Can Coach and Michael Kors Usher in the Rise of the American Fashion Conglomerate?

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Michael Kors

Whether it’s the Coach pronouncement that it’s creating the first “house of modern luxury lifestyle brands” or Michael Kors’ new self-identification as a “global fashion luxury group,” it’s clear that fashion retail is entering a new age.

With Coach’s recent acquisition of Kate Spade and Michael Kors’ impending deal for Jimmy Choo, the two companies are just beginning to build the kind of multi-label organizations that provide economies of scale, bargaining power and a balanced portfolio in which shortcomings in one area can be balanced out by growth in others.

It’s not a new concept, of course. Europe has long had the likes of Kering, which got its start in 1963 and boasts labels like Gucci, Yves Saint Laurent, Alexander McQueen, Bottega Veneta, Balenciaga and Puma. Similarly, rival LVMH, which was founded in 1987, encompasses five divisions and multiple illustrious brands like Fendi, Loewe, Louis Vuitton, Celine and Christian Dior.

But with few exceptions—think the stable of brands Andrew Rosen has amassed interests in—American companies haven’t seemed to see the merits of this type of arrangement until recently.

“We have short-term vision,” said Gary Wassner, co-founder and chairman of NYC-based InterLuxe, an investment firm, which operates in this way with brands like Jason Wu and A.L.C. “Our financial system is geared to short-term entry and exit. We have private equity, which has come into the fashion industry. Their expectations are three to five years. Kering and LVMH don’t swap out and sell in three years. They have a long-term picture, and we haven’t, which has commercialized the brands and shortened the lifespan of the brand asset.”

Wassner said like his organization, the Coach and Michael Kors visions are more closely aligned with the longer-term European model, which bodes well.

The spark that’s attracting companies to this business model now is the pressure to grow and the realization that we are over-stored, said Gabriella Santaniello, an analyst at A-Line Partners. “Ten years ago for a lot of these retailers, if they were publicly traded, the easiest way to grow was to open a store,” she said. “Now they see it as a margin drain. There’s no need to have that many touchpoints.”

Can Michael Kors Out Coach Coach?

Given that it’s been little more than two weeks since Michael Kors surprised much of the industry with the announcement that it will purchase Jimmy Choo, it’s too early to know exactly what that acquisition will mean.

The company’s chairman and CEO John Idol seems only to be looking at the effect the footwear brand will have on the balance sheet. “The biggest opportunity in Jimmy Choo and bringing it into our fashion luxury group is we very strongly believe it will grow to $1 billion,” he said during Michael Kors’ first quarter earnings call today. “If we’re able to achieve that, that will add to some very nice accretion for the company in the long term.”

For the industry as a whole, much of the reaction seems to range from curious to critical.

“The thing with Michael Kors is the brand isn’t performing well yet they’re taking this on, and you wonder if they can’t turn their own brand around, what will they do with Jimmy Choo?” asks Santaniello.

And it’s true, Kors has just embarked on a turnaround plan, dubbed Runway 2020, through which it will pull back on distribution, limit markdowns, innovate products and realign pricing. If it sounds familiar, it should. It’s much the same plan that has put Coach back on firm ground. But it has a three-year head start, a fact that makes the Coach expansion with Kate Spade more palatable, according to Santaniello.

[Read more about the handbag sector: Kors, Kate & Coach: Battle for the Purse Strings]

Plus, she said, both Coach and Kate Spade have strong brand identities with the former its authenticity and the latter whimsy. She’s at a loss when trying to describe either Kors or Choo in a succinct way.

“The product that put Kors on the map was essentially a knockoff so they don’t have that authenticity,” she said. “When you look at Choo, it has a huge presence in Asia, and that’s a huge opportunity but I don’t know what the core of the brand is and what it stands for.”

Rather than mutually beneficial, she sees the deal as potentially problematic. “I think there’s a concern that it will be a distraction that won’t help either one,” she said.

Further, Santaniello said Coach has also already proven itself with the 2015 acquisition of Stuart Weitzman. “What we’ve seen is the Stuart Weitzman handbag category is growing, and also we’ve seen Coach expand their footwear offering. And I’m sure there’s more to come,” she said.

But the synergies don’t have to come in the form of product categories, Wassner said. While InterLuxe does look at brands that are rooted in wearables so that the overall strategies align, he said he can see other ways in which Choo might benefit Kors and vice versa.

“The Jimmy Choo/Kors was a bit of a surprise, but they may be looking at it more from a real estate opportunity,” Wassner said, noting that the 125 store closures Kors announced in May could easily convert to Choo locations. “They could use, from the top, real estate forecasts, more leverage with landlords, better pricing, better construction costs. Everything is easier. Having your own retail is extremely important to brands today.”

The benefits could come strictly from back-office concerns as well. For instance InterLuxe brands have access to the company’s sourcing agent in Hong Kong, the CFO, who can help with macro and micro concerns, as well as the digital e-commerce manager, who’s far more experienced than any one of the brands under its umbrella could employ on its own.

And while benefits like these result in tangible results, Wassner said it’s not easy to juggle the competing demands of each brand. “There are clear challenges when you’re dealing with separate companies that have separate creative at the helm. Some services cannot be shared,” he said. “And everybody wants a bigger piece of the shared resources.”

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