Why Michael Kors Can't Afford to Cut PricesBy
The company just reported sales growth of 11 percent in the quarter that ended in September at North American stores that have been open for more than a year, down from a 24 percent jump in the prior quarter. Kors made it clear that the metric won’t be speeding up again over the holidays.
“There was definitely a reduction in mall traffic,” Kors Chief Executive Officer John Idol said during a conference call on Tuesday morning. “We’ve kind of been seeing that for the last couple of quarters, but it was more significant in this quarter than we had anticipated.”
This is getting to be a bit of an annual ritual in the retail world, a cycle not unlike the seasons themselves. Retailers get nervous about the holidays, start to worry about competitors cutting prices to save the season, and then cut prices themselves to beat everyone else to the punch. Play this out every year, and holiday sales will creep into October, while margins vanish like magical sugar fairies.
Kors refuses to play that game. Its sales growth will be slow, the company said, because it is refusing to “take a promotional posture.” “When you don’t take a promotional posture, obviously some of the business goes in different directions,” Idol explained. “We think that’s the right thing for us to do as a luxury brand.”
After all, this is a company that does the runway thing and goes head-to-head with the most chi-chi labels in the world. “We’re competing globally against the best of the best,” Idol said. “That’s Vuitton, that’s Prada, that’s Gucci. That’s the level of companies that we really believe we are competing with.”
Bold talk, and some fancy and fussy apparel executives in Europe would take issue with the characterization. Kors, to be sure, has some luxurious items—but it also sells a lot of more affordable stuff. It’s secret is to seem like a full-on luxury brand without always charging as much as one.
Consider handbags. Kors will gladly sell the Davos set a $13,000 tote made out of crocodile skin. The company also offers a “crocodile pattern” bag that costs $398. Vuitton, Prada, and Gucci don’t do much business in the three-figure range. But for Kors, a little real luxury helps sell a lot of “near-luxury” items. Cutting prices in any kind of unilateral way would shatter that relationship.
The rest of the retail world doesn’t have that problem. Gap, H&M, and Zara can discount heavily without facing much long-term risk to their brands because they aren’t trying to cut such a fancy figure. No doubt they will cut prices, too, if holiday shoppers don’t turn up en masse.
While Kors may not be cutting prices on its clothes and bags, its stock was on sale Tuesday morning. Shares immediately fell about 10 percent when the company provided its sober holiday forecast.