The latest financial releases from American luxury stalwarts Tapestry (Coach, Kate Spade and Stuart Weitzman) and Michael Kors (MK and Jimmy Choo) showed strong performances this year. With retail up 5.5% year-over-year through July, prospects look good for the rest of the year.
Both companies reported outstanding gains on the topline: Tapestry up 31% in both 4Q18 and full year and Michael Kors Holdings growing 26.3% in 1Q2019. But both companies got a big boost from recent acquisitions, Kate Spade by Tapestry and Jimmy Choo by Kors.
Each company’s results in its flagship brands were more modest. Tapestry’s Coach advanced 5% in the fourth quarter, reaching $1.1 billion in sales, with comparable store, including e-commerce, up only 2%.
Michael Kors brand grew 8% in the most recent quarter, reaching $1 billion, driven primarily by strong wholesale results, up 19.5% because it pushed deliveries from second to first quarter. MK wholesale accounts for 35% of total brand revenues. MK retail was up 3.2%, thanks to opening nine new stores, but comparable store sales were flat.
These are decent enough results, but nothing to get too excited about. In particular for MK wholesale, selling in isn’t the same thing as selling through. Overall department stores sales in the first half of 2018 were down -1.3%.
For both companies too, the other brands in their families are tiny compared with the flagships. Full-year guidance for both is in the mid-single digits, but Michael Kors brand is expected to grow low-single digits and comparable store sales to be flat.
American luxury retail has yet to turn the corner
To gain a forest instead of a trees perspective on American luxury retail, I had a chance to talk with Tom Murry, the former CEO of Calvin Klein who retired in 2014 after 17 years at the helm. Murry grew the Calvin Klein brand from $2.8 billion in global retail sales in 2003 to close to $8 billion in 2013.
While enjoying retirement in Palm Beach, Florida, he also has been reflecting on his experiences and has a new book coming out in 2019, A Great Fit: Finding the Work that Suits You Best.
“Luxury retail isn’t doing that well,” Murry reflects. “The stores that are doing well are the more moderately-priced to volume-priced stores, like the Walmarts and TJ Maxxs of the world.”
From his vantage point in Palm Beach where the average income is about $1.25 million and some 30 of the world’s billionaires live, Murry says the city’s shopping and dining district on Worth Avenue is largely deserted of shoppers. “All the luxury brands have stores on Worth Avenue, but I never see anybody in those stores, and my wife and I are frequently on Worth Avenue.”
Those stores, rather than being there to make money, are primarily billboards for the brands, but he questions the future for all those empty stores. “It is a marketing play, not a business play. I don’t know how long those luxury brands will be able to sustain those stores,” he says.
Michael Kors is there on Worth Avenue, as is Jimmy Choo. But in the U.S. market, the Jimmy Choo brand had sales of $25.6 million in first quarter, which is only 15% of its global taking.
Coach and its Kate Spade brand are located in the nearby Gardens Mall, along with another Michael Kors and Jimmy Choo store. But Gardens Mall is off the island and near the highway, so they aren’t likely to draw the wealthy Palm Beach natives either.
Boomers got the cash, Millennials don’t
Try as they might, American luxury brands can’t overcome the demographics that underpin the luxury market stateside. Maturing Baby Boomers are holding the cash, while next generation Millennials still haven’t got much.
“Luxury is still a Baby-Boomer driven business because that is where most of the money is,” Murry explains. “Millennials don’t have that much discretionary income to drive luxury and that will continue.”
This demographic trend is what I call the luxury drought: Baby Boomers are aging out of the prime consumer market when spending peaks, ages 35-54, and Millennials, whose leading edge is just reaching that threshold, are still lagging behind income-wise. While the current job market is giving Millennials an on-ramp to their careers, their lifestyles and aspirations are different from their Boomer parents.
