Coach Outflanking Vuitton in China With $400 Handbags

Corina Su aspires to someday own a handbag or shoes from luxury brands like Louis Vuitton or Gucci. For now, Kate Spade, Michael Kors, or Coach will do.

“We call these the American trendy brands,” said Su, a 25-year-old who works in advertising in Shanghai. She prefers Kate Spade’s bright colors and bold designs to the more muted styles offered by the big European luxury houses that tout their heritage to justify charging more.

“I might eventually buy an LV or Gucci bag,” Su said. “But it will not be until I’m much older, I suspect.”

As Chinese shoppers like Su get better acquainted with so-called accessible luxury brands, they’re discovering a designer wardrobe doesn’t have to cost them months of pay. That’s helping U.S. labels such as Coach Inc., whose handbags tend to sell for under $400. It comes as many European luxury- goods makers raise their prices for some bags to more than 10 times that level in a bid to combat slowing growth.

“Accessible luxury brands have a major opportunity in China,” said Luca Solca, an analyst at Exane BNP Paribas in London. “The Chinese market is developing into a middle-class market, looking a bit less elitist and a bit more American.”

More than 75 percent of China’s urban consumers will earn between 60,000 yuan and 229,000 yuan ($9,800 to $37,000) a year by 2022, according to estimates by McKinsey & Co. In purchasing power terms, about 68 percent of urban Chinese households fell in that range as of 2012, compared with 4 percent in 2000, the estimates show.

Narrower Distribution

The likes of Coach, Michael Kors and Tory Burch have been slow to tap growing Chinese luxury demand partly because they have narrower distribution in Europe and Asia, said Lucie Greene, editor at LS:N Global, the London-based research unit of consultant The Future Laboratory.

Chinese account for more than one dollar in every four spent on luxury goods worldwide, Bain & Co. estimates. As more Chinese travel to the U.S., sales of American fashion brands are poised to accelerate at home and in China, Greene predicts.

“Part of the allure of luxury brands is a sense of exclusivity and the exotic,” said Greene. “U.S. labels could well be where Chinese consumers turn next for newness.”

Coach, which gets about a fifth of North American store sales from tourists, says Chinese are the fastest growing group. Prada SpA, based in Milan, says it’s seeing fewer Chinese shoppers in Europe.

Shopping America

The shift comes as the U.S. eases visa restrictions for Chinese nationals and the euro’s 5 percent gain against the dollar in the past year makes it cheaper for them to shop in Miami than in Milan. Chinese visitors to the U.S. surged 25 percent in the first half last year, according to Bloomberg Industries.

To capitalize on this, Coach is adding Chinese-speaking staff in its American stores. And Coach and Kors, a maker of $140 dresses and $225 studded high-top sneakers, are using social networking applications such as WeChat and opening more shops in China. The result: revenue growth that is many times the industry’s rate in the mainland.

Coach reported an increase in comparable sales in China of at least 10 percent in the three months through Dec. 28, and Kate Spade saw comparable sales from its China joint venture rise 28 percent in the quarter ending Sept. 28.

China revenue at Gucci, by contrast, fell in each of the last two quarters, according to owner Kering SA. Total luxury sales last year expanded about 2 percent to $19 billion in mainland China as a government clampdown on flashy gifts to officials dented growth, Bain estimates.

Moving Target

European brands, meanwhile, are reining in expansion and making more expensive products in a bid to attract the wealthiest shoppers amid slowing sales.

LVMH shares have risen 2.3 percent this year, while Kering is off 3.5 percent and Coach has retreated 13 percent. Michael Kors has surged 23 percent in the period and Kate Spade has gained 8.8 percent.

Chinese consumers “feel an affinity to the U.S.,” said Citigroup Inc. analyst Oliver Chen. With Coach playing up its New York identity, Michael Kors emphasizing its high-fashion DNA, and Kate Spade offering “whimsical” designs, “there is strong growth potential for these brands,” Chen said.

The Americans and Europeans don’t always target the same customers. Most Coach bags sell for under $400. Vuitton, by contrast, last year introduced the $3,850 W and $5,350 Capucine handbag lines in an attempt to move upmarket, though it has some offerings that sell for less than $500.

Class Target

With the number of luxury consumers set to expand by 70 million to 400 million people by 2020, there is room for both U.S. and European brands to flourish even as middle-class shoppers rather than the super-rich drive growth in the period, according to Bain. The key is to be clear about which customers you’re targeting, said Claudia D’Arpizio, a partner at the consultant.

“You cannot be a brand that is selling to everyone,” said D’Arpizio.

The availability of cheaper luxury goods is making Chinese consumers more price-sensitive, according to Avery Booker, a partner at China Luxury Advisors in New York.

“It’s really proving to be their time in the mainland China market,” said Booker. The American labels are often cheaper than their European rivals “and people are not intimidated by these brands.”

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