantial amount of consumer research. We also do a substantial amount of testing and piloting of new products. We’ve been doing this for more than 20 years. Having been brought up in a small business, I learned two things from my association with Sara Lee. One was the value of rigorous financial planning. Second was the value of consumer insights. We’re told that no other company in the fashion world employs this blend, which we refer to as logic and magic – the magic of great products, and the logic of rigorous analysis of consumer insights.
What worries you the most?
I’m a serial worrier. I don’t have a single worry. I have many worries depending on the situation and the timing.
Right now, for instance?
I’m most concerned about the macro-economic situation and the need for the G20 leadership to provide enough economic stimulus and support during this period to stabilize our credit markets, which will almost immediately restore consumer confidence.