When it comes to luxury, Millennials on the road to affluence, who I call HENRYs – high-earners-not-rich-yet – crave luxury in a brand new style and don’t necessarily want the old style of luxury that Boomers hankered after. This will be the subject of a new book I have coming out entitled Meet the HENRYs and the New Luxury Brands They Love.
Many of those new luxury brands have been born, nurtured and grown on the internet. And since the shift from brick-and-mortar to online e-commerce is the most dynamic trend Murry has seen, he as of yet hasn’t identified a breakaway winner among the many emerging brands looking to be the next-generation luxury leader.
“I don’t see any new brands challenging or going to become that important in luxury,” he says. But all of those upstart luxury brands are taking a bite out of the same apple. Maybe the time has come and gone for another major luxury brand on the order of Louis Vuitton, Gucci, Hermès or even Coach, Michael Kors and Ralph Lauren, to break out.
Europeans know luxury, Americans sell fashion
Reflecting on Tapestry’s and Michael Kors Holdings’ aspiration to become American “House of” luxury conglomerates on the order of the European model after LVMH, Richemont and Kering, Murry sees a disconnect. “Europeans do it better,” he believes. “ Americans have never done as well as Europeans when it comes to the luxury brand model .”
The European luxury brand strategy is designed to create “long-selling products and not best-selling products,” as Vincent Bastien and Jean-Noël Kapferer explain in their book, The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands.
On the other hand, Michael Kors and Tapestry brands implement fashion and premium strategies, which are driven by newness and price/value. Neither one creates a lasting heritage value.
“Michael Kors and Coach are primarily an accessories-driven business,” Murry points out. And while this is and will likely continue to be the strongest segment in the luxury market, he sees Michael Kors and Coach primarily bridge lines, not true luxury. “I don’t think the Americans generally speaking can compete with the Europeans.”
If imitation is the sincerest form of flattery, Coach is paying homage to Louis Vuitton by copying the Louis Vuitton Monogram signature canvas bag (starting at about $1,300) with the re-launch of its own Signature collection (canvas totes priced at $275).
But where Louis Vuitton and Coach make their logos the heroes of their canvas bags, new luxury brand Everlane offers a full-on leather tote for only $175 without logo-pollution. Everlane’s is a classic forever staple, not a fashion play. It is an example of new luxury for the next generation.
Luxury in a consumer-driven world
Murry believes that rather than aspiring to be “House of” luxury brand companies, Michael Kors and Tapestry should get back to basics.
“They need to be good merchants and that means understanding what the consumer wants and giving it to them,” he says. “Runway and advertising are different pieces of the puzzle. They are for the press. Merchandising is for the customer, giving them the style and fashion they want.”
Indications are, however, that the American luxury brands are losing traction as measured by consumers’ online engagement. SimilarWeb, an online competitive intelligence service tracking website traffic, finds that traffic to Tapestry and Michael Kors Holdings’ brands are falling in the first half of 2018 compared to the same period in 2017, with the exception of Michael Kors, which is basically holding.
Jimmy Choo is off the most, down one-third, though its traffic is less than 10% of Michael Kors, and Coach is down nearly 30%.
Evolving American luxury
Murry and I agree that the American luxury model is rapidly evolving and perhaps rather than trying to follow the European playbook, the companies should focus on developing a uniquely American-made luxury model.
The key is the understand what the consumer wants and give it to them using a pull-marketing approach, rather than to try to push out more and more advertising and new products in the hope that something sticks.
“Millennials don’t like being advertised to or pushed,” he affirms. “They like to make their own decisions about what they want. They resent being advertised to.”
As the luxury market evolves under the direction of the next generation, it is more of a consumer-driven business, rather than a marketing-driven one. The call is for American luxury brands to understand the new image of luxury that the next generation of affluent customers want, not to follow a model created in a different time and place.
The European luxury brand model may well continue to work, as it has done for more than a century, but American luxury brands need to be different. That requires thinking and acting more like merchants rather than arbiters of some exalted, prestigious luxury style.