As the market for designer handbags expanded in recent years, Coach Inc., like many other brands, looked to wider distribution through promotion-heavy department stores.
In 2016, Coach announced that it would pull leather goods and handbags from 25% of its partnered department stores. Additionally, Coach took notice of the extremely promotional department store environment and cited a plan to cut down on markdown allowances. However, some of the damage to the Coach brand had already been done.
It’s important to understand how luxury brands have utilized wholesaling in order to grow, and the delicate balance they need to maintain their image. Coach, for example, started wholesaling to department stores in the 1940s. This was a main source of revenue and helped build their brand into what it is today. As recently as 2004, 45% of Coach North American sales were attributed to wholesale. Because retailers were desperately trying to maintain sales per square foot in a rapidly expanding footprint, promotions were deeper and more frequent. As a result, Coach and other premium labels began selling direct to consumer through outlets and ecommerce. By 2015, the wholesale share of Coach revenue had dropped to 5%.
As retailers struggle to stay above water, the decision to move Coach’s brand out of another 250 stores was a seemingly easy one.
Brands such as Ralph Lauren has also made efforts to remove themselves from department stores too reliant on discounts. Others, like Michael Kors and Kate Spade, have been more deliberate, choosing to build out wholesale networks with partners who won’t tarnish their luxury brand.
With foot traffic spread thin by overexpansion and soft sales due to competition from ecommerce and off-price options like T.J. Maxx, it’s not surprising that many department stores chose to react with lower prices. This was unsustainable for luxury brands that rely on their brand equity, however. Luxury consumers are seeking exclusivity when buying a premium handbag. If department stores regularly offer steep discounts on those brands, consumers will start to deem them less prestigious, damaging sales up the product line.
Coach pulling back to regain its rightful positioning is a lesson to all brands. The race to the bottom can be reversed. There is short term top-line pain (sales dropped by 150 basis points in its first quarter of 2017) as fewer outlets meant fewer sales. Wall Street, however, viewed Coach’s strategic move away from North American department stores in a positive light. The company’s stock rose by 10.3% after the third fiscal quarter.
Coach was able to avoid the pitfalls of chasing top-line revenue growth at the expense of its reputation as a luxury manufacturer. It understood that being overly promotional wasn’t sustainable for the long-term. Savvy premium designers are using customer data insights that were once closely protected by department stores to communicate directly with their customer, engage new audiences, improve their designs and sell-through. Any promotional efforts reward loyal customers without diminishing their brand over the long-term.
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