hnnhcronin On Monday, May 8, 2017 Coach announced plans to acquire its smaller rival company Kate Spade. Coach made an offer of $2.4 billion – or approximately $18.50 a share in cash to Kate Spade. Coach’s stated goal is to acquire multiple luxury brands in order to create a world-renowned luxury company. The Kate Spade opportunity presents a unique opportunity for Coach to expand its brand, especially among younger consumers. The unique designs of Kate Spade are a reflection of the brand’s motto, “Live Colorfully.” The bright colors and the playful designs have been particularly effective in creating a brand with a strong brand image and a specific target consumer: cosmopolitan millennials. Coach continues to revamp by cutting back on the number of outlet stores and flash sales, the revitalized brand hopes to expand into a global lifestyle company. With this merger, Coach hopes to cater to both their traditional customer base of older individuals seeking quality luxury accessories and to the millennials who identify with the “girly look” and the accessible prices of Kate Spade.
In November of 2016 hedge fund Caerus Investors encouraged Kate Spade to sell the company due to concerns over the decreasing share price brought on by financial troubles within the brand. In recent years, Kate Spade has been unable to meet the goals of management. The strong dollar has affected Kate Spade’s foreign buyers and tourists who comprise a sizable portion of the customer base. Like many brands in the accessible luxury sector, Kate Spade faces declining sales due to the harsh and competitive retail environment. The decline in foot traffic in department stores and the rise of e-commerce has hurt Kate Spade, especially considering Kate Spade’s overextension in department stores. Similarly to Coach, Kate Spade made the mistakes of opening too many outlets, having too many sales, and failing to alert department stores to exempt Kate Spade items from department store sales. These mistakes have tarnished the once high-end image of Kate Spade in the eyes of many luxury shoppers, causing the brand to move lower down market. Kate Spade lost some its luxury appeal after it was acquired by Neiman Marcus in 1999 and further through the Liz Claiborne acquisition in 2006.
Financially, Kate Spade has been lackluster and recently failed to meet analysts’ expected earnings expectations. Although during fourth quarter reports from February, Kate Spade reported a net income rise of 39% to $86 million and sales rose 9.6% to $429 million, these results can be accounted for by the opening of 52 new stores in 2016; while same store sales actually decreased. Although Coach has been able to rebrand itself back to its roots as a high-end leather and accessories manufacturer; Kate Spade has been slow to close outlets, adequately address the reduced amount of sales, and increase the quality of goods.
Kate Spade’s prospective sale prompted a bidding contest between competitors Coach, Michael Kors, PVH corp., and VF corp. Kate Spade’s appeal to millennials and its status as a lifestyle brand made it a valuable acquisition target. Coach and Michael Kors were the final two brands that Kate Spade considered for the merger. Ultimately, Kate Spade considered Coach the better partner. Coach has adopted strategies to resurrect its well-respected luxury brand once again, such as the creation of the sales-exempt 1941 collection, while Michael Kors has recently lost its luxury luster due to persistent discounting. While Michael Kors has never acquired another brand, Coach has successfully acquired Stuart Weitzman footwear in 2015. Creative director at Coach, Stuart Vevers has breathed new life into both the Coach brand and to Stuart Weitzman, and is expected to build upon the Kate Spade’s franchise. Vevers is expected to create Kate Spade designs as trends evolve, rather than Kate Spade’s current strategy of incremental change from season to season. The interests of Coach and Kate Spade align; both brands focus on selling a variety of merchandise in order to create the image as a lifestyle brand.
Coach is expected to update some of Kate Spade‘s product line. Kate Spade bags, known for their bright colors, loud prints, and bows, will continue to be produced without any major style changes. Customers will still be able to differentiate between a Kate Spade bag and a Coach bag. However, Coach will tweak certain Kate Spade products in order to keep the brand progressing as styles change. The design of Coach purses will continue along its current track; Coach will continue to phase out logos, produce higher end leather goods, and update its product styles. The quirky products made by the Kate Spade brand will be produced with the intent of appealing to the younger consumer base, while the products made by the Coach brand will be made to appeal to older individuals with more mature tastes. The proposed acquisition of Kate Spade would give Coach increased price and product diversification. Kate Spade handbags sell from $100 to $500, whereas Coach handbags sell between $285 and $3,000. With this acquisition, Kate Spade products will probably be made with higher quality leather with a resulting brand image with more polish. Kate Spade has recently introduced bedding and kitchen accessories, which will continue to be produced under Coach since these products are seen as beneficial for Coach’s goal of becoming an encompassing luxury brand.
The prospective merger between Kate Spade and Coach exemplifies to the realities of survival in the competitive retail market even among the affordable luxury sector: brand consolidation is here to stay. After the Great Recession of 2008, consumer spending on accessible luxury brands declined the most because wealthy customers unaffected by the economic turmoil could still afford to buy true luxury products, but the target market of accessible luxury brands – those most subject to change in economic fortune turned their backs in favor for cheap fast fashion brands like H&M and Zara. With additional changing consumer behaviors such as declining foot traffic, decreasing department store sales, and the rise of e-commerce, more and more brands will have trouble making it on their own. Brand consolidations are often seen as a beneficial alternative to continued poor performance in the stock market and declining sales.
Overall, the investor response to Monday’s news has been positive. Shares of Kate Spade rose 8.3%, up to $18.38 a share. Additionally, shares of Coach rose 4.8% to $44.71 per share. Investors, as well as the two companies feel confident that this move is a positive one. Coach is confident that it can turn Kate Spade into a globally recognized brand. Kate Spade provides Coach the opportunity for future expansion and the opportunity to broaden its customer base. The proposed merger between Coach and Kate Spade will likely give Coach an advantage in the accessible luxury market, especially against rivals such as Michael Kors, because Coach will have an appeal to the younger consumers with the Kate Spade brand. Both companies have achieved good growth as individual brands, but this merger allows for the two brands to produce goods at lower costs, widen the consumer base, and expand worldwide.
Sources:
“Kate Spade & Company Reports Fourth Quarter and Full Year 2016 Results and Is Reviewing
Strategic Alternatives.” Kate Spade & Company, 16 Feb. 2017, www.katespadeandcompany.com/web/guest/investorrelations.
Low, Elaine. “Coach-Kate Spade $2.4 Billion Merger Seen Weighing on Michael Kors.”Investor’s
Business Daily News, 8 May 2017, www.investors.com/news/coach-will-buy-kate-spade-for-2-4-billion-to-bag-millennials/.
Milnes, Hilary. “The Winners and Losers in a Coach-Kate Spade Acquisition.” Digiday, 24 May 2017,
digiday.com/marketing/winners-losers-coach-kate-spade-acquisition/.
Paton, Elizabeth, et al. “Coach’s $2.4 Billion Kate Spade Deal Aims at Weak Middle of Fashion
Market.” The New York Times, The New York Times, 8 May 2017, www.nytimes.com/2017/05/08/business/dealbook/coach-kate-spade-stock.html.
