Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Coach has had it with struggling department stores. 

The maker of luxury shoes and handbags -- which has been mounting a comeback as it reverses a years-long sales slump -- told analysts on Tuesday it was considering pulling goods out of certain department-store locations. It didn't mention names but said it would no longer participate in certain store-wide sales and promotions at the strained chains

Comeback Kid
Coach's shares are up 27 percent so far this year, after a 42 percent drop over the two years prior
Source: Bloomberg

Clearly Coach doesn't want to hang around to see how deeply department stores will discount its products to get customers in the door. It's the clearest indication yet that the practice of department stores lowering prices to lure customers is an increasingly unwinnable game. 

Coach has been trying to regain the cachet of a luxury brand, after aggressive moves to blanket the country with outlet stores and a handful of design mishaps tarnished its name and caused it to fall down-market in the eyes of many consumers. 

Closing Doors
Coach began as a U.S. wholesaler to department stores but now gets much fewer sales from that channel
Source: Bloomberg Intelligence
Coach stopped breaking out this metric after 2012. For North America alone, wholesale made up 5 percent of sales in 2015.

The company, which began as a U.S. wholesaler to department stores in the 1940s, no longer gets the bulk of its sales from those channels. Less than 5 percent of total Coach business today comes from North American department stores, even though its goods appear in 1,000 wholesale locations there. Back in 2008, it got almost 45 percent of its sales from wholesale channels (both U.S. and abroad). Other luxury sellers are following suit, choosing to sidestep department stores in favor of building their own retail locations or selling directly to consumers through the Web. 

Flip Flop
Percentage of Sales at luxury brands that come from their own retail stores versus wholesale channels, such as department stores
Source: Bloomberg Intelligence
Based on 24 luxury brands followed by Bloomberg Intelligence

Taking a stand on department-store promotions and pulling out of poor-performing locations are smart moves by Coach, which on Tuesday posted its first quarterly profit growth in three years. But the poke in the eye from a popular brand could not have come at a worse time for chains such as Macy's, Dillard's, and Nordstrom -- some of Coach's largest wholesale clients. All are grappling with plunging customer traffic and anemic or falling sales growth. 

Department Store Blues
Year-over-year change in sales at established locations
Source: Bloomberg Intelligence

Any mention of supplier dissatisfaction can be toxic for a retailer. Support of your vendors is the most important aspect of keeping a struggling retailer alive, and any indication that manufacturers are pulling items from your stores can send you into a negative spiral, à la Circuit City or Radio Shack.

Indeed, traditional department-store sales are under assault on all sides: from e-commerce retailers such as Amazon, off-price stores such as T.J. Maxx, mass merchants such as Target and the brand-flagship stores of specialty retailers such as Coach, which now has 1,000 of its own brick and mortar stores. Consumers see less need to enter confusingly cavernous department stores to find products they can often find more cheaply elsewhere. 

Collectively, the 10 biggest North American department stores tracked by Bloomberg brought in $108 billion in revenue last year -- slightly less than their haul in 2008. Meanwhile, as a group, sales per average square foot declined to roughly $200 in 2015 from $284 in 2006, while gross profit per average square foot has fallen to $73 from $94 during that time. 

Closing Time
Percentage of existing store base retailers would need to close to achieve 2006 sales per square foot
Source: Green Street Advisors
Sales per square foot is adjusted for inflation

Many of these losses come from unproductive locations that department stores have been reluctant to close. To regain the productivity they had a decade ago, department stores would need to close roughly 800 locations, according to a new report from real estate research firm Green Street Advisors. That's equivalent to 20 percent of all the anchor space at U.S. malls, the firm said. 

Chains that don't speed up store closings will keep resorting to discounts and promotions to drive system-wide sales, raising the risk that other brands leave stores. Coach may be setting a trend.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net