Coach (COH), long the handbag maker of choice for the reasonably wealthy, is losing its grip on the 5 percent. As it faces increasing competition from Kate Spade (KATE), J. Crew, and others eager to court women who can and will pay $200 to $400 for a handbag, Coach is embracing a strategy only the rich will appreciate: It is raising its prices.
Sales for the New York-based designer slipped 7 percent in the recent quarter while profit declined 20 percent. Cold weather and an unseasonably late Easter didn’t help, but the real culprit was Coach’s traditional moneymaker, its bag business.
Coach has long looked sharp in the ’mass affluent handbag market,’ but the arena is getting crowded. Kate Spade, which offers only a few bags above the $500 threshold, is making good progress on its goal to quadruple retail sales. J. Crew also has a burgeoning business in women’s bags. Michael Kors (KORS), a white-hot fashion house of late, has plenty of lady luggage for less than $400.
Acknowledging that demand, Coach is in the process of trimming its line of bags to around 100 models; a greater share of those offerings will be “upmarket.” Meanwhile, the company is making it harder to find its goods at discount. It has stopped selling merchandise on third-party flash sales sites such as Gilt and has limited access to its own online flash sales channel.
With almost 600 retail stores in the U.S., Coach has more power than a lot of fashion houses to directly reorient its brand. The trick will be to keep its prices below those of Louis Vuitton (MC:FP), Burberry (BRBY) and the true luxury houses in Europe. It may not be that hard: Those companies are all chasing even richer customers, according to analysts at Barclays. As a result, the customer looking for a $600 to $1,200 bag is woefully underserved.
Indeed, Coach’s pricing shift seems less like a bid for new buyers than an attempt to assure its current customers that the brand still confers status. Here’s how Chief Executive Officer Victor Luis described the play this morning:
“Quality, great design, great materials, craftsmanship are all a part of what has made Coach great and what differentiates us from many of our traditional competitors and especially the new accessible luxury competitors that have arisen in the market space. And that’s part of our mantra and what we’re going to reclaim.”
Translation: “We’re going to tell people why a bag from Coach is worth more than one from J. Crew.” Much of this new effort will rise or fall on the shoulders of Coach’s new creative director, Stuart Vevers, whose first full line goes on sale in the fall.