The luxury arms race: Michael Kors, Coach eye takeovers
By Vanessa Friedman and Elizabeth Paton
The global luxury market has long been dominated by three giants, all European — LVMH Moët Hennessy Louis Vuitton, Kering and Richemont. Now, it has two hungry American contenders.
Coach and Michael Kors, fashion houses that have thus far catered to the “middle market” of the luxury sector, are looking to transform themselves into leading forces in the field, and they could reshape the industry in the process.
Kors said last week that it would buy the upmarket London-based shoemaker Jimmy Choo for $1.2 billion. It declared the deal to be the beginning of a makeover that would turn an ailing American singlebrand accessories business into a multilabel global fashion and luxury behemoth.
“Acquiring Jimmy Choo is the beginning of a strategy that we have for building a luxury group that really is focused on international fashion brands,” John Idol, the chairman and chief executive of Michael Kors Holdings, said in an interview.
The deal came just two months after Coach’s $2.4 billion acquisition of Kate Spade. Coach, Kors’ biggest competitor, has also publicly promoted its ambitions to build itself into what CEO Victor Luis termed “a new American multibrand accessible luxury organization.”
Fashion may be in for consolidation and competition of a sort not seen since LVMH and what was then the Gucci Group — now part of Kering — went head-tohead for brands like Fendi.
With the boards of Kors and Coach clearly willing to spend on acquiring brands, two of the best known names in American accessories seem to be headed for an arms race — and there is plenty of speculation about their potential targets.
Idol said Kors was considering only “one or two more acquisitions” for now, and had no plans to reach the size of LVMH, which has more than 50 brands in its portfolio. But he added that he had great admiration for the French group’s longterm approach to brand building.
“First, we’re really going to look at luxury companies,” he said. “Second, we’re going to look at companies that lead in style and trend.” The third requirement, he said was for companies with “some size and scale” and “some heritage.”
While recent discussion in the fashion world has centered on the need to support new designers, rather than revive older names, Idol said Kors was not interested in emerging faces, but rather those with “some longevity” that “may need to have a structure to accelerate their growth.”
At the same time, he added, Kors was attracted to businesses where a founder or family member remained involved.
“It’s become harder and harder for independent designers to make the leap to household name,” said Robert Burke, the founder of a luxury consultancy that bears his name.
Coach is a little further along. It began life as an accessories business, unlike Kors, which is known for its readyto-wear items as much as its signature tote. In addition to Kate Spade, a label that operates at the more affordable end of the retail spectrum, it has bought the upmarket shoe brand Stuart Weitzman.
Luis has also been open about his ambitions for more acquisitions. Indeed, Coach was rumored to be a suitor for Jimmy Choo, underscoring the potential that Kors and Coach will pursue similar targets.
A number of possible acquisitions for both companies have already been mentioned, many of them hailing from across the Atlantic. Analysts have pointed to accessories brands like Furla in Italy and Longchamp in France; both are family-owned businesses with strong records of growth and established consumer appeal across continents and generations.
Burberry, a beleaguered company that is nevertheless Britain’s largest luxury brand by sales, was widely spoken of as a Coach takeover target before the Kate Spade deal. Burberry was considered too big at the time, but now that the stakes have been raised, it could make for a sizable jewel in a growing group’s crown. Mulberry, another British heritage brand, has also been mentioned by bankers in the sector, as have Hunter and Barbour.
The timing of the potential expansion is significant. The luxury landscape is in flux — mall and department store traffic has plummeted, consumer shopping habits are changing, and online retailers, notably Amazon, loom as threats. Other brands, like Ralph Lauren and Marc Jacobs, have opted to cut costs, close stores and fold multiple lines into a single offering.
Coach and Michael Kors, however, are going in a more expansive direction. The strategy has advantages: With acquisitions, they can gain new revenue streams, achieve distribution efficiencies and diversify their offering.
There are also financial reporting benefits. LVMH, for example, does not break out the performances of its smaller luxury brands, allowing any faltering names to benefit from better performance by their siblings.
“There’s strength in numbers,” said Burke.
It will still be hard to replicate the strategy of Europe’s luxury giants. In the 1990s, they went on a spree: LVMH bought Berluti, Loewe, Thomas Pink and Pucci (among others); a few years later Gucci Group swallowed Bottega Veneta, Alexander McQueen and Balenciaga.
But their strategy was markedly different.
American businesses tend to focus more on contemporary price points. Historically, they have depended heavily on department store sales, and grown via a pyramid structure. In that model, less expensive lines bring in the bulk of a company’s profits, powered by the high-end image of a luxury collection at the “pinnacle.”
The European “high luxury” model of Louis Vuitton and Hermès, by contrast, eschews discounting to maintain pricing power and market position.